The relation between treasury yields and corporate bond yield spreads in Australia: Evidence from VARs

In this paper we investigate the relation between treasury yields and corporate bond yield spreads. This is done by estimating VAR models on monthly Australian data from January 2005 to March 2017. Our results suggest-in line with mainstream theoretical models- that a higher risk free rate compresses the corporate bond yield spread. We also find that a higher corporate bond yield spread lowers the three-month treasury bill rate.