SWAPS: Goldman Sachs: Position For Higher Long End Rates

Goldman Sachs note that following BoJ "Governor Kuroda's indication of a reluctance to widen the tolerance band around the 10-Year YCC target, JGBs more than fully unwound the sell-off that took 10-Year yields as high as 0.18% in the past two weeks. While Kuroda's statement that he saw it "neither necessary nor appropriate to expand the tolerance band" reduces the odds of a near-term change in the fluctuation band, we believe the extent of the rally at longer maturities is likely overdone, as we expect this part of the curve to move higher in sympathy with the global selloff. By our estimates, the yield upside we are forecasting for U.S. Tsys (and other global yields) can generate enough spillover to move longer maturity JGB yields up at least another 15bp or so. Such repricing could persist, given what we believe will be diminished bid for long-end JGBs as foreign yields look increasingly attractive on both a hedged and unhedged basis. With 10-Year yields still some distance from the upper end of the tolerance band, we think risk/reward in entering short positions looks attractive at these levels, and recommend paying 20-Year swaps (with a target of 0.55% and stop of 0.30%)."