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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.

It can be stated that senior banks were less volatile than the telecommunications and automobile sectors. Especially the automobile sector and subordinated insurance increase the risk profile of a portfolio due to higher volatility and offer more potential to outperform/underperform the corporate benchmark if an overweighting is targeted. Services noncyclical and technology appear unattractive as they offer a relative low spread and a high spread volatility. The media, telecom and services cyclical sectors have an attractive risk-return profile and consequently should be overweight in a portfolio. The different spread volatilities of the sectors lead to divergent investor behavior regarding risk aversion /appetite, which in return results in different risk premia (spreads).

The rating differences between the various sectors have to be considered as well because in this example we compare AA-rated financials with low A/high BBB-rated telecommunication and automobile companies.