Goldman: Supply Shift Supports 20-Year Swap Spread Wideners On A Fly

Goldman Sachs note that "since the August refunding announcement, 7- and 10-Year swap spreads have outperformed while 20- and 30-Year spreads have lagged on the curve. We noted at the time that nominal coupon reductions seem relatively likely to begin in November, with trimming of 7s and 20s proportionately more than the rest of the curve. While recent spread performance has left 7-Year spreads towards the middle of their last 1-Year range on the 5s7s10s spread fly, 20-Year spreads are at the tighter end versus 10s and 30s."

• "We expect Treasury to reduce monthly issuance at the 20-Year point by a total of $9bn, more than offsetting the $5-6bn monthly flow of Fed purchases in its 10- to 22.5-Year bucket. Our projected auction reductions net of Fed purchases for the 10- and 30-Year points will either imply a more modest reduction (for 10s) or a modest increase (for 30s) over the next year or so. On balance, we think the relative shifts in net supply should, over time, help relieve some pressure that has weighed on the 20-Year point (where auctions started larger and increased by more than anticipated), and given the entry level along with carry (supported by the steepness of the 20-Year point on the Treasury curve), we favor going long 20-Year U.S. Tsy spreads on the 10s20s30s spread fly."
• The recommendation has an entry point of -23bp, target set at -15bp with a stop set at -28bp.