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Goldman Like Weighted EDM3/M4 Flatteners


Goldman Sachs note that "since the start of the year, markets have further repriced the path for the Fed, pulling in the timing of the first rate hike from early '24 to mid-'23 & steepening the trajectory beyond that point. In theory, the sequencing of policy should provide somewhat of an "inner bound" for how soon the market can price liftoff under an assumption that the Fed wants to have ended asset purchases before commencing rate hikes. We believe this translates to a soft bound - around late '22 - as the earliest plausible liftoff time. In terms of the speed of hikes, we think that pricing substantially more than 50bp/year is likely to be hard to sustain for the time being. To be sure, there are upside risks to that assessment over shorter periods - the market, for instance, priced roughly twice that steepness on a 2-3 year forward horizon during the taper tantrum. However, even in that instance, the spike proved temporary, and the priced annual pace of hikes ultimately settled back around 50bp (per year). Further, the shift in Fed framework is more consistent with a gradual pace of rate hikes. With pricing in 2024 implying close to 50bp of hikes already, we believe an "overshoot" scenario will manifest more as a pull forward of rate hikes rather than additional steepening of the 2023/24 portion of the forward curve. Therefore, we recommend weighted EDM3/M4 flatteners (1.8:1), which currently at 0.22%, would, in our view, fare well with rate moves in either direction under the assumption of a soft 50bp/yr bound on steepness."

MNI London Bureau | +44 0203-865-3809 |
MNI London Bureau | +44 0203-865-3809 |

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