There has been a great deal of attention on the shape of the yield curve this year, particularly in the Treasury market. The majority of the conversation has been focused on the inversion of the front end of the curve (the negative slope from the 3-month Treasury bill to the 10-year note). The front end of the Treasury curve still remains very flat (now slightly positively sloped), while the long end of the Treasury curve has steadily steepened this past year, as seen in this week’s chart. Admittedly, long end interest rate levels are still near the historical lows experienced in August, while the Treasury curve slope out long is very close to the long-term average.
The chart also shows the steepening of the 10s-30s corporate credit curve, which now sits at the steeper end of the range over the past five years. The option adjusted spread (OAS) for 30-year investment grade (IG) corporate bonds is currently about 45 basis points (bps) more than the 10-year OAS. There are several factors that could be contributing to this steepening. First, IG new issuance year-to-date has seen a larger portion print in the long end relative to prior years. With rates at these very low levels, the added interest rate sensitivity (duration) for extending out the curve is greater than during periods of higher rates and could result in investors demanding more spread. Macroeconomic concerns related to trade wars and inflation worries could also influence the curve steepening.
In spite of the steepening credit curve, performance in long IG corporates, like most risk assets, has been quite impressive, up over 21% in 2019. With the 30-year IG corporate OAS only 12 bps tighter year-to-date, the majority of long corporate performance has been driven by the rate move.
The steepening of the long Treasury and corporate curves has been persistent this year, although it does appear to have paused. At a time when rates around the globe are meaningfully lower than in the U.S. and the economic backdrop is less constructive abroad, it would not surprise me to see the steepening trend in corporate credit spreads subside and even begin to flatten. The new issue picture is also supportive of credit curve flattening, as total supply is widely expected to be below last year’s level and well below 2017’s record issuance.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
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