We document that positive association between corporate and sovereign cost of funds borrowed on global capital markets weakens during periods of unusually high sovereign yields, when corporate borrowers are able to issue debt that is priced at lower rates than sovereign debt. This state-dependent sensitivity of corporate yields to sovereign yields has not been previously documented in the literature. We demonstrate that this stylized fact is observed across countries and industries as well as for a given borrower over time and is not explained by a different composition of borrowers issuing debt during periods of high sovereign yields or by the relationship between corporate and sovereign credit ratings. We show that even if we exclude high-yield episodes that accompany financial crises and IMF programs, the sensitivity of corporate yields to sovereign yields is lower when sovereign yields are high. We propose a simple information model that rationalizes our empirical observations: when sovereign yields are high and more volatile, corporate yields are less sensitive to sovereign yields.
Tallman, Eric, Galina B. Hale, and Julia Bevilaqua. 2019. “Corporate Yields and Sovereign Yields,” Federal Reserve Bank of San Francisco Working Paper 2019-23. Available at https://doi.org/10.24148/wp2019-23