Drivers of Inflation-Linked Corporate Bond Spreads and the Inflation Swap/Bond Breakeven Difference
18 Pages Posted: 21 Jul 2011
Date Written: May 15, 2008
Abstract
Spreads of inflation-linked corporate bonds over TIPS are considerably tighter than spreads of corporate bonds over nominal Treasuries. A related phenomenon is that inflation swaps rates are higher than bond “breakeven” inflation rates for the same maturities. The typical explanation for this phenomenon is that imbalances of inflation receivers over inflation payers in the CPI swaps market causes implied inflation to be mispriced in inflation swaps. Since all corporate linker issues to date have been swapped, this results in abnormally tight spreads in the corporate market. I demonstrate that the difference in spreads can be attributed to the Treasury curve, which trades richer than it should by an amount reflecting the value of the stream of special financing that redounds to the benefit of the Treasury buyer. TIPS, contrariwise, rarely trade special; therefore, the abnormally tight spreads in the corporate linker market and the difference between the bond and swap curves result from the fact that these spreads are measured against a cheaper sovereign curve.
Keywords: TIPS, inflation, inflation swaps, CPI, CPI swaps, corporate inflation-linked bonds, CIPS, ILBs
JEL Classification: G12
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Explaining the Rate Spread on Corporate Bonds
By Edwin J. Elton, Martin J. Gruber, ...
-
The Determinants of Credit Spread Changes
By Pierre Collin-dufresne, J. Spencer Martin, ...
-
How Much of Corporate-Treasury Yield Spread is Due to Credit Risk?
By Jing-zhi Huang and Ming Huang
-
How Much of the Corporate-Treasury Yield Spread is Due to Credit Risk?
By Jing-zhi Huang and Ming Huang
-
How Much of the Corporate-Treasury Yield Spread is Due to Credit Risk?
By Jing-zhi Huang and Ming Huang
-
Corporate Yield Spreads: Default Risk or Liquidity? New Evidence from the Credit-Default Swap Market
By Francis A. Longstaff, Sanjay Mithal, ...
-
Equity Volatility and Corporate Bond Yields
By John Y. Campbell and Glen B. Taksler
-
Equity Volatility and Corporate Bond Yields
By John Y. Campbell and Glen B. Taksler
-
Structural Models of Corporate Bond Pricing: An Empirical Analysis
By Young Ho Eom, Jing-zhi Huang, ...
-
By Roberto Blanco, Simon Brennan, ...