The Slope of the Credit Yield Curve for Speculative-Grade Issuers

Authors

  • Jean Helwege,

    1. Ohio State University, Blackrock Financial Management, Inc.
    Search for more papers by this author
  • Christopher M. Turner

    1. Ohio State University, Blackrock Financial Management, Inc.
    Search for more papers by this author
    • Ohio State University and Blackrock Financial Management, Inc. We are grateful for helpful comments from Richard Cantor, Lea Carty, Ian Cooper, Lee Crabbe, Greg Duffee, Jerry Fons, Max Holmes, Brad Jordan, Tim Opler, Frank Packer, Stephen Vogt, Arthur Warga, and participants in seminars at the Federal Reserve Bank of New York, Rutgers-Newark, the 1997 Financial Management Association meetings, and the 1998 American Finance Association meetings. Phil de Imus, Paul Kleiman, Vhan Tran, and Kin Cheng provided excellent research assistance. This work was completed while Helwege was at the Federal Reserve Bank of New York, but the views expressed in this paper are ours and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System.

Abstract

Many theoretical bond pricing models predict that the credit yield curve facing risky bond issuers is downward-sloping. Previous empirical research (Sarig and Warga (1989), Fons (1994)) supports these models. Our study examines sets of bonds issued by the same firm with equal priority in the liability structure, but with different maturities, thus holding credit quality constant. We find, counter to prior research, that risky bonds typically have upward-sloping credit yield curves. Moreover, when we combine our matched sets of bonds (no longer controlling credit quality), the estimated slope is negative, indicating a sample selection bias problem associated with maturity.

Ancillary