Switching interest rate sensitivity regimes of U.S. Corporates |
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| Institution: | 1. ISCAL – Lisbon Accounting and Business School, Instituto Politécnico de Lisboa, Av. Miguel Bombarda, 20, 1069-035 Lisbon, Portugal;2. SOCIUS – Research Centre in Economic and Organizational Sociology, CSG – Research in Social Sciences and Management, Rua Miguel Lupi, 20, 1249-078 Lisbon, Portugal;3. ISEG – Lisbon School of Economics and Management, Universidade de Lisboa, Portugal;4. UECE – Research Unit on Complexity and Economics, Rua Miguel Lupi, 20, 1249-078 Lisbon, Portugal;1. Department of Public Finance, National Chengchi University, No. 64, Sec. 2, Zhi-nan Rd, Wenshan, 11605 Taipei, Taiwan;2. Department of Business Administration, Chung Yuan Christian University, No. 200, Chung-pei Rd, Chung-li, 32023 Taoyuan, Taiwan;3. Department of Accountancy, City University of Hong Kong, 88 Tat Chee Avenue, Kowloon Tong, Hong Kong;1. Research Department, Hong Kong Monetary Authority, 55/F, Two International Finance Centre, 8 Finance Street, Central, Hong Kong, China;2. Institute of Theoretical Physics and Department of Physics, The Chinese University of Hong Kong, Shatin, New Territories, Hong Kong, China;1. School of Finance and Accounting, Fuzhou University of International Studies and Trade, No. 28, Yuhuan Road, Shouzhan New District, Changle, Fuzhou City, Fujian Province, China;2. International School of Business and Finance, Sun Yat-sen University, Zhuhai City, Guangdong Province, 519082, China;3. Department of Finance, National Sun Yat-sen University, No. 70 Lien-hai Rd., Kaohsiung 804, Taiwan, ROC;1. Department of Financial Engineering and Actuarial Mathematics, Soochow University, Taipei 10048, Taiwan;2. College of Management, Yuan Ze University, Taoyuan 32003, Taiwan;3. Department of Quantitative Finance, National Tsing Hua University, Hsinchu 30010, Taiwan |
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| Abstract: | We study interest rate sensitivities of U.S. investment grade BBB-rated and high yield corporate bonds over the period of 2001–2016. Our methodology assesses the capital gains of corporate bond portfolios and risk-free government bond portfolios, using average coupon and blended yield indices for the U.S. market. For both, U.S. BBB and high yield corporate bonds, we evidence the switching, from positive to negative interest rate sensitivity, occurring over the transition from the normal economic conditions to the periods of economic distress and vice-versa. The proposed theoretical explanation of such binary behavior posits an interrelation between interest rate and creditworthiness of issuers, which varies according to the phases of the business cycle. This research advances an economic understanding of interest rate risk management and sheds light on how financial institutions may develop strategies that hedge against downside risk. |
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| Keywords: | Fixed income Portfolio performance evaluation Downside risk management Corporate debt Interest rate sensitivity |
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