Government Debt Maturity and Term Structure of Credit Spreads

We investigate how government borrowing behaviors influence the private sector by exploring the relationship between government debt maturity and the term structure of credit spreads. Using the data of individual corporate bonds between 1972 and 2015, we find that a longer government debt maturity is associated with a steeper credit term structure in both the primary and secondary corporate bond markets. An instrumental variable approach and an exogenous event study help us establish a causality. Additional tests suggest that our findings are because the safety, rather than the liquidity, attribute of government debts attracts long-term investors from the corporate bond market, leading to a reduction in the demand, hence an increase in the credit spread, of long-term corporate bonds