The Importance of Sovereign Bond Benchmarks for Corporate Debt Issuance

Abstract

Sovereign bond benchmarks are important determinants of corporate bond issuance and maturity. We show that by providing benchmark rates, long-maturity government issues complement the issuance of similar-maturity corporate issues. Government and corporate bond issues are also substitutes and more long-term corporate bonds are issued when sovereign alternatives are in short supply. However, the substitution weakens when sovereign bonds fail to provide a precise benchmark. Sovereign debt and its maturity play an important role in capital market development with sovereign bond issues that increase a country’s maximum maturity preceding increases in the maximum maturity of corporate issues.