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US TSYS: VIEW: Goldman Sachs note that "front-end swap spreads have remained
stable despite increased Treasury free float and several months of heavy bill
issuance. A significant factor, in our view, has been substantial bank demand
for Treasuries, with commercial banks net buyers of about $175bn USTs since the
start of April. Commercial bank UST buying is typically concentrated in shorter
maturities (5y and in), leaving USTs in this sector well-supported versus swaps
- this is visible in the correlation between bank purchases and the residual
from our spread model. We expect bank demand to remain elevated through the rest
of the year. Another potential tailwind going forward is bill supply, which
could decline faster than our current projections given that Treasury's cash
balances are well in excess of their already elevated target, even accounting
for 'Phase 4' fiscal package. The combination of robust bank demand and a
potential earlier-than-expected bill paydown should allow 2s to richen a further
5bp or so versus OIS in the coming months. We therefore recommend buying 2y USTs
versus OIS on a tactical basis."