Issuer Term Variability, Bond Yield Spreads, and Reaching for Yield.

This article investigates how "issuer term variability" (ITV)—the variation in nonfinancial contractual terms across bonds issued by the same firm—affects corporate bond yield spreads, returns, and investor behavior. Using a comprehensive dataset of U.S. corporate bonds from 1998 to 2018, the study finds that higher ITV is associated with significantly higher yield spreads and greater default risk, even after controlling for credit ratings and other risk measures. Despite higher yields, bonds with high ITV deliver lower risk-adjusted returns, suggesting that yield-seeking investors, including certain bond funds, disproportionately hold these complex bonds in a behavior termed "reaching for ITV" (RFV). The findings indicate that this preference is difficult to justify as rational risk-taking under portfolio constraints and may reflect either investor naivety or a deliberate but potentially irrational pursuit of yield, highlighting important implications for bond pricing, investor clientele, and regulatory considerations.