We document key facts about the inflation risk exposure of corporate bond returns within standard portfolio frameworks over the period 2004-2022. First, while inflation betas of standard bond excess returns (relative to T-bills) are, on average, negative, inflation betas of credit excess returns---measured relative to duration-matched Treasurys---are positive across nearly all bonds. Second, the cross-sectional variation in the inflation beta of corporate bond returns is primarily driven by that of credit excess returns, with higher-default-risk bonds exhibiting more pronounced positive inflation betas. Third, inflation beta affects future bond returns positively in the cross-section, and this effect is driven entirely by credit excess returns. Finally, firms with higher bond inflation betas also have higher stock inflation betas.

Using inflation swap prices, we study how changes in expected inflation affect firm-level credit spreads and equity returns, and uncover evidence of a time-varying inflation sensitivity. In times of “good inflation,” when inflation news is perceived by investors to be more positively correlated with real economic growth, movements in expected

inflation substantially reduce corporate credit spreads and raise equity valuations. Meanwhile in times of “bad inflation,” these effects are attenuated and the opposite can take place. These dynamics naturally arise in an equilibrium asset pricing model with a time-varying inflation-growth relationship and persistent macroeconomic expectations.

Do global credit conditions affect local credit and business cycles? Using a large cross-section of equity and corporate bond market returns around the world, we construct a novel global credit factor and a global risk factor that jointly price the international equity and bond cross-section. We uncover a global credit cycle in risky asset returns, which is distinct from the global risk cycle. We document that the global credit cycle in asset returns translates into a global credit cycle in credit quantities, with a tightening in global credit conditions predicting extreme capital flow episodes and declines in the stock of country-level private debt. Furthermore, global credit conditions predict the mean and left tail of real GDP growth outcomes at the country-level. Thus, the global pricing of corporate credit is a fundamental factor in driving local credit conditions and real outcomes.