Corporate bonds and the credit premium

Project researchers

Research summary

This paper asks whether corporate bonds are genuinely a distinct asset class and whether investors have been rewarded over the long run for taking credit risk. Using a newly assembled global dataset spanning more than a century, the authors separate corporate bonds from government bonds and equities to analyse their risk, return and diversification properties.

They document a persistent “credit premium”: over long periods, corporate bonds have delivered higher returns than high‑quality government bonds, compensating investors for default and downgrade risk. However, this premium is far from constant. It varies substantially across time, countries and rating categories, and can be eroded by defaults, downgrades and transaction costs. The study shows that headline yields often overstate the true reward to credit risk.

The authors also demonstrate that corporate bonds behave differently from both equities and government bonds in crises and normal times, supporting the view that they form a distinct asset class with their own return drivers. For students of finance, the key message is that credit risk has historically been rewarded, but the realised premium is smaller and more unstable than raw yields suggest, and careful attention to default experience, credit migration and implementation costs is essential when evaluating corporate bond strategies.