Academic research published in April 2026 reveals that investment-grade corporate bonds have historically paid a sizable credit risk premium, challenging a modern consensus that extra corporate yields merely compensate for interest rate risk. A study titled “Reconstructing a Century of U.S. Corporate Bonds: Credit Risk in Historical Perspective” examined 128 years of data from 1895 to 2022. Researchers found that previous conclusions about negligible credit risk were artifacts of studying a short, unusual post-1986 window marked by falling interest rates.
Building a Century-Long Bond Database
To reconstruct historical yields, the study’s authors compiled a panel of more than 100,000 unique bonds and over seven million observations. They digitized monthly bond quotes from more than 80,000 pages of archival print sources using double-blind data entry. The primary archival sources included the Commercial and Financial Chronicle, Standard & Poor’s Bond Guide, and Mergent/Moody’s Bond Record. Researchers combined these archives with modern datasets from Lehman Brothers and Wharton Research Data Services. The team hand-collected specific bond characteristics such as coupons, maturities, collateral statuses, ratings, and call features from Moody’s Manual going back to 1917, producing a ground-up return series without relying on synthetic data.
Shifting Returns Across Sample Periods
When the authors restricted their analysis to the post-1986 sample window, they successfully replicated the prevailing academic consensus. Over that modern period, AAA and AA-rated corporate bonds earned a 3.75% annualized excess return over Treasuries, but only 0.25 percentage points of that total stemmed from actual default risk. The remaining portion reflected term premium driven by a multidecade decline in interest rates.
Extending the sample back to 1926 fundamentally alters those findings. The long-run credit risk premium for AAA and AA bonds climbs to 0.62%, while BBB-rated corporate bonds yield a 1.4% premium. High-yield assets display an even wider gap, as B-rated bonds generate a credit risk premium of 5.88% across the century-long sample compared to 3.06% in the post-1986 era. Across every rating tier, the historical premium scales monotonically with default risk.
Reconciling Historical Credit Spread Puzzles
The paper addresses a longstanding tension in financial economics regarding why average credit spreads remained relatively stable while estimated credit risk premiums swung wildly. The authors demonstrated mathematically that this wedge stems from a spread duration effect. When credit spreads decline over a sample period, bond prices receive an extra realized return boost. Conversely, when spreads rise or remain volatile, realized returns understate the true compensation.
Over a sufficiently long timeframe, spread increases and decreases offset each other, causing the estimated credit risk premium to converge with average credit spreads. The researchers noted that much of the existing literature ignores embedded call provisions when matching corporate bonds to comparable-duration Treasuries. During decades of falling interest rates, in-the-money call options shrunk effective durations well below stated Macaulay durations, which systematically understated the credit risk premium in post-1986 studies.
Tracking Systematic Risk Exposure
Sorting bonds by their sensitivity to stock returns, aggregate bond market returns, industrial production shocks, and inflation shocks revealed clear pricing patterns. Bonds with higher exposure to these systematic factors earned higher returns, with the entire spread explained by the credit risk premium component rather than the term premium. The authors also extended the Gilchrist-Zakrajšek credit spread measure back to 1926, finding that it consistently predicts future corporate bond excess returns and National Bureau of Economic Research recession probabilities.
What Archival Sources and Risk Premiums Define the Database?
What archival sources were used to build the 128-year database?
Researchers hand-collected monthly bond quotes from the Commercial and Financial Chronicle, Standard & Poor’s Bond Guide, and Mergent/Moody’s Bond Record, supplementing them with Moody’s Manual data dating back to 1917.
How much higher is the credit risk premium for B-rated bonds in the long sample?
B-rated bonds show a credit risk premium of 5.88% across the 128-year sample, compared to 3.06% in the post-1986 sample analyzed by previous studies.
Why did post-1986 studies understate corporate bond credit risk?
Past studies relied heavily on a period featuring a historic, multidecade decline in interest rates and ignored embedded call provisions, which misallocated credit compensation into the term premium bucket.
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