2017 strategy conference - · may 15-17, 2017 | charlotte, nc 2017 financial institutions balance...

May 15-17, 2017 | Charlotte, NC

2017 Financial Institutions Balance Sheet Strategy Conference

2017 Financial Institutions Balance Sheet Strategy Conference May 15-17, 2017 | Charlotte, NC | Attire: Business casual

Monday, May 15 Marriott Event Hub and Mezzanine 3rd Floor

Time Activity

5:00 8:00 p.m. Welcome reception and cocktails

Tuesday, May 16 Marriott Hotel Charlotte Ballroom ABCD 3rd Floor

Time Topic Presenter 7:15 8:00 a.m. Breakfast

8:00 8:10 a.m. Welcome remarks Sean Ladley,Conference Co-Chair, Head of Generalist Fixed Income Sales

8:10 8:45 a.m. Economic Outlook Tim Quinlan, Senior Economist

8:45 9:15 a.m. Rates Outlook: Central Bank Policy vs. Political Risk

Michael Schumacher, Rates Strategist

9:15 10:00 a.m. Current Regulatory Environment and its Impacts on the Banking Industry

April Frazer, Regulatory Advisory and Capital Structuring

10:00 10:30 a.m. Break

10:30 11:30 a.m. Client Panel: Navigating the Current Environment

Moderator: Charlie Crowley, Conference Co-Chair, Head of Depository Strategy Panelists: George Boyan SVP - Treasurer Bank Leumi USA New York, NY Marito Domingo Chief Credit and Investment Officer First Technology Federal Credit Union Mountain View, CA Ken Hessel Portfolio Manager and Senior Credit Analyst United Community Bank Blairsville, GA Tom Speir SVP - Head of Balance Sheet Management Regions Bank Birmingham, AL

11:30 a.m. 1:00 p.m. Lunch Keynote Address: The Leadership Differentiator Charlotte Ballroom EFGH, 3rd Floor

Joe Moglia TD Ameritrade Chairman of the Board Head Football Coach - Coastal Carolina 2017 Lombardi Hall of Fame Inductee

2017 Financial Institutions Balance Sheet Strategy Conference (continued)May 15-17, 2017 | Charlotte, NC

2017 Wells Fargo Securities. All rights reserved.

Tuesday, May 16

1:00 1:30 p.m. U.S. Mortgage Trading & Markets: Tactical Investing in an Uncertain World If, Then, Else.

Kevin Jackson, Mortgage Strategist

1:30 2:00 p.m. Relative Value Across the Curve: Whats happened and where are we going?

Will Fisher, Depository Strategist

2:00 3:00 p.m. Breakout sessions #1

Municipal Bonds: Current Market and Credit Evaluation Meeting Room: 1st Ward, 3rd Floor

Loan Opportunities: Residential Whole Loans and Asset Backed Syndications Meeting Room: 2nd Ward, 3rd Floor

CLOs: Sector Overview and Secondary Market Meeting Room: 3rd Ward, 3rd Floor

Agency CMBS: Common Structures and Investor Demand Meeting Room: 4th Ward, 3rd Floor

Choose two sessions (30 minute sessions)

Daymon Little, Muni BQ Trading Donald Lipkin, Head of Muni Credit Strategy

Greg Tsang, Whole Loan Trading Tim Andrew, Whole Loan Trading Michele Simons, ABF Syndicated Loans

Dave Preston, CLO Research Kevin Farley, CLO Trading

Chris Van Heerden, CMBS Research Chuck Mather, CMBS Trading

3:00 3:15pm Break

3:15 4:15 p.m. Breakout sessions #2

Interest Rate Hedging & Derivative-based ALM Strategies Meeting Room: 1st Ward, 3rd Floor

Value in the Agency MBS Market Meeting Room: 2nd Ward, 3rd Floor

Credit Outlook: Where are we in the cycle and expectations by sector. Meeting Room: 3rd Ward, 3rd Floor

M&A: Trends, Outlook and Portfolio Integration Meeting Room: 4th Ward, 3rd Floor

Choose two sessions (30 minute sessions)

Bill Kistner/Shannon Grant, Interest Rate Risk Management

Alex Papson, CMO Trading Chris Moen, MBS Specified Pool Trading

George Bory and Trey Winslett, Credit Strategy

Mohan Ramanathan, Depository Strategist John Hallett, Investment Banking

4:15 4:30 p.m. Break/Walk over to 550 S. Tryon, 4th floor 4:30 5:00 p.m. Option: Duke Energy Center Trading Floor Visit 5:00 5:15 p.m. Walk back to Hotel

5:15 5:45 p.m. Break

5:45 p.m.5 Shuttles to The Olde Mecklenburg Brewery

6:00 10:00 p.m. Dinner, Drinks & Fun | The Olde Mecklenburg Brewery Shuttles run to and from Marriott

http://www.oldemeckbrew.com/

2017 Financial Institutions Balance Sheet Strategy Conference (continued)May 15-17, 2017 | Charlotte, NC

2017 Wells Fargo Securities. All rights reserved.

Wednesday, May 17

Time Activity7:15 a.m. Shuttle departs from Marriot Lobby to TPC Piper Glen for Golf

8:15 9:00 a.m. Breakfast, Driving Range, Putting Green

9:00 a.m. Golf Shotgun Start

9:00 3:00 p.m. Golf Boxed Lunches served on back nine

Shuttles provided to the airport at 3:00 p.m. and 4:15 p.m. Travel time to the airport is approximately 45 minutes.

Addresses: Marriott Charlotte City Center Duke Energy Center 100 West Trade St 4th Floor, Wells Fargo Securities Trading Floor Charlotte, NC 28202 550 S Tryon St

Charlotte, NC 28202

The Olde Mecklenburg Brewery TPC at Piper Glen 4150 Yancey Rd 4300 Piper Glen Dr. Charlotte, NC Charlotte, NC 28277

*This event is eligible for CPE credit. Additional details and formal invitation to follow (planned release: March 2017). Conferencecontent and times are subject to change. Please contact your Wells Fargo Securities representative for the most recent conferenceagenda.

http://www.clubcorp.com/Clubs/TPC-Piper-Glen

Welcome Remarks Sean Ladley | Head of Generalist Fixed Income Sales

Thank you

3

Wells Fargo Strength and Stability Wells Fargo continues to be one of the strongest and best capitalized banks Wells Fargo is one of the strongest banks in the United States, rated A by

Standard & Poors Wells Fargo has a coast-to-coast footprint and a broad array of product

capabilities, allowing our clients to tap into a wealth of financial expertise

Wells Fargo U.S. Market Rank*

Market Capitalization $276 billion

#2 among banks globally

Total U.S. Deposits $1.2 trillion

#1 (as of 9/30/16)

Total Loans, net $983 billion #1

Mortgage Servicing $2.2 trillion #1 (as of 12/31/15)

Retail Brokerage

14,882 financial advisors1

3rd largest U.S. full-service brokerage based on financial

advisors

Mutual Funds $199 billion AUM #3 bank-owned mutual fund family

Insurance $2.2 billion #1 best insurance broker in the U.S. (2015)

Coast to Coast Presence

Wells Fargo Retail Branches Wells Fargo Advisors Wells Fargo Home Mortgage

Data is as of 12/31/2016 unless otherwise noted *Rankings are U.S. unless otherwise noted 1Series 7 brokers Sources: Earnings release, 10-Q/K, Capital IQ, SNL Financial, WF Funds Management Group monthly letter and Global Finance magazine

4

Proven domestic and global success An extensive global reach

Total Wells Fargo Wholesale offices globally 1,166*

A strong global presence with 45 international locations Leading provider of FX services #1 global financial institution in overall institutional satisfaction

(FImetrix, 2015)

Distinguished provider for global transaction services (FImetrix, 2013-2016)

Best trade finance bank in North America (Global Finance, 2016) Best provider of Supply Chain Finance (Trade & Forfaiting, 2015) U.S. large corporate trade finance quality leader (Greenwich, 2015)

Source: Wells Fargo unless otherwise specified, data as of 12/31/2016 * The map shows global Wells Fargo Wholesale Banking locations as of September 30, 2016.

5

U.S. Footprint - Wells Fargo Securities Fixed Income Offices

Coast-to-coast presence

MEM

BOS

CHI

CLT

DAL

DEN

LA

MIA

MNP

OMH PHI

PHO

SAC

SEA

SF

NYC

ATL

Wells Fargo Securities delivers a strong institutional and middle market distribution network.

Total of 17 Offices in the U.S. covering over 7,600 clients.

Fixed Income sales teams strive to partner with multiple Wells Fargo teams to deliver comprehensive solutions to our investing clients.

Access to New Issue Syndicated Product across the entire spectrum of fixed income securities.

Wells Fargo Securities Fixed Income Sales Office

6

The Power of Wells Fargo Securities platform

6

Sales & Trading Investment & Balance Sheet Solutions

Over $25 Billion of products offered daily in both new issue and secondary markets on one of the most active trading desks on the street: RMBS (#1 CMO issuer and CRA solutions) CMBS (#2 US Bookrunner3 and #1 Agency CMBS

issuer)

ABS (#3 U.S. issuer) Treasuries and Agencies (#2 Issuer) Municipals (includes Bank Qualified) High Grade (#6 US Issuer) and High Yield Corporates CLO (#1 middle market CLO issuance4) Money Markets (280 CP programs)

Strategy Portfolio Analysis & Reporting

Interest Rate Risk Reporting Generate gap, income simulation and EVE reports Recommend specific ALM strategies to mitigate interest

rate risk Monitor risk limits and internal policy guidelines Investment Portfolio Analysis Sector and security level breakdown Portfolio optimization recommendations Performance evaluation and considerations Impact to capital of changing interest rates Liquidity & Funding Reporting Evaluate current wholesale funding structure Determines retrospective liquidity ratios Projects available alternative liquidity sources

Analysis & Strategy Reports Recommend appropriate portfolio allocation to meet

investment objectives given current market conditions Maximize NIM and income by optimizing asset

allocations Recommend earnings strategies with appropriate

funding and investment mix to meet specific balance sheet objectives

Additional Custom peer analysis on a regional and national level Multi-sector fixed income relative value matrix Wholesale funding strategies Regularly published newsletter discussing industry

trends

Research Economics & Fixed Income

Economics Top 10 in forecasting in each of past four years

(Bloomberg, 2009-2013) Award winning economic commentary (American

Economic Assn, 2010, 2012, 2013, 2015)

Fixed Income #1 Overall High Grade 1 #3 High Yield1 #1 CLOs #1 in Strategy, Municipal Bond Research Team5 Seasoned team of RMBS, CMBS & ABS analysts

Power to Deliver

1 Institutional Investor 2016 Fixed Income Research Survey 2 Inside Mortgage Finance, 4Q16 3 Commercial Mortgage Alert as of December 30, 2016 4 Wells Fargo 5 Smiths Research and Gradings, 2014 and 2016

Chart1

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10

10

10

10

10

Sales

Sheet1

Sales

1st Qtr10

2nd Qtr10

3rd Qtr10

4th Qtr10

10

10

7

2017: Potential for Increased Market Volatility Trump Administration

The Fed

Putins Russia

North Korea

8

Disclosure

This publication is intended for institutional accounts only (as defined in FINRA Rule 4512), please do not forward. This Commentary is a product of Wells Fargo Securities Fixed Income Sales and Trading and is not a product of Wells Fargo Securities, LLCs Research, Economics and Strategy. The views expressed herein might differ from those of Research, Economics and Strategy. This communication is for informational purposes only, is not an offer, solicitation, recommendation or commitment for any transaction or to buy or sell any security or other financial product, and is not intended as investment advice or as a confirmation of any transaction. Interested parties are advised to contact the entity with which they deal, or the entity that provided this report to them, if they desire further information. WFS and its investment representatives do not act as Municipal Advisors and only provide investment advice or recommendations with respect to bond proceeds as permitted by available exemptions. Accuracy of Information The information in this report has been obtained or derived from sources believed by Wells Fargo Securities, LLC to be reliable, but Wells Fargo Securities, LLC does not represent that this information is accurate or complete. Any opinions or estimates contained in this report represent the judgment of Wells Fargo Securities, LLC at this time and are subject to change without notice. Wells Fargo Securities, LLC and its affiliates may from time to time provide advice with respect to, acquire, hold or sell a position in, the securities or instruments named or described in this report. Important Disclosures Relating to Conflicts of Interest and Potential Conflicts of Interest Wells Fargo Securities, LLC may sell or buy the subject securities to/from customers on a principal basis. Wells Fargo Securities, LLC has or may have proprietary positions in the securities mentioned herein. The trading desk has or may have proprietary positions in the securities mentioned herein. The author's compensation is based on, among other things, Wells Fargo Securities, LLC's overall performance, the profitability of Wells Fargo Securities, LLC's Markets Division and the profitability of the trading desk. About Wells Fargo Securities Wells Fargo Securities is the trade name for the capital markets and investment banking services of Wells Fargo & Company and its subsidiaries, including but not limited to Wells Fargo Securities, LLC, a member of NYSE, FINRA, NFA and SIPC, Wells Fargo Prime Services, LLC, a member of FINRA, NFA and SIPC, and Wells Fargo Bank, N.A. Wells Fargo Securities, LLC and Wells Fargo Prime Services, LLC are distinct entities from affiliated banks and thrifts. Copyright 2017 Wells Fargo Securities, LLC SECURITIES: NOT FDIC:-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE

Global Economic Outlook Tim Quinlan| Senior Economist

2

GDP and Fed Funds Long-Run Expectations from the Fed Over the past several years, the Fed has dialed-back it own estimates of potential GDP growth as have private-sector economists and Congressional Budget Office

Openings Separations

1.0%

1.5%

2.0%

2.5%

3.0%

1.0%

1.5%

2.0%

2.5%

3.0%

Jun-2012 Jun-2013 Jun-2014 Jun-2015 Jun-2016

Long-Run GDP ProjectionsSummary of Economic Projections, Central Tendency Range

Midpoint of Central Tendency: Mar @ 1.9%2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Jun-2012 Jun-2013 Jun-2014 Jun-2015 Jun-2016

Long-Run Fed Funds ProjectionsSummary of Economic Projections, Central Tendency Range

Midpoint of Central Tendency: Mar @ 2.9%

Source: Federal Reserve and Wells Fargo Securities

3

Real GDP Forecast

Outlook is for below-trend growth to continue

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

U.S. Real GDP Bars = CAGR Line = Yr/Yr Percent Change

GDP - CAGR: Q1 @ 0.7%GDP - Yr/Yr Percent Change: Q1 @ 1.9%

Forecast

Source: U.S. Department of Commerce and Wells Fargo Securities

4

Federal Fiscal Policy Outlook The fiscal policy checklist

Key Issues to Watch in the 115th Congress Budget Debates

Currently the government is funded through September 30 Repeal & Replace the Affordable Care Act

Failure here raises doubts about Trump agenda Corporate Tax Reform

We are assuming the top statutory corporate tax rate is cut only modestly perhaps to 30% from the current 35% rate

The tax cut will be at least partially paid for by reducing the tax rate for repatriated corporate profits.

Individual Tax Reform Cuts are likely but reforms will not likely move quickly We expect a total tax cut of roughly $1.6 trillion over 10

years.

5

Federal Fiscal Policy Outlook

Timeline

Key Dates Policy Action Expected Mar. 15th Debt Ceiling Re-Established Mar. 23rd ACA Repeal & Partial Replacement Bill Expected Apr. 28th Current Continuing Resolution Expires Early Spring Fiscal Year 2018 Budget Resolution Passed Late Spring Individual/Corporate Tax Cut Bill Expected May/Jun. Debt Ceiling Needs to be Increased Jul. 31 - Sep. 1st August Recess Sep. 30th Fiscal Year 2017 Ends

6

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

1948-1973 1974-1995

1996-2003

2004-Q2 2016

2004-2007

2008-2010

2011-Q4 2016

yAverage Annual Percent Change in Output Per Hour Worked

Potential GrowthLittle Help From Productivity Productivity growth has downshifted over the past cycle

Nonfarm Labor Productivity

Source: U.S. Department of Labor and Wells Fargo Securities

7

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

q p Bars = CAGR Line = Yr/Yr Percent Change

Equipment Investment - CAGR: Q1 @ 9.1%Equipment Investment - Yr/Yr Percent Change: Q1 @ 0.8%

Forecast

Business Spending Tough to find reasons to get excited about prospects for capital outlays

Real Equipment Investment


8

Business Fixed Investment The rebound in energy prices and more specifically oil prices is starting to boost business investment. Trump Effect?

Business Investment Ex-Mining Energy Share of Investment

-20%

-16%

-12%

-8%

-4%

0%

4%

8%

12%

16%

-20%

-16%

-12%

-8%

-4%

0%

4%

8%

12%

16%

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

Real Business Fixed InvestmentYear-over-Year Percent Change

BFI Ex-Mining: Q1 @ 2.7%BFI: Q1 @ 3.1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

0%

1%

2%

3%

4%

5%

6%

7%

8%

95 97 99 01 03 05 07 09 11 13 15 17

Fixed Investment Spending on EnergyAs Percent of Total BFI

Energy: Q1 @ 2.7%


9

Oil Prices The OPEC meeting helped oil get back above $50

Baker-Hughes Rig Count vs. Oil Prices

Source: Baker Hughes Inc., Bloomberg LP and Wells Fargo Securities

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

05 06 07 08 09 10 11 12 13 14 15 16 17

Oil Rotary Rigs; USD per Barrel

Oil Rig Count: May-05 @ 703 (Left Axis)WTI: May-05 @ $46.23 (Right Axis)

10

-10%

-5%

0%

5%

10%

15%

-$100

-$50

$0

$50

$100

$150

2000 2001 2002 2003 2004 2005 2006 2007

Repatriated Earnings vs. Business Spending Billions of U.S. Dollars; Year-over-Year Percent Change

Repatratiated Profits: Q4 2007 @ $63.5B (L)

Equip + I-Prop: Q4 2007 @ 3.9% (R)

Repatriation Our analysis suggests a tax repatriation may provide short-term revenue, but it will not make a material impact on capital spending

Repatriated Earnings vs. Business Spending

Source: Baker Hughes Inc., Bloomberg LP and Wells Fargo Securities

11

Repatriation Impact on Capital Spending & Outlook

The Homeland Investment Act of 2004 did not lead to the anticipated influx of capital into fixed business investment.

Rebounding corporate profits and renewed animal spirits are supporting capital spending more than tax reform and repatriations will.

We expect capital expenditures to strengthen further in the next two years as the investment environment continues to improve.

-30%

-20%

-10%

0%

10%

20%

30%

-30%

-20%

-10%

0%

10%

20%

30%

00 02 04 06 08 10 12 14 16 18

Real Capital Investment by TypeYear-over-Year Percent Change

Equipment: Q4 @ -3.9%Intellectual Prop.: Q4 @ 5.1%Research & Development: Q4 @ 5.0%

ForecastRepatriatedTax Years2005-2007

2004 HomelandInvestment Act

$0

$400

$800

$1,200

$1,600

$2,000

$2,400

$0

$400

$800

$1,200

$1,600

$2,000

$2,400

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16

Corporate Profits USD Billions, SAAR

Corporate Profits: Q4 @ $2,150.0 Billion

Adjusted for Inventory Valuation & Capital Consumption


Corporate Profits Real Capital Investment by Type

12

Household Balance Sheets Consumer deleveraging may be nearing an end, but monthly debt and other financial obligation payments remain near historic lows

Household Debt Financial Obligations Ratio

Source: Federal Reserve Board and Wells Fargo Securities

0%

20%

40%

60%

80%

100%

0%

20%

40%

60%

80%

100%

60 65 70 75 80 85 90 95 00 05 10 15

Household Debt - Consumer & MortgageAs a Percent of Disposable Personal Income

Consumer Credit: Q4 @ 26.4%Home Mortgages: Q4 @ 68.4%

14.5%

15.0%

15.5%

16.0%

16.5%

17.0%

17.5%

18.0%

18.5%

14.5%

15.0%

15.5%

16.0%

16.5%

17.0%

17.5%

18.0%

18.5%

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16

Financial Obligations Ratio-TotalAs a Percent of Disposable Personal Income

Total: Q4 @ 15.4%

13

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Real Personal Consumption ExpendituresBars = CAGR Line = Yr/Yr Percent Change

PCE - CAGR: Q1 @ 0.3%PCE - Yr/Yr Percent Change: Q1 @ 2.8%

Forecast

Real PCE Forecast Consumer spending growth is set to moderate but remain positive throughout the forecast horizon

Real Personal Consumption Expenditures


14

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Appropriate Pace of Policy FirmingTarget Federal Funds Rate at Year-End

March 2017 Median ResponseDecember 2016 Median ResponseSeptember 2016 Median ResponseDecember 2015 Median ResponseFutures Market: April 30

2017 Longer Run2018 2019

Pace of Policy Firming Normalization is underway, another rate hike in June

Appropriate Pace of Policy Firming

Source: Federal Reserve Board, Bloomberg LP and Wells Fargo Securities

15

2%

4%

6%

8%

10%

12%

2%

4%

6%

8%

10%

12%

94 96 98 00 02 04 06 08 10 12 14 16

U.S. Unemployment RateSeasonally Adjusted

FOMC Central Tendency for Longer Run

Unemployment Rate: Apr @ 4.4%

Unemployment The labor market is steadily firming, the unemployment rate is in line with the FOMCs central tendency target

U.S Unemployment Rate

Source: U.S. Department of Labor, Federal Reserve Board and Wells Fargo Securities

16

0%

4%

8%

12%

16%

20%

24%

0%

4%

8%

12%

16%

20%

24%

94 96 98 00 02 04 06 08 10 12 14 16

Underuse of LaborU-6 Unemployment Rate Components, Seasonally Adjusted

Part-Time for Economic Reasons: Apr @ 3.3%Discouraged and Marginally Attached: Apr @ 0.9%Unemployed: Apr @ 4.4%U-6 Unemployment Rate: Apr @ 8.6%

Unemployment Rates Even the broadest measures of unemployment are roughly in line with prior cycles although part-time for economic reasons remains high

Underuse of Labor


17

Labor Turnover Job openings appear to be leveling off, while the mix of turnover in the labor market remains healthy

Openings Separations


1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

Job OpeningsMillions of Openings, Seasonally Adjusted

Total Job Openings: Feb @ 5.74MThree-Month Moving Average: Feb @ 5.64M 1.0

1.5

2.0

2.5

3.0

3.5

1.0

1.5

2.0

2.5

3.0

3.5

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

Quits vs. LayoffsMillions of Workers, SA

Quits: Feb @ 3.08MLayoffs: Feb @ 1.58M

18

0%

1%

2%

3%

4%

5%

6%

0%

1%

2%

3%

4%

5%

6%

97 99 01 03 05 07 09 11 13 15 17

Average Hourly Earningsvs. Atlanta Fed Wage Growth Tracker; YoY % Chg. of 3-MMA

Atlanta Fed Wage Growth Tracker: Mar @ 3.4%

Average Hourly Earnings (Prod. & Supervisory): Apr @ 2.4%

Average Hourly Earnings Wage growth has picked up modestly but remains limited by lower-skilled workers entering the workforce and Baby Boomers beginning to retire

Average Hourly Earnings

Source: Federal Reserve Bank of Atlanta, U.S. Department of Labor and Wells Fargo Securities

19

Inflation Inflation has moved higher but remains below the Feds 2 percent target


-2%

-1%

0%

1%

2%

3%

4%

5%

-2%

-1%

0%

1%

2%

3%

4%

5%

92 94 96 98 00 02 04 06 08 10 12 14 16

PCE Deflator vs. Core PCE DeflatorYear-over-Year Percent Change

PCE Deflator: Mar @ 1.8%"Core" PCE Deflator: Mar @ 1.6%

PCE deflator vs. Core PCE Deflator

20

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

$4.5

$5.0

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

$4.5

$5.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Federal Reserve Balance Sheet Trillions

Other: Apr @ $182.8BForeign Swaps: Apr @ $5.1BPDCF & TAFCommercial Paper & Money MarketRepos & Dis. Window: Apr @ $0.1BAgencies & MBS: Apr @ $1,782.5BTreasuries: Apr @ $2,464.4B

Its easier to get into something than to get out of it Donald Rumsfeld

Federal Reserve Balance Sheet

Prior to the 2008, Feds holdings were about $900 of mostly Treasuries

Balance sheet briefly held a diverse selection of financial instruments, such as commercial paper and currency swaps, to help mitigate the liquidity challenges in the financial system.

Current size is roughly $4.5 trillion, comprised mostly of Treasuries and mortgage-backed securities (MBS).

Source: Federal Reserve System and Wells Fargo Securities

21

Front-Loaded Maturity Schedule for Treasuries

More Treasury securities come due in 2018 than any other year

Roughly half the Feds Treasury holdings come due between now and 2020

Right now Fed is still reinvesting as these Treasuries come due, by year end we suspect it will reinvest less than 100% of maturities and eventually let them roll off the balance sheet altogether


$0

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$0

$50

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$450

17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47

Maturity Schedule of Fed Treasury HoldingsBy Year of Maturity, Billions of USD

Total Fed Treasury Holdings: $2.4 Trillion

Maturity Schedule of Fed Treasury Holdings

22

$0

$200

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$800

$1,000

$1,200

$1,400

$1,600

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$1,000

$1,200

$1,400

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$1,800

$2,000

1 25 49 73 97 121 145 169 193 217 241 265 289 313 337

Maturity Path of Fed MBS HoldingsBillions, Months from Initial Date of Stopping Reinvestments

Fed Holdings of MBS if Reinvestments Stopped

Reinvestment of MBS Will Need to Be Dialed Back Very Gradually

Maturity Path of Fed MBS Holdings

Treasury market is highly liquid, but not MBS

A hypothetical illustration of MBS pre-payments suggests similar front-loaded maturity path for MBS

In order to prevent taper tantrum repeat, Fed will signal this well in advance and likely choose to reinvest a sizable percentage of the maturing MBS assets, smoothing the transition


23

Where Fiscal and Monetary Policy Are Intertwined

U.S. Federal Budget Fed Earnings Remitted

Source: U.S. Department of the Treasury, Congressional Budget Office and Wells Fargo Securities

-$1,800

-$1,600

-$1,400

-$1,200

-$1,000

-$800

-$600

-$400

-$200

$0

$200

$400

-$1,800

-$1,600

-$1,400

-$1,200

-$1,000

-$800

-$600

-$400

-$200

$0

$200

$400

00 02 04 06 08 10 12 14 16 18 20 22 24 26

U.S. Federal Budget BalanceBillions of Dollars

Federal Budget Balance: FY 2016 @ -$587.3BCBO Forecast: FY 2027 @ -$1,296.8B

$0

$20

$40

$60

$80

$100

$120

$140

$0

$20

$40

$60

$80

$100

$120

$140

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16

Fed Earnings Remitted to the TreasuryBillions of Dollars, 12-Month Moving Sum

Earnings Remitted: Feb @ $89.4 Billion

Like it or not, Feds large holdings currently help reduce the budget deficit

With rising deficits and trouble finding the funding for policy proposals, reduced remittances to the Treasury cannot be ignored

Fed earnings remitted to the Treasury in past year add up to roughly $90 billion

Without it, last years fiscal budget deficit would have been 16 percent larger

24

Housing After a very slow start, we see single-family homebuilding steadily gaining momentum over the next few years Apartment construction is showing signs of topping out but should remain near recent levels


0.0

0.3

0.6

0.9

1.2

1.5

1.8

2.1

2.4

0.0

0.3

0.6

0.9

1.2

1.5

1.8

2.1

2.4

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20

Housing StartsMillions of Units

Multifamily StartsMultifamily ForecastSingle-Family StartsSingle-Family Forecast

Forecast

Housing Starts

25

U.S. Homeownership Rate at Multi-Decade Low The long slide in the homeownership rate may have finally ended. The recovery in homeownership is likely to be protracted due to a combination of cyclical and structural factors


62%

63%

64%

65%

66%

67%

68%

69%

70%

62%

63%

64%

65%

66%

67%

68%

69%

70%

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16

U.S. Homeownership RatePercent

U.S. Homeownership Rate: Q4 @ 63.7%

U.S. Homeownership Rate

26

House Price to Income Ratios Above Long-Term Averages In many areas around the country, affordability challenges remain a big roadblock to owning a home

Source: Zillow and Wells Fargo Securities

0

1

2

3

4

5

6

7

8

9

10

0

1

2

3

4

5

6

7

8

9

10

Uni

ted

Sta

tes

Los

Ang

eles

San

Fra

ncis

co

San

Die

go

New

Yor

k

Riv

ersi

de

Sea

ttle

Bos

ton

Sea

ttle

Mia

mi

Den

ver

Phoe

nix

Was

hing

ton,

DC

Phoe

nix

Tam

pa

Dal

las

Phila

delp

hia

Min

neap

olis

Chi

cago

Hou

ston

Atla

nta

St.

Lou

is

House Price-to-Income Ratio in Large MetrosRatio of Median Home Price to Median Household Income

Historic Avg. (1985-99)Q4 2016

House Price-to-Income Ratio in Large Metros

27

50

100

150

200

250

300

50

100

150

200

250

300

05 06 07 08 09 10 11 12 13 14 15 16 17

Commercial Property Price IndexIndex

Apartment: Feb @ 278.9Retail: Feb @ 175.0Industrial: Feb @ 184.4Office - CBD: Feb @ 279.4Office - Suburban: Feb @ 151.3

Property Prices: CBD, Suburbs Differ High valuations have caught the Feds attention

Commercial Property Price Index

Source: RCA and Wells Fargo Securities

28

50

100

150

200

250

300

50

100

150

200

250

300

05 06 07 08 09 10 11 12 13 14 15 16 17

Commercial Property Price IndexIndex 2000 = 100, All Property Types

Major Markets: Feb @ 267.2Non-Major Markets: Feb @ 178.9

Property Prices: Major/Non-Major Market Splits Valuations have grown the fastest in major markets

Commercial Property Price Index

Source: RCA and Wells Fargo Securities

29

U.S. Forecast

Wells Fargo U.S. Economic Forecast

2014 2015 2016 2017 20181Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Real Gross Domestic Product 1 0.8 1.4 3.5 2.1 0.8 2.9 2.6 2.3 2.4 2.6 1.6 2.1 2.5Personal Consumption 1.6 4.3 3.0 3.5 1.1 2.7 2.5 2.4 2.9 3.2 2.7 2.5 2.7

Inflation Indicators 2

PCE Deflator 0.9 1.0 1.0 1.4 2.0 1.9 2.0 2.0 1.5 0.3 1.1 2.0 2.2Consumer Price Index 1.1 1.1 1.1 1.8 2.7 2.4 2.5 2.4 1.6 0.1 1.3 2.5 2.4

Industrial Production 1 -1.3 -0.7 0.8 0.8 2.2 3.2 2.4 2.4 3.1 -0.7 -1.2 1.8 2.4Corporate Profits Before Taxes 2 -6.6 -4.3 2.1 9.3 3.8 3.6 3.2 3.1 5.9 -3.0 -0.1 3.4 2.9Trade Weighted Dollar Index 3 89.8 90.6 90.0 95.8 94.0 96.3 97.0 99.3 78.4 91.1 91.6 96.6 97.4Unemployment Rate 4.9 4.9 4.9 4.7 4.7 4.6 4.6 4.5 6.2 5.3 4.9 4.6 4.5Housing Starts 4 1.15 1.16 1.14 1.25 1.26 1.24 1.26 1.27 1.00 1.11 1.17 1.26 1.35

Quarter-End Interest Rates 5

Federal Funds Target Rate 0.50 0.50 0.50 0.75 1.00 1.25 1.50 1.50 0.25 0.27 0.52 1.31 1.88Conventional Mortgage Rate 3.69 3.57 3.46 4.20 4.20 4.29 4.45 4.46 4.17 3.85 3.65 4.35 4.5310 Year Note 1.78 1.49 1.60 2.45 2.40 2.55 2.72 2.75 2.54 2.14 1.84 2.61 2.84

Forecast as of: April 12, 20171 Compound Annual Growth Rate Quarter-over-Quarter2 Year-over-Year Percentage Change3 Federal Reserve Major Currency Index, 1973=100 - Quarter End4 Millions of Units5 Annual Numbers Represent Averages

ForecastActualForecastActual2016 2017

International Developments

31

-1%

0%

1%

2%

3%

4%

5%

-1%

0%

1%

2%

3%

4%

5%

10 11 12 13 14 15 16 17

10-Year Government Bond YieldsPercent

Japan: May-04 @ 0.0%United States: May-04 @ 2.4%Germany: May-04 @ 0.4%United Kingdom: May-04 @ 1.1%

Sovereign Yields Government bond yields have declined across the globe but have jumped since the election

10-Year Government Bond Yields

Source: Federal Reserve Board, IHS Global Insight and Wells Fargo Securities

32

-1.50%

-1.00%

-0.50%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

-1.50%

-1.00%

-0.50%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

2012 2013 2014 2015 2016 2017

3-Month Interbank Offered Rates

Eurozone: May-5 @ -0.33%Denmark: May-5 @ -0.24%Sweden: May-5 @ -0.48%Switzerland: May-5 @ -0.73%

Negative Rates But short-term rates remain firmly negative

3-Month Interbank Offered Rates

Source: Bloomberg LP and Wells Fargo Securities

33

Foreign Purchases of U.S. Securities Capital flows and asset allocation by global investors play a strong role in rate determinations Less appetite for Treasuries growing appetite for Agencies

Source: U.S. Department of the Treasury and Wells Fargo Securities

-$300

-$200

-$100

$0

$100

$200

$300

$400

$500

$600

-$300

-$200

-$100

$0

$100

$200

$300

$400

$500

$600

04 05 06 07 08 09 10 11 12 13 14 15 16 17

Foreign Private Purchases of U.S. Securities 12-Month Moving Sum, Billions of Dollars

Treasury: Feb @ -$25.5 BillionEquity: Feb @ $24.9 BillionAgency: Feb @ $230.6 BillionCorporate: Feb @ $126.0 Billion

Foreign Private Purchases of U.S. Securities

34

-12%

-9%

-6%

-3%

0%

3%

6%

-12%

-9%

-6%

-3%

0%

3%

6%

00 02 04 06 08 10 12 14 16 18

U.K. Real GDPBars = Compound Annual Rate Line = Yr/Yr % Change

Compound Annual Growth: Q1 @ 1.2%Year-over-Year Percent Change: Q1 @ 2.1%

Forecast

U.K. GDP Growth Implications of Brexit have not been as bad as feared

U.K. Real GDP

Source: IHS Global Insight and Wells Fargo Securities

35

-12%

-8%

-4%

0%

4%

8%

-12%

-8%

-4%

0%

4%

8%

2002 2004 2006 2008 2010 2012 2014 2016 2018

Eurozone Real GDPBars = Compound Annual Rate Line = Yr/Yr % Change


Forecast

Eurozone Real GDP 3+ Years of Uninterrupted Growth

Eurozone Real GDP


36

30

35

40

45

50

55

60

65

30

35

40

45

50

55

60

65

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Eurozone Purchasing Managers' IndicesIndex

E.Z. Manufacturing: Apr @ 56.7E.Z. Services: Apr @ 56.4

Eurozone PMIs The Eurozone purchasing managers indices are pointing to continued recovery


Eurozone Purchasing Managers Indicies

37

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

00 01 03 05 07 09 11 13 15

ECB Balance SheetTrillions of Euros

ECB Balance Sheet: Apr @ 4.14T

ECB Balance Sheet The ECBs QE program should remain operational through at least March 2017

ECB Balance Sheet


38

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

92 94 96 98 00 02 04 06 08 10 12 14 16

Global Export VolumesYear-over-Year Percent Change

Real Exports: Feb @ 2.5%Average 1992-Present: 5.1%

Global Exports Global trade has slowed over the past year

Global Export Volumes


39

0%

2%

4%

6%

8%

10%

12%

14%

16%

0%

2%

4%

6%

8%

10%

12%

14%

16%

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Chinese Real GDP ForecastYear-over-Year Percent Change

Year-over-Year Percent Change: Q1 @ 6.9%

WFFcst.

China Real GDP Growth in China has stabilized, but we do not expect it to return to the double-digit growth rates seen in the past

Chinese Real GDP Forecast


40

-24%

-20%

-16%

-12%

-8%

-4%

0%

4%

8%

12%

-24%

-20%

-16%

-12%

-8%

-4%

0%

4%

8%

12%

2000 2002 2004 2006 2008 2010 2012 2014 2016

Japanese Real GDPBars = Compound Annual Rate Line = Yr/Yr % Change


Japanese GDP Mixed track record for Abenomics

Japanese Real GDP

Source: Bank of Japan, IHS Global Insight and Wells Fargo Securities

41

0

50

100

150

200

250

300

350

400

450

0

50

100

150

200

250

300

350

400

450

2000 2002 2004 2006 2008 2010 2012 2014 2016

Japan's Monetary BaseTrillions of Yen

Bank of Japan current policy path

Introduction of QQE

October 2014 announcement of QQE expansion

Japanese Monetary Base The expansion of the monetary base will continue to expand the size of the BoJs balance sheet considerably; the move into negative rates is dangerous and uncharted ground

Japans Monetary Base


42

60

75

90

105

120

1350.0

2.0

4.0

6.0

8.0

10.0

00 02 04 06 08 10 12 14 16

Japanese Currency Intervention vs. Yen Trillions of Yen, Purchases of Foreign Exchange; JPY per USD

Net FX Purchases/Yen Sales (L)JPY per USD: Mar @ 112.9 (R, Inverted)

Japanese Currency Intervention? Talk of currency intervention is misplaced, in our view

Japanese Currency Intervention vs. Yen


43

-1.5%

0.0%

1.5%

3.0%

4.5%

6.0%

7.5%

-1.5%

0.0%

1.5%

3.0%

4.5%

6.0%

7.5%

1980 1985 1990 1995 2000 2005 2010 2015

Real Global GDP GrowthYear-over-Year Percent Change, PPP Weights

Period Average

WFForecast

Global GDP Growth 2016 will likely mark the weakest year for global economy since 2009, but we see gradual improvement in coming years OECDs updated forecast: 3.3% in 2017 3.6% in 2018 Real Global GDP Growth

Source: International Monetary Fund and Wells Fargo Securities

44

Global Forecast Growth in the global economy likely will grind closer to long term trend

Source: International Monetary Fund and Wells Fargo Securities

(Year-over-Year Percent Change)

GDP CPI2016 2017 2018 2016 2017 2018

Global (PPP Weights) 3.0% 3.2% 3.3% 3.1% 3.3% 3.6%Global (Market Exchange Rates) 2.7% 3.0% 3.1% 3.1% 3.3% 3.6%

Advanced Economies1 1.8% 2.1% 2.3% 0.7% 2.0% 2.0%United States 1.6% 2.1% 2.5% 1.3% 2.5% 2.4%Eurozone 1.7% 1.8% 2.0% 0.2% 1.7% 1.8%United Kingdom 1.8% 1.8% 1.7% 0.7% 2.3% 2.1%Japan 1.0% 1.3% 0.9% -0.1% -0.1% 0.7%Korea 2.8% 2.6% 2.7% 1.0% 2.1% 1.7%Canada 1.4% 2.2% 1.9% 1.4% 1.8% 2.1%

Developing Economies1 4.2% 4.3% 4.3% 5.5% 4.7% 5.3%China 6.7% 6.3% 5.8% 2.0% 1.6% 2.2%India2 7.9% 7.1% 7.2% 5.0% 4.1% 5.5%Mexico 2.3% 1.2% 1.9% 2.8% 5.5% 4.5%Brazil -3.6% 0.7% 1.9% 8.7% 4.7% 5.1%Russia -0.2% 1.5% 2.1% 7.1% 4.2% 4.5%

Forecast as of: April 12, 20171Aggregated Using PPP Weights 2Forecasts Refer to Fiscal Year

Wells Fargo U.S. Economic Forecast

45

Wells Fargo Securities Economics Group

John E. Silvia [email protected]

Global Head of Research, Economics & Strategy Diane Schumaker-Krieg [email protected] Global Head of Research, Economics & Strategy

Chief Economist

Mark Vitner, Senior Economist [email protected]

Jay H. Bryson, Global Economist [email protected] Sam Bullard, Senior Economist [email protected] Nick Bennenbroek, Currency Strategist [email protected]

Anika R. Khan, Senior Economist [email protected] Eugenio J. Alemn, Senior Economist [email protected] Azhar Iqbal, Econometrician [email protected]

Tim Quinlan, Senior Economist [email protected] Eric J. Viloria, Currency Strategist [email protected]

Senior Economists Misa Batcheller, Economic Analyst

[email protected]

Michael Pugliese, Economic Analyst [email protected]

Julianne Causey, Economic Analyst [email protected]

E. Harry Pershing, Economic Analyst [email protected]

Economists Sarah House, Economist [email protected] Michael A. Brown, Economist [email protected]

Jamie Feik, Economist [email protected] Erik Nelson, Currency Strategist [email protected]

Economic Analysts

Administrative Assistants

Wells Fargo Securities Economics Group publications are produced by Wells Fargo Securities, LLC, a U.S broker-dealer registered with the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the Securities Investor Protection Corp. Wells Fargo Securities, LLC, distributes these publications directly and through subsidiaries including, but not limited to, Wells Fargo & Company, Wells Fargo Bank N.A., Wells Fargo Advisors, LLC, Wells Fargo Securities International Limited, Wells Fargo Securities Asia Limited and Wells Fargo Securities (Japan) Co. Limited. Wells Fargo Securities, LLC. ("WFS") is registered with the Commodities Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. Wells Fargo Bank, N.A. ("WFBNA") is registered with the Commodities Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. WFS and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this publication. Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities, LLCs research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm which includes, but is not limited to investment banking revenue. The information and opinions herein are for general information use only. Wells Fargo Securities, LLC does not guarantee their accuracy or completeness, nor does Wells Fargo Securities, LLC assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. Wells Fargo Securities, LLC is a separate legal entity and distinct from affiliated banks and is a wholly owned subsidiary of Wells Fargo & Company 2017 Wells Fargo Securities, LLC.

SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE

Important Information for Non-U.S. Recipients

For recipients in the EEA, this report is distributed by Wells Fargo Securities International Limited ("WFSIL"). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority. The content of this report has been approved by WFSIL a regulated person under the Act. For purposes of the U.K. Financial Conduct Authoritys rules, this report constitutes impartial investment research. WFSIL does not deal with retail clients as defined in the Markets in Financial Instruments Directive 2007. The FCA rules made under the Financial Services and Markets Act 2000 for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. This report is not intended for, and should not be relied upon by, retail clients. This document and any other materials accompanying this document (collectively, the "Materials") are provided for general informational purposes only.

Donna LaFleur, Executive Assistant [email protected]

Dawne Howes, Administrative Assistant [email protected]

mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]

Rates Outlook Central Bank Policy vs. Political Risk Mike Schumacher | Managing Director, Head of Rate Strategy [email protected] | 212-214-5043

Please see page 36 for the rating definitions, important disclosures and required analysts certifications. All estimates/forecasts are as of 5/03/17 unless otherwise stated.

Overview

3

Market Themes

Political risk is at the forefront New U.S. administration, Brexit, lots of European elections

Can anyone reliably forecast political events?

Market implication: Vols should find a bid

Gradual shift from monetary to fiscal policy In late 2016, the ECB, Bank of England and the Fed all

became less accommodative

Market implication: Global long rates should diverge over time

Central Bank Policy

5

Major Central Banks Overall Are Likely to Tighten Policy

Bank of England

The U.K. economy has been surprisingly resilient.

Our economics team expects no change in Bank Rate during 2017.

Bank of Japan

The BoJ may persist in keeping the 10yr JGB yield near zero through 2017.

It is promising to overshoot its inflation target of 2%, but we expect inflation to remain below 0.9% in 2017.

ECB

It has begun tapering.

The Governing Council seems to be losing its appetite for negative deposit rates.

Fed

We expect the Fed to hike twice more in 2017.

We look for the Fed to announce balance sheet reductions late this year.

Source: Wells Fargo Securities, Bloomberg L.P.

6

Monetary Policy Comparison: What a Difference a Year Makes?

Source: Federal Reserve Board, IHS Global Insight, Bloomberg LP and Wells Fargo Securities

March 2016 March 2017

FOMC Projected Number of Hikes 4 3 FOMC Projected Inflation (PCE Deflator) 1.6% 1.9%

Unemployment Rate 4.9% 4.5%

Blue Chip Consensus GDP 2.1% 2.3%

S&P 500 Change (Jan 1 April 10) 0.5% 5.7%

7

The March 15 Fed Rate Hike May Have Caused WIRP-lash

The Fed followed an unusual path to its March 15 tightening. The Fed rarely hikes unless the market probability is 60% one month ahead of the FOMC meeting.

The Fed implemented 25 bps hikes on 27 occasions between 1991 and 2016. The Fed violated the 60% rule only three times.

Is the Fed especially concerned about inflation risk, or did it simply seize an opportunity to tighten?


Market pricing ahead of the 27 meetings at which the FOMC tightened 25 bps, 1991-2016

Implied probability of 25bps hike

Frequency (%) vs. Trading Days Prior to FOMC

Min Max 60 20 10 5 0 40 15 4 11 4 40 60 0 7 4 0 60 80 4 19 4 11 80 81 70 81 85

The Feds Balance Sheet

9

The Feds Balance Sheet

Do not look for another taper tantrum.

We think Treasury yields will be affected much more by funds rate hikes than balance sheet cuts.

The 5s/10s area of the Treasury curve should flatten, not steepen as it did in the taper tantrum. We think 2s/10s also will flatten.

Source: Federal Reserve Bank of New York, Wells Fargo Securities, Bloomberg L.P.

10

If the Fed Continues 100% Reinvestment, Its Treasury Portfolio Will Roll Off Slowly

Treasury note/bond maturities should be about $200 billion this year, then surge.

The SOMA portfolios Treasury holdings are unlikely to fall below $1 trillion until 2021.


Fed SOMA Treasury notes and bonds Actual holdings for Dec 2016, projections for 2017-2021 Projected monthly Treasury maturities

0

90

180

270

360

450

0

500

1000

1500

2000

2500

2017 2018 2019 2020 2021

Mat

urin

g

Bal

ance

Balance Maturing

0

5

10

15

20

25

30

35

40

Jun-17

Jul-17 Aug-17

Sep-17

Oct-17

Nov-17

Dec-17

Jan-18

Feb-18

Mar-18

Apr-18

May-18

11

We Expect Yields to Rise Far Less Due to a Shrinking Balance Sheet Than in the Taper Tantrum

The Fed is buying fewer bonds

In 2013, the Fed bought $45 billion Treasuries per month, and $524 billion in nominal Treasuries for the year

We expect the Fed to purchase fewer than $200 billion nominal Treasuries this year

The duration of the Feds purchases (and holdings) has shortened dramatically

We estimate $122 billion 10yr equivalents this year, versus $548 billion in 2013

Average duration of Treasuries and MBS in Feds SOMA portfolio, 2012-16


0.0

3.0

6.0

9.0

Jan-12 Oct-12 Jul-13 Apr-14 Jan-15 Oct-15 Jul-16

Total SOMA Treasury Agency MBS

12

In the Taper Tantrum, Yields Rose Fastest in Maturities Where the Fed Bought the Most Bonds

5-10yr Treasury yields jumped more than 120bps. The 2yr yield rose more than 30bps, even though the Fed did not include 2s in its purchase program during 2013.

Defining the starting point of the taper tantrum is a little tricky

May 1, 2013 FOMC statement indicates the committee is prepared to increase or reduce the pace of its purchases

May 21, 2013 When appearing before Congress, Chairman Bernanke notes in the next few meetings, we could take a step down in our pace of purchase

Distribution of SOMA Treasury purchases in 2013 and 2016, and yield changes between May 1 and Sep. 5, 2013


0

30

60

90

120

150

0

30

60

90

120

150

180

2yr 3yr 5yr 7yr 10yr 30yr

Yiel

d c

han

ge

duri

ng t

antr

um

(b

ps)

SO

MA p

urc

has

es (

$ b

illio

n)

2016 purch 2013 purch Yield chg

13

In 2016, the Fed Bought More Than 25% of Agency MBS Issued

SOMA Agency MBS purchases in 2016


% of Gross % of Gross30-year Coupon $ Billion Issuance 15-year Coupon $ Billion IssuanceFannie Mae 3.0 83 33 Fannie Mae 2.0 1 11

3.5 41 32 2.5 16 284.0 4 8 3.0 6 28

Freddie Mac 3.0 60 34 Freddie Mac 2.0 0 83.5 29 33 2.5 10 254.0 2 8 3.0 4 30

Ginnie Mae 3.0 79 333.5 49 274.0 3 6

30-year total 349 29 15-year total 38 2430-year + 15-year 387 27

SOMA purchases SOMA purchases

U.S. Yield Curve

15

Another Sign That the Market Anticipates a Tame Fed Cycle: Little Change in Fed Funds/2s

Forwards suggest that the front end will barely steepen at any point this year.

Front end pricing mirrors the 2004 cycle.

Change in 2yr Treasury vs. Fed funds around tightening cycles, 1994, 1999 and 2004 changes versus levels six months before first hike. We assume the current cycle began in December 2016. 6-12 month data points use OIS forwards.


-50

0

50

100

150

-6.0 -4.1 -2.3 -0.5 1.4 3.2 5.1 6.9 8.7 10.6

Cum

ulat

ive

chan

ge (

bps)

in

Fed

fund

s/2s

Months relative to first rate hike or starting point1994 1999 2004 2016 Forward

16

We Expect Treasury 2s/5s to Flatten

Forwards imply that 2s/5s will flatten only 3bps by year-end, much less than in previous tightening cycles.

Several factors suggest flatteners will prevail:

If U.S. yields generally remain fairly low, investors may feel compelled to extend.

If the Fed becomes considerably more hawkish, then 2yr/3yr yields should jump.

If the U.S. lowers tax rates on repatriated earnings, we look for corporate Treasuries to sell short-term notes.

Risk: Fed shrinks its balance sheet quite aggressively. Change in Treasury 2s/5s around Fed tightening cycles, 1994, 1999 and 2004 changes versus levels six months before first hike.

We assume the current cycle began in December 2016. 3-12 month data points are forwards.


-150

-100

-50

0

50

-6.0 -4.1 -2.3 -0.5 1.4 3.2 5.1 6.9 8.7 10.6

Cum

ulat

ive

chan

ge (

bps)

in F

ed

fund

s/2s


17

Treasury 5s/10s: Another Wide Gap Between Forwards and Historical Patterns

The 5s/10s flattener looks appealing per our scenario analysis of fed funds / balance sheet

Forwards price 6bps in flattening through December 2017. The historical norm for the first year of a cycle is at least 25bps.

One big risk is that fiscal policy dramatically worsens the budget deficit.

We assume the current cycle began in December 2016. 3-12 month data points are forwards.


Change in Treasury 5s/10s around Fed tightening cycles, 1994, 1999 and 2004 changes versus levels six months before first hike.

-100

-75

-50

-25

0

25

-6.0 -4.1 -2.3 -0.5 1.4 3.2 5.1 6.9 8.7 10.6

Cum

ulat

ive

chan

ge (

bps)

in F

ed

fund

s/2s


18

Major Fiscal Stimulus Probably Is the Biggest Risk to Curve Flatteners

Treasury 2s/10s was quite steep when the budget was farthest in the red.

The long end also has been steep when the budget deficit is at least 6% of GDP.

Nonetheless, the usual moderate deficit can correspond to vastly different curve shapes. For deficits of 2-4%, 2s/10s has ranged from roughly flat to more than +250bps.

Treasury 2s/10s and 10s/30s versus U.S. budget surplus/deficit, annual data, 1990-2016

Source: Federal Reserve Bank of New York, Wells Fargo Securities, Bloomberg LP.

-50

0

50

100

150

200

250

300

-12 -10 -8 -6 -4 -2 0 2 4

Cur

ve s

lope

(bp

s)

Budget surplus/Deficit (%)10s/30s 2s/10s

Y = 20.26 + 63.70R2 = 0.42

Y = 7.33x + 32.85R2 = 0.43

19

-$2,000

-$1,500

-$1,000

-$500

$0

$500-$500

$0

$500

$1,000

$1,500

$2,000

00 02 04 06 08 10 12 14 16 18

U.S. Budget Deficit vs. Net Treasury IssuanceBillions of Dollars, Right Axis Inverted

Net Issuance Forecast: 2017 @ $612.54B (Left Axis)Deficit Forecast: 2017 @ -$771.43B (Right Axis)

Forecast

We Expect the Fiscal Bump to Boost Treasury Issuance in 2018

The Federal Deficit & Net Treasury Issuance

Composition of Treasury Issuance

Source: U.S. Department of the Treasury and Wells Fargo Securities

-$500

$0

$500

$1,000

$1,500

$2,000

-$500

$0

$500

$1,000

$1,500

$2,000

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

y pBillions of Dollars

Net Interest-Bearing Issuance: 2017 @ $468.4BNet Treasury Bill Issuance: 2017 @ $144.1B

Forecast

Global Rates and Flows

21

G10 Government Bond Yields Have Reconnected Recently

No major market was close to keeping pace when U.S. yields surged late last year.

Since the end of February, developed market 10yr yields have tracked decently.

In our opinion, the recent strong correlation is part of a flight to quality. We think the era of consistently high correlations that prevailed for years after the financial crisis probably has ended.

Changes in 10yr government bond yields, 2016 2017


-80

-40

0

40

80

Jan 1 2016 - Nov 8 Nov 8 - Dec 30 Dec 30 - Feb 28 Feb 28 to May 5

Yiel

d ch

ange

(bp

s)

Germany Japan U.K. U.S.

22

China and Japan Flows by Asset Class

China and Japan consistently have increased their holdings of U.S. agencies (largely MBS) over the past few years.

Japanese investors were net sellers of foreign bonds in the first two weeks of the new fiscal year.

Annual flows by asset class

Source: US Treasury, Wells Fargo Securities, Bloomberg L.P.

Through Feb 2017US Treasury US US Corp US Foreign Foreign

Country Securities Notes/Bonds Agencies Bonds Stocks Bonds Stocks2014

China 218 186 26 1 -2 7 0Japan 6 11 0 -11 -9 17 -1

2015China -6 -22 19 0 -5 5 -3Japan -33 -97 31 0 9 21 2

2016China -130 -155 23 1 -4 6 -1Japan 86 -70 92 11 9 31 14

2017China 16 3 13 0 0 0 0Japan -8 -6 0 -1 0 0 -1

23

China: Capital Flows May Offer a Link to Treasury Markets

These data imply that Chinese investors could revert to selling UST in the next few months.

China became a fairly consistent net seller of Treasuries about 9-12 months after it started to experience steady capital outflows in 2014.

Chinas estimated capital flows, 3-mo totals, 2009-2017

Source: Bloomberg L.P, Wells Fargo Securities

-150

-125

-100

-75

-50

-25

0

25

50

75

-400

-300

-200

-100

0

100

200

Aug-

09

Jan-

10

Jun-

10

Nov

-10

Apr-

11

Sep-

11

Feb-

12

Jul-1

2

Dec-

12

May

-13

Oct

-13

Mar

-14

Aug-

14

Jan-

15

Jun-

15

Nov

-15

Apr-

16

Sep-

16

Feb-

17

3mo

chan

ge in

Hol

ding

s $ b

il

est c

apita

l flo

ws $

bil

est cap flows (3-mo total)

3 mo TSY flow

24

Big Shift by Japanese Bond Investors Beginning in Late 2016

Out with the old favorites, U.S. and France.

U.S.: Japanese investors reduced their bond holdings in the fourth quarter of 2016, and again in Jan/Feb 2017.

France: holdings fell sharply in Feb. 2017.

Still wary of the U.K.

Germany has become popular. Increased this position during Q4 2016 and early 2017.

Japan net foreign bond purchases by country/region, JPY billion

Source: Japan Ministry of Finance, Wells Fargo Securities, Bloomberg L.P.

Begin Jan-14 Jan-15 Jan-16 Apr-16 Oct-16 Jan-16 1-Jan-17End Dec-14 Dec-15 Mar-16 Sep-16 Dec-16 Dec-16 28-Feb-17

Total 4,516 16,451 9,860 15,391 440 25,691 -3,376US 2,714 15,296 5,957 10,865 -1,296 15,526 -1,891France 2,792 308 1,712 1,972 146 3,830 -1,615Canada 437 450 409 808 95 1,312 28Central & South America 1,809 661 426 -157 549 818 -157Australia 561 579 87 362 315 764 106UK 246 -575 122 501 -115 508 -272Asia 856 760 167 99 136 402 30Netherlands -615 -742 113 -149 240 204 -16Eastern Europe -49 98 -33 8 -18 -42 60Germany -3,553 -1,920 -40 -699 179 -559 720

Swaps and Vol

26

Will Interest Rate Vol Ever Find a Bid ?

Swaption vol has fallen dramatically this year. For many structures, vols are near multi-year lows

Low delivered realized vol explains a portion of the move. Once again, portfolio managers seem torn between deploying cash now, and hoping that yields/spreads will improve in a month or two.

USD swaption volatility, last 12 months


55

65

75

85

95

5-May-16 5-Jul-16 5-Sep-16 5-Nov-16 5-Jan-17 5-Mar-17 5-May-17

Impl

ied

vol (

bps)

1y10y 3m5y

27

U.S. Yields Have Been Choppy Recently, While Still Inhabiting Normal to Narrow Ranges

Our take is that a major directional move probably will require one of these catalysts:

Sustained shift in Fed policy;

Fiscal policy. Republicans successfully enact stimulative measures, or the plans fail;

European election surprise. U.K. vote takes an odd turn, or Angela Merkel is defeated in Germany.

The daily political to and fro seems to be driving local vol

Treasury yield 40-day ranges, 2015-17


0

25

50

75

100

30-Jun-15 30-Sep-15 31-Dec-15 31-Mar-16 30-Jun-16 30-Sep-16 31-Dec-16 31-Mar-17

Ran

ge (

bps)

2yr 10yr 30yr

28

U.S. Swap Spreads versus Three-Month LIBOR and General Collateral Repo

2yr and 10yr swap spreads have tracked LIBOR GC repo pretty well (good?) this year. However, they did disconnect toward the end of April.

In 2016, the 2yr swap spread tracked LIBOR GC repo, but the 10yr spread diverged.

3mo LIBOR GC repo, US 2yr and 10yr swap spreads, 2015 - 17


-30

-20

-10

0

10

20

30

40

50

Jan-15Mar-15May-15 Jul-15 Sep-15Nov-15 Jan-16 Mar-16May-16 Jul-16 Sep-16Nov-16 Jan-17Mar-17May-17

Spr

ead

(bp)

LIBOR - GC 3m Swap 2y Swap 10y

29

USD Swap Spreads Have Diverged from Equities in March-May after Tracking Closely for a While

USD 10yr swap spread versus SPX, 2016-2017 Spread widening early in

2017 confounded conventional seasonal norms Heavy issuance usually

leads to narrower spreads Asset-liability managers may

be partly responsible for spread widening Insurers: big post-election

equity rally boosted surplus buffers for variable annuities

Corporate pensions: may look to monetize hedges before yields rise

These factors suggest diminished need to hedge in swaps and swaptions


y = 0.001x - 15.294R = 0.001-20

-15

-10

-5

0

1,800 2,000 2,200 2,400

10yr

swap

spre

ad (b

ps)

S & P 500

Jan - Oct 2016 Nov-Dec 16

Jan-17 Feb-17

Mar-17 Apr-May 17

30

USD 3mo LIBOR Seems Very Low versus 1mo LIBOR

The spread has narrowed substantially as banks shift their funding mix in response to money market reform Overseas issues Repo

We think it will increase notably in the next 3-6 months.

LIBOR basis and 2yr swap spread, May 2016 May 2017


0

10

20

30

40

May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17

bp

1m vs 3m (1y tenor) 3m vs 6m (1y tenor) 2y swap spread

c

cc

8.9

16.3

Appendix

32

Balance Sheet Reduction Could top $100 Billion 10-Year Treasury Equivalents in 2018

We expect Treasury to auction about $250 billion 10-year notes in 2017. If the Fed moves aggressively, its reductions could equate to more than 50% of a full years supply of 10s in 2018.

The SOMA portfolio holds over $400 billion in Treasuries that mature next year.

Projected change in 10yr Treasury equivalents for various balance sheet reduction strategies

Source: Federal Reserve Board, Wells Fargo Securities, Bloomberg L.P.

Reinvestment % scenarioBeginning Slow Moderate Aggressive

Apr-17 100 100 100Sep-17 100 100 75Dec-17 100 100 50Jun-18 100 75 25Dec-18 75 50 0Jun-19 50 25 0

Annual % reinvestment2017 100 100 922018 99 85 352019 61 36 0

Balance sheet reduction in 10yr Treasury equivalents2017 0 0 92018 3 36 1562019 85 140 219

33

Quite a Few FOMC Members Expect the Fed Funds Rate to Reach 3.00% in 2019

Appropriate Pace of Policy Firming

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Target Federal Funds Rate at Year-End

March 2017 Median ResponseDecember 2016 Median Response

2017 Longer Run2018 2019

Source: Federal Reserve Board, Bloomberg LP and Wells Fargo Securities

34

U.S. Interest Rate Outlook

Wells Fargo U.S. Interest Rate Forecast

Source: Federal Reserve Board and Wells Fargo Securities

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4QQuarter End Interest Rates

Federal Funds Target Rate 0.50 0.50 0.50 0.75 1.00 1.25 1.50 1.50 1.50 1.75 2.00 2.253 Month LIBOR 0.63 0.65 0.85 1.00 1.15 1.50 1.75 1.75 1.75 2.00 2.25 2.50Prime Rate 3.50 3.50 3.50 3.75 4.00 4.25 4.50 4.50 4.50 4.75 5.00 5.25Conventional Mortgage Rate 3.69 3.57 3.46 4.20 4.20 4.29 4.45 4.46 4.47 4.48 4.55 4.623 Month Bill 0.21 0.26 0.29 0.51 0.76 1.02 1.30 1.40 1.45 1.50 1.75 2.026 Month Bill 0.39 0.36 0.45 0.62 0.91 1.19 1.45 1.56 1.60 1.66 1.92 2.181 Year Bill 0.59 0.45 0.59 0.85 1.03 1.35 1.65 1.80 1.85 1.90 2.10 2.312 Year Note 0.73 0.58 0.77 1.20 1.27 1.75 2.05 2.15 2.20 2.26 2.41 2.565 Year Note 1.21 1.01 1.14 1.93 1.93 2.10 2.40 2.46 2.49 2.52 2.66 2.8010 Year Note 1.78 1.49 1.60 2.45 2.40 2.55 2.72 2.75 2.76 2.78 2.86 2.9430 Year Bond 2.61 2.30 2.32 3.06 3.02 3.18 3.44 3.54 3.56 3.58 3.67 3.76

Forecast as of: April 12, 2017

2016 2017

2018ForecastActual

35

Performance of Wells Fargo Rate Strategy Trade Recommendations

Trade suggestions since Oct 2015, when we began publishing the Rates Explorer.

3-May-17 Total Up Down Hit Rate (%)Open 5 3 2 60Closed 22 14 8 64Total 27 17 10 63

3-May-17Open 5/3/2017 13:21 Trade Level Gain /Type Curve area or Sector Market Position Par Date Units Initial Current Loss Target Stop Loss Initial CurrentVol Gamma US Hedge near-term political volatility Equal notional 2-Feb-17 bp 41 0 -41 121 60 2.47 2.29Inflation Intermediate/Long US 5/30 breakeven steepener Risk weight 20-Mar-17 bp 9 24 17 27 0 2.50 2.29Inflation Intermediate US Switch to the "New" 5y Sector via Jan-2022 Risk weight 3-Apr-17 bp 22 17 6 27 0 2.32 2.29Rate curve intermediate US Treasury 5s/10s flattener Dur weight 19-Apr-17 bp 47 47 0 7 67 1.84 2.29Rate curve front US Spreads, 1mo/3mo LIBOR basis widener, 1y1y tenor Outrigh 19-Apr-17 bp 10 9 -1 18 5 2.21 2.29

Closed Trade Level Gain / CloseType Curve area Market Position Par Date Units Initial Closed Loss Date Initial @ closeRate curve front US Steepener. 6mo forward 1s/2s 100 29-Oct-15 bp 29 28 -1 4-Jan-16 2.17 2.21Rate curve long end US Flattener. Long 2.5 2/45 vs. 2.0 8/25 Dur weight 29-Oct-15 bp 81 85 -4 4-Feb-16 2.17 1.85Vol US Vol surface flattener. Long 6m2y, short 6m10y 100 20-Nov-15 bp 11 19 -8 9-Feb-16 2.26 1.71Relative value US Relative value. Long 3y versus 2y and 5y Dur weight 21-Dec-15 bp -7 -18 12 9-Feb-16 2.19 1.71Vol US Payer spread. 6m3y, ATM vs. 50bp OTM $673 million 20-Jan-16 $mln 2.99 2.00 -0.99 9-Feb-16 2.19 1.71Relative value US Curve/Relative value. Short 5y versus long 2y and 10 Dur weight 29-Feb-16 bp -8 -3 5 24-Mar-16 1.73 1.88Vol US Tail Risk/Vol - Brexit hedge Equal notional 14-Mar-16 bp 128 133 5 4-Apr-16 1.95 1.76Inflation US Inflation. Long 50% 5y Bei vs 100% 5/10 RY flattener Risk weight 21-Jan-16 bp 0 50 50 21-Apr-16 2.03 1.88Rate curve front US Front end steepener. EDM6 vs. EDM7 Equal notional 9-Feb-16 bp 12 28 16 19-Apr-16 1.71 1.79Vol US Buy gamma. 6m10y at the money straddle 100 19-Apr-16 bp 432 450 18 24-Jun-16 1.79 1.50Vol US Vol. Buy fwd vol: 6mo fwd 2y5y option DV01-weighted 23-Feb-16 bp 275 307 32 24-Jun-16 1.79 1.50Vol US Buy 6m2y ATM/-25 Receiver Spread 100 10-May-16 bp 19 20 1 18-Jul-16 1.75 1.56Rate curve intermediate US Flattener. Long 2.25 11/25 vs. 1.25 12/18 Dur weight 4-Jan-16 bp 94 81 13 9-Sep-16 2.17 1.68Inflation US Inflation, 5/10 breakeven steepener Dur weight 30-Jun-16 bp 5 6 1 28-Sep-16 1.47 1.54Relative value US Basis, short 2y Treasury/OIS in Dec-2018 Risk weight 28-Sep-16 bp 18 20 -2 26-Oct-16 1.54 1.79Rate curve long end US Treasury 10s/30s steepener Dur weight 9-Nov-16 bp 81 68 -13 18-Nov-16 1.84 2.35Rate curve front US Spreads, 1-mo/3-mo LIBOR basis widener, 1-yr teno Outright 9-Sep-16 bp 23 24 1 22-Nov-16 1.67 2.31Rate curve front US Front end steepener. EDZ6 vs. EDZ7 Equal notional 19-Apr-16 bp 24 46 22 13-Dec-16 1.79 2.47Rate curve front US Steepener. Long 0.75 4/18 vs. 0.875 4/19 Dur weight 2-May-16 bp 14 18 4 3-Apr-17 1.87 2.34Inflation US Inflation, TIPS Rel Value. Switch to 7/25 from 1/26 Dur weight 23-May-16 bp -3 -7 4 3-Apr-17 1.84 2.34Relative value US Long "Fed convexity". Buy US 1y2y, 3y3, sell 1y5y Risk weight 2-Jun-16 bp 134 120 -14 3-Apr-17 1.81 2.34Rate curve intermediate US Treasury 3s/10s flattener Dur weight 9-Nov-16 bp 90 90 0 19-Apr-17 1.84 2.21

Level 10yr Treasury

10yr Treasury


36

Disclosure Appendix

Additional information is available on request.

Analysts Certification

The research analyst(s) principally responsible for the report certifies to the following: all views expressed in this research report accurately reflect the analysts personal views about any and all of the subject securities or issuers discussed; and no part of the research analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the research analyst(s) in this research report.

Important Disclosures Relating to Conflicts of Interest and Potential Conflicts of Interest

Wells Fargo Securities does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities research analysts receive compensation that is based on and affected by the overall profitability of their respective department and the firm, which includes, but is not limited to, investment banking revenue. Wells Fargo Securities may sell or buy the subject securities to/from customers on a principal basis or act as a liquidity provider in such securities.

Wells Fargo Securities Fixed Income Research analysts interact with the firms trading and sales personnel in the ordinary course of business. The firm trades or may trade as a principal in the securities or related derivatives mentioned herein. The firms interests may conflict with the interests of investors in those instruments.

About Wells Fargo Securities

Wells Fargo Securities is the global brand name for the capital markets and investment banking services of Wells Fargo & Company and its subsidiaries, including but not limited to Wells Fargo Securities, LLC, a U.S. broker-dealer registered with the U.S. Securities and Exchange Commission and a member of NYSE, FINRA, NFA and SIPC, Wells Fargo Prime Services, LLC, a member of FINRA, NFA and SIPC, Wells Fargo Bank, N.A., Wells Fargo Securities Asia Limited, a Hong Kong Incorporated investment firm licensed and regulated by the Securities and Futures Commission to carry Types 1, 4, 6 and 9 regulated activities and Wells Fargo Securities International Limited, a U.K. entity investment firm authorized and regulated by the Financial Conduct Authority. The Wells Fargo Securities legal entity that takes responsibility for the production of the Product is the legal entity which the first named author is employed by. Non-US analysts may not be associated persons of Wells Fargo Securities, LLC. and therefore may not be subject to FINRA Rule 2242 restrictions on communications with subject company, public appearances and trading securities by the analysts, but will be subject to their own local regulatory requirements.

Notice to U.S. Investors

Unless prohibited by the provisions of Regulation S of the 1933 Act, this material is distributed in the U.S., by Wells Fargo Securities, LLC, which takes responsibility for its contents in accordance with the provisions of Rule 15a-6 and the guidance thereunder, under the U.S. Securities Exchange Act of 1934. Any transactions in securities identified herein may be effected only with or through Wells Fargo Securities, LLC.

Important Information for Non-U.S. Clients

EEA

The securities and related financial instruments described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. For recipients in the EEA, Wells Fargo Securities International Limited (WFSIL) disseminates Research which has been approved for the purposes of Section 21 of the Financial Services and Markets Act 2000 (the Act). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority. For the purposes of Section 21 of the Act, WFSIL does not deal with retail clients. The FCA rules made under the Financial Services and Markets Act 2000 for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. This report is not intended for, and should not be relied upon by, retail clients.

37

Disclosure Appendix (contd)

Australia

Each of Wells Fargo Securities, LLC, Wells Fargo Securities Asia Limited and Wells Fargo Securities International Limited is exempt from the requirements to hold an Australian financial services license in respect of the financial services it provides to wholesale clients in Australia. Wells Fargo Securities, LLC is regulated under U.S. laws, Wells Fargo Securities Asia Limited is regulated under Hong Kong law, and Wells Fargo Securities International Limited is regulated under U.K. law, all of which differ from Australian laws. Any offer or documentation provided to Australian recipients by Wells Fargo Securities in the course of providing the financial services will be prepared in accordance with the laws of the United States, Hong Kong or U.K. and not Australian laws.

Hong Kong

This report is issued and distributed in Hong Kong by Wells Fargo Securities Asia Limited (WFSAL), a Hong Kong incorporated investment firm licensed and regulated by the Securities and Futures Commission ("SFC") to carry on types 1, 4, 6 and 9 regulated activities (as defined in the Securities and Futures Ordinance (Cap. 571 of The Laws of Hong Kong), the SFO). This report is not intended for, and should not be relied on by, any person other than professional investors (as defined in the SFO). Any securities and related financial instruments described herein are not intended for sale, nor will be sold, to any person other than professional investors (as defined in the SFO). The author or authors of this report may or may not be licensed by the SFC. Professional investors who receive this report should direct any queries regarding its contents to Mark Jones at WFSAL (email: [email protected] ).

Japan

This report is distributed in Japan by Wells Fargo Securities (Japan) Co., Ltd, registered with the Kanto Local Finance Bureau to conduct broking and dealing of type 1 and type 2 financial instruments and agency or intermediary service for entry into investment advisory or discretionary investment contracts. This report is intended for distribution only to professional investors (Tokutei Toushika) and is not intended for, and should not be relied upon by, ordinary customers (Ippan Toushika). The ratings stated on the document are not provided by rating agencies registered with the Financial Services Agency of Japan (JFSA) but by group companies of JFSA-registered rating agencies. These group companies may include Moodys Investors Services Inc, Standard & Poors Rating Services and/or Fitch Ratings. Any decisions to invest in securities or transactions should be made after reviewing policies and methodologies used for assigning credit ratings and assumptions, significance and limitations of the credit ratings stated on the respective rating agencies websites.

Published reports and additional disclosure information are available at www.wellsfargoresearch.com.

This report is for your information only and is not an offer to sell, or a solicitation of an offer to buy, the securities or instruments named or described in this report. Interested parties are advised to contact the Wells Fargo entity in their local jurisdiction with which they deal, or the entity that provided this report to them, if they desire further information or if they wish to effect transactions in the security discussed in this report. The information in this report has been obtained or derived from sources believed by Wells Fargo Securities, to be reliable, but Wells Fargo Securities does not represent that this information is accurate or complete. Certain text, images, graphics, screenshots and audio or video clips included in this report are protected by copyright law and owned by third parties (collectively, Third Party Content). Third Party Content is made available to clients by Wells Fargo under license or otherwise in accordance with applicable law. Any use or publication of Third Party Content included in this report for purposes other than fair use requires permission from the copyright owner. Certain website links included in this publication are not maintained, controlled or operated by Wells Fargo Securities. Wells Fargo Securities does not provide the products and services on these external websites and the views expressed on these websites do not necessarily represent those of Wells Fargo Securities. Please review the applicable privacy and security policies and terms and conditions for the website you are visiting. Credit Strategists focus on investment themes across the credit markets and sectors. Any discussion within a Credit Strategy report of specific securities is not intended to provide a fundamental analysis of any individual company described therein. The information provided in Credit Strategy reports is subject to change without notice, and investors should not expect continuing information or additional reports relating to any security described therein. Any opinions or estimates contained in this report represent the judgment of Wells Fargo Securities at this time, and are subject to change without notice. For the purposes of the U.K. Financial Conduct Authority's rules, this report constitutes impartial investment and substantive research. Each of Wells Fargo Securities, LLC, and Wells Fargo Securities International Limited is a separate legal entity and distinct from affiliated banks. Copyright 2017 Wells Fargo Securities, LLC.

This report was prepared by Wells Fargo Securities, LLC.

2017 Financial Institutions Balance Sheet Strategy Conference Bank Regulatory Update

2

Timeline of the Great Recession and U.S. Intervention

Real GDP growth, quarterly

"Our capital position at the moment is strong. - Former Lehman Brothers CFO Ian Lowitt, five days before the firm filed for bankruptcy

Source: U.S. Treasury.

0.5%

3.6%3.0%

1.7%

-1.8%

1.3%

-3.7%

-8.9%

-6.7%

-0.7%

1.7%

3.8%Feb. 2009

Financial Stability Plan announced Recovery Act signed

Housing programs announced

Dec. 12, 2007Fed establishes first liquidity facility and

currency swap lines with other central banks

Mar. 2008Bear Stearns collapses

Jul. 7, 2008FDIC intervenes in

IndyMac Bank

Oct. 3, 2008TARP financial stabilization package enacted

Jan. 2Q 2009President Obama

takes office

2007 2008 2009Mar. 3, 2009

TALF program launched to help revive credit markets

Mar. 23, 2009PPIP program announced to help revive mortgage financial market

Sept. 2008Fannie Mae and Freddie Mac

conservatorship Lehman Brothers bankruptcy AIG stabilization effort

3

Primary Drivers of Bank Failures: Insufficient Capital and Liquidity

Cash, Cash Equivalents, and Treasuries as % of Total Assets

As evidenced by a continuing stream of scholarship, many factors contributed to the unsustainability and fragility of the pre-crisis financial system. But the inadequacy of regulation and supervision was clearly among them. Large banking firms had insufficient levels of high-quality capital; excessive amounts of short-term, wholesale funding; too few high-quality, liquid assets; and inadequate risk measurement and management systems. Former Federal Reserve Governor Daniel Tarullo (12/02/16)

Tangible Common Equity / Tangible Assets

Source: SNL Financial.

22.8% 22.8% 22.8% 22.9%

7.0% 7.7% 5.6% 5.2%

16.6% 15.9% 16.2% 16.1%

2005 2006 2007 2008

U.S. Banks $50bn

7.9% 8.0% 7.9%7.3%

6.9% 7.2%7.6%

6.9%

4.9% 4.7%4.1%

3.5%

2005 2006 2007 2008

U.S. Banks $50bn

4

Bank

2017 strategy conference - · may 15-17, 2017 | charlotte, nc 2017 financial institutions balance...

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