Gap filling and the determinants of long-term corporate debt issuances

Investment grade corporations issue debt across a wide spectrum of maturities. A significant proportion of the debt issued by these firms has maturities greater than 20 years. In this paper we examine the determinants of these long-term debt issues, and in particular, we investigate how variations in the supply of long-term Treasury bonds affect the issuance of long-term corporate bonds. We argue that an important determinant of these long-term debt issues is gap filling behavior, in which highly rated issuers fill gaps in the supply of long-term government bonds. Using a large sample of individual corporate loans and bond issues by U.S. companies between 1987 and 2009, we estimate both linear and non-linear models of corporate debt maturity choice. Additionally, we examine an exogenous shock to the supply of long-term government bonds, the suspension of 30-year Treasury bond issues in 2001, and its impact on long-term corporate bond issuance. We find evidence of gap filling only in the very long end of the maturity spectrum where the required risk capital makes it difficult for arbitrageurs to smooth out supply shocks. Specifically, we find that highly rated firms’ issuance of long-term bonds is inversely related to the proportion of outstanding Treasury bonds with maturities of 20 years or more. Our results suggest that shifts in the supply of long term Treasuries impact corporate bond issues in a relatively narrow segment of the term structure.