Currency risk in corporate bond spreads in the eurozone

Corporate bond yields generally follow yields on sovereign debt when debt is denominated in foreign currency (FC), but have historically behaved rather differently when debt is denominated in domestic currency (DC), with noticeable spikes in big recessions that are not matched by spikes in yields on sovereign debt. This difference reflects a currency risk on FC debt that is common to sovereign and corporate bonds but which is absent from DC debt. Euro-denominated corporate bonds issued in the Eurozone are DC debt, yet it is shown here that outside Germany their yields are strongly influenced by yields on sovereign debt, like FC debt, after controlling carefully for other factors. We argue that this can be attributed to currency risk associated with a possible split in the Eurozone.