When Bonds Act Like Stocks

Research into the determinants of fixed-income returns have found that a number of stock and bond market risk factors can be shown to demonstrate explanatory power beyond the standard term-structure variables.

Ivelina Pavlova, Ann Marie Hibbert, Joel Barber and Krishnan Dandapani—authors of the paper “Credit Spreads and Regime Shifts,” which appears in the Summer 2015 issue of The Journal of Fixed Income—add to the literature by investigating the impact on credit spreads of three groups of macro determinants: 1) term-structure variables; 2) bond market volatility and liquidity; and 3) stock market return and volatility.

As the authors point out, in theory, these variables influence credit spreads in three ways:

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