Reaching for Yield in the Bond Market

By Bo Becker, Victoria Ivashina. 2013

472 citations recorded by the source corpus.

Reaching-for-yield--investors' propensity to buy riskier assets in order to achieve higher yields--is believed to be an important factor contributing to the credit cycle. This paper presents a detailed study of this phenomenon in the corporate bond market. We show that insurance companies, the largest institutional holders of corporate bonds, reach for yield in choosing their investments. Consistent with lower rated bonds bearing higher capital requirement, insurance firms' prefer to hold higher rated bonds. However, conditional on credit ratings, insurance portfolios are systematically biased toward higher yield, higher CDS bonds. Reaching-for-yield exists both in the primary and the secondary market, and is robust to a series of bond and issuer controls, including bond liquidity and duration, and issuer fixed effects. This behavior is related to the business cycle, being most pronounced during economic expansions. It is also more pronounced for firms with poor corporate governance and for which regulatory capital requirement is more binding. A comparison of the ex-post performance of bonds acquired by insurance companies shows no outperformance, but higher systematic risk and volatility.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/35b5f24c6d7733ea4f02cc10e3abab80094aab40

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Citations in the corpus

Monetary Policy, Financial Conditions, and Financial Stability (2014, background): “For example, Becker and Ivashina (2015) document that insurance companies’ reach for yield behavior is more pronounced during economic expansions, which they can test because credit ratings used to determine requirements are imperfect measures of risk.”
How Did COVID-19 Affect Firms’ Access to Public Capital Markets? (2020, unknown): “, Becker and Ivashina (2015)) or by the increased demand by other investors, such as hedge and mutual funds.2 Our finding of a pronounced increase in issuance activity for investment-grade bonds is consistent with Erel et al. (2012), who analyze debt issues over the business cycle and find that capi”
The 'Greatest' Carry Trade Ever? Understanding Eurozone Bank Risks (2013, unknown): “Our paper is related to the literature investigating the yield-chasing investment behavior of non-bank financial institutions due to agency frictions (Becker and Ivashina, 2013; and Kacperczyk and Schnabl, 2013).”
Competitive monetary easing: is it yesterday once more? (2014, background): “See Borio and Disyatat (2009) for an excellent early comprehensive taxonomy and assessment of balance sheet policies. 3. I was not a member of the fraternity at that time, so I do not feel a conflict in doling out praise! 4. ‘A step in the dark: unconventional monetary policy after the crisis’, Ragh”
Estimating the Costs of Issuer-Paid Credit Ratings (2013, unknown): “conjecture, Becker and Ivashina (2012) provide evidence that, conditional on credit ratings,”
The role of venture capital in the emerging entrepreneurial finance ecosystem: future threats and opportunities (2019, background): “A final advantage of direct investing in private firms is that it offers a better alignment of the interests between the LPs and the GPs in a classic principal-agent problem (Lerner, Schoar, and Wongsunwai 2007; Becker and Ivashina 2015).”
A capital structure channel of monetary policy (2018, unknown): “12 Another explanation for the increase in bond debt and the decrease in bank debt could be a reduction in loan supply (Becker and Ivashina, 2015).”
Catering to Investors Through Security Design: Headline Rate and Complexity (2017, result): “First, our study contributes to the literature on reaching for yield (Rajan, 2011; Yellen, 2011; Becker and Ivashina, 2015; Hanson and Stein, 2015).”
Market Tantrums and Monetary Policy (2014, unknown): “For instance, Becker and Ivashina (2013) document reaching for yield on the part of insurance companies in their investments in corporate bonds.”