5s30s Tactical Steepeners

TD Securities is putting on tactical curve position around current levels as they see potential for further steepening in 5s30s, citing: a high bar for a Fed hike in the bear term as well as high amount of "duration supply."

• For reference: 5s30s yield curve is over 3bp steeper at the moment, over 145.75, off session high of 147.376 -- and certainly the multi-year high of 166.984 from Feb 24.
• The "Fed is looking for an inclusive labor market recovery and inflation to overshoot the 2% target to hike rates. This should help anchor the 5y sector. The market is already pricing the first Fed hike in March 2023 and a terminal rate of 2%."
• "With a deficit of $3.6tn in FY2021 and $2.3tn in FY2022, we see $2.7tn of coupon supply both this year and next. Given the increase to long-end auction sizes, this translates to $3.4tn of 10y equivalents in FY2021 and $3.5tn in FY2022 (Figure 2). Note that Fed QE at the current pace only takes out $640bn/yr in 10y equivalents creating large duration supply for the private market to take down. There is $24bn of 30y supply tomorrow and a $24bn 20y auction next week."