Goldman Sachs: Looking At The Underperformance Of 7s And 20s

Goldman Sachs note that "so far this year, the 7-Year and 20-Year points on the Treasury curve have been relative laggards, with forward points having cheapened noticeably versus OIS, resulting in discernible kinks in the spread curve. Recent auctions have been somewhat consistent with this cheapening, with 7s tailing 4.4bp in February and 2.5bp in March, while 20s tailed 1.4bp in January and 2.3bp in February (before a somewhat better March auction). Along with the 5-Year point, these maturities have seen an increase in the dealer award this year compared to last year's average (where other points have seen dealer awards decline), with auction allotment data through February suggesting that this increase in dealer take-down has come amid weakened foreign demand at the 7-Year point and softer investment fund interest in 20s. These facts suggest the auction sizes may be too large for markets to absorb efficiently; both maturities saw an aggressive ramp up in issuance last year, with 7s now the largest single auction size (monthly supply is up $30bn, and the size almost double what it was a year ago). Other existing nominal points, by contrast, saw about a 50% increase. 20s, meanwhile, were introduced as a new point on the curve last May, with the initial size materially higher than what we'd expected at the time. The newness of the product may mean that sponsorship is still building but the point lacks a dedicated investor base. However, in both cases, we do not see the cheapness on the curve dissipating near-term without a change in Treasury's issuance strategy (which we suspect is unlikely in the short run)."