UBS: Long-End Spreads: Don't Get Over-Excited At Jackson Hole

Monday saw UBS note that "30y swap spreads had been closely tracking the 5s30s curve until recently. In August, 30y spreads widened by 4bp despite that a 20bp curve steepening. This could be a temporary market mismatch in our view. Apart from the slow-down in financial corporate issuance and low trading volume, one driver may be speculation about a possible Fed QE tweak. Chair Powell is set to discuss the Fed's Framework Review at the Jackson Hole Conference on Thursday. We don't look for a QE announcement this week, but our economists think the Strategy Review will set the stage for the Sep FOMC meeting and expect the Fed to switch QE purchases to 5yr+ Treasuries in September. As of now, half of the Fed's QE purchases are short tenors, and short rates are so low that those purchases don't have much of an impact. Even if the Fed switches the QE purchases as we expect with a $50bn purchase of 5yr+ securities, it will only reduce the net monthly duration flow by ~$14bn (Net monthly duration flow in August: $77bn), far short of offsetting the overall supply impact. Therefore, we think the 30y swap spreads have been overstretched and prefer to fade the wideners tactically."