Goldman Sachs Recommend 2s10s Steepener

In light of Friday’s BoJ decision Goldman Sachs note that the Bank “explicitly avoided communicating any hawkishness, which suggests that the BoJ is unlikely to make any further policy adjustments for the remainder of the year.”

• “Our fair value estimate for 10y JGBs yields remains around 70bp, so we see room for further yield increases and steepening of the JGB curve.”
• “However, with the 10y yield at least locally unconstrained, we expect it will move to a greater extent than longer-maturity bonds.”
• “Additionally, with several Japanese life insurers indicating an interest in adding domestic bonds following a YCC tweak, we suspect the long end may be better supported going forward.”
• “As a result, we recommend taking profits on 5s30s JGB yield curve steepeners, and instead entering into a 2s10s JGB steepener.”
• “Although 10y JGB yields may not converge to our estimate of fair value immediately, the cost of carrying the position is small, and we see limited risk of either a NIRP exit or a large decline in 10y yields in the near term.”
• They recommended entering the 2s10s steepener at 59bp, targeting a move to 80bp, with a stop set at 50bp.