Consumer Confidence and Corporate Credit Spreads

Abstract

We find that consumer confidence, proxied by consumers’ expectation of the business condition during the next 12 months, is negatively related to the credit spreads of corporate bonds. This relation cannot be explained by the traditional macro, firm-, and bond-level control variables. Consistent with behavioral theory, consumer confidence has a weak impact on institutional issues but a strong impact on high-risk issues (high yields, more illiquidity, and larger default probability firm issues). The negative effect is enhanced during recession periods and downmarket states. Potential omit variables (Canada/UK confidence index and oil price), other investor sentiments, and personal consumption also cannot explain the effect. We conclude that consumer confidence has a significant effect on firms’ borrowing costs.

Keywords: credit spread, consumer confidence, behavioral theory

JEL Classification: G12, G13