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Curves Are Slower To Adjust

09 July 2014 by HCM

What this grapple shows you is fairly counterintuitive. Even though risk premia have risen (modestly) over the last few weeks, with almost all sectors trading wider than they were a month ago, the curves have not steepened. The difference between the 10 year risk premia and the 5 year risk premia are roughly unchanged across the board. If you look at the same grapple but on a 6 months time span, you will see that these curves have all meaningfully flattened during the good run of the credit market when risk premia decreased by roughly 15%. Most of the recent move wider took place over the last few sessions, and dealers have not yet adjusted the level of their 5 year 10 year switches, as it often only represents a second order move in the bigger scheme of things. That anomaly should soon correct itself if the change in the spreads direction is confirmed. If the weakness persists in the credit market, curves will be quoted steeper.