Insurance Insights: September 2025

Key Insights

• Our Global Interest Rate and Currency Strategy team maintains a bearish outlook on U.S. Treasury yields, particularly at the long end.
• We believe high-quality high yield corporates offer value despite rich valuations.
• Long-end U.S. Investment Grade Corporates face our most cautious stance despite persistent technical support.

Risk-Neutral Stance Amid Rich Valuations

T.Rowe Price’s Sector Strategy Advisory Group adopted a risk-neutral stance in September, reflecting a pragmatic pivot in the face of richening valuations and moderating technical support. Importantly, this neutral position implies a structural credit overweight within our framework reflecting a preference for capturing carry given technicals and fundamentals generally remain solid despite stretched valuations.

Despite stretched valuations, the structural credit overweight remains supported by positive macro signals. The accelerating AI-driven CAPEX boom, resilient U.S. consumer fundamentals, and a 2Q 25 earnings suggest growth could surprise to the upside as we push into 2026. Forward-looking activity data confirms that equity market optimism reflects underlying momentum, while policymakers continue easing in tandem, providing additional support for risk assets.

Treasury Yield Curve: Rising Pressure Ahead

Our Global Interest Rate and Currency Strategy team maintains a bearish outlook on U.S. Treasury yields, particularly at the long end, driven by two powerful macro forces working in concert.

Growth momentum is accelerating as major headwinds have been mitigated or cleared. Tariffs have been continuously walked back by the Administration, delaying potential supply-chain disruption while maintaining moderate cost pressures. More significantly, the ‘One Big Beautiful Act’ passed in July eliminated the overhang of potential Tax Cuts and Jobs Act tax cut expiration while heavily incentivizing capital expenditures and modestly supporting low-end consumers through tax exemptions on tip and overtime income.

Inflation risks are mounting from multiple sources. The growth-stimulative legislation could create abrupt acceleration in demand for raw materials and services given its CAPEX focus. The steadfast AI capacity build out continues fueling massive technology spending while straining power grids and energy sources.

Tariffs, while moderated from initial expectations, are still set to rise materially from recent historical averages of 2.5% to levels potentially exceeding 15%—the highest in nearly a century.

Our quantitative models reinforce this outlook: breakeven and commodity momentum frameworks flash strong long signals for 5-year inflation breakevens, macro signals remain at high conviction levels, and market-based inflation expectations still underappreciate the stickiness potential.

Implications for Insurance Investors

In this environment, insurance companies stand to benefit from better book yields as they reinvest cash flows at higher rates. However, they may face unrealized losses as bond prices decline in response to rising yields. The impact should be less severe than 2022’s sharp rate climb from historic lows, but insurance companies must focus on managing duration prudently while positioning portfolios to capture higher yield opportunities.

Strategic sector positioning becomes critical, with our overweight recommendations centered on three key areas emphasizing credit quality:

• We believe high-quality high yield corporates offer value despite rich valuations. With spread dispersion at historically tight levels—BB vs. BBB spreads compressed versus history—the focus should be on crossover and BB-rated credits over B-rated or lower. These higher quality sub-investment grade credits provide appealing yields while offering better downside protection in a potentially volatile environment.
• High quality senior bank loans present attractive current income that can offer some risk mitigation against our bearish rate outlook. We believe the sector’s composition—largely services, technology, and financials—provides relative insulation from tariff-related risks.
• High-quality CLOs remain our preferred securitized credit choice, offering defensive carry positions with structural protections and spread pickup versus similarly rated corporates. The emphasis on AAA through single-A rated tranches provides quality carry suitable for insurance investors seeking defensive positioning in a tight-valuation environment.

Long-End Investment Grade: Proceed with Caution

Long-end U.S. Investment Grade Corporates face our most cautious stance despite persistent technical support. Credit spreads have returned to the tightest levels in over two decades while index-level credit quality has modestly deteriorated, underscoring the valuation risk. Within investment grade allocations, the preference should favor an up-in-quality bias, as compressed spread dispersion offers minimal compensation for lower credit quality or security subordination. For example, we are recommending investors consider swapping up into senior financials out of subordinated financial paper given this dynamic.

Most concerning is the concentration of duration risk in longer maturities, where tight valuations and low carry leave minimal room to withstand even small spread widening. Given our bearish yield environment, this supports patience around extending portfolio duration until more attractive entry points emerge.

Summary

The potential for rising Treasury yields creates both challenges and opportunities for insurance portfolios. We favor high-quality, subinvestment grade credit sectors like BB-rated high yield corporates and senior bank loans, as well as A-rated or better CLOs while being patient on long-duration investment grade purchases. This quality-focused positioning allows insurance investors to capture enhanced book yields while managing both credit and interest rate risk in an environment where policy-driven growth and sticky inflation pressures are just beginning to unfold.
 

T.Rowe Price fixed income credit sector views for September

(Fig. 1) As of September 16, 2025

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*See additional information on the next page for details about the SSAG.
Past performance is not a guarantee or a reliable indicator of future results.
 

Sector statistics and returns

(Fig. 2) As of June 30, 2025

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Past performance is not a guarantee or a reliable indicator of future results.
1 Returns are hedged to USD.
2 Yields are hedged to USD.
3 Loan yields and spreads are forward to maturity.
Please see Additional Disclosures for additional legal notices and disclaimers.

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Additional Information Relating to The Market Indices on The Previous Page
Market indices shown on previous page represent the following:
Global HY: Bloomberg Global High Yield Bond Index USD-Hedged; US HY: Bloomberg US Corporate High Yield Bond Index; Euro HY: Bloomberg Pan- European High Yield Bond Index USD-Hedged; Asia HY: Bloomberg Asia USD High Yield Bond Index; Bank Loans: J.P. Morgan Leverage Loan Index; EM Sovereigns (USD): J.P. Morgan EMBI Global Diversified Index; EM Corporates: J.P. Morgan CEMBI Broad Diversified Index; Global IG: Bloomberg Global Aggregate – Corporate Index USD-Hedged; US IG: Bloomberg US Corporate Bond Index; Euro IG: Bloomberg Pan European Aggregate Corporate Index USD-Hedged; Asia IG: Bloomberg Asia USD Investment Grade Bond Index USD-Hedged; CLO: J.P. Morgan CLO Post-Crisis Index; CMBS: Bloomberg US CMBS ERISA Eligible Index; ABS: Bloomberg US ABS Index; Agency MBS: Bloomberg US MBS Index; Taxable Munis: Bloomberg Taxable Muni US Agg Eligible Index; Global Aggregate: Bloomberg Global Aggregate Bond Index USD-Hedged; US Aggregate: Bloomberg US Aggregate Bond Index.
Yields for European credit indices and German bunds are hedged using the EUR 3-month implied yield and 3-month USD LIBOR. Source: Bloomberg.

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