Debatin' Duration: IG Long-End Rel Val Update

Winnie Cisar - Global Head of Strategy
Brian Perez - Analyst - Strategy
Zachary Griffiths, CFA - Senior Analyst - U.S. Strategy

EXECUTIVE SUMMARY
  • In 2022, duration risk and credit risk have traded in tandem, severely impairing total and excess return performance for the long-end of the IG market. Given the magnitude of losses in the long-end, we take a closer look at current valuations and our expectations for catalysts and performance over the next 12 months.
  • The most challenging scenario for long-end IG total return performance would be a continuation of recent trends, driving credit spreads wider and UST yields higher.
  • We have a more tempered view of excess returns as long-end spreads currently trade tight to the belly of the curve and are not particularly wide when compared with prior cycle wides.

In recent weeks, rates market volatility has remained elevated as a combination of inflation fears and central bank tightening has continued to weigh on fixed income investor sentiment. In the US IG market, spreads have held at the wide end of recent ranges, while total return losses continue to mount amid rising yields. Since YE 2021, IG yields have climbed by 372 bp to 6.1%, driving YTD total return losses of -20% and marking the worst performance since 1995 when our data series begins. While UST curve inversion has somewhat anchored the overall move in long-end (10+ year) yields, which are 311 bp higher YTD at 4.6%, total return losses now total -32%, also the worst on record. The same curve inversion has also weighed on long-end excess returns. YTD 2022 10+ year excess return losses of -5.2% are well below those of the front-end (-1.1%) and IG aggregate market (-3.7%).

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