Goldman Sachs Favour Paying 10s On The 3s10s30s Fly

Goldman Sachs note that "the rates market has been in search of a catalyst to provide a somewhat clearer sense of direction, and while there were hopes that the June jobs report could provide one, the mixed signal it delivered fell short. To that end, it makes sense that the highest carry part of the curve (3- to 5-Year) was relatively well-supported after the number, as the lack of an impulse and removal of one more risk event leaves the market once again in an environment where carry considerations matter. Focus shifts to the FOMC minutes, which could be somewhat additive insofar as they are more revealing on the shift in the dots - particularly if there's evidence of building concern that inflation pressures may prove more persistent - as well as into the taper discussion (in terms of sequencing, pace, and what constitutes advanced notice). While we don't expect price action to be quite as extreme as that seen post-FOMC, hawkish news may risk some flattening pressure, led by higher front-end yields. We remain of the view that yields should head higher over the next 3-6 months, but noisy data and lack of clear directional catalysts create a challenging environment for outright shorts near term. On a sustained move higher in yields, we see the 10-Year part of the curve leading, and think that selling 10-Year U.S. Tsys on the 3s10s30s fly offers a favourable mix of carry (modestly positive), directionality, and is somewhat more protected than a steepener in the event of further hawkish Fed news or upside data surprises."