Corporate bonds and the credit premium: a distinct asset class with a long history

Abstract

This article presents and interprets long-run evidence on corporate bonds since the 1860s for both the US and UK. Even very high-quality corporate bonds have provided a significant credit risk premium. The reward from buying high-yield (or junk) bonds is appreciably higher. Yield spreads of corporate over government bonds incorporate this premium but are not a measure of the expected premium because they also encapsulate expected default losses. This study reports on default and recovery rates over the long haul and reviews the determinants of yield spreads and default rates. The authors present evidence showing that corporate bonds are a distinct asset class. Finally, it examines whether factors and other return regularities can help boost corporate bond returns and provide positive premia.