Goldman Sachs: Timing Uncertainty For Duration Shorts = Carry Dominates

Goldman Sachs note that "since peaking at the end of March, longer term yields appear to have established a range. Over that time, the trajectory and composition of economic data have diverged somewhat from what we had expected in our earlier discussions of "overshoot risk" for yields, with more pronounced inflation pressure and mixed growth and hiring data (both likely owing to transitory bottlenecks)."

• "As we noted earlier this month, we think this backdrop could see some delay to the fairly front-loaded selloff embedded in our forecasts. While we still see compelling arguments for higher real yields and expect the inflation outlook to remain supportive of breakevens, timing the move higher is a challenge for short duration positions."
• "Our standing recommendation has been to be short belly nominals via midcurve payers on 5y5y swaps on the view that a sharp, recovery-driven selloff would be felt most acutely at that part of the curve, but given the combination of time decay and the steepness in the forwards, we think there is a good argument for setting outright duration shorts at the long-end instead (for comparison, 6m10y rolldown is about 11bp, versus just 3bp for 6m30y). Although long-end yields might lag somewhat on an especially sharp repricing, the more structural arguments for higher intermediate forward yields also apply here, and the less onerous carry make shorts easier to hold in an environment where timing is less certain. We therefore close out our 1y5y5y midcurve payer recommendation (at a loss), and instead set an outright short in 30-Year U.S. Tsys."