Goldman Sachs Look To 7-/30-Year Steepeners

Goldman Sachs note that "one interesting consequence of Treasury's preference for longer maturity issuance may be the reappearance of an auction cycle-related pattern observed with consistency the last time there was a similar increase in relative supply at those tenors. The contribution of longer maturities to duration supply increased by about 8% in the year or so following the financial crisis (Dec 2008-Feb 2010). During that period, beta-weighted yield curves (with weights chosen to make the curve direction-neutral) steepened more on average than in other periods over the past decade in the two-week period leading into mid-month refunding auctions. Not only was the average steepening observed larger (between 7-12bp depending on the curve), but so was the frequency with which that steepening occurred. Indeed, this steepening pattern played out during the May refunding. We therefore recommend adding (1.1:1) weighed 7s30s UST steepeners as a tactical auction cycle play. We've chosen the 7s30s curve instead of the 2s30s or 5s30s curve as we believe it to be more insulated from a potential rally in yields."