Goldman: 30-Year Swap Spread Underperformance Likely Stems From LDI Selling

Goldman Sachs write that “the sharp selloff in rates also resulted in tighter short term and long-end spreads over the last week or so. We suspect this tightening was to some extent driven by liquidation of cash assets.”

• “At the long-end in particular, the move pushed 30-Year U.S.Tsy-OIS spreads to their tightest levels since early in the pandemic, accelerating what had been a trend underperformance in long-end U.S. Tsys versus swaps.”
• “This is likely the result of UK (and possibly other) investors selling relatively liquid portions of their portfolio to meet variation margin calls.”
• “The flattening in the 20s30s spread curve is somewhat striking, particularly in light of underperformance of the 20-Year point on a spread basis in past periods of impaired market functioning.”
• “A reduction of the supply/demand balance that had been weighing on this maturity has likely supported the performance on-the-run, but even off-the-run 20s have outperformed.”
• “One possibility is that the wider ownership and better liquidity of 30s worked to their detriment over the last week, as investors adopted a “sell what you can” approach. We think there is a tactical case for 20s30s spread curve steepeners, though the broader context the cheapness of the 20-Year point on the broader spread curve and improved supply technicals likely limits the scope for a more sustained re-steepening.”