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The yield spreads between corporate bonds and government bonds are most likely to decrease if:

A investors increase their estimates of the recovery rate on the corporate bonds.

Yield spreads reflect the credit quality of bond issuers and the liquidity of the market for their bonds. Narrowing (decreasing) yield spreads reflect improving credit quality or more liquidity. Widening (increasing) yield spreads reflect deteriorating credit quality or less liquidity. Increased estimates of the recovery rate in the event of default represent an improvement in investors’ assessment of the issuers credit quality and are likely to narrow yield spreads on the issuers bonds.


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