Corporate Loan Spreads and Economic Activity

We study the predictive power of loan versus bond spreads for business cycle fluctuations. Using a novel credit spread measure derived from the secondary loan market, we show that loan market-based credit spreads have additional predictive power for macroeconomic outcomes (such as employment and industrial production) compared to bond spreads as well as other credit spreads and equity returns, both in the U.S. and Europe. Differences in the composition of firms borrowing in loan or bond markets are important in understanding the differential predictive power of both credit spreads. Industry specific loan spreads predict different industry cycles and can be used to construct alternative weighting schemes which further improve the predictive power of loan spreads.