CREDIT SPREADS AND THE ZERO-COUPON TREASURY SPOT CURVE

Authors


  • We would like to thank Chris Brooks, Apostolos Katsaris, and Arthur Warga for valuable comments, as well as participants of the International Credit Risk conference in Montreal and Financial Management Association Europe conference in Copenhagen. Nicolas Papageorgiou would also like to thank the Research Office at HEC Montreal for financial support. Any errors are our own.

Abstract

We examine the relation between credit spreads on industrial bonds and the underlying Treasury term structure. We use zero-coupon spot rates to eliminate the coupon bias and to allow for a consistent study both within and across the different credit ratings. Our results indicate that the level and slope of the Treasury term structure are negatively correlated with changes in the credit spread on investment-grade corporate bonds. We also find that the relation between credit spreads and the Treasury term structure is relatively stable through time. This is good news for value-at-risk calculations, as this suggests that the correlations among assets of different credit classes are stable; therefore use of historic correlations to model spread relations can be valid.

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