Goldman Sachs Like Long 5y5y Inflation Swaps

Goldman Sachs note that "while base effects largely drove for the significant outperformance of shorter maturity inflation through June, the flat inflation accrual in July meant that the front-end inflation rally was entirely a reflection of anticipation of a better CPI path. Though less dramatic, the inflation curve flattening extended, taking the 2s10s inflation swap curve back to levels that prevailed before the COVID shock. Given the extent of the inflation move and the potential for energy price consolidation (our commodity strategists have a range-bound oil forecast), front-end inflation may be comparatively vulnerable to downward revisions to the near-term growth outlook. Further out the curve, we think there is room to extend recent gains; factors weighing down the front end should matter to a lesser degree, as longer maturities converge towards survey measures that have so far remained relatively well anchored despite the softer spot inflation prints. This argues for inflation curve steepening; combined with our more constructive medium term view on inflation across the curve, we recommend going long 5y5y inflation swaps. While the rate has recovered substantially from recent lows, it still remains slightly below its pre-COVID lows."