Climbing the ladder of interest: A study of the impact of interest rate hikes on corporate bond credit spreads in the U.S

Abstract

This thesis examines the impact of interest rate hikes and other key economic variables on the credit spreads of corporate bonds. Based on rising interest rates and shifts in investor preferences, our study seeks to capture and understand the dynamics influencing corporate bonds. Utilizing fixed effects models and data from 2002 to 2022, we test the hypothesis that rate hikes significantly increase credit spreads due to heightened risk perception among investors. Our findings show that interest rate hikes impact investment-grade bonds in the short term, while high-yield bonds show no significant, isolated impact for both short- and long-term. These results underscore the importance of considering interest rate changes and heightened risk perception in investment and policy decisions.