Issuer Term Variability, Bond Yield Spreads, and Reaching for Yield

We examine how variation in non-financial terms across bonds for the same issuer (“issuer term variability†) is related to yield spreads, realized returns, and the clientele who hold the issuer’s bonds. We find that bonds trade at a higher yield spread when their issuer has a greater variety of terms across its outstanding bonds, even after controlling for the issuer’s bond rating and credit risk. This effect is stronger for opaque issuers and/or in times of greater economic uncertainty. However, within-issuer variety in bond terms is associated with lower bond realized returns and higher probability of bond default, implying higher credit risk for such issuers. Finally, we uncover that investors who tend to reach for yield, that is, who tend to hold bonds with higher yields relative to their peers within the same rating and maturity, also tend to hold bonds whose issuers have greater term variability. Further empirical tests suggest that this clientele effect is consistent with risk taking of yield-reaching investors.