Corporate Bond Specialness

Using data on all corporate bond loans by one of the world’s largest custodian banks, we study the main determinants of shorting costs as measured by rebate rate specialness. We find that 3.0% of corporate bonds are on loan, and 11% of loaned bonds have substantial shorting costs above 50 basis points. In the cross section, specialness is higher for bonds that are of worse credit rating, higher yield spread, smaller issues, less time to maturity, more illiquid, and bonds that appear expensive relative to the corresponding credit default swap. Bonds that are downgraded to speculative grade are more likely to be on special for several weeks before and after the downgrade, and have large shorting activity. Finally, equity specialness is positively related to the firm’s bond specialness and the bond-CDS basis. JEL classification: G10 (General Financial Markets) ∗Nashikkar is a doctoral candidate at the Stern School of Business, New York University. Pedersen is at the Stern School of Business, New York University, CEPR, and NBER, 44 West Fourth Street, Suite 9-190, New York, NY 10012-1126, [email protected], http://pages.stern.nyu.edu/∼lpederse/. We are grateful for helpful conversations with Marti Subrahmanyam, and especially to Sriketan Mahanti and Gaurav Mallik of State Street Global Markets for valuable information and assistance.