Goldman Sachs: Cash Rates Take The Lead As Selloff Accelerates

Goldman Sachs note that "the early phase of the selloff bore the hallmarks of one where convexity hedging flows were likely exacerbating the moves, with swap spreads initially directional with rates. Since the local peak, however, 30-Year U.S. swap spreads have reversed lower, with the bond-led nature of the move up in yields taking on a more global tone. Looking across G4 10s and 30s swapped back to the same currency (dollars), cash rates cheapened versus swaps by 6-12bp at the 30-Year point through Thursday's close and by a more modest 3-8bp at the 10-Year point. This bond underperformance vis-à-vis swaps is typical of concerns about higher levels of duration supply (as and when central banks dial back asset purchases). We've noted in the past that in addition to liability-driven investors (who we believe have been actively adding duration at a modest clip), foreign (private) demand was a potentially important support for longer maturity swap spreads. However, higher levels of realized volatility and the global nature of the move likely limits the near-term support from these latter buyers. The balance of flows and absence of Fed pushback to long end repricing suggests that at least in the near term, spreads could remain under pressure."