Do FOMC actions speak loudly?

Monday, August 7, 2017

Corporate bond market investors bear the risk that the borrower will not pay them as promised; that’s why corporate bond prices tend to be lower than treasury bonds. But why isn’t corporate bond investor behavior consistent with the old adage that “no news is good news?” when the Federal Open Market Committee announces a plan to stay the course?

Oklahoma State University professor of finance Tim Krehbiel and associate professor of finance Ali Nejadmalayeri, along with co-author Siamak Javadi from the University of Texas – Rio Grande Valley, look into corporate bond investor behavior in their latest research, “Do FOMC Actions Speak Loudly? Evidence from Corporate Bond Credit Spreads.”

“If the Federal Reserve announces the intention to ‘stay the course,’ spreads between corporate and treasury bond prices widen,” Krehbiel said. “If the Federal Reserve announces the intention to either raise or lower rates, the spread between bond market prices narrows, and this is somewhat puzzling behavior. We find that staying the course seems to be unsettling for the corporate bond market.”

Corporate bond investors run a high risk of not being repaid by borrowers, so the nature of monetary policy changes is crucial to corporate bond investors.

This research is to be published in the Review of Finance. To view the article online, visit the SSRN copy.