Chart of the week: steeper curves: risk or opportunity?

Data-driven insights and analysis from our investment team every week.

Last week we outlined that yield curves have steepened year to date, meaning longer duration bonds offer higher yields relative to shorter duration bonds. Historically, the prevalence of inverted yield curves, supported a short duration bias. In this context it is reasonable to consider if investors should extend the duration of bond portfolios now that curves have steepened.

While steeper curves imply higher yields for long-duration bonds, we view this as a reflection of repriced risk rather than a genuine value opportunity at this time. Several factors underpin this view. In Europe, growing scrutiny of sovereign debt levels is exerting upward pressure on long-duration bond yields, particularly for bonds with maturities past 15-20 years. Meanwhile, in the US, the Federal Reserve continues to cite labour market softness when discussing future rate cuts, but risks remain around the stickiness of inflation for the region.

Of course, selective opportunities remain in the market. While it’s still challenging to justify outright long-duration exposure, the broad steepening of yield curves has shifted relative value across segments, creating more attractive entry points in certain areas. One emerging trend cited by fund managers is a rotation away from cash-like instruments—such as ultra-short duration bonds and bills with maturities under one year—toward slightly longer, yet still short-duration assets, typically in the 2–3 year range. This shift is most evident in increased demand for short-duration corporate bonds and bond funds.