AAA Corps and the Flow of Risk-Off TradingRE
The other day, I had the opportunity to attend a presentation by an analyst who’s focus is in Rates Trading. During the presentation, he talked about the future outlook of US Tsys and what that said about the US Government’s future relating to its credit rating and debt/gdp ratio.
The most disturbing and eye opining chart was an overlap with the US Tsy yields and the AVERAGE AAA Corp yields, with the X-axis extending 30 years. Naturally, the AAA yields were a little higher than the Tsys…until year 25, where they intersected. Thus, year 30 showed that the AAA yields were lower than those of US Tsys (suggesting AAA Corpsless risk in the long run).
Obviously, the implications are huge. This essentially means that there is greater confidence in AAA corporations making coupon payments than the US Government (startin in 25 years).
Another implication relates to how bonds are traded in a Risk-Off environment. Currently, the flow results in buying Tsys and selling Corps/Equities. If Corps become safer (lower yields) that could lead to a shift of inflowing Corps and outflowing Tsys. While only certain Corps arelower at this time, that number will likely increase as US debt obligations increase.
So do you guys (UGs, S&T Analysts, anyone) think that Risk-Offwill see this dramatic shift, with Corps being the safer option?
“Presidents come and go; Exxon doesn’t come and go.” - Former ExxonMobil CEO Lee Raymond