Fragmentation and heterogeneity in the euro-area corporate bond market: Back to normal?

• Assessment of the degree of market fragmentation in the euro-area bond market.
• Analysis of the determinants of the risk premium paid on bonds at origination.
• Ability to isolate idiosyncratic country-specific effects.
• Evidence of possible credit risk misjudgement in the market.
• Low fragmentation is coupled with a still high heterogeneity.

We assess the degree of market fragmentation in the euro-area corporate bond market by disentangling the determinants of the risk premium paid on bonds at origination. By looking at over 2400 bonds we are able to isolate the country-specific effects which are a suitable indicator of the market fragmentation. We find that, after peaking during the sovereign debt crisis, fragmentation shrank in 2013 and receded to pre-crisis levels only in 2014. However, the low level of estimated market fragmentation is coupled with a still high heterogeneity in actual bond yields, challenging the consistency of the new equilibrium.