Corporate Debt Maturity and Monetary Policy
Do firms lengthen the maturity of their borrowing following a flattening of the Treasury yield curve that results from monetary policy operations? We explore this question separately for the years before and during the zero lower bound (ZLB) period, recognizing that the same change in the yield curve slope signifies different states of the economy and monetary policy over the two regimes. We find that the answer is robustly yes for the pre-ZLB period: Firms extended the maturity of their bond issuance by nearly three years in response to a policy-induced reduction of 1 percentage point in the maturity-matched Treasury term spread between the current and previous bond issuance. By comparison, the answer is more nuanced for the ZLB period: The magnitude and significance of the maturity response were even more pronounced during the peak quarter of the financial crisis (the fourth quarter of 2008), but they were much more muted afterward. In addition, we find that the corporate bond credit spread declined consistently following a policy-induced flattening of the yield curve, albeit not significantly after 2008:Q4. Most of these effects are due to the lower term premium, not due to the expected short-term rate. Taken together, these findings indicate that firms tend to adjust the maturity and composition of their debt issuance in order to benefit from changes in the term spread induced by monetary policy. Our analysis illustrates one channel through which unconventional policy operations can affect economic activity, especially when markets are under distress. This can help us understand the transmission of unconventional monetary policy, which has become a vital issue in the low-interest, low-inflation environment that has prevailed since the financial crisis.