Constructing the term structure of the U.S. corporate credit spread components - is there a relationship with the real economy?

Abstract: This paper decomposes the credit spread of U.S. corporate bonds into a component driven by issuer default-risk and a component common to all bonds in the market. It then uses these components to develop a procedure for constructing their term structure. The first result of the thesis is the consequent ability to observe the time developments of maturity-specific credit market indicators and examine their yield curve configurations. Further, the predictive power of the term structure latent factors on economic activity are assessed. The paper thus finds the growth rates of GDP and its constituents, as well as of monthly activity indicators, to be negatively associated with the slope factor of the component based on default-risk and with the level of the common component in credit spreads.