The Term Structure of Corporate Bond Risk Premia



I construct a forward-looking estimate of the term structure of corporate bond risk premia based on yields and estimated default probabilities. I document an upward-sloping term structure of risk premia both at the aggregate bond market level and across various cross-sectional sorts over 2002-2020. The forward-looking estimates reveal that most of the credit risk, value and size premia in corporate bonds are earned on short-duration bonds, suggesting that the investors are particularly averse to the short- and intermediate-horizon risks. These patterns are not detectable by the average realized returns that in the same sample period exhibit a slightly downward-sloping term structure. I show that a significant fraction of the realized returns is driven by downward-trending risk premia over the last 20 years, which substantially reduced the informativeness of realized returns about risk premia.