The Importance of Sovereign Bond Benchmarks for Corporate Debt Issuance

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.