Monetary Policy and Corporate Bond Returns

Abstract

We investigate the impact of monetary policy shocks on excess corporate bonds returns. We obtain a significant negative response of bond returns to policy shocks, which is especially strong among low-grading bonds. The largest portion of this response is related to higher expected bond returns (discount-rate news), while the impact on expectations of future interest rates (interest-rate news) plays a secondary role. However, the interest-rate channel is dominant among high-grading bonds and Treasury bonds. By looking at the two components of bond premia news, we find that the dominant channel for high-rating (low-rating) bonds is term premia (credit premia) news.

Keywords: Corporate Bond Market, Bond Returns, Return Decomposition, Monetary Policy, Bond Premia, Present-Value Relation, Credit Risk

JEL Classification: E44, E52, G10, G12