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  • Journal of Finance

Reaching for Yield in the Bond Market

By: Bo Becker and Victoria Ivashina
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Abstract

Reaching for yield—the 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 analyzes this phenomenon in the corporate bond market. Specifically, we show evidence for reaching for yield among insurance companies, the largest institutional holders of corporate bonds. Insurance companies have capital requirements tied to the credit ratings of their investments. Conditional on ratings, insurance portfolios are systematically biased toward higher yield, higher CDS bonds. This behavior appears to be related to the business cycle, being most pronounced during economic expansions. It is also more pronounced for the insurance firms for which regulatory capital requirements are more binding. The results hold both at issuance and for trading in the secondary market and are robust to a series of bond and issuer controls, including issuer fixed effects as well as liquidity and duration. Comparison of the ex-post performance of bonds acquired by insurance companies does not show outperformance but higher volatility of realized returns.

Keywords

Fixed Income; Reaching For Yield; Financial Intermediation; Insurance Companies; Insurance; Assets; Bonds; Investment Return; Investment Portfolio; Risk Management; Insurance Industry

Citation

Becker, Bo, and Victoria Ivashina. "Reaching for Yield in the Bond Market." Journal of Finance 70, no. 5 (October 2015): 1863–1902.
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About The Author

Victoria Ivashina

Finance
→More Publications

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  • Disruption and Credit Markets By: Bo Becker and Victoria Ivashina
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  • PE Secondaries: Blackstone Strategic Partners By: Victoria Ivashina and Luis M. Viceira
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