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Determinants of Launch Spreads on EM USD-Denominated Corporate Bonds

August 10, 2016
Naoto Higashio*1
Takahiro Hirakawa*2
Ryo Nagaushi*3
Shinsuke Ohyama*4
Atsushi Takanashi*5


This paper examines the development of launch (primary) spreads (the difference between a bond's yield to maturity at issuance and U.S. Treasury yields of corresponding maturity) on USD-denominated corporate bonds issued by emerging market (hereafter "EM") companies since the mid-1990s and decomposes their determinants to assess the primary market environment surrounding EM companies. Our empirical results indicate that while the launch spreads on EM corporate bonds properly reflect firm-specific factors as structural credit models suggest, they are also affected by those market-wide factors that describe the primary market environment at issuance (hereafter "time effects"). During the 2004 to 2008 and 2010 to 2015 periods, the time effects clearly lowered the launch spreads to a level well below the long-term average prior to the global financial crisis of 2008, which indicates that the primary market environment for EM USD-denominated corporate bonds was favorable by historical standards during these periods. In addition, we find that the more accommodative the Fed's monetary policy is, and the more stable U.S. financial markets are, the lower the launch spreads on EM USD-denominated corporate bonds are. This finding is in line with the view that the accommodative and stable financial conditions in the U.S. contributed to improving USD funding conditions for EM companies since 2010.

We would like to thank the staff of the Bank of Japan for their valuable comments. The views expressed in this paper, as well as any remaining errors, are those of the authors and do not necessarily reflect the official views of the Bank of Japan.

  1. *1International Department (currently Financial System and Bank Examination Department), Bank of Japan
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  2. *2International Department, Bank of Japan
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  3. *3International Department, Bank of Japan
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  4. *4International Department, Bank of Japan
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  5. *5International Department, Bank of Japan
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