My Corporate Credit Research - thoughts/comments?

Hey y’all, first post here.

As part of my culminating project as an undergrad I’m doing research on yield spreads. I don’t know how interesting people will find this post - I haven’t seen too much Fixed Income discussion, but I’m just starting my research and was eager for some suggestions and comments.

Cyclical and Non-cyclical Corporate Credit Spreads as an Indicator of Economic Activity

That’s my title…a bit dry at the moment but it gets across the intent. The idea is that as the market anticipates a recession and the deterioration of especially cyclical companys’ fundamentals, participants will drop out of cyclical corporate credit and bid up “safer” non-cyclical company credit. Thus you would see the yield of cyclical bonds widen against non-cyclical company bonds. At this point I’d imagine this would be more of a leading indicator.

Anyways, I appreciate any comments or sources of useful information. Maybe someone who works with credit could tell me if this has be studied before?


Confused how we can judge your research based on the title? What about the actual content so far? What has your research to date told you?

I’m all for research and the more controversial / contrarian, the better. This is a pretty well-covered topic and a simple Google search should turn up a bunch of papers published at leading academic institutions. Curious to see how your view is somehow differentiated.

At this point I barely have a view. Just a hypothesis as I recently put together the question.

Perhaps what level of credit quality or what I define as cyclical vs. non-cyclical will differentiate the research?

I actually had a hard time finding academic papers looking exactly at the spread of cyclical company credit over non-cyclical but I’m sure its out there.

I was just looking for some thoughts on how to proceed and what else to consider.

I agree with Numi; its pretty hard to really infer much about your paper with what you have given us. Are you trying to investigate the relationship between the performance of investment-grade, cyclical (or non-cyclical) companies and the state of the overall macroeconomy? If you are starting out that broad, you really have to narrow it down to a specific question.

Ex. Investment-grade/speculative/junk yield spreads in the _____ industry during the _______ crisis/period/decade/century.

I agree with both of you but the fact of the matter is I literally just put the proposal together.

I’m thinking about looking at the yield of investment-grade bonds of cyclical industry and comparing it to the yield of investment-grade bonds of non-cyclical industry. Then looking at the yield spread between these two groups as an indicator of the macroeconomy.

I don’t know if that’s clear enough…I’m not just simply looking at the spread of cyclical company credit over Treasuries.

Seems pretty clear to me. I think it’s an interesting topic. Like Numi said, there’s probably some similar stuff out there already. But, it’s not like it’s a dissertation for your PhD. I doubt any undergrad program requires entirely unique topics.

Anyway, I’d actually like to see the results, so I say go for it.

Yeah, my reaction is the same as STL’s. It’s not necessarily a “no one’s ever thought of it before” topic, but it might be a “no one’s ever thought of it before and actually bothered to do the work to check it out and publish it.”

And in any case, the data can look different at different times. I’d be interested in those results.

People also sometimes use equity valuation ratios of cyclicals vs noncyclicals to gauge the market’s estimate of recession. This basically ports the same idea over to credit spreads. It might be interesting to see if bonds give better/worse or different timing signals than stocks.

Some people believe that the bond market is more reliable than the stock market, in part because people who are more prone to euphoria and desperation tend to gravitate to stocks.

Thanks for the support and comments.

I never thought of coupling it with equity valuation ratios, thanks bchadwick, that would make the whole paper a lot deeper and more interesting.

I would love to get it published and my teacher-advisor is hoping to help. Don’t really know what that process entails.

Final copy is due in May so maybe I can post some updates as I go along.

Where can you find historical spreads on different industries? A Bloomberg terminal surely…but for those of us without one I can’t think of where I’d go to find the info.

I luckily have access to Bloomberg through my school.

You can get the info you’re looking for from Barclays Indices, JPM’s JULI Indices, or Merrill/BofA Indices. Not sure about the others, but I know that Barclays has spread data back to 1990 on subsectors and they’re the king for fixed income. If this time frame works for your report, I would give them a call and see if they would grant you temp access. I believe you would need an institutional brokerage relationship otherwise.

A project like this would definitely give you an edge in your job search after college if you want to get into fixed income.

Thanks a lot that data might prove to be very helpful. I’ll probably start researching after the holidays, so if Bloomberg doesn’t suffice I might take you up on that offer!