who is buying treasuries, mt cdit dm i?mortgages, credit ... · trading volumes: us government bond...

Deutsche Bank

Who is buying Treasuries, M t C dit d M i ?Mortgages, Credit, and Munis?

December 2014 Peter Hooper, Matthew Luzzetti, and Torsten Slok60 Wall Street

New York New York 10005New York, New York 10005Tel: 212 250 7275

DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 114/04/2014.

US Overview

Deutsche Bank 2Torsten Slok, [email protected] +1 212 250-2155 December 2014

Total global AUM is around $117 trnAssets under management in USD trillion,

2013 Estimates

28.9

35.2

Mutual funds

Pension funds

11.7

28

FX reserves

Insurance funds

2.6

6.3

Hedge funds

SWFs

2 2

2.3

Private equity

ETFs

g

2.2

0 10 20 30 40

Private equity

NOTE: An average growth trend has been assumed for Private Equity, Insurance Funds and Pension Funds


Source: CBO, DB Global Markets ResearchSource: DB estimates, Hedge Fund Research, The City UK, SWF Institute, ICI. DB Global Markets ResearchNOTE: An average growth trend has been assumed for Private Equity, Insurance Funds and Pension Funds

Who is funding the US budget deficit?

2500

$ bln

2500

$ blnRest of the world Fed

2000

2500

2000

2500Other domestic Net issuance of treasuries

1000

1500

1000

1500

0

500

0

500

-1000

-500

-1000

-500

-150007 08 09 10 11 12 13 14

-1500


Source: CBO, DB Global Markets ResearchSource: FRB, Haver Analytics, DB Global Markets Research

Trading volumes: US government bond market dominates

Daily trading volumes$ bln $ bln

500

600

500

600

400

500

400

500

200

300

200

300

100

200

100

200

0US treasuries UK gilts German bunds

0


Source: Fitch, DB Global Markets Research

US fixed income markets much bigger in sizeSize of treasury marketsbln bln

80009000

10000

8000900010000

4000500060007000

4000500060007000

1000200030004000

1000200030004000

01000

US surie

s

genc

y

govt

)

ranc

ego

vt.)

govt

.)

man

yov

t.)er

ednd

sm

any)

nada

ovt.)

vere

don

dspa

in)

01000

Utre

as

US

ag

Italy

( F r (g

UK

(g

Ger

m(g

oC

ove

bon

(Ger

mC

a (go

Cov bo (Sp


Source: Fitch Ratings, US Treasury, SIFMA, US debt management office, Agency France Tresor, Bundesrepublik Deutscheland, European Covered Bond Council, DB Global Markets Research

Non-Fed sector mainly holding <5yr Treasuries = foreigners and US private sector vulnerable to changes in Fed speak

Marketable debt held outside the Fed Reserve: maturity breakdown

% of GDP % of GDP

50

60

50

60less than 1 1-55-10 >10Total outstanding

40

50

40

50

30 30

10

20

10

20

075 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13

0


Source: Treasury, BEA , Haver Analytics, DB Global Markets Research75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13

The Fed holds +40% of long Treasuries

Fed holdings of treasury securities outstanding (% of total securities outstanding by maturity)% %total securities outstanding by maturity)

4550

4550Fed share of total: 0-5 years

Fed share of total: 0-10 years

303540

303540Fed share of total: 10+ years

Fed share of total: 5+ years

202530

202530

51015

51015

05

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 1405


Sources: IMF, Treasury, Haver Analytics and DB Global Market ResearchSource: FRB, Haver Analytics, DB Global Markets Research

Auction outcomes


Primary dealers mainly holding < 3yr couponsy y g y

Primary dealer positions in coupon treasuries by maturity sector

$ bln $ bln

150 150<3yr 3yr-6yr 6yr-11yr >11yr Total

50

100

50

100

50

0

50

0

-100

-50

0 0 0 0 1 1 1 1 2 2 2 2 3 3 3 3 4 4 4 4

-100

-50

Jan-

2010

Apr-

2010

Jul-2

010

Oct

-201

0Ja

n-20

11Ap

r-20

1Ju

l-201

1O

ct-2

01Ja

n-12

Apr

-12

Jul-1

2O

ct-1

2Ja

n-13

Apr

-13

Jul-1

3O

ct-1

3Ja

n-14

Apr

-14

Jul-1

4O

ct-1

4


Source: FRB, Haver Analytics, DB Global Markets Research

Foreign participation in 10y and 30y auctions stableg p p y y

10 and 30 yr auction amounts awarded to foreigners % %(% of total issued)

4045

4045

253035

253035

101520

101520

05

10

9 9 0 0 0 0 1 1 1 1 2 2 2 2 3 3 3 3 4 4 4 4

0510

Jul-0

9O

ct-0

9Ja

n-10

Apr

-10

Jul-1

0O

ct-1

0Ja

n-11

Apr

-11

Jul-1

1O

ct-1

1Ja

n-12

Apr

-12

Jul-1

2O

ct-1

2Ja

n-13

Apr

-13

Jul-1

3O

ct-1

3Ja

n-14

Apr

-14

Jul-1

4O

ct-1

4


Source: ODM, Haver Analytics, DB Global Markets Research

Direct bidding trending down for 10s…g g

US 10 Year Notes Bidder Participation for % of Direct Bidder Amount Accepted50

%50

%

404550

404550

253035

253035

10152025

10152025

05

10

0510

May

-03

Oct

-03

Mar

-04

Aug

-04

Jan-

05Ju

n-05

Nov

-05

Apr

-06

Sep-

06Fe

b-07

Jul-0

7D

ec-0

7M

ay-0

8O

ct-0

8M

ar-0

9A

ug-0

9Ja

n-10

Jun-

10N

ov-1

0A

pr-1

1Se

p-11

Feb-

12Ju

l-12

Dec

-12

May

-13

Oct

-13

Mar

-14

Aug

-14


Source: Treasury, Bloomberg Finance LP, DB Global Markets Research

…and direct bidding for 2s also lower…g

U.S. 2 Year Notes Bidder Participation for % of Direct Bidder Amount Accepted45

%45%

p

35

40

35

40

25

30

25

30

10

15

20

10

15

20

0

5

10

0

5

10

0

Jun-

03D

ec-0

3Ju

n-04

Dec

-04

Jun-

05D

ec-0

5Ju

n-06

Dec

-06

Jun-

07D

ec-0

7Ju

n-08

Dec

-08

Jun-

09D

ec-0

9Ju

n-10

Dec

-10

Jun-

11D

ec-1

1Ju

n-12

Dec

-12

Jun-

13D

ec-1

3Ju

n-14

Dec

-14

0



…is China behind direct bidding on 10s? g

50%

60USD blnUS 10 Year Notes Bidder Participation for % of Direct Bidder

Amount Accepted (ls)China Gross Purchases of US Treasury Bonds & Notes (rs)

40

4550

China Gross Purchases of US Treasury Bonds & Notes (rs)

25

30

35

30

40

15

20

25

20

30

5

10

15

10

02003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

0



Bid-to-cover ratios up for 2s and down for 10s

Treasury auction results: bid-to-cover ratioRatio Ratio

5 5

2-yr 10-yr

4 4

3 3

2 2

11994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

1


Source: U.S. Treasury, Bloomberg finance LP, DB Global Markets Research

…and indirect bidding stable for 2s and 10s

Indirect bidding for Treasuries at Treasury auctions% %

70

80

70

802-yr 10-yr

50

60

70

50

60

70

30

40

50

30

40

50

10

20

30

10

20

30

0

10

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20150

10


Source: U.S. Treasury, Bloomberg Finance LP, DB Global Markets Research

What are foreignWhat are foreign central banks doing?central banks doing?


Foreign official holdings of Treasuries moving sideways…

Foreign US Treasury holdings:4500$bn

4500$bn

3500

4000

4500

3500

4000

4500

Official Private

2500

3000

2500

3000

1500

2000

1500

2000

0

500

1000

0

500

1000

0

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

0


Source: Treasury, Haver Analytics, DB Global Markets Research

...and Japan has stepped up purchases recently...

Chinese and Japanese US treasury holdingsUSD bln USD bln

1200

1400

1200

1400China Japan

800

1000

800

1000

400

600

400

600

0

200

9 09 9 0 0 0 0 1 1 1 1 2 2 2 2 3 3 3 3 4 4 4 4

0

200

May

-200

Aug

-200

Nov

-200

Feb-

201

May

-201

Aug

-201

Nov

-201

Feb-

201

May

-201

Aug

-201

Nov

-201

Feb-

201

May

-201

Aug

-201

Nov

-201

Feb-

201

May

-201

Aug

-201

Nov

-201

Feb-

201

May

-201

Aug

-201

Nov

-201



China’s foreign reserves have started falling...

$bn, q/q chg. $bn, q/q chg.Chi ’ f i

160

200

160

200China’s foreign reserves

80

120

80

120

-40

040

-40

040

-120-80

40

-120-80

40

-16004 05 06 07 08 09 10 11 12 13 14

-160


Source: PBC, SAFE, Haver Analytics, DB Global Markets Research

…despite a record-high trade balance surplus

China's trade balance$ bln $ blnChina's trade balance

40

50

$ bln

40

50

$ bln

20

30

20

30

10

0

10

10

0

10

-30

-20

-10

-30

-20

-10

-402003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

-40


Source: IMF, Haver Analytics, DB Global Markets Research

…and the monthly data shows that China's FX reserves are now around $3.8trn

China's FX reserves declining4.5$ trn

4.5$ trn

3 5

4.0

3 5

4.0

3.0

3.5

3.0

3.5

2.0

2.5

2.0

2.5

1.0

1.5

1.0

1.5

0.52005 2006 2007 2008 2009 2010 2011 2012 2013 2014

0.5


Source: PBC, Haver Analytics, DB Global Markets ResearchNote: data for Jan and Feb 2014 was not available in PBC

Custody holdings fell a lot in October…y g

Rolling 4 week change in Fed custody holdings

100120

$bn

100120

$bnGSE Treasury Total

20406080

20406080

-40-20

020

-40-20020

-100-80-60

-100-80-60

Jan-

09A

pr-0

9Ju

l-09

Oct

-09

Jan-

10A

pr-1

0Ju

l-10

Oct

-10

Jan-

11A

pr-1

1Ju

l-11

Oct

-11

Jan-

12A

pr-1

2Ju

l-12

Oct

-12

Jan-

13A

pr-1

3Ju

l-13

Oct

-13

Jan-

14A

pr-1

4Ju

l-14

Oct

-14

Jan-

15


Source: Bloomberg Finance LP, DB Global Markets Research

…and overall Fed custody holdings moving sideways

Fed custody holdings of Treasuries and agencies for foreign central banks

$bn $bng

35004000

35004000Agency debt

Treasury securities

250030003500

250030003500

Total

100015002000

100015002000

0500

1000

05001000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014


Source: FRB, Bloomberg Finance LP, DB Global Markets Research

In real effective terms the Chinese Yuan is well above where it was in 2002

R l ff ti h t f Y b k t f 58 i

July 2005=100 July 2005=100

Real effective exchange rate of Yuan vs. a basket of 58 currencies

150 150

130

140

130

140

110

120

110

120

100

110

100

110

902000 2002 2004 2006 2008 2010 2012 2014

90


Source: BIS, Haver Analytics, DB Global Markets Research

FX reserves: $8trn in EM and $4trn in DM…

Foreign reserves: Emerging vs Developed markets$ bln $ bln

7000

8000

7000

8000Developed markets Emerging markets

5000

6000

7000

5000

6000

7000

3000

4000

3000

4000

1000

2000

1000

2000

01995 1997 1999 2001 2003 2005 2007 2009 2011 2013

0


Source: IMF COFER, Haver Analytics, DB Global Markets Research

…and as a share of GDP emerging markets holding what corresponds to 27% of EM GDP in reserves

International reserves held by Emerging Markets% of GDP % of GDP

30

% of GDP

30

% of GDP

20

25

20

25

15

20

15

20

10 10

595 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

5


Source: CBO, DB Global Markets ResearchSource: IMF COFER , Haver Analytics, DB Global Markets Research

China’s reserves as a share of reserves held by:China s reserves as a share of reserves held by:

2000M12 2004M12 2010M12 2011M6 2012M9 2013M9 2013M12

All countriesAll countries9% 16% 31% 31% 29% 32.0% 32.7%

Advanced i 14% 30% 92% 96% 83% 97 3% 100%economies 14% 30% 92% 96% 83% 97.3% 100%

Emerging/Developing 23% 36% 46% 47% 45% 47 7% 48 6%Developing economies

23% 36% 46% 47% 45% 47.7% 48.6%


Source: IMF, PBC, Haver Analytics, DB Global Markets Research

Unallocated (meaning undisclosed) share of total world reserves risingg

US dollars Euro Others currencies Unallocated

100% 100%

60%

80%

60%

80%

40% 40%

20% 20%

0%99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

0%



Central bank appetite for US bonds much lower than in 2009-2013bonds much lower than in 2009-2013

m/m chg, 12m sum

m/m chg, 12m sum

Foreign net purchases ($bln) of US Treasuries: official holders

500600700

500600700

300400500

300400500

Bonds Bills

100200

100200

-200-100

0

-200-1000

200

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

200



On a yoy basis central banks are buying fewer dollar assetsare buying fewer dollar assets…

Year-over-year change in world USD reserves $ bln $ bln

400

500

400

500

300

400

300

400

100

200

100

200

-100

0

-100

0

-20000 01 02 03 04 05 06 07 08 09 10 11 12 13 14

-200



...and foreigners more broadly have less appetite for all US assets...Net foreign buying of all US securities

(12-month rolling sum)1200

$bn

1200

$bn

Long term public & private debt

800

1200

800

1200Long-term public & private debtShort-term public & private debtEquities

800 800

400 400

0 0

-4001990199219941996199820002002200420062008201020122014

-400



…with the level of purchases lower for Treasuries, MBS, and Credit…

Net foreign buying of US long-term debt securities (12-month rolling sum)

$Mln $Mln

800

1000

800

1000Treasury bonds & notes

GSE MBS & agency debt

600

800

600

800Corporate & other bonds

200

400

200

400

0 0

-2001990199219941996199820002002200420062008201020122014

-200



Who is buying Treasuries?Who is buying Treasuries?


OverviewFramework for thinking about demand for fixed income

-The key driver of rates is the economy. But different buyers have different price sensitivities:p

P i iti itL HighPrice sensitivityLow High

Fed Foreign central banks

Money market funds

Mutual funds

Households BanksPension/insurance


Foreigners, Fed, and mutual funds have increased their holdings of Treasuries

Holders of Treasury debt securities

Q3 2014 Q1 2007 Q1 2003

R t f ld 47 7% 44 3% 36%Rest of world 47.7% 44.3% 36%Fed 19.2% 15.6% 17.5%

Mutual funds 8.6% 5.2% 7.6%Mutual funds 8.6% 5.2% 7.6%

Households/Hedge funds 5.7% 6.1% 8.4%

Government retirement funds 3.5% 4.7% 5.9%

Private pension funds 2.6% 2.8% 3.0%

Commercial banks 3.5% 2.2% 4.0%

Insurance companies 2.2% 3.7% 4.5%

Investment banks 0.4% -0.8% 0.5%

GSEs 0 5% 0 3% 0 7%GSEs 0.5% 0.3% 0.7%

ABS issuers 0.2% 1.3% 0.0%

Others 5.9% 13.5% 12.3%



Fed buying Treasuries has been eating into share of Treasuries held by others

Holdings of treasuries as % of treasury debt outstanding

60

%

60

%

50

60

50

60Foreigners BanksPension+insurers Mutual fundsHouseholds Federal Reserve

30

40

30

40Others

20

30

20

30

0

10

0

10

01955 1961 1967 1973 1979 1985 1991 1997 2003 2009

0



70% of Treasuries are held by foreigners and the Fed

Holdings of treasuries as % of treasury debt outstanding

% %Federal Reserve

70

80

70

80

%US domestic real money, banks, and householdsForeigners

50

60

70

50

60

70

30

40

50

30

40

50

During QE domestic real money

10

20

30

10

20

30During QE domestic real money “sold” their Treasuries to the Fed

0

10

0

10

1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015



Most Treasuries held by foreigners

Holders of US Treasuries,% outstandingHousehold/Corp Mutual funds Foreign

90%100%

90%100%

Fed Banks and brokers PensionInsurance Other

70%80%90%

70%80%90%

40%50%60%

40%50%60%

10%20%30%

10%20%30%

0%10%

90 95 00 05 100%10%



Treasury net issuance down recently

300

$bn, 3m MA

300

$bn, 3m MAGross issuance of Treasury notes & bonds

f &250 250

Net issuance of Treasury notes & bonds

150

200

150

200

50

100

50

100

0

50

0

50

-501980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013

-50


Source: Bureau of Public Debt, Haver Analytics, DB Global Markets Research

Global rebalancing is needed – China needs more consumption and the US less imports.

Private consumption as a share of GDP% %

p pThis process will take many years

80 80China Germany Japan US

60

70

60

70

50

60

50

60

40 40

301995 2000 2011 2012 2013

30


Source: CAO, EUROSTAT, BEA, CNBS , Haver Analytics, DB Global Markets Research

Fed holdings of MBS and Treasuries

Treasuries outstanding and MBS outstanding held by the FedUSD bln USD bln

3500

4000

4500

3500

4000

4500Mortgage Backed Securities (MBS)Treasury securities

2500

3000

3500

2500

3000

3500y

1500

20002500

1500

20002500

500

1000

500

1000

000 01 02 03 04 05 06 07 08 09 10 11 12 13 14

0



Repo outstanding highly correlated with US fixed income daily traded volume

Primary dealer total financing vs total daily traded volume across US fixed income$trn $bln

US fixed income daily traded volume

6

7

1000

1200Repo outstanding (ls) Daily traded volume(rs)

4

5800

1000

3

4

400

600

1

2

200

400

01996 1998 2000 2002 2004 2006 2008 2010 2012

0


Source: SIFMA, DB Global Markets Research

Who is buying GSEWho is buying GSE MBS and agency debt?MBS and agency debt?


Fed holds 22% of all outstanding agency and GSE-backed debt securities

Holders of agency and GSE-backed debt securities

Q3 2014 Q1 2007 Q1 2003

Commercial banks 22 4% 18 3% 18 6%Commercial banks 22.4% 18.3% 18.6%Fed 22.2% 0.0% 0.0%Rest of world 11.4% 20.1% 11.4%Mutual funds 14.9% 9.7% 13.6%Insurance companies 5.7% 7.6% 8.0%GSEs 3 7% 10 5% 20 8%GSEs 3.7% 10.5% 20.8%Government retirement funds 3.0% 3.0% 3.6%Private pension funds 2.9% 3.1% 3.4%Households 0.1% 9.7% 3.0%Investment banks 1.4% 2.2% 2.3%ABS issuers 0 0% 5 0% 5 6%ABS issuers 0.0% 5.0% 5.6%Others 12.3% 10.4% 9.7%

* Agency and GSE-backed debt securities consists of GSE debt and Agency and GSE-backed mortgage pools.


Source: FRB, Haver Analytics , DB Global Markets Research

Fed holds 20% of mortgages

Holdings of GSEs as % of GSE debt outstanding% %

70

80

90

70

80

90Fed Banks

Insurance companies Mutual funds

50

60

70

50

60

70Foreigners Others

30

40

30

40

0

10

20

0

10

20

01955 1961 1967 1973 1979 1985 1991 1997 2003 2009

0



Mortgage originations moving down recently

Total new mortgages1400$bn

1400

$bn

1200 1200

800

1000

800

1000

400

600600

800

200

400

400

099 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

200


Source: MBA, Haver Analytics, DB Global Markets Research

Trading volumes in MBS declining, steady for Treasuries

Turn over in treasuries & agenciesaverage daily trading volume ($bn)

600

$ bln

600

$ bln

T MBS A

500

600

500

600Treasury MBS Agency

300

400

300

400

100

200

100

200

0

100

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

0

100

199

199

199

199

200

200

200

200

200

200

200

200

200

200

20 20 20 20Y

TD 2

0


Source: SIFMA, DB Global Markets Research* As of March 2014

Primary dealer inventory of IG and high yield bonds currently 20% of what it was in 2007

Primary dealer positions, $bn

300

$ bln

300

$ bln

C t b d

bo ds cu e y 0% o a as 00

250

300

250

300Corporate bonds

200 200

100

150

100

150

50 50

001 02 03 04 05 06 07 08 09 10 11 12 13 14

0



Primary dealer inventory of spread product currently 20% of what it was in 2007

Primary dealer positions by asset class, $bn$ bln $ bln

p oduc cu e y 0% o a as 00

250

300

250

300GSE Corporate

200

250

200

250

100

150

100

150

50

100

50

100

001 02 03 04 05 06 07 08 09 10 11 12 13 14

0



Who is buying Corporate and Who is buying GSE MBS and agency debt?

Who is buying CorporateForeign Bonds?

Who is buying Corporate and Foreign Bonds?and Foreign Bonds?


Holders of HY and HG credit

Holders of corporate and foreign bonds Q3 2014 Q1 2007 Q1 2003

Rest of world 24.90% 23.70% 17.90%Life insurance companies 20.10% 17.30% 22.80%

Mutual funds 19.50% 7.50% 7.20%Other 15.00% 22.30% 21.70%

Households/Hedge funds 8 00% 15 10% 17 90%Households/Hedge funds 8.00% 15.10% 17.90%Commercial banks 6.70% 8.70% 8.20%

Private pension funds 5.10% 3.40% 3.90%Funding corporations 0.70% 0.70% 1.10%



Mutual funds buying more credit in recent yearsHoldings of Corporate bonds as % of corporate bonds outstanding

% %

60

70

60

70Households Banks

Life insurance companies Mutual funds

Foreigners

40

50

40

50Foreigners

20

30

20

30

0

10

0

10

1955 1961 1967 1973 1979 1985 1991 1997 2003 2009

Banks include US charted depository institutes, foreign banking offices in US, bank holding companies, and Banks in U S Possessions


Source: FRB, Haver Analytics, DB Global Markets Researchin U.S. Possessions

Net issuance of corporate and foreign bonds

Net issuance of corporate & foreign bonds$ bln $ bln

Nonfinancial

1500 1500

Nonfinancial Rest of the worldFinancial

500

1000

500

1000

0

500

0

500

-500 -500

-10002000 2002 2004 2006 2008 2010 2012 2014

-1000



Distribution of corporate credit ratings

Global corporate rating distribution (issuer count)7000 7000

5000

6000

5000

6000AAA AA A BBB BB B CCC and below

4000

5000

4000

5000

2000

3000

2000

3000

0

1000

0

1000

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012


Source: CBO, DB Global Markets ResearchSource: S&P and DB Global Markets Research

Who is buying MUNI problemsmunicipal securities MUNI problems

and loans?


Holders of munis

Holders of Municipal securities and loans Q4 2013 Q1 2007 Q1 2003

Households/Hedge funds 42.9% 50.5% 37.0%Mutual funds 25.5% 23.9% 32.8%

I i 13 1% 11 7% 11 9%Insurance companies 13.1% 11.7% 11.9%Commercial banks 12.2% 6.1% 7.2%

Rest of world 2.0% 1.1% 0.7%Security brokers and dealers 0.4% 1.5% 1.1%

Other 3.9% 5.1% 9.3%



Munis mainly held by households/mutual funds but banks have been buying more recently

Holdings of Municipal securities by agent as % of municipal securities outstanding

60

%

60

%Households BanksInsurance companies Mutual fundsForeigners Others

Break in data

40

50

40

50

Foreigners Others

20

30

20

30

0

10

20

0

10

20

01955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

0


Source: FRB, Haver Analytics , DB Global Markets Research

Market not worried about muni situation

% %Treasury 10Y

4.0

4.5

4.0

4.5Treasury 10Y

BVAL 10Y AAA Muni index

3.0

3.5

3.0

3.5

2.0

2.5

2.0

2.5

1.0

1.5

1.0

1.5

Jan-

10

May

-10

Sep

-10

Jan-

11

May

-11

Sep

-11

Jan-

12

May

-12

Sep

-12

Jan-

13

May

-13

Sep

-13

Jan-

14

May

-14

Sep

-14


Source: Bloomberg Finance LP, FRB, Haver Analytics, DB Global Markets Research

Muni CDS not showing signs of distress

Muni CDS level400bps

400bpsIllinois 5Y California 5Y MCDX 5Y New York 5Y

300

350

300

350

200

250

200

250

100

150

100

150

0

50

0 0 0 0 1 1 1 1 1 1 2 2 2 2 2 2 3 3 3 3 3 3 4 4 4 4 4 4

0

50

May

-10

Jul-1

0Se

p-10

Nov

-10

Jan-

11M

ar-1

1M

ay-1

1Ju

l-11

Sep-

11N

ov-1

1Ja

n-12

Mar

-12

May

-12

Jul-1

2Se

p-12

Nov

-12

Jan-

13M

ar-1

3M

ay-1

3Ju

l-13

Sep-

13N

ov-1

3Ja

n-14

Mar

-14

May

-14

Jul-1

4Se

p-14

Nov

-14


Source: Bloomberg Finance LP, DB Global Markets Research

State and local government problems closely linked to the overall macro outlook

% y/y % y/yRetail sales (1Q lead)State and local general sales taxes

10

15

10

15

State and local general sales taxes

5

10

5

10

0 0

-10

-5

-10

-5

-1500 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

-15


Source: Census, Haver Analytics, DB Global Markets Research

Improving macro picture helping state & local govt

% y/y % y/yFederal employee withholding receipts (ls)State and local personal income taxes (rs)

12

16

20

30

4

810

20

0

4

10

0

-8

-4

-20

-10

-1200 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

-30


Source: Census, Haver Analytics, Treasury, DB Global Markets Research

State and local govt problems mainlydealt with via workforce reduction

Surveyed cities response to their fiscal crisis in various waysy

Human services cuts

Public safety cuts

Debt renegotiation

Employee health benefit modifications

Across the board cuts

W kf d ti

Delay/cancelation of capital projects

Cuts in general services

0% 10% 20% 30% 40% 50% 60% 70% 80%

Workforce reduction


Source: NLC, DB Global Markets Research

State budget is mainly confronted with the problem of cuts in state-aidthe problem of cuts in state aid

State Actions Since FY 2010

8%Other

21%

18%

Cut funds for state-required services

Transfer programs

26%

21%

Cut reimbursement or other transfers

Reduce/limit local authority

37%

39%

Cut state-shared revenues

Cut state aids

3 %

0% 10% 20% 30% 40% 50%


Source: NLC report ‘’ City Fiscal Conditions in 2013’’, DB Global Markets Research

Local government expenditures and revenues

Expenditures Revenuesp

Types of spending by local governments, 2012Social

Sources of revenues for local governments, 2012

Aid from Federal govt,

Education,Administatio

Social services,

13%

4%

Aid from State govt 29%

Other revenues,

24%Education,

36%Administatio

n, interst and others,

14%

govt, 29%

Utility 9%

Environment9%

Public safety, 10%

Sales and other taxes,

revenues, 9%

Utility, 11%, 9%Property

taxes, 27%7%

Deutsche Bank 65Torsten Slok, [email protected] +1 212 250-2155 December 2014 2010 DB Blue template

Source: Census, Haver Analytics, DB Global Markets Research

Some states rely heavily on property taxes

In which states does Govt rely mostly on property taxes?

Fiscal Year 2010

State Fraction of tax revenue coming fromState Fraction of tax revenue coming from property taxes

New Hampshire 64.6%N J 48 4%N.J. 48.4%

Vermont 45.8%Rhode Island 45.6%

Texas 45.2%Illinois 43.6%Fl id 42 9%Florida 42.9%

Wyoming 42.5%Connecticut 42.0%

Note: Includes residential and commercial real estate (mostly local revenue) as well as personalproperty taxes on cars, boats, etc. (mostly state revenue).


Source: Tax foundation calculations based on Census Bureau’s data, DB Global Markets Research

State Collections Per Capita RankN.J. $2,663 1Conn. $2,473 2

State and Local Property Tax Collections Per Capita, Top 15 FY2010

St t C ll ti P C it R kN.H. $2,440 3Wyo. $2,285 4N.Y. $2,136 5Vt. $2,056 6R.I. $2,018 7

State Collections Per Capita RankNew Jersey $2,819 1Wyoming $2,633 2

Connecticut $2 522 3R.I. $2,018 7Mass. $1,874 8Ill. $1,782 9Alaska $1,728 10Maine $1,640 11Wis $1 633 12

Connecticut $2,522 3New Hampshire $2,463 4

New Jersey $2,280 5Vermont $2,166 6Wis. $1,633 12

Fla. $1,589 13Tex. $1,475 14Calif. $1,465 15

$ ,Rhode Island $2,083 7

Massachusetts $1,986 8Alaska $1,865 9Illinois $1,827 10Maine $1,786 11

Wisconsin $1,698 12C l d $1 601 13Colorado $1,601 13

Texas $1,562 14Florida $1,507 15

Deutsche Bank 67Torsten Slok, [email protected] +1 212 250-2155 December 2014 2010 DB Blue template

Source: U.S. Census Bureau, Tax Foundation, DB Global Markets Research

Asset allocation for Households/Hedge funds,

Institutional Investors and ForeignersInstitutional Investors, and Foreigners


Households’/hedge funds’ asset allocation

100% 100%

Treasury Agency & GSEs Munis Credit* Equity** Other

80% 80%

60% 60%

20%

40%

20%

40%

0%

20%

0%

20%

52 57 62 67 72 77 82 87 92 97 02 07 12*Credit includes corporate & foreign bonds**Equities includes corporate equities, mutual fund shares, life insurance reserves and pension funds reserves



Pension funds’ asset allocation

100% 100%


80% 80%

40%

60%

40%

60%

20%

40%

20%

40%

0%92 94 96 98 00 02 04 06 08 10 12 14

0%

Pension funds incl. Private, State& local govt.retirement and Federal govt. retirement fundsCredit includes corporate and foreign bondsEquities includes corporate equities and mutual fund shares



Insurance companies’ asset allocation

100% 100%

Treasury Agency and GSEs Munis Credit* Equity** Other

80% 80%

60% 60%

40% 40%

0%

20%

0%

20%

0%94 96 98 00 02 04 06 08 10 12 14

0%

Insurance sector includes both life and non-life insurance*Credit includes foreign and corporate bonds; **Equities include mutual fund shares and corporate equities



Mutual funds’ asset allocation

100% 100%


80% 80%

60% 60%

20%

40%

20%

40%

0%

20%

0%

20%

08 09 10 11 12 13 14Mutual funds incl. traditional mutual funds, money mkt. MFs, exchange traded MFs & open ended MFs*Credit incudes corporate and foreign bonds; **Equity includes corporate equites and mutual fund shares



Asset allocation of foreigners in US assets

100% 100%

Treasury Agency & GSEs Munis Credit* Equities** Other

80% 80%

60% 60%

20%

40%

20%

40%

0%

20%

0%

20%

92 97 02 07 12*Credit is Corporate bonds held by Foreign sector; **Equities is calculated as sum of corporate equities and mutual fund shares



Banks’ asset allocation

90%100%

90%100%


70%80%90%

70%80%90%

40%50%60%

40%50%60%

10%20%30%40%

10%20%30%40%

-10%0%

10%

-10%0%10%

89 91 93 95 97 99 01 03 05 07 09 11 13Banks incl. all US charted depository instituions and brokers and dealers*Credit includes corporate and foreign bonds; **Equities includes corporate equities and mutual fund shares



Who is buying Corporate and Who is buying GSE MBS and agency debt?

O tl kForeign Bonds?Outlook


US 10y fair value is currently 2.7% in the weekly model

6%

6%

Actual Model predicted forecast

15-yr average 1993-20085 5

Actual Model-predicted forecast

4 4

2

3

2

3

1 1Equation:

T10 = c T2 5Y implied inflation Euro risk Fed holdings of long term tryCoeff. 2.8 0.2 0.5 -0.00 -1.7

(29 15) (21 4) (14 2) ( 42 1) ( 6 6)

Note: Explanatory variables used in the model are 2y treasury yield and Aruoba-Diebold-Scotti Business Conditions Index

003 04 05 06 07 08 09 10 11 12 13 14

0 (29.15) (21.4) (14.2) (-42.1) (-6.6)


Source: FRB, BDlt, BDE, Bbk, Haver Analytics, DB Global Markets Research

Monthly model suggests 10y rates should be 3.6%

10y tsy monthly model% %

89

89Actual Estimated

567

567

345

345

Equation: T10 = c IP YoY Inflation exp Unemp( 1)

12

12

T10 = c IP_YoY Inflation exp Unemp(-1)Coeff. -0.3 0.02 2.84 -0.44 (-0.4) (1.74) (13.5) (-15.1)Note: t-stats in parentheses

095 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

0


Source: FRB, BLS, Haver Analytics, DB Global Markets Research

The quarterly model suggests 10y fair value is 2.4%

10yr yield forecast model with fiscal variables% %

7 7Actual Model-predicted forecast

5

6

5

6

4 4

2

3

2

3Equation: T10 = c Debt to GDP Output gap Inflation expectations Coeff. 6.0 -0.03 0.10 0.33

(8 12) ( 6 8) (2 40) (0 89)

12000 2002 2004 2006 2008 2010 2012 2014

1

(8.12) (-6.8) (2.40) (0.89)Note: t-stats in parentheses


Source: FRB, BEA, Haver Analytics, DB Global Markets Research

GDP forecast suggests 10y rates in the US are too low

% %Nominal GDP growth (% y/y) 10y treasury yield (%)

12

15

12

15

9

12

9

12

6 6

3 3

053 58 63 68 73 78 83 88 93 98 03 08 13

0


Source: FRB,BEA, DB Global Markets ResearchSource: BEA, FRB , DB Global Markets Research

Outstanding amount of risk-free assets globally

Outstanding amounts of marketable potentially safe assets (percent of total)

Gold11% Corporate debt11% Corporate debt

(investment grade)11%

Covered bonds4%

ABS MBS th

AAA/AA OECD government securities

U S d b

ABS,MBS, other securitization

17%

securities46%

U.S agency debt3%

Supranational d bt

A/BBB OECD government securities

debt1%

7%

Data for government and corporate debt are as of 2011:Q2; supranational debt, covered bonds, and gold, as of end-2010; and U.S. agency debt and securitization, as of 2011:Q3. ABS = asset-backed securities; MBS = mortgage-backed securities; OECD = Organization for Economic Cooperation and Development


Source: IMF, DB Global Markets ResearchOECD = Organization for Economic Cooperation and Development.

Holders of risk-free assets globally

Holdings of government securities worldwide,by investor type, end 2010

Other22%

Banks34%

Cental banks i l di

34%

including reserve

managers22%Insurance

Sovereign wealth fundsPension funds

7%

Insurance companies

15%

1%7%Note: Banks include commercial, investment, and development banks; data for pension funds include only direct holdings; SWF holdings are an IMF staff estimate; reserve manager holdings are an IMF staff estimate based on a representative allocation of total official reserves to government securities and own government bond holdings by the Federal Reserve, Bank of England, and Bankof Japan "Other" is estimated as a remainder based on BIS data on total outstanding government securities worldwide


Source: IMF, DB Global Markets Researchof Japan. Other is estimated as a remainder based on BIS data on total outstanding government securities worldwide.

US government debt mainly held by foreigners

Sovereign debt holdings,by type and location of investor(In percent of total,June 2011)

United States$

3.018.7

Domestic banks**

Total outstanding marketable debt *= $ 9.3 trillion

48.2

Domestic banks

Insurance,pensionsand mutual fundsOther

11 8

Federal reserve

Nonresidents11.8

18.2*Excludes $5 trillion of nonmarketable public debt securities held mostly in intragovernmental accounts.**Domestic depository institutions.


Source: IMF, DB Global Markets Research

Fewer sovereign risk-free assets outstanding…Fewer sovereign risk-free assets outstanding…Historical Overview of S&P Sovereign Debt ratings of Selected OECD Countries, 1970-January 2012

Country

Year of First Rating 1970 1975 1980 1985 1990 1995 2000 2005 2010 2011 2012

Austria 1975 NR AAA AAA AAA AAA AAA AAA AAA AAA AAA AA+Austria 1975 NR AAA AAA AAA AAA AAA AAA AAA AAA AAA AABelgium 1988 NR NR NR NR AA+ AA+ AA+ AA+ AA+ AA AACanada 1949 AAA AAA AAA AAA AAA AA+ AA+ AAA AAA AAA AAADenmark 1981 NR NR NR AA+ AA AA+ AA+ AAA AAA AAA AAAFinland 1972 NR AAA AAA AAA AAA AA- AA+ AAA AAA AAA AAAFrance 1975 NR AAA AAA AAA AAA AAA AAA AAA AAA AAA AA+France 1975 NR AAA AAA AAA AAA AAA AAA AAA AAA AAA AA+Germany 1983 NR NR NR AAA AAA AAA AAA AAA AAA AAA AAAGreece 1988 NR NR NR NR BBB- BBB- A- A BB+ CC CCIceland 1989 NR NR NR NR A A A+ AA- BBB- BBB- BBB-Ireland 1988 NR NR NR NR AA- AA AA+ AAA A BBB+ BBB+Italy 1988 NR NR NR NR AA+ AA AA AA A+ A BBB+Italy 1988 NR NR NR NR AA+ AA AA AA- A+ A BBB+Japan 1959 NR1 AAA AAA AAA AAA AAA AAA AA- AA AA- AA-Luxembourg 1994 NR NR NR NR NR AAA AAA AAA AAA AAA AAANetherlands 1988 NR NR NR NR AAA AAA AAA AAA AAA AAA AAANorway 1958 NR1 AAA AAA AAA AAA AAA AAA AAA AAA AAA AAAPort gal 1988 NR NR NR NR A AA AA AA A BBB BBPortugal 1988 NR NR NR NR A AA- AA AA- A- BBB- BBSpain 1988 NR NR NR NR AA AA AA+ AAA AA AA- ASweden 1977 NR NR AAA AAA AAA AA+ AA+ AAA AAA AAA AAASwitzerland 1988 NR NR NR NR AAA AAA AAA AAA AAA AAA AAATurkey 1992 NR NR NR NR NR B+ B+ BB- BB BB BBU it dUnited Kingdom 1978 NR NR AAA AAA AAA AAA AAA AAA AAA AAA AAAUnited States 1941 AAA AAA AAA AAA AAA AAA AAA AAA AAA AA+ AA+

AAA A Noninvestment gradeAA BBB


Note: The Organization for Economic Cooperation and Development (OECD) was established in 1961. Countries selected constituted the OECD membership in 1970. Ratings shown are S&P's long-term foreign currency ratings. NR = not rated.1Sovereign rating suspended; see Bhatia (2002).

Source: S&P , IMF, DB Global Markets Research

d f i k f t t t di ll…and fewer risk-free assets outstanding more generally

Distribution of Sovereign Debt Ratings for OECD countries, Today

BB CC

Distribution of Sovereign Debt Ratings for OECD countries, Before crisis

A12%

BBB8%

BB4% 4%

12%

AAA

A8%AA

20%

AAA52%

AA24%

AAA68%


Source: IMF, DB Global Markets Research

Treasury issuance down as a share of total fixed income issuanceshare of total fixed income issuance

Change in debt outstandingUS$trn US$trn

Open market Munis Other loans Trsy

4

5

4

5

p yCorp & frn Mortgages GSE-backed Bank loansCons. credit Total

2

3

4

2

3

4

0

1

0

1

-2

-1

-2

-1

-3

1996 1998 2000 2002 2004 2006 2008 2010 2012-3



The composition of fixed income issuance has changed recently: More spread product fewer treasuriesrecently: More spread product, fewer treasuries

Change in debt outstandingUS$trn US$trnO k t M i Oth l

2.0 2.0

Open market Munis Other loansTrsy Corp & frn MortgagesGSE-backed Bank loans Cons. creditTotal

1.0

1.5

1.0

1.5

0.0

0.5

0.0

0.5

-1.0

-0.5

-1.0

-0.5

-1.52007 2008 2009 2010 2011 2012 2013 2014

-1.5



Holders of U.S. equities

6%3%3%

US residents

Advanced markets6%

Advanced markets

Financial centers

China

Other emerging

90%

g gmarketsMiddle East oilproducersOthers


Note: Data for 2009. Source: TIC and IMF, DB Global Markets Research

Holders of U.S. debt

5%

5%4%

US residents

11%

5%Advanced markets

Financial centers11%

China

73% Other emerging markets

Middle East oilproducersproducersOthers


Data for 2009. Source: TIC and IMF, DB Global Markets Research

Financial markets in advanced economies are six times bigger than in emerging marketsgg g g

Absolute size of capital markets, 2009US$ trn US$ trn

150 150Debt securities Stock market cap

GDP at current prices$122trn

90

120

90

120

30

60

30

60

0

30

AE G7 T t l EM0

30

AE G7 Total EMsNote: AE equals G7 plus other AE.** Total Ems is the sum of EM in LatAm, MENA, Africa and Europe


Source: Adapted from IMF, DB Global Markets Research

Recent developments in pownership of p

government debtgovernment debt


High spread euro area constitutes 11% of the advanced economy government debt universe. Traditional reserve

currencies (US Japan UK and Switzerland) make up 68%Advanced Economy Sovereign Debt Universe

(trillion U.S. dollars, end-2012)$ trn $ trn

currencies (US, Japan, UK, and Switzerland) make up 68%.

30.030

$ trn

30

$ trn

20

25

20

25

Total US $44 trillion

10

15

10

15

6.1 5.03.05

10

5

10

0Traditional

reserve countriesLow-spread euro

areaHigh-spread euro

areaOther advanced

economies

0


reserve countries area area economiesSource: Sovereign investor base estimates by Arslanalp and Tsuda (2012), DB Global Markets Research

China is the biggest foreign holder of Japanese JGBs

Foreign Holdings of Government Debt by Region 1/ 2/Japan

90Yen trn

90Yen trn

China US

70

80

70

80China USEuro Area Other EuropeOther Advanced Offshore CentersDeveloping

50

60

50

60

30

40

30

40

10

20

10

20

02004 2005 2006 2007 2008 2009 2010 2011

0

11/ Excluding foreign official loans and SMP holdings of foreign central banks.


Source: Sovereign investor base estimates by Arslanalp and Tsuda (2012), DB Global Markets Research2/ Regional groups are based on country classifications of BIS international banking statistics.

Foreign holdings of high spread euro area government debt rising

Foreign Holdings of Advanced Economy Sovereign Debt, 2004-2014 Q2, High spread euro area

euro area government debt rising

90%

100%

80%

90%Greece Ireland Italy Portugal Spain

60%

70%

80%

60%

70%

40%

50%

60%

40%

50%

20%

30%

40%

20%

30%

2004

Q1

2005

Q1

2006

Q1

2007

Q1

2008

Q1

2009

Q1

2010

Q1

2011

Q1

2012

Q1

2013

Q1

2014

Q1


Source: Sovereign investor base estimates by Arslanalp and Tsuda (2012), DB Global Markets Research

Foreign holdings of low spread euro area government debt rising in GermanyForeign Holdings of Advanced Economy Sovereign Debt,

2004-2014 Q2, Low spread euro area

euro area government debt rising in Germany

80%

90%

80%

90%Austria Finland France Germany Netherlands

60%

70%

60%

70%

50%

60%

50%

60%

30%

40%

30%

40%

2004

Q1

2005

Q1

2006

Q1

2007

Q1

2008

Q1

2009

Q1

2010

Q1

2011

Q1

2012

Q1

2013

Q1

2014

Q1



Foreign holdings of traditional reserve countries government debt rising in United States

Foreign Holdings of Advanced Economy Sovereign Debt, 2004-2014 Q2, Traditional reserve countries

government debt rising in United States

%40%45%

%40%45%Japan Switzerland United Kingdom United States

25%30%35%

25%30%35%

10%15%20%

10%15%20%

0%5%

10%

0%5%10%

2004

Q1

2005

Q1

2006

Q1

2007

Q1

2008

Q1

2009

Q1

2010

Q1

2011

Q1

2012

Q1

2013

Q1

2014

Q1



Who owns different countries’ government debt?

Investorbase of Advanced Economy Government Debt at end-2013 (% of total)

Domestic central bank Domestic banks Domestic nonbanks

100% 100%

Domestic central bank Domestic banks Domestic nonbanksForeign official Foreign banks Foreign nonbanks

60%

80%

60%

80%

20%

40%

20%

40%

0%

eece

rtuga

lel

and

land

sra

nce

Sta

tes

man

yst

ralia

eden

nlan

dus

tria

mar

kor

way

Spa

ingd

omna

dagi

umer

land

alan

dve

nia

Italy

publ

icK

orea

apan

0%

Gre

Por Ire

Net

herl Fr

Uni

ted

SG

erm

Aus Sw

eFi

nA

uD

en No S

Uni

ted

Kin

gC

aB

elS

witz

eN

ew Z

eaS

lov

Cze

ch R

ep K J


Source: Sovereign investor base estimates by Arslanalp and Tsuda, DB Global Markets Research

Half of foreign central bank holdingsof government bonds are Treasuries

Foreign Central Bank Holdings of Advanced Economy Government Debt Securities, 2004-14 (in billion USD)9 000 9000

of government bonds are Treasuries

, ( )

7,000

8,000

9,000

7000

8000

9000Other United States United KingdomJapan Germany FranceCanada Australia

5,000

6,000

,

5000

6000

3,000

4,000

3000

4000

1,000

2,000

1000

2000

02004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

(June)

0



Peter HooperManaging Director, Chief EconomistDeutsche Bank Securities, Inc.+1 (212) [email protected]

Peter Hooper joined Deutsche Bank Securities in 1999 as Chief USPeter Hooper joined Deutsche Bank Securities in 1999 as Chief US Economist. He became Chief Economist and co-head of global economics in 2006. Prior to joining Deutsche Bank, Hooper enjoyed a distinguished 26-year career at the Federal Reserve Board in Washington, D.C. While rising to senior levels of the Fed staff, he held numerous positions, including as an economist on the FOMC. Hooper and his team produce weekly and quarterly publications for Deutsche Bank with a focus on US and global economic developments and Fed policy; he also comments on US and global economic and financial developments in the news mediadevelopments in the news media.

Hooper currently serves as a member of the Economic Advisory Panel of the Federal Reserve Bank of New York, a member and former chairman of the Economic Advisory Committee of the American Bankers Association, a founding member of the US Monetary Policy Forum a member of thea founding member of the US Monetary Policy Forum, a member of the Economic Leadership Council for the University of Michigan, and a member of the Forecasters’ Club of New York. Hooper earned a BA in Economics (cum laude) from Princeton University and an MA and Ph.D. in Economics from University of Michigan He has published numerous


in Economics from University of Michigan. He has published numerous books, journal articles, and reviews on economics and policy analysis.

Torsten Slok, Ph.D.Chief International Economist, Managing DirectorDeutsche Bank Securities, Inc.

Torsten Slok joined Deutsche Bank Securities in the fall of 2005. Mr. Slok’s Economics team has been ranked Top 3 by Institutional Investor for the

past three years. Slok currently serves as a member of the Economic Club of New York Prior to joining the firm Mr Slok worked at the OECD in Paris in the Money and Prior to joining the firm, Mr. Slok worked at the OECD in Paris in the Money and

Finance Division and the Structural Policy Analysis Division. Before joining the OECD he worked for four years at the IMF in the Division responsible for writing the World Economic Outlook and the Division responsible for China, Hong Kong, and MongoliaMongolia. Mr. Slok studied at University of Copenhagen and Princeton University. He has

published numerous journal articles and reviews on economics and policy analysis, including in Journal of International Economics, Journal of International Money and Fi d Th E t i J lFinance, and The Econometric Journal.


Matthew [email protected]

Matthew Luzzetti received a Ph.D. in Economics from theUniversity of California, Los Angeles, focusing onmacroeconomics. Prior to that he worked as a researchmacroeconomics. Prior to that he worked as a researchanalyst at the Federal Reserve Bank of Philadelphia. Mattjoined Deutsche Bank in September 2012 and is part ofDB’s top II ranked economics team.


22/12/2014 11:00:54 2010 DB Blue template

Torsten Slok, Ph.D.Chief International Economist, Managing DirectorDeutsche Bank Securities, Inc.

Torsten Slok joined Deutsche Bank Securities in the fall of 2005. Mr. Slok’s Economics team has been top-ranked by Institutional Investor in fixed

income and equities for the past five years. Slok currently serves as a member of the Economic Club of New York Prior to joining the firm Mr Slok worked at the OECD in Paris in the Money and Prior to joining the firm, Mr. Slok worked at the OECD in Paris in the Money and

Finance Division and the Structural Policy Analysis Division. Before joining the OECD he worked for four years at the IMF in the Division responsible for writing the World Economic Outlook and the Division responsible for China, Hong Kong, and MongoliaMongolia. Mr. Slok studied at University of Copenhagen and Princeton University. He has

published numerous journal articles and reviews on economics and policy analysis, including in Journal of International Economics, Journal of International Money and Fi d Th E t i J lFinance, and The Econometric Journal.


Deutsche Bank

Appendix 1

Important DisclosuresAdditional Information Available upon Request

For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global di l l k b it t htt // db / /di l /Di l Di tdisclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr

Analyst CertificationThe views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Torsten Slok


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Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the “Disclosures Lookup” and “Legal” tabs. Investors are strongly encouraged to review this information before investing.

2. Short-Term Trade Ideas

Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank’s existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com.

3. Country-Specific Disclosures

Australia and New Zeeland: This research, and any access to it, is intended only for “wholesale clients” within the meaning of the Australian Corporations Act and New Zealand Financial Advisors Actand New Zealand Financial Advisors Act.

EU countries: Disclosures relating to our obligations under MiFiD can be found at http://globalmarkets.db.com/riskdisclosures.

Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc. Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, The Financial Futures Association of Japan. This report is not meant to solicit the purchase of specific financial instruments or related services. We may charge commissions and fees for certain categories of investment advice, products and services. Recommended investment strategies, products and services carry the risk of losses to g , p g , p yprincipal and other losses as a result of changes in market and/or economic trends, and/or fluctuations in market value. Before deciding on the purchase of financial products and/or services, customers should carefully read the relevant disclosures, prospectuses and other documentation. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are not registered as rating agency in Japan unless specifically indicated as Japan entities of such rating agencies.

Malaysia: Deutsche Bank AG and/or its affiliate(s) may maintain positions in the securities referred to herein and may from time to time offer those securities for purchase or may have an interest to purchase such securities. Deutsche Bank may engage in transactions in a manner inconsistent with the views discussed herein. Qatar: Deutsche Bank AG in the Qatar Financial Centre (registered no 00032) is regulated by the Qatar Financial Centre Regulatory Authority Deutsche BankQatar: Deutsche Bank AG in the Qatar Financial Centre (registered no. 00032) is regulated by the Qatar Financial Centre Regulatory Authority. Deutsche Bank AG - QFC Branch may only undertake the financial services activities that fall within the scope of its existing QFCRA license. Principal place of business in the QFC: Qatar Financial Centre, Tower, West Bay, Level 5, PO Box 14928, Doha, Qatar. This information has been distributed by Deutsche Bank AG. Related financial products or services are only available to Business Customers, as defined by the Qatar Financial Centre Regulatory Authority.

Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation.

Kingdom of Saudi Arabia: Deutsche Securities Saudi Arabia LLC Company, (registered no. 07073-37) is regulated by the Capital Market Authority. Deutsche Securities Saudi Arabia may only undertake the financial services activities that fall within the scope of its existing CMA license. Principal place of business in Saudi Arabia: King Fahad Road, Al Olaya District, P.O. Box 301809, Faisaliah Tower - 17th Floor, 11372 Riyadh, Saudi Arabia.

United Arab Emirates: Deutsche Bank AG in the Dubai International Financial Centre (registered no. 00045) is regulated by the Dubai Financial ServicesAuthority. Deutsche Bank AG - DIFC Branch may only undertake the financial services activities that fall within the scope of its existing DFSA license. Principal place of business in the DIFC: Dubai International Financial Centre, The Gate Village, Building 5, PO Box 504902, Dubai, U.A.E. This information has been distributed by Deutsche Bank AG Related financial products or services are only available to Professional Clients as defined by the Dubai Financial Services


distributed by Deutsche Bank AG. Related financial products or services are only available to Professional Clients, as defined by the Dubai Financial Services Authority.

Risks to Fixed Income Positions

Macroeconomic fluctuations often account for most of the risks associated with exposures to instruments that promise to pay fixed or variable interest rates. For an investor that is long fixed rate instruments (thus receiving these cash flows), increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a loss. The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the loss. Upside surprises ininflation, fiscal funding needs, and FX depreciation rates are among the most common adverse macroeconomic shocks to

i B t t t i dit thi li t t ti l ti (i l di h i treceivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation (including changes in assets holding limits for different types of investors), changes in tax policies, currency convertibility (which may constrain currencyconversion, repatriation of profits and/or the liquidation of positions), and settlement issues related to local clearing housesare also important risk factors to be considered. The sensitivity of fixed income instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to FX depreciation, or to specified interest rates – these are common in emerging markets. It is important to note that the index fixings may -- by construction -- lag or mis-measure the actual move in the underlying variables they are intended to track The choice of the proper fixing (or metric) is particularlyactual move in the underlying variables they are intended to track. The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating coupon rates (i.e., coupons indexed to a typically short-dated interest rate reference index) are exchanged for fixed coupons. It is also important to acknowledge that funding in a currency that differsfrom the currency in which the coupons to be received are denominated carries FX risk. Naturally, options on swaps (swaptions) also bear the risks typical to options in addition to the risks related to rates movements.


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They do not necessarily reflect the opinions of Deutsche Bank and areOpinions, estimates and projections in this report constitute the current judgement of the author as of the date of this report. They do not necessarily reflect the opinions of Deutsche Bank and are subject to change without notice. Deutsche Bank has no obligation to update, modify or amend this report or to otherwise notify a recipient thereof in the event that any opinion, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. Prices and availability of financial instruments are subject to change without notice. This report is provided for informational purposes only. It is not an offer or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy. 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