Goldman Sachs: Belly Shorts May Have Best Ex-Ante Risk/Reward

Goldman Sachs note that "in terms of curve positioning, we note that being short longer maturities, which may sell off more in some scenarios, nevertheless does not have the best ex-ante risk/reward going into the election - we believe the 5- to 10-year portion of the curve offers the best trade-off for a few reasons. First, with belly yields fairly close to the ELB, there is simply less room for them to decline if negative outcomes, such as a contested election, materialize. Second, in a Democratic sweep scenario, markets could start to contemplate earlier liftoff, which would disproportionately affect this portion of the curve. Finally, levered fund positioning data from the CFTC suggest there is sizable exposure to belly/long end steepeners in the market. Therefore, we recommend adding 2s10s30s belly cheapening UST butterflies; outside of the all-time lows seen in mid-2019, the fly is close to the lows since the re-introduction of 30y auctions in 2006. As can be seen in the figure, this fly performed well following the 2016 election."