Web Manual of Loans Tips

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.