Investigating the determinants of corporate bond credit spreads in the euro area

The COVID-19 pandemic led to a surge in credit spreads that cannot be fully explained by a higher probability of issuer defaults. The sharp rise in spreads is consistent with a liquidity shock caused by heavy selling pressure that mainly affected the more liquid and safer bonds. Indeed, the results of a panel analysis confirm that the credit spread depends not only on idiosyncratic factors, such as duration and rating attribution, but also on liquidity and macroeconomic factors, especially in times of crisis. Furthermore, over the last decade, sustainability factors have increasingly affected the choices of bond investors. Our findings suggest that a better ESG performance may be associated with lower credit spreads.