Goldman Sachs: Lower Slack, Higher Fives

Goldman Sachs note that the Tsy curve "flattened aggressively last week on both a long end rally and aggressive front-end repricing. Our cross-asset macro PCA framework, attributed much of the move in long-end yields to a pullback in the growth factor. At the same time, it's worth noting that the downshift in growth expectations has not materially shifted the market's perception of the policy rate response, with yields out to the five-year point much more resilient."

• "Markets appear to be taking a less sanguine outlook on medium-to-longer term growth on the view that central banks will likely pursue a path of earlier and faster hikes to arrest inflationary pressures. We find that historically, yields particularly in the front and belly, tend to be more responsive to shifts in expectations around slack than to shifts in growth momentum. Even more so, we find sell offs have tended to be more pronounced as employment gaps close when core inflation is near or above the Fed's target."
• "In contrast, further out the curve, prior experience offers mixed evidence on the relative sensitivity to these cross-currents. This suggests to us that 5s10s and 5s30s curves are likely to continue to trade with a flattening bias given our expectations for a further diminishing of slack over the next year and firm inflationary backdrop despite a slowdown in growth momentum."