In this paper, we estimate the impact of fundamental economic factors on corporate bond
spreads in Israel. Using a database that includes all tradable corporate bonds in Israel in
2007–20, we examine if, when, and in what bond groups there was a prolonged deviation
of the actual spread from the spread forecasted by the fundamental factors. We find that
in the years prior to the crisis of 2008, and in the year prior to the European sovereign
debt crisis in 2011, more than 20 percent of the corporate bond market value traded at
spreads lower than those forecast based on the fundamental factors. In addition, we find
that aggregate flows to corporate bond mutual funds contributed to accentuating the
trends of deviation from the forecast spread existing in the market, primarily in the period
after the 2008 crisis. The results indicate that rapid aggregate inflows to mutual funds
contribute to increasing the vulnerability of the corporate bond market. Should corporate
bond spreads deviate from those forecasted by fundamental economic factors, such rapid
aggregate net inflows are liable to intensify rising-price trends, and when the trend
changes—rapid aggregate net outflows might exacerbate declining-price trend.
The factors impacting corporate bond spreads
The factors impacting corporate bond spreads
04/08/2021
Abstract: