Goldman: Sell 2s10s Curve Floors To Position For Limited Further Inversion

Goldman Sachs note that “Thursday’s CPI release brought some Fed frontloading back into pricing, but in slightly different form and while curves did flatten, it did not result in new cycle lows in terms of curve inversion despite a new peak in terminal rate pricing.”

• “For front versus belly curves (e.g. 2s10s) we don’t necessarily view this assessment as arguing definitively for material curve steepening in the near-term. Our curve model suggests comparatively stable 2s10s curves over the balance of the next year or so under our econ team’s baseline for another 150bp of Fed hikes, some eventual inflation moderation, and a modest increase in the unemployment rate.”
• “We continue to think that for a more substantial steepening in that segment of the curve, it will likely require a more material labor market deterioration and/or policy rate cuts.”
• “The latter seems unlikely so long as the Fed remains committed to bringing inflation back under control.”
• “Where we see value is in expressing a more range-bound view, and on there being limited scope for even deeper inversion. The combination of fairly flat near-term forward 2s10s (3-month forwards are 0.5bp flatter than spot) and elevated level of volatility creates a more favorable backdrop for selling curve floors to express this, in our view, and we therefore recommend selling 3-month 2s10s curve floors.”