Goldman: Long End Curve Inversion Likely To Moderate

Goldman Sachs note that “the 10s30s swaps curve is closing in on levels seen last October. One common explanation for relative long end outperformance is strong demand from LDI accounts with rising yields.”

• “U.S. corporate defined benefit pensions are in the best financial shape since 2007.”
• “At current rate levels, and with a continued rise in Pension Benefit Guaranty Corporation (PBGC) premiums, sponsors have a strong incentive to either immunise the remaining duration risk in their DB plans or offload them via pension risk transfers. Indeed, elevated stripping activity is suggestive of strong demand from these investors.”
• “We do not expect such flows will be large enough to flatten the curve further, or even sustain current levels for an extended period.”
• “Although both term premium estimates and volatility have increased over the past month, they remain below where they were last October when the 10s30s curve was similarly inverted. Either because term premium will need to rise further if the environment becomes more volatile, or because the current bout of volatility will fade (thereby reducing the convexity benefit at longer maturities), we expect current levels of inversion in the swap curve will reverse.”
• “We therefore recommend fading it (in the swap curve) in a levered format, via 10y/10y20y SOFR curve steepeners. We note that the curve is counter-directional with the level of rates, so a large selloff could produce further inversion.”
• They recommended entry at -84bp, targeting a move to -55bp, with a stop placed at -100bp.