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Goldman Reveals “Top Trade” Recommendation #2 For 2014: Go Long Of 5 Year EONIA In 5 Year Treasury Terms

Tyler Durden's picture

zerohedge.com / By Tyler Durden / 11/26/2013 07:27 -0500

If yesterday Goldman was pitching going long of the S&P in AUD terms (the world renowned Goldman newsletter may cost $29.95 but is only paid in soft dollars) as its first revealed Top Trade of 2014, today’s follow up exposes Top Trade #2: which is to “Go long 5-year EONIA vs. short 5-year US Treasuries.” Goldman adds: “The yield differential between these two financial instruments is currently -61bp, and we expect it to reach around -130bp. On the forwards, the differential is priced at around -95bp at the end of 2014 at the time of writing. We have set the stop-loss on the trade at a spread of -35bp. The choice of Treasuries over OIS or LIBOR on the short leg is motivated by the fact that yields on the former could underperform more than they have already in relative space as the Fed scales down its asset purchase program.”

More from Goldman on this trade recommendation:

  • We unveil today the second of our Top Trade recommendations for 2014
  • Long 5-year EONIA vs. short 5-year US Treasuries at -61bp for a target of -130bp
  • The spread is already priced to widen in the forwards, led mostly by the US leg
  • We look for a bigger term premium at the belly of the US curve …
  • …while disinflation and the AQR should preserve the ECB’s easing bias

We present today the second of our Top Trade recommendations for 2014: long Euro area 5-year rates vs short their US counterparts. Specifically, we recommend receiving 5-year EONIA fixed rates against shorting 5-year US Treasury Notes. The yield differential between these two financial instruments is currently -61bp, and we expect it to reach around -130bp. On the forwards, the differential is priced at around -95bp at the end of 2014 at the time of writing. We have set the stop-loss on the trade at a spread of -35bp. The choice of Treasuries over OIS or LIBOR on the short leg is motivated by the fact that yields on the former could underperform more than they have already in relative space as the Fed scales down its asset purchase program. We will, however, be watching to see if the decline in US borrowing requirements more than compensates for these effects. The greater liquidity of 5-year Treasuries compared with 5-year US$ OIS has also been a consideration. In the Euro area, we are of the view that German bonds may ‘cheapen’ further relative to EONIA as fixed income portfolios are rebalanced in favour of higher-yielding securities, particularly if the ECB eases further. Three macro factors underpin our new Top Trade recommendation, which we review in the sections below.

Separately, and from a tactical standpoint, we now recommend going long Mar-14 Australian Bank bill futures (IRH4) (see Trade Update: Position for further RBA easing, published earlier today). Our view is that the weakness in the Australian economy will remain in place through 2014. As such, we expect the RBA to cut rates by a further 25bp, most likely by the March policy meeting, with a move as early as in December quite possible. At this point, we believe the market only discounts a 25% chance of an easing move in March.

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