Goldman Sachs: Setting Belly Shorts, Keeping Long-Dated Payers

Goldman Sachs note that "on balance, our central case is that the larger portion of the uplift in the belly of the curve will come from the inflation component, although real rates should also be a contributor. However, there is the risk the real component turns out to be a more significant driver, if markets require elevated term premia, or a there is a reassessment higher in r*, which in turn, could curtail the degree of inflation upside. We therefore favor setting outright belly shorts in nominal space, though in light of the fairly sizable YTD selloff, we prefer to do so conditionally, recommending 1y5y5y midcurve payers. Admittedly, the relatively steep rolldown imposes a carry cost that makes timing important for belly shorts. Investors less convinced about turbocharged economic performance over the coming months may prefer instead longer-dated long-end payers (where we maintain our 5y30y payer recommendation)."