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Goldman: Inflation Pricing Argues For Higher NT Real Rate Fwds

US TSYS/TIPS

Goldman Sachs note that “headline inflation relief from lower gasoline prices has driven front-end real yields sharply higher, with the real curve now firmly inverted.”

  • “Beyond the very front-end, however, the market continues to imply a relatively firm path for inflation in 2023 and 2024, potentially reflecting an anticipation that (elevated) sticky components will be key drivers of future prints. Despite this, the inversion in the nominal forward curve means that 1y1y and 2y1y real yields are at levels (just above 0% in OIS terms) that do not appear all that restrictive, despite the Fed’s clear communication on its desire to bring inflation lower even at the cost of some near-term pain.”
  • “To the extent that inflation does realize somewhat above 3% next year (as the market currently implies), it would likely result in somewhat higher nominal yields than currently priced being realized, either because the Fed tightens further than is priced, or simply because it keeps policy rates at somewhat restrictive levels.”
  • “Even in the scenario where inflation were to realize softer than current market pricing, outside of continued deeply below potential growth, it isn’t clear that an immediate start of Fed easing would be warranted. Such an outturn would also at the very least favor being short real rates over nominals.”
  • Thus, they recommend entering a 1y1y TIPS position, targeting a move to 35bp, with a stop set at -25bp.
MNI London Bureau | +44 0203-865-3809 | anthony.barton@marketnews.com
MNI London Bureau | +44 0203-865-3809 | anthony.barton@marketnews.com

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