Goldman Sachs Recommend SFRU3/U4 Steepener

Friday saw Goldman Sachs note that “a favourable set-up for front-end steepeners. Though data, particularly the ISM surveys, have been softer-than-expected this month, the asymmetry in yield responses that we previously noted appears to be reversing.”

• “Looking ahead, we see some potential for additional weakness in activity data, particularly related to housing, before a rebound in survey data earlier next month.”
• “Given recent price action, we suspect markets may underreact to near-term weakness, possibly because investors have gotten somewhat long - indeed, our positioning indicators suggest real money may be somewhat overweight duration at this point.”
• “As a result, given our anticipation of a bounce in activity data, cooling, but still-elevated inflation, and this switch in market behaviour, we recommend adding SFRU3/U4 steepeners.”
• “Though the main motivation for this trade is our anticipation that some cuts currently being priced will come off, it should also work in the scenario where, contrary to our expectations, there is a sharp deterioration in the growth outlook, as in that case, we expect cuts will get front loaded.”
• They recommended entering the trade at -1.55, targeting a move to -1.15, with a stop set at -1.75.