In a note out on Wednesday, Antoine Lesne, Tapiwa Ngwena and Rebeca Chesworth argue that with deflation threats fading into the background as markets increasingly focus on recent economic and inflation figures (next week’s US election notwithstanding) there is the possibility for a steepening of the curves.
“After two years of downside inflation surprises, the deflation threat seems to be easing, pushing break-evens higher. US 10-year break-evens trade around 1.73% (at the time of writing) while euro equivalents are at 1.07%,” it said.
Despite this increase seen in treasury yield, however, it said, spreads have continued to tighten in sterling, US dollar and euro corporate indices. Adding, in such a context, a more pointed duration exposure is required to manage interest rate risk.
“The Barclays US Corporate 3-10 Year Index currently has a duration of circa 5.3 vs. 8.4 in an all maturity index like the iBoxx US$ Liquid Corporate Index. In the past 10 years the duration of the Barclays All Maturity IG Corporate Index has been extended by 1.5, from 6 to 7.5. The case for controlling duration thus becomes natural,” the trio said.
Adding: “Maturity-based indices offer this opportunity to investors to more precisely adjust their portfolio.”