The Long and Short
20-year trade crowded negating curve inversion
This material is a Marketing Communication and does not constitute Independent Investment Research.
The US Treasury curve is inverted at the long end with 20-year rates around 2 bp higher than 30-year. Conventional wisdom says this is an opportunity to overweight the 20-year part of the investment grade corporate curve, but the trade has gotten crowded. A closer look at segment fair value curves and real-world examples suggests a barbell approach to long duration in corporate credit should work better.
On March 19, the long end of the Treasury curve inverted for the first time since last July. Those market conditions had persisted since the later tail of the Covid crisis in 2021 but returned to normal last summer and remained that way until the recent spike in inflation concerns (Exhibit 1).
Exhibit 1. UST 20s/30s yield curve – five year history
Source: Bloomberg LP
As the global conflict in Iran has escalated, higher oil prices have stoked inflation concerns, further dampening the prospect for Fed rate cuts and leading to higher base rates over the past four weeks. Meanwhile, investment grade corporate bond spreads peaked right around the same time the curve inverted, with the index hitting a local peak of 93 bp before gradually receding back over the next week or so.
On Exhibit 2, the top graphic demonstrates the change in the US Treasury yield curve versus year-end 2025 (green) and the current shape of the fair value yield curve for single-A rated industrials (blue) as well as BBB-rated industrials (red). Beneath that, current investment grade spreads over Treasuries demonstrate the current shapes of the single-A and BBB-rated industrial spread curves versus year-end as well. Notable steepness in the long-end of the IG spread curve versus year-end highlights that both cohorts indicate that 20-year maturities have been overbought in recent weeks favoring a barbell approach to long duration in both A- and BBB-rated industrial securities.
Exhibit 2. Yield and Spread Curves – Industrials (A, BBB) versus UST
Source: Bloomberg LP – Bloomberg fair value curves
Shifting focus to the utilities sector, a segment of the market that often offers opportunities to target undervalued, seasoned 20-year paper with exceptional value relative to the long-end. On Exhibit 3, the top graphic demonstrates the change in the US Treasury yield curve versus year-end 2025 (green) and the current shape of the fair value yield curve for single-A rated utilities (blue) as well as BBB-rated utilities (red). Beneath that, current investment grade spreads over treasuries demonstrate the current shapes of the single-A and BBB-rated utilities spread curves versus year-end as well. Once again, even more steepness in the long-end of the investment grade spread curve versus year-end highlights that in both cohorts, 20-year maturities have been substantially overbought in recent weeks favoring a barbell approach to long duration in both A- and BBB-rated utilities securities.
Exhibit 3. Yield and Spread Curves – Industrials (A, BBB) versus UST
Source: Bloomberg LP – Bloomberg fair value curves
Financials have been particularly hard hit with the recent sell-off in spreads as private credit concerns have taken an even greater priority among credit investors than the recent geopolitical events. Specific segments of the sector have been rapidly repriced since the tights of January, including: life insurance, brokers/private equity and business development companies (BDCs). The latter two have minimal if any concentration in the long end of the curve, but insurance offers plenty of longer-dated securities. On Exhibit 4, the top graphic demonstrates the change in the US Treasury yield curve versus year-end 2025 (green) and the current shape of the fair value yield curve for single-A rated financials (blue) as well as BBB-rated financials (red). Beneath that, current investment grade spreads over Treasuries demonstrate the current shapes of the single-A and BBB-rated financials spread curve versus year-end as well. Lastly, the financials sector demonstrates similar type of pressure on 20-year maturity spreads, perhaps even more so than the other sectors as the 10s/20s spread curve is distinctly inverted for BBB-rated financials. This once again favors a barbell approach to long duration in both A- and BBB-rated financials securities.
Exhibit 4. Yield and Spread Curves – Financials (A, BBB) versus UST
Source: Bloomberg LP – Bloomberg fair value curves
While the Bloomberg fair value curves are mostly conclusive that the 20-year bucket appears overbought, taking some real-world market examples demonstrates a more mixed result regarding the attractiveness of 20-year maturities amidst UST curve inversion. Taking a sample of bond pairings from the BBB-rated utilities segment (Exhibit 5 below), there still appear to be select opportunities to target seasoned 20-year paper at a yield pick to commensurate long-dated debt in multiple issuers from the sample set below. The relationships in the long-end of the curve are flat overall, but a selective approach enables investors to maximize their spread/yield opportunities in this current environment. Some of the more attractive options for 20-year issues from the sample below include: AEP, PacifiCorp (BRKHEC), LNT, Boston Gas (NGGLN), PNW and SO.
Exhibit 5. BBB-rated Utilities – 10s/20s/30s bond pricing
Source: Bloomberg/TRACE YAS spread and yield indications only
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