The Development of Domestic Bond Markets

This paper documents the importance of government debt in facilitating the development of corporate bond markets. Using micro-level data from Brazil, I exploit variation in the supply of government bonds at different maturities to estimate the causal effect of additional government debt outstanding on firm issuance decisions. I find that at early stages of development, government debt complements corporate debt, implying that additional government debt outstanding at a given maturity causes firms to issue more. These effects ultimately increase long-term debt issuance and investment across firms, with stronger responses from companies with higher asset duration. However, as markets mature and government debt levels rise, I document a shift from complementarity to substitution. This evidence can be rationalized through government debt reducing corporate pricing uncertainty by providing pricing benchmarks and facilitating price discovery in bond markets.