Decomposing corporate bond spreads

Quarterly Bulletin 2007 Q4
Published on 17 December 2007

By Lewis Webber of the Bank's Systemic Risk Assessment Division and Rohan Churm of the Bank's Conjunctural Assessment and Projections Division.

Sterling, dollar and euro-denominated corporate bond spreads narrowed substantially between late 2002 and mid-2007, but widened abruptly during the recent financial market turmoil. This article uses a structural credit risk model to examine the extent to which movements in spreads over the past decade have been driven by credit and non-credit related factors. Compensation for bearing non-credit related illiquidity risk appears to have been a particularly important driver of high-yield spreads, including during the recent financial market turmoil, but the compensation required for credit risk has also increased recently. 

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