/INFLATION SWAPS: Goldman: Potential For 5y5y To Move To 3.00%

Goldman Sachs note that "the traded inflation rally has taken a bit of a breather since peaking earlier this month, with 10-Year breakevens currently around levels we had projected for year-end. Our economists' latest inflation forecasts show a notably higher path for inflation over the next year or so, creating room for further upside to breakevens from these levels, though much of this upside may not be realized near term."

• "With the front-end of the inflation curve broadly aligned with our economists' forecast path, we think the more important factor for traded inflation will be the degree to which the firmer readings pass through to longer run expectations. Historical relationships suggest that the inflation outlook could translate to 15bp or so of upside to 10-Year CPI survey expectations, which would return these expectations to pre-2008 levels."
• "Such a reassessment in survey inflation would argue for more upside to intermediate and longer term forwards as compared to the front end of the inflation curve. While this doesn't necessarily argue for dramatically higher traded inflation this year (our model suggests a somewhat flatter curve centered around 2.5% by year-end), we do see scope for longer maturities to be supported through next year, with potential for equilibrium levels on 5y5y inflation swaps (currently 2.41%) to return to the 2.75-3.00% range."