Goldman: Fade Cheapness Of 3s On Tsy Curve Via 2s3s Spread Steepeners

Goldman Sachs note that “among the many striking elements of the rate repricing has been the significant underperformance of the 3-Year point on the curve. The market’s implied inflation path may in part explain this relative weakness, with inflation forwards only dipping below 3% (and towards more target consistent levels) out beyond the 3-Year horizon. While uncertainty around the inflation trajectory creates risks around the outright curve shape, the more acute cheapening of 3s on the Tsy curve compared to swaps makes spreads a compelling way to fade this underperformance. The level shift tighter and slope of the spread curve make outright spread longs in the 3-Year sector somewhat attractive given their carry profile, but we think spread curve trades offer better risk/reward here. Outright spread levels have been somewhat tighter, and they are vulnerable to potential accumulation of supply pressure once QT begins. By contrast, the 2s3s spread curve has compressed to historically flat levels in recent months, and the spread curve steepener rolls positively over a 3-month horizon. We recommend positioning for richening of 3s on the curve via 2s3s swap spread curve steepeners, with an entry point of -12bp, targeting a move to -4bp, with a top set at -16bp.”