The Effect of Government Reference Bonds on Corporate Borrowing Costs: Evidence from a Natural Experiment

Abstract

Government bonds might provide reference entities that reduce corporate bond yield. We study China’s 2017 issuance of two U.S. dollars (USD) denominated sovereign bonds when there were (effectively) no outstanding USD sovereigns. We find that USD-denominated Chinese corporate bonds experienced a decline in yield spreads while RMB bonds did not, and the effect was stronger for corporate bonds with maturities similar to those of the USD sovereigns. Further consistent with the reference effect, USD-denominated corporate bonds experienced declines in bid-ask spreads and volatility. Limited evidence indicates that new corporate bond maturities shifted toward the sovereign bonds’ maturity after their issuance.

Keywords: reference bond; China; corporate borrowing

JEL Classification: G12, G15, G18