The Term Structure of the Excess Bond Premium: Measures and Implications

September 24, 2021

Simon Gilchrist New York University and National Bureau of Economic Research

Bin Wei Research Economist and Adviser

Vivian Yue Emory University, the National Bureau of Economic Research, and the Center for Economic and Policy Research

Egon Zakrajšek Federal Reserve Bank of Boston and Center for Economic and Policy Research

Summary

In this article, we construct daily aggregate as well as short-, medium-, and long-term "excess bond premium" (EBP) measures using a widely available corporate bond database (known as "TRACE"). The novel EBP measures we construct provide an important gauge of strains in the financial sector at different horizons. We find that the short-term EBP measure increased more dramatically at the peaks of the COVID-19 pandemic and the 2007–09 global financial crisis, but the pattern was reversed around the interest rate liftoff at the end of 2015.

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Policy Hub 2021-12

Excess bond premium data

Key finding:

The authors find that the short-term EBP measure increased more dramatically at the peaks of the COVID-19 pandemic and the 2007–09 global financial crisis.
The pattern was reversed around the interest rate liftoff in the end of 2015.

Center affiliation: Center for Quantitative Economic Research

JEL classification: E44, E58, G12

Key words: excess bond premium, term structure, TRACE, COVID-19

Digital Object Identifier: https://doi.org/10.29338/ph2021-12