Goldman Sachs: Pre-Refunding Steepeners Still Hold Appeal

Goldman Sachs note that "though we do not expect Treasury to announce further nominal auction size increases for the upcoming refunding cycle, we still see scope for tactical long-end steepeners into new long-end supply. As Treasury substantially upsized long-end auctions last year, the long-end sold-off and 5s30s steepened over the two weeks into the May, August and November refunding auctions, consistent with the more discernable pattern observed last time Treasury was increasing the share of long-duration supply. Notably, although that set of auction size increases ended in November 2009, the pre-supply steepening continued reliably through the 2010 refunding cycles, suggesting the adjustment to last year's long-end supply increases may persist. The upcoming cycle also has the added dynamic of the new 30y TIPS, which we've noted in the past has likely been behind the fact that February has historically stood out from other refunding months in supporting the cyclical steepening. While investors can position for a pre-auction concession either via outright shorts or steepeners, we recommend setting tactical (5s30s) UST steepeners to insulate somewhat against potential near-term downside macro risks."