Goldman Recommend Jun ‘22/Dec’22 FOMC OIS Steepener

Late on Friday Goldman Sachs noted that “markets took Chair Powell’s post-FOMC press conference as hawkish and repriced front-end yields roughly 15-20bp higher. Of particular note was his emphasis on the different nature of this recovery compared to the last, acknowledgment of upside risks to a highly uncertain inflation outlook, and statement that the FOMC would move “steadily” towards a tighter policy stance (rather than characterizing it as “gradual”), reinforcing our economists’ view that high inflation could push the Fed to consider hiking at consecutive meetings this year. The market is now pricing about 120bp of hikes this year, up from just below 100bp as of Tuesday’s close, split approximately 70bp in the first half versus 50bp in the second half. We noted markets’ tendency to frontload tightening previously, though we think pricing for the first half is getting close to “full”; with just three meetings in this half, that amounts to nearly a hike every meeting unless we begin to entertain hikes in 50bp increments (we think successive 25bp hikes are more likely than this outcome). However, a hike at the May non-SEP meeting would, in our view, likely lead markets to build more risk of a faster pace of hikes in the back half of the year as well, with non-SEP meetings (which currently have lower weights) likely supporting that shift. Conversely, if the Fed did not raise the policy rate at the May meeting, perhaps out of caution in light of the negative fiscal impulse in the second half (that Powell highlighted), some of the front-end pricing is likely to dissipate, while leaving a minimum of two hikes (current pricing) in the back half. Given this, we recommend adding Jun-22/Dec-22 FOMC OIS steepeners, which we believe has an attractive risk/reward tradeoff.”

• The recommendation had an entry point of 52bp, target of 70bp, with a stop set at 37bp