A corporate spread is the difference in yield between a high-grade corporate bond and Treasury bonds of the same maturity. A spread widens when perceptions about the creditworthiness of the bond issuer deteriorate and narrows when conditions improve. It is an important tool for investors to understand as it affects both investment grade and high-yield corporate bond prices and yields in different ways.

Investors perceive corporate bonds to be riskier investments than government bonds with the same maturities, so they demand compensation in the form of a higher yield. This premium is called the credit spread.

Many investors believe that the Federal Reserve pulls all the strings in the corporate bond market, causing the spread to rise and fall at the whim of the central bank. While the Fed can have an effect on the corporate spread, there are other important drivers.

The most common reason for the spread to move is due to changes in business and funding conditions. This can be a result of a slowdown in economic activity or a negative event that impacts the company’s financial condition, such as a change to credit ratings.

We investigate the effect of these events on the slope of the corporate spread curve to Treasuries (the “corporate QE” announcement). The results show that the coefficients associated with this measure retain their signs and magnitude, indicating that it captures information beyond what is contained in the yield curve. The slope of the curve also predicts future cumulative growth rates of industrial production for 3 to 48 months forecasting horizons, and even the marginal rate of growth over 18 months.