Goldman Sachs Maintain Curve Flattening Bias

Goldman Sachs note that “with active U.S. Tsy sales from the Fed’s SOMA portfolio very unlikely, net U.S.Tsy coupon issuance and gross MBS issuance set to decline, and the strong likelihood that Treasury will lean heavily on bill issuance to replace lost Fed financing, the change in duration risk the public has to absorb is likely to be relatively modest. That said, over time, waning demand from other unlevered buyers could weigh on markets, resulting in steepening pressure, all else being equal. However, this will most likely be readily offset by curve flattening from a likely further front-loading of hikes - the Fed’s March meeting minutes also seemed to suggest there was sizable support among officials for “one or more” 50bp hikes if necessary. Given upside risks to inflation, and the Fed’s stated desire to move towards a neutral stance “expeditiously,” recent steepening notwithstanding, we retain our curve flattening bias.”