Impact of country risk & sovereign credit rating on corporate bond yields of Singapore

Abstract

This research paper examines the impact of country risk and sovereign credit rating on corporate bond market yields of Singapore for a time frame of August 2010 to December 2019. A good composite country risk score & sovereign credit rating help better private capital inflow in a country. As sovereign bonds are less risky than corporate bonds, it is essential to perform respective risk analysis before investing in corporate bonds for better yield expectations by institutional & retail investors. Singapore being a good rated and less risky country for several consecutive years, has increasingly becoming popular as a first choice for private investments among Asian countries. For investigating the impact of country risk & sovereign credit rating on corporate bond yields of Singapore, moderating variables- GDP growth rate of Singapore, annual inflation percentage change, current account balance to GDP are added in the analysis. Previous studies found that bond yield holds negative correlation with sovereign credit rating, current account balances & inflation rate. However, as the rating didn’t fluctuate for chosen time period of Singapore, conclusion couldn’t be drawn in this regard. But negative correlation with current account balances has been found similar in case of Singapore. The data of inflation proved to be statistically insignificant to conclude any relationship. It has been also evident that GDP growth rate formed negative association with corporate bond yields in case of Singapore which implies that as GDP grew, corporate bond yields flattened. Finally, country risk has been found negatively correlated with corporate bond yields signifying that as the country becomes riskier (ratings go higher), bond yields fell. Among the variables, country risk and GDP growth rate data proved to be statistically significant to draw these remarks.