The Relation Between Treasury Yields and Corporate Bond Yield Spreads


  • Gregory R. Duffee

    1. Federal Reserve Board
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    • Federal Reserve Board. I thank Fischer Black, Jean Helwege, René Stulz, seminar participants at the Federal Reserve Board, and especially Ken Singleton (the referee) for helpful comments and discussions. Nidal Abu-Saba provided valuable research assistance. All errors are my own. The analysis and conclusions of this paper are those of the author and do not indicate concurrence by other members of the research staff, by the Board of Governors, or by the Federal Reserve Banks.


Because the option to call a corporate bond should rise in value when bond yields fall, the relation between noncallable Treasury yields and spreads of corporate bond yields over Treasury yields should depend on the callability of the corporate bond. I confirm this hypothesis for investment-grade corporate bonds. Although yield spreads on both callable and noncallable corporate bonds fall when Treasury yields rise, this relation is much stronger for callable bonds. This result has important implications for interpreting the behavior of yields on commonly used corporate bond indexes, which are composed primarily of callable bonds.