Credit curves to steepen further, says Goldman Sachs

Goldman Sachs reported in its research on Friday that the rapid steepening of index curves last week was caused by a combination of improving funding conditions and the relaxation of hedging presure from CDO investors. Analysts believe systemic and short-term risks are normalising, and should drive credit curves to continue steepening and dis-inverting going forward.

CDO reference entities are less inverted now, as banks look to raise capital and trading desks concentrate more on risk-taking than pure hedging. Refinancing is less of a concern, as many investment grade and high-quality high-yield names restructure their debt. Leverage, however, remains important as levels remain above average.