How Downward-Sloping are Demand Curves for Credit Risk?
by Yigal S. Newman of Stanford University, and
April 5, 2002
Abstract: We analyze European telecom debt issues between October 1999 and July 2001, and find evidence that the demand curve for telecom-sector debt slopes downwards. Consequently, industry-wide spreads rise in reaction to unanticipated new debt issuances. We separate the portion of the bonds' yield spreads driven by the issuer's credit risk from the portion driven by this "new-issuance risk". A €16B issue by Deutsche Telekom increased spreads across all telecom issues by an estimated twelve basis points. For example, the decline in market value of a $2.8 billion British Telecom bond attributable to the Deutsche Telecom issue is estimated to be 1.54% or $43.2 million.