How Do Inflation Expectations Influence Bond Credit Spreads?
JI Min, QIU Liping, YANG Gang, LIU Junjie, GAO Jie
Research Bureau, People's Bank of China; School of Finance, Shanghai University of Finance and Economics; Financial Market Research Center, China Minsheng Bank
Summary:
Inflation expectations, as an integral component of expectation management, exert a significant influence on the pricing of financial assets and the corporate financing environment. While existing studies have made preliminary attempts to explore the relationship between inflation expectations and corporate bond credit spreads, their conclusions remain notably divergent. Most studies focus predominantly on firm-specific default risks, neglecting systemic macroeconomic factors, thus failing to comprehensively depict the full transmission pathways through which inflation expectations affect credit spreads. In fact, as a forward-looking indicator reflecting market participants' views on future price trends, inflation expectations not only directly affect the pricing level and return structure of financial assets but also influence credit spreads by altering investors' risk preferences and required risk premiums. This study employs expert inflation forecast data from Securities Market Weekly (2010-2022) as the core explanatory variable, combined with secondary-market transaction data and primary-market issuance data of A-share listed companies' credit bonds, to systematically examine the relationship between inflation expectations and corporate bond credit spreads, as well as the underlying mechanisms. The paper develops a dual-channel transmission framework: (1) the Default Risk Premium (DRP) channel, reflecting investors' required compensation for the probability and potential loss of default; and (2) the Excess Risk Premium (ERP) channel, measuring the additional return investors require for bearing systemic macroeconomic risks. The empirical findings reveal a pronounced nonlinear U-shaped relationship between China's inflation expectations and corporate bond credit spreads: At a moderate level of inflation expectations, identified at 1.99%, which is close to the 2% inflation target adopted by most central banks, credit spreads reach their minimum, implying lower corporate financing costs. Deviations from this threshold in either direction significantly widen credit spreads. This result remains robust across various model specifications, alternative variable definitions, frequency adjustments, and samples excluding the pandemic period, and is particularly pronounced among non-state-owned enterprises, low-leverage firms, and low-rating bonds. Mechanism analysis shows that inflation expectations affect credit spreads through two distinct channels: First, via the DRP dimension, moderate inflation facilitates “debt deflation” effects, alleviating firms' real debt burdens and reducing default risk. However, when inflation expectations rise excessively, macroeconomic uncertainty increases, growth expectations weaken, and firms' debt-servicing capacity deteriorates, raising default risk. Second, via the ERP dimension, moderate inflation expectations enhance market risk appetite and suppress systemic risk premiums, whereas extreme inflation expectations (either high or low) trigger heightened risk aversion, increasing required risk compensation and thus widening credit spreads. Extending the analysis to the primary bond market, the study finds that moderate inflation expectations not only compress credit spreads in the secondary market but also reduce issuance yields, shorten issuance maturities, and improve issuers' financing flexibility at the issuance stage, indicating that inflation expectations directly shape real financing outcomes through the primary market. At the monetary policy level, further analysis reveals that unanticipated monetary easing shocks significantly raise inflation expectations and that unexpected policy actions affect bond market volatility by altering expectations. Both excessive expansionary and tightening unexpected monetary policies lead to increased bond yield volatility. Based on these findings, the paper offers several policy suggestions: First, guide the market toward reasonable expectations. Stabilizing inflation expectations within a moderate range can enhance monetary policy transmission efficiency, reduce financing costs in both primary and secondary markets, and strengthen market resilience. Second, recognize the impact of inflation expectations on microeconomic agents and financial markets. Inflation expectations substantially influence both corporate and investor risk preferences. In the context of heightened global economic uncertainty, policymakers should more precisely identify and monitor both individual and market-wide expectations. Third, enhance policy transparency and consistency. Reducing the disruptive effects of unexpected policy shocks on market expectations, strengthening macroeconomic policy coordination, and combining institutional reforms with market mechanism improvements can further solidify the foundations of the corporate bond market. The contributions of this study are threefold: First, it systematically documents the nonlinear U-shaped relationship between inflation expectations and corporate bond credit spreads in the Chinese market, linking macro-level expectation management with micro-level financing behavior. Second, it decomposes credit spreads into default risk premiums and excess risk premiums, uncovering their differentiated roles in the transmission process. Third, it incorporates monetary policy surprises into the analytical framework, underscoring the importance of policy communication in stabilizing market expectations. These findings provide empirical support for China's pursuit of high-quality economic growth and financial risk prevention, while also offering valuable insights for central banks worldwide in managing inflation expectations under volatile global financial conditions.
纪敏, 邱丽萍, 杨刚, 刘俊杰, 高洁. 通胀预期如何影响债券信用利差？[J]. 金融研究, 2025, 544(10): 1-20.
JI Min, QIU Liping, YANG Gang, LIU Junjie, GAO Jie. How Do Inflation Expectations Influence Bond Credit Spreads?. Journal of Financial Research, 2025, 544(10): 1-20.
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