Goldman Like Long 7-Year Swap Spreads Via 2-/7-/30-Year Swap Fly

Goldman Sachs note they have "previously highlighted weakness in the 7-Year and 20-Year sectors of the yield curve - the combination of auction performance and relative weakness on the spread curve suggest relative supply/demand imbalances. After all, these maturities have seen the greatest increase in supply over the past year. While near term speculation on a reduction in the size of 20-Year auctions has picked up following a dealer survey question soliciting thoughts on potential improvements/changes in the 20-Year product, we suspect any change, were it to occur ahead of the broader reductions discussed above, would affect both the 7-Year and 20-Year auctions to avoid questions on Treasury's commitment to a new product. While an adjustment to sizes at the May refunding isn't our baseline, there are nevertheless a few potential tailwinds. First, we think there is already some value to being long 7-Year spreads on the fly (e.g., versus 2s and 30s) on account of the relative attractive carry and cheapness given the broader level of spreads. Second, even without explicit reductions, an indication by Treasury that adjustments to address imbalances may be forthcoming could move pricing, though the more substantial boost would likely come on the back of the flow effect from smaller auction sizes being realized. Third, a reallocation of Fed purchases away from the wings to the belly of the curve to realign purchases with the distribution of outstanding debt could also help on the margin. While each of these factors may have only a marginal impact, the cumulative effect could be supportive of 7-Year spreads - we recommend going long on a 2-/7-30-Year spread fly."