Credit Spreads and the Treasury Zero Coupon Spot Curve
34 Pages Posted: 29 Apr 2005 Last revised: 28 Oct 2011
We examine the relation between credit spreads on industrial bonds and the underlying Treasury term structure. We use zero-coupon spot rates to eliminate the coupon bias and allow for a consistent study both within and across the different credit ratings. Our results indicate that the level and slope of the Treasury term structure are negatively correlated with changes in the credit spread on investment grade corporate bonds. We also find that the relation between credit spreads and the Treasury term structure is relatively stable through time. This is good news for value-at-risk calculations as this suggests that the correlations amongst assets of different credit classes are stable; therefore use of historic correlations to model spread relations can be valid.
Keywords: credit spreads, coupon bias, correlation
JEL Classification: G21, G24
Suggested Citation: Suggested Citation