Goldman Recommend 5s30s Steepener

Late on Friday Goldman Sachs noted that ”historically, Fed adjustment cuts have produced more modest steepening (e.g., in 1995, 2019) than seen in easing cycles into recessions, but we believe the beta to cuts could be higher than in those instances this time around, both because the adjustment cuts are likely to be deeper this time, and because risk premium needs to adjust upwards to clear higher supply in the context of growth upside.”

• “Additionally, the Fed’s focus on inflation progress and moving away from “restrictive territory” may mean that it will be willing to look through more modest overshoots in growth relative to trend.”
• “We therefore recommend adding 5s30s swap curve steepeners, preferring this to more typical expressions (e.g., 2s10s) to avoid both more onerous carry and exposure to shifts in timing (and to a lesser extent, magnitude) of delivered cuts.”
• The recommendation came with the spread trading at -30bp, targeting a move to +20bp, with a stop set at -50bp.