Halister News

(Bloomberg) -- Divergence between term premia and credit spreads is now widest on record, and the positive correlation that existed until 2008 isn’t likely to return, Credit Suisse strategists led by Praveen Korapaty say in note.

• Term premia are near multi-decade lows, while credit spreads “remain somewhat elevated”
• Term premia are structurally lower than in recent decades because of Fed communication, lack of inflation and duration supply/demand imbalance, however that doesn’t explain divergence from credit spreads
• Causes of divergence include reduced liquidity (requiring “greater liquidity risk compensation”), spillover weakness from high yield, and disinflationary environment that “isn’t particularly good for corporate debt, but can be fairly good for ‘risk-free’ bonds”
• Depressed term premium makes USTs “somewhat more likely to work as a risk-off hedge, though they will probably provide lesser protection than in the past”
• “Therefore, investors seeking to hedge risky assets to the same extent they did in the past with long Treasury positions are likely to need to consider either increasing leverage or perhaps exposure via constrained rather than outright upside positions in rates”