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The steepness of the yield curve follows a certain pattern over the business cycle. The 1991–2001 economic cycle is representative for past economic cycles in the sense that it displays the usual pattern for the correlation between yield curve steepness and industrial production. But it is special because it comprises the longest economic expansion in the United States since the NBER started dating recessions back in the 1850s.

The management of the yield curve is a central element of fixed income portfolio management, even for corporate bond investors. However, many of them tend to take no or rather small active exposures with respect to duration and the positioning on the yield curve. Consequently, active positions with regard to sector and issuer exposures are responsible for a large part of the out- or underperformance versus the benchmark index.

Since corporate bonds as an asset class clearly depend on the boom and bust of the economy, it seems natural that not only the spread level but also the slope of the credit curve may – similar to the slope of the yield curve – be related to economic activity. The question then is if taking active positions on the credit curve can attribute to the performance of a corporate bond portfolio.

Technical factors have to be considered in the decision process regarding the weighting of various sectors in a corporate bond portfolio. First of all, projections about the expected net new issuance volume have to be made. All redemptions in an industry are known and the projected financing needs of all companies within an industry add to the total expected issuance from a specific sector. In the past, the largest issuance volume has been concentrated in the automobile, telecommunications and utility sectors.

It has to be evaluated whether the new issuance volume can be absorbed by the market or whether it will put pressure on spreads. The general risk appetite/aversion of market participants and the prevailing sentiment towards the various sectors will give a hint about the demand for certain sectors. Another important factor is liquidity because it will vary substantially between sectors. Furthermore if investors want to express a certain view on different maturity buckets within a portfolio the choice might be limited to a few frequent borrowers who have bonds in all maturity buckets outstanding. Those companies are usually concentrated in the automobile, telecommunications and utility sectors.