Goldman: Relief Steepening Poss., Less Likely To Sustain In Hike Cycle

Goldman Sachs note that “with Fed liftoff quickly approaching and longer-dated forwards still sticky, our expectation is for curves to remain biased flatter, with risks that faster Fed moves mean that our expectation for a completely flat 2s10s U.S. Tsy curve is achieved somewhat earlier than late 2023 (as our forecasts currently imply). However, the combination of an already flat starting point, rising global yields, and geopolitical headline risk means that further bouts of steepening are fairly likely to occur along the way. Looking back at the past two hike cycles (starting three months from the first hike through the final hike), 2s10s flattening has been more frequent (occurring on 56% of days) with the average daily flattening comparable in size to steepening moves (both about 1.9bp per day on average). The more notable difference is in the frequency of sustained trends, measured as days of consecutive 2s10s flattening or steepening - over the last two hike cycles, the average flattening trend lasted 2.4 days, versus 1.8 days for the average steepening trend, with longer (and subsequently larger) streaks increasingly skewed towards flattening (for example, of the 54 instances 5+ day trends, 37 were flattening). Overall, the evidence suggests that while instances of steepening can and do occur into and during hiking cycles, they are less frequent on the whole and are comparatively less likely to extend over longer periods.”