Inflation Risk in Corporate Bonds

72 Pages Posted: 15 Mar 2012 Last revised: 15 Jun 2018

See all articles by Johnny Kang

Johnny Kang

BlackRock, Inc

Carolin E. Pflueger

National Bureau of Economic Research (NBER); University of Chicago - Harris School of Public Policy

Date Written: September 26, 2013


We argue that corporate bond yields reflect fears of debt deflation. When debt is nominal, unexpectedly low inflation increases real liabilities and default risk. In a real business cycle model with optimal but infrequent capital structure choice, more uncertain or pro-cyclical inflation leads to quantitatively important increases in corporate log yields in excess of default-free log yields. A panel of credit spread indexes from six developed countries shows that credit spreads rise by 14 basis points if inflation volatility or the inflation-stock correlation increases by one standard deviation.

Keywords: Inflation Volatility, Nominal-Real Correlation, International Credit Spreads, Corporate Default, Capital Structure, Leverage

JEL Classification: G12

Suggested Citation

Kang, Johnny and Pflueger, Carolin E. and Pflueger, Carolin E., Inflation Risk in Corporate Bonds (September 26, 2013). Journal of Finance, Forthcoming, Available at SSRN: or

Johnny Kang

BlackRock, Inc ( email )

400 Howard Street
San Francisco, CA 94010
United States

Carolin E. Pflueger (Contact Author)

University of Chicago - Harris School of Public Policy ( email )

1155 East 60th Street
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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