abcGlobal Research

We think Japanese buying of overseas

bonds could be close to a trillion dollars this year

This private sector outflow is being driven by anticipation of the Bank of Japan’s huge monetary stimulus

German Bunds and French OATs are the biggest winners so far, but emerging markets are also benefiting

Tracking bond flows after the BoJ shift

The aggressive monetary easing that Japan is planning to

boost its economy and kill deflation is already having a big

impact in international bond markets. Money is flowing out

of Japan in anticipation of further yen weakness and because

of the incredibly low JGB yields. The biggest beneficiaries

are core European bond markets as Japanese investors seek

additional yield and the prospect of currency gains. Over the

past six months, 20% of the gross issuance of core Eurozone

debt has effectively been bought by Japanese investors.

With more stimulus likely, we think this trend will continue,

driving down yields in core Eurozone markets, particularly

Germany and France. We think the yield on 10-year German

Bunds could fall close to 1.0% later this year, reflecting the

extensive new demand for a relatively scarce product. This

goes against the consensus view that Bund yields will rise.

USD1 trillion outflow

In total, we estimate USD700bn-USD1trn could flow out of

Japan over the next year, reflecting both higher historical

levels of Japanese investor ownership and an extrapolation

of recent evidence of flows from the mutual fund sector. The

beneficiaries include other core markets, supranationals and

agencies. We think Indonesia, Mexico, Brazil, Poland,

Turkey and South Africa will be among the emerging

markets affected.

BoJ QE will contain JGB yields

These private sector purchases of foreign bonds will not lead

to higher JGB yields if the BoJ launches earlier quantitative

easing, including buying longer maturities, under Haruhiko

Kuroda, the new Bank governor.

Global Fixed Income Strategy

Special

Japan's trillion dollar bond rotation Where are the bond flows going?

19 March 2013

Steven Major, CFA Global Head of Fixed Income Research HSBC Bank plc +44 20 7991 5980 steven.j.major@hsbcib.com

André de Silva, CFA Head of Asia-Pacific Rates Research The Hongkong and Shanghai Banking Corporation Limited +852 2822 2217 andre.de.silva@hsbcib.com

View HSBC Global Research at: http://www.research.hsbc.com

Issuer of report: HSBC Bank plc

Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

Vote for HSBC Fixed Income research in the Euromoney investor survey 2013:

http://www.euromoney.com/fixedincome2013 The deadline for voting is 12th April 2013

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Investment implications 3

Core Europe and select EM 3

USD700-1,000bn outflows 3

Bunds attractive to Japan’s investors 3

And French OATs too 4

UK gilts could be an alternative 4

Pick of the emerging markets 5

Europe attracting flows 6 Germany’s short yields fall 6

Germany’s rally no longer driven by a Eurozone crisis 7

Evidence of European bond buying from

September onwards 7

USD700-1,000bn outflow 8

Future flow projections 8 Mutual fund bond flows 8

Investment trusts also shifting 9

What if pension funds follow? 9

Government pension funds lag private sector in

foreign buying 9

EM markets benefit too 10 Asia-Pacific 10

Buying of Indonesia increasing fast 10

Greater demand elsewhere in Asia 10

Selling of Korea reflects currency reversal 10

Latam and EMEA 11

Mexico and Poland stand out 11

Uridashi bonds – Turkey for retail 11

Retail like Brazil too 12

And some recent losers 13 Selling of Australian bonds 13

Japan as part of the G4 14 G4 conspiracy or coincidence 14

Real yields negative 14

G4 balance sheet expansion 14

Japan is just catching up 15

G4 yield convergence 15

Cross-currency basis normalisation 16

Opportunities for investors to hedge 16

BoJ’s policy is a catalyst 17 It is not all about the BoJ 17

BoJ foreign bond purchases? 17

Japanese diversification on the agenda 17

Equities may not be the answer 18

JGB concentration risk 19 Selling of JGBs contained 19

Investment funds likely to shift to international bonds 19

Pension review started 19

Bank holdings of JGBs vulnerable 20

How much QE could BoJ do? 21

Disclosure appendix 25

Disclaimer 27

Contents

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Core Europe and select EM

USD700-1,000bn outflows

The recent monetary policy revolution in Japan

has led to a change in the investment pattern of

domestic asset management firms. Historically,

local asset managers have largely invested in

domestic bonds but recently there has been a

return to international bond markets.

Assuming an across the board 5-7% increase in

foreign bond investment as a proportion of total

financial assets, there could be at least

USD700bn-USD1trn net inflows into the

international bond market from private and

state-owned entities in Japan (Table 1, page 8)

over the next 12 months.

This estimate is conservative in our opinion and

could be far greater if the evidence from individual

fund flows by large mutual funds (page 10) proves

correct. Please note the BoJ itself has not announced

any plans to buy foreign bonds and we think this is

unlikely to happen in the near term.

The private sector outflows from Japan are a new

dynamic for the Bund market that has traditionally

benefited from safe-haven status and flows from

periphery countries in the Eurozone. Ten-year

Bund yields could fall towards 1.0% in the coming

months, defying consensus expectations for them to

rise. Previous HSBC forecasts for yields to reach a

low of 1.3% in Q3 2013 were not made with the

expectation of a significantly weaker yen, with its

potentially negative impact on German growth, and

the flows from Japanese investors.

Bunds attractive to Japan’s investors

From a Japanese investor’s perspective, the core

Eurozone markets are attractive given the positive

yield differential versus JGBs and the prospect of

currency gains. The sense that the worst of the

eurozone debt crisis may be over is also helping

sentiment and potentially reducing exposure to

risk for investors buying core markets.

Of the G4 central banks, the ECB will be regarded

as the least inclined towards full-blown

quantitative easing, making investments in the

Eurozone appealing to yen-based investors. The

weaker yen could be negative for the growth of

Investment implications

Short-dated G4 yields to be forced lower for longer by expanding

central bank balance sheets which, when combined, already

exceed USD10trn

Significant flows from Japan’s private sector investors towards

Europe have been detected

Eurozone bonds are the key beneficiaries but there are

investment implications for corporate and EM bonds too

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competing economies like Germany (see Japan’s

policy revolution, 26 February 2013) and with

German Bunds the smallest of the G4 markets

(see Figure 1), there is a significant risk of this

market being squeezed. Already a number of

German bonds trade as ‘special’ in the repo

markets, suggesting a relative scarcity of supply.

Figure 1. Top sovereign markets by market cap.

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

USD JP

Y

ITL

GBP

FRF

DEM

CN

Y

BRL

ESP

INR

Am

ount

out

stan

ding

(USD

bn)

Sovereign debt >1yr maturity

Source: HSBC, Bloomberg Note: For details of BRL please see Latam Rates Guide 2013

As a result of its safe haven status, the short-end of

the Bund market has often attracted international

flows in times of uncertainty. With yields already

very low, the intermediate maturities (7-10 year)

are attractive to Japanese investors because they

offer an attractive macro backdrop, liquidity and

twice as much yield as JGBs.

The fact that the ECB is not easing policy doesn’t

matter. Under its new governor, the BoJ could soon

be joining the Fed with a large QE programme and

with short rates of the G4 close to the floor, there

will be downward pressure on the intermediate

yields, led by Germany. This could benefit the US

and UK too, although these markets are likely to

follow the Bund. It is noticeable that in recent

months Bunds have not been following the

Treasury market (see Figure 2).

And French OATs too

There is also likely to be continued demand for

the other liquid core markets, led by France and

the Netherlands. These markets offer a pick-up

versus Germany and, with short Bunds yielding

close to zero, investors will seek good substitutes.

Whenever short German yields have approached

zero there has been a noticeable increase in flow

towards the other core markets that offer a little

more yield.

We expect agency and supranational bonds, which

offer an additional pick-up versus government

bonds, to be in demand also (see Figure 3).

UK gilts could be an alternative

UK gilts have not been bought by Japanese

investors, according to the latest flow data, and

this is consistent with the historical relationship

between the fortunes of the UK currency and the

level of overseas holdings. So, if sterling, which

has been falling this year, were to stabilise, flows

could return to gilts. From the perspective of a

yen-based investor, sterling has actually

performed quite well – ie the pound has not

weakened as much since September– so, with

gilts offering 50bp more than Bunds, they might

soon offer some diversification.

Figure 2. Bunds and Treasuries – staying within range

1.1

1.3

1.5

1.7

1.9

2.1

Apr 12 Jun 12 Aug 12 Oct 12 Dec 12 Mar 1310

yr y

ield

(%)

Treasury Bund

QE3

Source: HSBC, Bloomberg

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Pick of the emerging markets

Emerging market debt in general is attractive for

yen-based investors, particularly Indonesia. Even

if the rupiah currency outlook is less certain, carry

considerations alone are sizeable and significant

inflows by Japanese investors have been recorded

very recently (page 10). Prospective investment-

grade status for the Philippines is also likely to be

an additional trigger for Japanese investor

demand. Currency gains and generous yields

have made Turkey attractive, combined with Fitch

Ratings raising the country’s foreign currency

rating to investment-grade status (November

2012). Diversification appears to be well

underway, with heavy demand for Poland and

Mexico already apparent from Japanese investors.

Figure 3. OATs and Agencies are good Bund substitutes

0.9

1.3

1.7

2.1

2.5

2.9

3.3

Mar 12 Jun 12 Sep 12 Dec 12 Mar 13

10yr

yie

ld (%

)

BundOATEIB

Source: HSBC, Bloomberg

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Germany’s short yields fall Japanese flows may already have had a big impact

on the front-end of Germany, contributing to the

reversal of the move that saw yields rising earlier

this year.

The rates on two-year G3 government bonds – those

of the US, Japan and Germany – have been in a

30bp (0.3%) range over the past year, tight by fixed

income standards, but insignificant in the context of

the foreign exchange and equity markets.

EUR/JPY at 125 means the yen is 24% below where

it was at the beginning of August and the Nikkei is

39% above where it was at the beginning of

November, the rally starting three months later.

Within the 30bp bond range there has been some

significant movement in JGB and Schatz (short

German Bunds) yields, while the US two-year

Treasury Note has been stable around the top-end of

the Fed funds target of 0-0.25% (see Figure 4).

Two-year JGB yields have been falling since the

start of the year, reflecting anticipation of more BoJ

monetary easing. These yields now appear to

represent the floor for G3 rates.

Europe attracting flows

Europe – led by France and Germany – has attracted the biggest

flows, according to Japan’s Ministry of Finance

The Netherlands, the European supranational and Agency bonds

also appear to be benefiting

The USD36bn flow to France and Germany over the past six

months represented c20% of their gross refinancing needs

Figure 4. G3 two-year yields contained & Japan lowers floor Figure 5. Bund vs periphery relationship has changed

-0.1

0.0

0.1

0.2

0.3

0.4

Mar 12 Jun 12 Sep 12 Dec 12 Mar 13

2yr

yiel

d (%

)

JGB Bund Treasury

-0.1

0.0

0.1

0.2

0.3

0.4

Oct 12 Nov 12 Dec 12 Jan 13 Feb 13 Mar 13

2yr

yiel

d (%

)

2.0

2.2

2.4

2.6

2.8

3.0

3.2

3.4

2yr

yiel

d (%

)

Bund (LHS)Bonos (RHS)

Source: HSBC, Bloomberg Source: HSBC, Bloomberg

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Germany’s rally no longer driven by a Eurozone crisis

The Schatz yield has been the most volatile, moving

from negative levels at the start of the year towards

that of the US Treasury Note by early February.

Germany has been the safe-haven of choice through

the Eurozone crisis so the yields on short bonds have

tended to move inversely with the fortunes of the

Eurozone periphery; eg Spanish yields down,

German yields up (see Figure 5). But this

relationship has broken down recently and there

have been times when the yields have moved in the

same direction. Part of the reason is the impact of

Japanese policy which has prompted flows into safe

assets, with Germany appearing to be the main

beneficiary, according to the data (MoF).

Normal currency basis means hedging is cheap

The normalisation of the currency basis swaps is a

measure of the success of G4 central bank policy

co-ordination (see Figure 20, page 16). The positive

yield spread offered by Bunds, especially higher up

the curve in the 5-10 year segment, together with

minimal hedging costs, makes Eurozone bonds

attractive. Because central banks provided liquidity

to deal with the excess demand for dollars, a result

of distressed market conditions in 2008/09 and

2011/12, the hedging costs between regions are no

longer onerous (see page 16).

Evidence of European bond buying from September onwards

Japanese investors’ portfolio reallocation started in

anticipation of the regime change and the new

policies that might come with it. Since last

September – prior to the events which triggered the

dissolution of the Diet on 16 November and then

elections on 16 December – there has been an

increase in overseas bond investments. Japanese

investors have, since September 2012, rapidly

invested in certain regions, while reducing

exposure elsewhere.

Outward investment data for government and

corporate bonds confirm that Europe has been the

key net beneficiary of Japanese demand since last

September (Figure 6).

For sovereigns, France has been the biggest

recipient of European inflows with USD22bn

since September last year (Figure 7). Germany

comes in second at USD14bn. This is a significant

change in trend and, based on gross issuance for

these two sovereigns, represents about 20%.

Figure 7. France, Germany & Netherlands attract flows

-10

-50

5

10

1520

25

US

Can

ada

Aust

ralia

Germ

any

Fran

ce

Italy

Net

herla

nds

UK

Den

mar

k

Switz

erlan

d

Hon

g Ko

ng

Swed

en

USD

bn

Cummulative investments in sovereign bonds (since Sep 12)

Source: HSBC, Japan’s Ministry of Finance

For the past two years (through to January 2013),

Germany has actually seen net Japanese outflows

of USD17bn, whereas France registered Japanese

inflows of USD41bn.

Figure 6. Europe benefits more than any other major region

-20

-100

1020

30

4050

60

US

Euro

pe

Oce

ania

Asia

LATA

M

EEM

EA

USD

bn

Cummulative investments in bonds* (since Sep 12)

Source: HSBC, Japan’s Ministry of Finance *includes bonds and notes issued in the region

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USD700-1,000bn outflow The recent policy shift in Japan has led to a change

in the investment pattern of domestic asset

management firms. Historically, local asset

managers have largely invested in domestic bonds

but recently there has been a return to international

bond markets. Assuming an across the board 5-7%

increase in foreign bond investment as a proportion

of total financial assets, there could be at least

USD700bn-USD1trn net inflows into the

international bond market from the private and

public sector in Japan (Table 1). This estimate is

conservative in our opinion and could be far greater

if evidence from some individual fund flows

(Page 10) is extrapolated.

Mutual fund bond flows

In mid-January 2013 Japan’s largest mutual fund

resumed the purchase of European Financial

Stability Facility (EFSF) bonds for the first time

in two years. Subsequently, the weighting of

EUR-denominated bonds in the funds managed by

this fund increased by over 3ppt in two months,

from 14.8% in mid-January to 17.9% on 7 March

(Reuters, 11 March 2013). If one fund can

increase its weighting by 3% in two months, the

expectation of a 5% shift over 12 months for total

bond holding could prove to be conservative.

Mutual funds – or ‘Toushin’ – in Japan are the

eighth largest in the world, with total assets of

around USD1.1trn. Of this, around USD140bn

(13% of the total) are held in the form of

international bonds, low compared with 2009

(around 20%). So, expectations of a 5% increase

would not be unreasonable from current levels.

The share of EUR-denominated bonds in mutual

fund portfolios fell from 6% in February 2009 to

1% in August 2012 (Figure 8). However, recent

data indicates that these funds have started to

return to Europe with net investment increasing

by over USD2.8bn between August 2012 and

Future flow projections

There could be a USD700-1,000bn flow into non-yen bonds by

Japanese investors over the next year, in our opinion

This is based on the flows already seen from mutual funds

extending to other parts of the private sector and is well within

historical precedents

These projections do not include direct purchases by the BoJ

Table 1. Flows into bonds could easily reach USD700-1,000bn

Total assets under management

(USDbn)

5-7% increase in allocation to foreign

bonds (USDbn)

Private sector Pension funds 1000 50-70 Mutual funds 1097 55-77 Banks 3500 175-245 Insurance funds 2830 142-198 Public sector Public pension funds 2702 136-190 Japan Post insurance 1100 55-77 Japan Post Banks 1900 95-133 Potential inflows into foreign bonds (USDbn)

700-1000bn

Source: Tower Watson, HSBC

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February 2013. With most of the major investor

groups in Japan increasing exposure to

international bond markets, there is potential for

the ownership of EUR-denominated bonds in

mutual funds’ portfolio to return to 2009 levels, in

our opinion, representing a 5% increase.

Investment trusts also shifting

Total EUR-denominated bond holdings of Japanese

investment trusts have already increased by 25%

since August 2012. This indicates a broader trend of

shifting flows into Europe from Japan. According to

flows data, Japanese investors invested USD6.6bn

in EUR-denominated bonds between August 2012

and January 2013, a sharp contrast from the

disinvestment of USD760m in 2011.

Note that this excludes any reserve diversification

by the Ministry of Finance and BoJ purchases of

foreign bonds. As discussed on page 17, it is the

catalyst of policy stimulus that it is likely to be

more important. Flow of funds by the private

sector and state-run funds into foreign bonds are

set to dwarf any official purchases.

What if pension funds follow?

Japan has the second-largest pension assets (both

private and public sector, Figure 9) in the world

and, at USD3.72trn, the pension industry is larger

than the entire German economy. A large chunk

of pension fund assets are invested into the bond

markets (55%) and the share of international

bonds has been rising since 2010. As of December

2012, foreign bonds accounted for 30% of the

bond portfolios, compared with 25% in 2010. The

shift towards overseas bonds is expected to

intensify as government policies have suppressed

domestic yields to record lows.

Government pension funds lag private sector in foreign buying

Japan’s Government Pension Investment Fund

(GPIF), the largest government pension fund in the

world, has assets of USD1.13trn, which is almost

equal to the size of Korea’s economy. The GPIF

has, on average, generated 2.6% annual returns on

its investments between 2003 and 2011. Japanese

PM Shinzo Abe recently pointed out the need to

build more sophisticated investment and risk

management structures for public funds, so there is

clearly a bias to shift more public funds into

international markets (WSJ, 11 January 2013).

GPIF invests over 62% of its funds in domestic

bonds and only 8.8% in international bonds. So

increasing the weighting of foreign bonds by

another 5% would generate a significant flow (see

table 1, page 8). According to the latest investment

report released by GPIF, domestic bonds and

equities generated total returns of only 1.5% and

1.6%, respectively, compared with 10.3% by

international bonds last year.

Figure 8. International holdings of Japanese mutual funds Figure 9. Japan’s pension funds are second biggest

0%

5%

10%

15%

20%

25%

Feb-09 Feb-10 Feb-11 Feb-12 F eb-13

0 .0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Over al l intern ation al ho ldin gs (LHS )

Ho ld in gs in EUR bon ds (RHS )

Ho ld in gs in US bo nds (RHS)

104113168252340

498732

119914831555

2736

372116851

Hong KongIre landFrac eSouthBraz il

G ermanySw itz erlandNetherland

CanadaA ustralia

UK

J apanUS

2012 p ensio n ass ets estim ates (U SDb n)

0 170001500 3000

Netherlands

France

S. Africa

Source: The Investment Trust Association, Japan Source: Tower Watson

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Global Fixed Income Strategy Special 19 March 2013

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Asia-Pacific

Buying of Indonesia increasing fast

The Indonesian government bond market has

registered healthy foreign inflows in recent

months. Total foreign purchases reached

USD872m in February 2013, the largest since

November 2012. This is in part due to strong

demand from Japan. Japanese investors’

purchases of Indonesian bonds have amounted to

JPY81bn (USD850m) since September 2012

(Figure 10). To gauge the degree of this recent

appetite, these purchases represent 70% of the

total net purchase of Indonesia bonds by Japanese

investors over the past two years.

Greater demand elsewhere in Asia

Japanese net purchases were also observed in

Hong Kong, Thailand, Singapore, Malaysia and

Philippines but these were more modest.

Nevertheless, there is a clear shift with greater

demand evident since September 2012. It is not

just high yields that Japanese investors are

targeting. The country’s largest mutual fund,

stated that it has added Singapore Sovereign

bonds for the first time to its main USD16bn bond

fund in order to lower its risk profile. These bonds

make up 0.5% of its Global Sovereign Fund as of

March 2013 (Reuters, 11 March 2013).

The Philippines could be a key recipient of

additional flows from Japanese investors, given the

likelihood that it will achieve investment-grade

status from at least two of the major rating agencies

within the next six months.

Selling of Korea reflects currency reversal

Korea is a notable exception with Japanese

investors net selling JPY76.3bn (USD75m) of

Korean bonds since September, compared with

JPY658bn (USD6.9bn) of net purchases over the

past two years. This reflects the significant

reversal in direction of the Korean won, which

had previously become very cheap versus the yen.

EM markets benefit too

Acceleration of diversification into EM is already evident

The size of these markets means that even small flows could

have a big impact

Indonesia, Turkey, Poland and Mexico have been key recipients

of inflows

Figure 10. Japanese investment flows into the rest of Asia

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Chi

na

Hon

gKon

g

Tai

wan

Kore

a

Sing

apor

e

Thai

land

Indo

nesi

a

Mal

aysi

a

Phi

lippi

nes

Viet

nam

Indi

a

US

Db

n

Cum mulative investments in bonds* (since Sep 12)

Source: HSBC, Japan’s Ministry of Finance *includes bonds and notes issued in the region

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LatAm and EMEA

Mexico and Poland stand out

Growing appetite for emerging market bonds is also

evident in other regions. Within LatAm, there has

been strong demand for Mexico very recently

(Figure 11). Elsewhere, Eastern Europe and South

Africa have also been recipients of strong Japanese

inflows (Figure 12). Indeed, the country’s largest

mutual fund has also purchased the sovereign bonds

of Mexico and Poland over the past year. These

bonds account for 1.6% and 1.9% of its Global

Sovereign Fund, respectively, and the portfolio

manager has indicated these weightings could be

raised further (Reuters, 11 March 2013). Heavy

demand from Japanese investors has helped drive

foreign holdings of Polish sovereign bonds to a

record high of PLN190bn (USD62bn) in December.

This growing appetite for Mexican, South African

and Eastern European bonds has been evident in

the investment holdings of retail investors. Data

from the Investment Trust Association of Japan

reveals that total investments by Japan’s

investment trusts in Poland have more than

doubled from USD808m in September 2011 to

USD1.73bn in February 2013.

Mexican bonds have been the top recipient of

flows from Japanese retail investors in emerging

markets. Total bond holdings in Mexico increased

from USD1bn in May 2012 to USD2.3bn in

February 2013. Similarly, total holdings in South

African bonds have been rising continuously over

the past nine months. Investment trusts hold

around USD1.1bn of bonds in South Africa as of

February 2013. This helps to partly explain why

FX weakness has not translated into bond

capitulation (South Africa: flows and woes: bond

capitulation? Not yet, 7 March).

Uridashi bonds – Turkey for retail

A significant investment channel for Japanese

household investors (sometimes referred to as Mrs

Watanabe), which is also incorporated in these

investment trust flows, is the uridashi market. A

uridashi bond is denominated in a foreign currency

and sold in the Japanese market by a non-Japanese

issuer and tends to be short term, ie up to 3 years.

Brazil has been a key target and more recently there

has been greater interest in Turkey. Turkish lira

bonds sold to retail investors in Japan outstripped

those of all other emerging markets in 2012. Of the

USD19.5bn uridashi bonds (Bloomberg data) sold

last year, USD3.7bn were issued in Turkish lira. This

is second only to the USD6.7bn issuance of

Australian-dollar uridashi bonds.

Figure 11. Japanese investment flows into LATAM Figure 12. Japanese investment flows into EMEA

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Mex

ico

Braz

il

Arge

ntina

USD

bn

Cummulative investments in bonds* (since Sep 12)

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Sout

h

Afric

a

Saud

iAr

abia

UAE

Bahr

ain

East

ern

Euro

pe

USD

bn

Cummulative investments in bonds* (since Sep 12)

Source: HSBC, Japan’s Ministry of Finance *includes bonds and notes issued in the region Source: HSBC, Japan’s Ministry of Finance *includes bonds and notes issued in the region

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Higher yields in Turkey and currency gains

(eg 24% lira appreciation against the yen over the

past six months) have been a draw. In addition,

Turkey also received investment-grade

recognition from Fitch Ratings on 5 November

2012, the first in nearly two decades. During the

first two months of 2013, Japan’s investment

trusts have increased holdings of Turkish bonds

by USD300m to USD1.35bn. This is more than

the total purchases of around USD200m in 2012.

Retail like Brazil too

Uridashi bonds denominated in Brazilian real remain

significant at USD3.05bn, but the figure has fallen

27% versus a year earlier. Among the emerging

markets, Japan’s investment trusts have the largest

bond holdings in Brazil of around USD17bn. These

holdings fell from a peak of USD26.7bn in March

2011 to USD16.7bn in November 2012.

Nevertheless, recent investment trust data indicates a

pick-up in purchases of real-denominated bonds. In

fact, between November 2012 and February 2013,

Brazil bonds have received the largest inflows of

USD207m among EM bonds.

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Selling of Australian bonds

Japanese investors have reduced their holdings in

Australia. Between September 2012 and January

this year, their Australia bond holdings fell by

USD8.5bn, the most since the MoF started data

collection in 2005. A sizeable proportion of this

can be traced back to the USD7bn net sale of

Australia government bonds.

The sharp appreciation of the Australian dollar

versus the yen, in particular over the past three

months, has likely been a trigger for profit taking

(Figure 13). Indeed, over the past three years

Australian government bonds returned 49% in yen

terms, the second highest amongst all other major

bond markets (New Zealand bonds rank first at

56%). Japanese investors (especially retail) have

been key participants in the Australia bond market in

recent years (Figure 14), holding AUD178bn of

bonds in 2011 or 21% of the AUD832bn outstanding

debt issued by the government and corporations in

Australia. Given the scale of such established

holdings and impressive returns, pressure to divest

may further intensify. Yet a weakening of AUD/JPY

towards 80-85 levels could create buying

opportunities for Japanese investors.

Rather than repatriating the funds obtained from the

heavy selling of Australian bonds, Japanese

investors are likely to reinvest into other high

yielding currencies/bond markets (invariably EM as

indicated on page 10) and to certain degree, equities.

And some recent losers

Australian bonds remain at risk of further liquidation by

Japanese investors

There has been profit taking after a significant currency gain

Inflows may materialise again if AUD/JPY weakens

Figure 13. Higher AUD/JPY encourages Japanese investors to sell AUD bonds

Figure 14. Large established holdings of Australian bonds by Japanese investors

-4000

-2000

0

2000

4000

6000

8000

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

US

Dm

55

65

75

85

95

105

Monthly portfo lio flows (LHS) AUD/JPY (RHS)

-20

0

20

40

60

80

100

Australia

USD

bn

Since 2005 -2years since Sep 12

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

New Zealand

USD

bn

Source: HSBC, Bloomberg, Ministry of Finance Source: HSBC, Ministry of Finance

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G4 intention or coincidence

Real yields negative

With official interest rates zero bound, an

objective of monetary policy has been to deliver

stimulus through negative real rates. In this regard

the Bank of Japan has been lagging the rest of the

G4 – the US Federal Reserve, European Central

Bank and Bank of England. It was about a year

ago that Japan’s two-year real swap rate moved

below zero (see Figure 15), while the rest of G4

had already achieved this three years ago.

Comparing the delivery of monetary stimulus,

Japan has some catching up to do.

The UK has already achieved negative real rates

of close to 3%, based on the swap market (see

Figure 15) and consistently achieved the lowest

level of the G4 over the last five years; the US is

not far behind.

G4 balance sheet expansion

To achieve negative real interest rates, inflation

must increase, yields on assets must fall or there

needs to be a combination of both. Central banks

have gone for direct asset purchases, and other

forms of balance sheet expansion, to achieve

negative real yields. By building bigger balance

sheets, with bonds as the assets and reserves

typically the liabilities, central banks are pursuing

easier monetary policy, the modern day equivalent

of cutting interest rates.

In fairness this is not the only way central banks

expand balance sheets because the ECB has

concentrated on repo operations, accepting bonds as

collateral. The nearest the ECB has so far come to

the direct quantitative easing of the other G4 central

banks is with the Securities Market Programme.

Outright Monetary Transactions would be another

form of this type of intervention.

Japan as part of the G4

With the BoJ now expected to increase its balance sheet again, all

short-dated G4 real yields are negative

There has been a normalisation of currency basis swap spreads,

so hedging from a yen base is inexpensive

Convergence of short yields means looser policy from one G4

country can be transmitted to another

Figure 15. Negative real yields – Japan joining in

-3

-2

-1

0

1

2

3

4

5

6

Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13

Rea

l 2yr

sw

ap r

ate

(%)

EURUSDGBPJPY

Source: HSBC, Bloomberg Note: Real swap rate = Nominal swap – Inflation swap

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Global Fixed Income Strategy Special 19 March 2013

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As a percentage of GDP the G4 central banks have

balance sheets that represent 20-30% of GDP (see

Figure 16) with the BoJ the first of the G4 to move

towards 30% at the start of the last decade.

Japan is just catching up

G4 central bank balance sheets currently total

circa USD9trn and the re-entry of the Bank of

Japan to purchasing assets is likely to take this

figure close to USD11trn before long. Note that

this year alone the US Fed will add USD1trn to its

balance sheet, through purchases of USD85bn

government and mortgage bonds per month.

Strikingly, when viewed over the last five years,

the BoJ’s balance sheet has been relatively static

(see Figure 18). Choosing 2008 as a starting point

means this is a form of selection bias and

framing but it serves to illustrate how, since the

start of the developed world’s financial crisis,

Japan has been a relative laggard when it comes to

monetary stimulus. The ECB has recently overseen a modest balance

sheet contraction as LTRO funds have been

repaid, resulting in its balance sheet moving back

below EUR3.0trn (see Figure 17). But this should

be regarded as temporary, as the Eurozone

economy is a long way from being able to tolerate

higher interest rates, which is what will happen if

liquidity becomes scarce. With many countries

enduring year-after-year of negative growth, a

continuation of austerity policies, and the growing

threat of deflation, we think the ECB will

eventually have to deliver easier monetary policy.

G4 yield convergence

Whether this was an intention of G4 policy or not,

the result has been the same. G4 risk-free rates

have been driven lower and the spreads have

converged on zero (see Figure 19). US swap yields

have converged on their European and Japanese

equivalents over the last five years so that there is

now only a few basis points of spread left. In the

case of the US vs Europe, it was more a case of

European rates falling towards US levels, a function

of lower core rates and the more recent convergence

of the short periphery yields as a result of the ECB’s

OMT policy announced last summer. For the US vs

Japan, it has been the US rates that converged on

Figure 17. LTRO prepayments reduce balance sheet

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

03 04 05 06 07 08 09 10 11 12

ECB

bal

ance

she

et -

Ass

ets

(EU

Rtr

n)

OtherSMP purchases*LTROsOther OMOsFX ReservesGold

13

Source: HSBC, Bloomberg *SMP purchases also includes CBPP1 and CBPP2 OMOs: Open market operations

Figure 16. Central bank balance sheets, from the beginning Figure 18. Since 2008: scope for BoJ balance sheet catch-up

5

10

15

20

25

30

35

1999 2001 2003 2005 2007 2009 2011 2013Cen

tral

ban

k ba

lanc

e sh

eet (

% o

f GD

P)

BoE Fed ECB BoJ

50

100

150

200

250

300

350

400

2008 2009 2010 2011 2012 2013CB

bal

ance

she

et (%

of G

DP,

Q10

8=10

0)

BoE Fed ECB BoJ

Source: HSBC, Bloomberg, Thomson Reuters DataStream Source: HSBC, Bloomberg, Thomson Reuters DataStream

16

Global Fixed Income Strategy Special 19 March 2013

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the Japanese equivalents, which were already zero

bound as a result of previous quantitative easing and

persistent deflation.

Cross-currency basis normalisation

A measure of success from G4 central bank co-

ordination has been the removal of distortion in the

cross-currency basis spreads (see Figure 20). The

Fed introduced liquidity swaps in the aftermath of

the Lehman collapse in 2008 and continued to offer

USD in swaps with other central banks through the

start of 2009 as the Fed’s quantitative easing started.

The negative basis swap was the result of a huge

demand for funding in dollars, especially from banks

in Europe that had become exposed to the US sub-

prime market. By satisfying this demand for dollars,

the basis swap eventually normalised but, as can be

seen from the chart, the safe-haven status of the

dollar was to return with the Eurozone sovereign and

financial sector crisis, culminating in the bailouts for

Greece in 2011/12.

The basis swap allows an investor or issuer to

hedge cash flows, although not principal, through

the life of the swap. European issuers sought to

take advantage of the wide spread by issuing in

dollars and swapping back into local currency,

thereby achieving a lower all-in cost of funds

(such as an AAA rated, outlook negative,

European issuer that gained around 35bp while

issuing a 5-year dollar bond in July 2012).

Opportunities for investors to hedge

The normalisation of the swap spreads means that

the opportunities for issuers across currencies are

no longer so attractive but logically it has

implications for investors; if the advantage has

been removed from the issuers, it must have gone

somewhere else. From Figure 20 it can be seen

that the EUR/JPY currency basis swap has

returned to zero, which means it should be

possible for investors in Japan to buy European

bonds, which yield more than the local

equivalents, and hedge the cash flows at minimal

cost. Indeed, the motivation for doing this is

probably more than the relative value, rather a

view on where yields could be going in the future.

Figure 19. G4 yield convergence, side-effect or objective?

-400

-300

-200

-100

0

100

200

300

2008 2009 2010 2011 2012 2013

Diff

eren

ce in

2yr

sw

ap y

ield

s (b

p) USD-JPYUSD-EURUSD-GBP

Source: HSBC, Bloomberg

Figure 20. Currency basis normalisation, EUR/JPY at zero

-140

-120

-100

-80

-60

-40

-20

0

20

40

2008 2009 2010 2011 2012 2013

1yr

basi

s sw

ap (b

p)

0

100

200

300

400

500

600

700

Fed liquidity swaps (RHS) EUR/USD (LHS) JPY/USD (LHS) EUR/JPY (LHS)

Draghi:

'Whatev er

it takes'

Lehman US QE1 announced

LTRO1

LTRO2US QE2 announced

1st Greek bail-out

2nd Greek bail-out

Fede

ral R

eser

ve li

quid

ity s

wap

s (U

SDbn

)

Source: HSBC, Bloomberg, Federal Reserve Note: In basis swaps the denominator currency is held flat at zero. When the spread is negative the said currency is viewed as ‘riskier’

17

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It is not all about the BoJ

Much of the focus in Japan is on the prospect of

BoJ policy measures to defibrillate the economy

and cure the ills of deflation. Measures that could

be introduced imminently by the new BoJ

Governor Haruhiko Kuroda and his deputies

include bringing forward open-ended QE and

extending the maturities of JGB purchases made

under the asset purchase programme. By

implication, this points at further yen weakness. In

a similar vein to the Fed’s QE, this will provide

additional global liquidity even if the sustained

impact on the economy is more debatable. Yet,

what could be more significant for international

capital markets is the repositioning of investment

portfolios by Japan’s private sector and

government-owned entities.

BoJ foreign bond purchases?

BoJ purchases of foreign bonds seem to be ruled out

for now and the priority is likely to be an extension

of long-term JGB purchases. Finance Minister Taro

Aso indicated in January that the Ministry of

Finance planned to use its foreign-exchange reserves

to buy bonds issued by European Stability

Mechanism and euro-area sovereigns (Bloomberg,

8 January 2013). No schedule or amounts were

disclosed but purchases of ESM and euro-area

sovereigns by the MoF via reserves are likely to be

modest as this is financed by existing euro positions.

A majority of Japan’s foreign USD1.27trn reserves,

the world’s second-largest after China, are in dollars.

Japan already bought EUR7bn of bonds issued by

the Eurozone’s temporary rescue fund – EFSF – last

year and held around 6.7% of outstanding EFSF

bonds as of the end of 2012. Potential shifts in

portfolio flows by key domestic investors are more

sizeable (as indicated above) and pressing.

Japanese diversification on the agenda

While the Nikkei 225 has soared over the past 6

months, JGB yields have actually edged lower,

primarily as a result of the market anticipating that

the BoJ would extend the maturity of its government

bond purchases (Page 18, Figure 21) sooner rather

than later, with the incoming governor. This has

already driven the 10-year JGB yield back to around

60bp, near record lows. The need for higher returns

and diversification has therefore intensified as a by-

product of anticipated BoJ policies.

BoJ’s policy is a catalyst

The need for diversification and higher returns has intensified as a

result of planned BoJ policies and low JGB yields

The Government pension fund aims to boost returns by

diversifying and already invests in emerging markets – we expect

others to follow suit

Japanese bank holdings of JGBs are substantial and vulnerable to

any policy success in engineering inflation

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The Government Pension Investment Fund

(GPIF), which has substantial holdings of

domestic debt (page 19), has already started to sell

Japanese bonds, as pension payouts are becoming

larger than revenues. To boost returns, the GPIF

started to invest in emerging markets last year

(Pension & Investments). Lower JGB yields as a

result of more aggressive BoJ buying will only

exacerbate this trend.

The prospect that the BoJ will continue easing

monetary policy to meet its 2% inflation target is set

to keep yields low and pinned down over the next

couple of years. Domestic investors are therefore

likely to continue to struggle to achieve favourable

returns in JGBs and will be encouraged to look at

alternative assets, including foreign bonds.

Equities may not be the answer

Domestic equities might be an obvious target for the

reallocation of assets, especially if the impressive

rally in the Nikkei continues. But Japanese investors

will be very reluctant to immediately pile into the

local stock market. The asset bubble that burst more

than 20 years ago left its mark. More than half of

households’ USD15trn financial assets were kept in

cash as of September 2012 and only 6% in equities,

according to BoJ data. Other significant domestic

holders of JGBs such as banks and pension funds

will also be constrained to match liabilities and meet

regulation requirements, implying bond investments,

including overseas bonds, are more likely than

equity investments.

Figure 21. Lower JGB yields despite a surge in the Nikkei

8500

9500

10500

11500

12500

Sep 12 Oct 12 Dec 12 Jan 13 Mar 13

Inde

x le

vel

0.60

0.65

0.70

0.75

0.80

0.85

%

Nikkei 10yr JGB yields (RHS)

Source: HSBC, Bloomberg

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Selling of JGBs contained

Investment funds likely to shift to international bonds

There is significant concentration risk in the JGB

market, with Japanese domestic investors holding

91% of outstanding JGBs (Figure 22). Japan’s

Government Pension Investment Fund (GPIF), the

world’s largest pension fund, holds assets of

JPY108.2trn (USD1.13trn), of which 67% is held

in domestic bonds. The scale of JGB holdings

(USD720bn) is significant and accounts for

around 10% of the outstanding market. The

remaining exposure is in Japanese equities (11%),

foreign equities (9%), foreign bonds (8%) and

short-term assets (5%) (Figure 23). According to

GPIF Chairman Takahiro, the fund started to

diversify into emerging markets in 2012.

Pension review started

Crucially, the GPIF is conducting a review to

accelerate divestments in domestic bonds in

favour of EM (Reuters, 4 February 2013). Other

state-run institutions in Japan also have

substantial holdings in JGBs and may soon follow

suit in diversification. The Japan Post Group

JGB concentration risk

Low JGB yields could catalyse the liquidation of domestic bond

holdings by public and private sector funds

But BoJ’s QE could help to contain yields of JGBs over the next

few years

Just bringing forward the plans of the ex-Governor of the BoJ

would result in more than USD1,000bn purchases over a year

Figure 22. Domestic ownership of JGBs still high at 91% Figure 23. Holdings of Japanese Govt Pension Investment fund

86%

88%

90%

92%

94%

96%

98%

1998 2000 2002 2004 2006 2008 2010 2012

Dom estic ownership of JGBs

Domestic

bonds

67%

Domestic

equities

11%

Foreign

equities

9%

Foreign

bonds

8%

Short term

assets

5%

Source: HSBC, Japan’s Ministry of Finance Source: Ministry of Finance

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Global Fixed Income Strategy Special 19 March 2013

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consists of Japan Post Insurance, which owns

around USD800bn of JGBs, and Japan Post Bank,

which holds around USD1.8trn of JGBs.

Potential listings of such government entities

(Seiho, 2011-2012) is also likely to accelerate the

shift in asset allocation away from domestic

bonds. Publicly offered mutual funds have already

increased their purchases of international bonds,

adding over USD10bn to their USD780bn

portfolio in the past six months.

Other large funds in Japan, in particular pension

funds, are also likely to re-evaluate their approach

to portfolio management. Unfavourable

demographics and underfunded pensions have

been well known problems facing the sector. The

recent emphasis on re-inflationary policy

measures exacerbates the need to diversify and

obtain higher returns than that currently achieved

from domestic bonds. The super-long sector

(20yr+) of the JGB curve, a natural target for

pension funds, is already begin to dislocate

(Figure 24) on concerns of re-inflation, debt

supply and the absence of BoJ buying for this area

of the curve. This has significant ramifications as

Japan has the second-largest pension assets

(USD3,721bn) globally. The industry’s asset

allocation as of 2012 was 55% in bonds, 35% in

equities, 7% in other asset classes and 3% in cash.

Though pension funds have reduced their

allocation to domestic bonds over the past

two years from 75% in 2010 to 70% currently,

this is still a large proportion (pension funds hold

around USD2.6trn or 33% of total bond markets).

Bank holdings of JGBs vulnerable

There is also an asymmetric risk to JGB yields in

the very long term (ie beyond the next couple of

years), making diversification compelling on a

risk-adjusted basis. If official policies in Japan

begin to bite and inflation rises on a more

sustainable basis, this would place pressure on

interest rates and materially reduce the value of

JGBs held by banks. Yet, given the scale of such

holdings, reducing exposure to JGBs would be

difficult. Japanese financial institutions hold a

substantial amount of JGBs. According to the

BIS, Japanese banks hold 90% of their tier 1

capital in JGBs. Japan’s largest bank, Bank of

Tokyo-Mitsubishi, has already acknowledged that

reducing its USD485bn holdings of JGBs would

be disruptive for the markets (Financial Times,

2 December 2012).

Debt dynamics in Japan have so far proven not to

be a detriment to the JGB market. The debt-to-

GDP ratio of around 220% and the large budget

deficits have been financed by domestic investors.

Unlike other ‘true’ sovereigns, a weaker currency

does little to erode the value of debt as foreign

ownership at around 9% is very modest. As

indicated above, a shift in the value of debt may

come more internally in the form of inflation. At

that point, domestic investors would be unlikely

to stand idle with their JGB holdings. Such a

scenario is likely to take a considerable time,

especially considering that the last time inflation

reached 2% and above was in 1991 but it is a risk

that needs to be acknowledged.

Figure 24. Local impact of regime change in Japan

50

60

70

80

90

100

110

120

130

Mar 10 Sep 10 Mar 11 Sep 11 Mar 12 Sep 12 Mar 13

Spre

ad (b

p)

30-10yr JGBs 10-2yr JGBs

Inflation target of

1% set

Abe calls for 2-3%

inflation target

Source: HSBC, Bloomberg

21

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How much QE could BoJ do?

If the outgoing BoJ Governor's (Shirakawa) open-

ended QE programme – due to start in 2014 – was

brought forward to this year and the maturities of

JGB purchases lengthened, the scale of

government bond buying could be around

USD1.1trn for a 12-month period, even outpacing

the sizeable USD1trn open-ended QE3 by the Fed

this year. More aggressive implementation of QE

under the new governor, Kuroda, is widely

expected. However, at the time of writing, the BoJ

is scheduled to start in January 2014 a JPY13trn

per month asset purchase programme, including

JPY2trn in government bonds and JPY10trn in

treasury bills. The overall net increase in the size

of the asset purchase programme would amount to

only JPY10trn in 2014 given that a large

proportion of the monthly purchases will be offset

by redemptions of previous short-dated purchases.

The net growth in the size of the asset purchase

programmes could rise substantially if the BoJ

extends the maturities of JGB purchases.

If the proportion of long-dated JGB purchases

increased JPY10trn (USD105bn) per month

instead of treasury bills then the net increase (after

redemptions) over time could be equivalent to

approximately USD1.1trn for a year.

22

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Notes

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Notes

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Notes

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Disclosure appendix Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Steven Major and Andre de Silva.

Credit: Basis for financial analysis

This report is designed for, and should only be utilised by, institutional investors. Furthermore, HSBC believes an investor's decision to make an investment should depend on individual circumstances such as the investor's existing holdings and other considerations.

HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given these differences, HSBC has two principal aims in its credit research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a six-month time horizon; and 2) from time to time to identify trade ideas on a time horizon of up to three months, relating to specific instruments, which are predominantly derived from relative value considerations or driven by events and which may differ from our long-term credit opinion on an issuer. HSBC has assigned a fundamental recommendation structure only for its long-term investment opportunities, as described below.

HSBC believes an investor's decision to buy or sell a bond should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of terms as well as different systems to describe their recommendations. Investors should carefully read the definitions of the recommendations used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the recommendation. In any case, recommendations should not be used or relied on in isolation as investment advice.

HSBC Global Research is not and does not hold itself out to be a Credit Rating Agency as defined under the Hong Kong Securities and Futures Ordinance.

Definitions for fundamental credit recommendations Overweight: The credits of the issuer are expected to outperform those of other issuers in the sector over the next six months

Neutral: The credits of the issuer are expected to perform in line with those of other issuers in the sector over the next six months

Underweight: The credits of the issuer are expected to underperform those of other issuers in the sector over the next six months

Prior to 1 July 2007, HSBC applied a recommendation structure in Europe that ranked euro- and sterling-denominated bonds and CDS relative to the relevant iBoxx/iTraxx indices over a 3-month horizon.

26

Global Fixed Income Strategy Special 19 March 2013

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Distribution of fundamental credit opinions As of 17 March 2013, the distribution of all credit opinions published is as follows:

___All Covered Companies___ Companies where HSBC has provided Investment Banking in the past 12 months

Count Percentage Count Percentage

Overweight 158 25 89 56Neutral 332 54 149 45Underweight 132 21 43 33

Source: HSBC

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.

* HSBC Legal Entities are listed in the Disclaimer below.

Additional disclosures 1 This report is dated as at 19 March 2013. 2 All market data included in this report are dated as at close 17 March 2013, unless otherwise indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its

Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

27

Global Fixed Income Strategy Special 19 March 2013

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The information in this document is derived from sources the Participating Companies believe to be reliable but which have not been independently verified. The Participating Companies make no guarantee of its accuracy and completeness and are not responsible for errors of transmission of factual or analytical data, nor shall the Participating Companies be liable for damages arising out of any person’s reliance upon this information. All charts and graphs are from publicly available sources or proprietary data. The opinions in this document constitute the present judgement of the Participating Companies, which is subject to change without notice. This document is neither an offer to sell, purchase or subscribe for any investment nor a solicitation of such an offer. This document is intended for the use of institutional and professional customers and is not intended for the use of private customers of the Participating Companies. This document is intended for distribution in the United States solely to “major US institutional investors” as defined in Rule 15a-6 of the US Securities Exchange Act of 1934 and may not be furnished to any other person in the United States. Each major US institutional investor that receives this document by such act agrees that it shall not distribute or provide a copy of the document to any other person. Such recipient should note that any transactions effected on their behalf will be undertaken through HSBC Securities (USA) Inc. in the United States. Note,however, that HSBC Securities (USA) Inc. is not distributing this report, has not contributed to or participated in its preparation, and does not take responsibility for its contents. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (“SFA”) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. Recipients in Singapore should contact a "Hongkong and Shanghai Banking Corporation Limited, Singapore Branch" representative in respect of any matters arising from, or in connection with this report. HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC is authorized and regulated by Secretaría de Hacienda y Crédito Público and Comisión Nacional Bancaria y de Valores (CNBV). HSBC Bank (Panama) S.A. is regulated by Superintendencia de Bancos de Panama. Banco HSBC Honduras S.A. is regulated by Comisión Nacional de Bancos y Seguros (CNBS). Banco HSBC Salvadoreño, S.A. is regulated by Superintendencia del Sistema Financiero (SSF). HSBC Colombia S.A. is regulated by Superintendencia Financiera de Colombia. Banco HSBC Costa Rica S.A. is supervised by Superintendencia General de Entidades Financieras (SUGEF). Banistmo Nicaragua, S.A. is authorized and regulated by Superintendencia de Bancos y de Otras Instituciones Financieras (SIBOIF). The document is intended to be distributed in its entirety. Unless governing law permits otherwise, you must contact a HSBC Group member in your home jurisdiction if you wish to use HSBC Group services in effecting a transaction in any investment mentioned in this document. HSBC Bank plc is registered in England No 14259, is authorised and regulated by the Financial Services Authority and is a member of the London Stock Exchange. (070905) In Canada, this document has been distributed by HSBC Bank Canada and/or its affiliates. Where this document contains market updates/overviews, or similar materials (collectively deemed “Commentary” in Canada although other affiliate jurisdictions may term “Commentary” as either “macro-research” or “research”), the Commentary is not an offer to sell, or a solicitation of an offer to sell or subscribe for, any financial product or instrument (including, without limitation, any currencies, securities, commodities or other financial instruments). © Copyright 2013, HSBC Bank plc, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Bank plc. MICA (P) 038/04/2012, MICA (P) 063/04/2012 and MICA (P) 110/01/2013

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Rates

Europe Bert Lourenco Head of Rates Research, Europe +44 20 7991 1352 bert.lourenco@hsbcib.com

Subhrajit Banerjee +44 20 7991 6851 subhrajit.banerjee@hsbcib.com

Theologis Chapsalis +44 20 7992 3706 theologis.chapsalis@hsbcib.com

Wilson Chin, CFA +44 20 7991 5983 wilson.chin@hsbcib.com

Di Luo +44 20 7991 6753 di.luo@hsbcib.com

Chris Attfield +44 20 7991 2133 christopher.attfield@hsbcib.com

Johannes Rudolph +49 211 910 2157 johannes.rudolph@hsbc.de

Sebastian von Koss +49 211 910 3391 sebastian.von.koss@hsbc.de

Asia André de Silva, CFA Head of Rates Research, Asia-Pacific +852 2822 2217 andre.de.silva@hsbcib.com

Pin-ru Tan +852 2822 4665 pinrutan@hsbc.com.hk

Grace Qiu +852 2996 6569 gracetqiu@hsbc.com.hk

Himanshu Malik Associate +852 3941 7006 himanshu1malik@hsbc.com.hk

Americas Larry Dyer +1 212 525 0924 lawrence.j.dyer@us.hsbc.com

Jae Yang +1 212 525 0861 jae.yang@us.hsbc.com

Pablo Goldberg Head of Global Emerging Markets Research +1 212 525 8729 pablo.a.goldberg@us.hsbc.com

Bertrand Delgado EM Strategist +1 212 525 0745 bertrand.j.delgado@us.hsbc.com

Gordian Kemen Chief Strategist, LatAm Fixed Income +1 212 525 2593 gordian.x.kemen@us.hsbc.com

Victor Fu +1 212 525 4219 victor.w.fu@us.hsbc.com

Alejandro Mártinez-Cruz +52 55 5721 2380 alejandro.martinezcr@hsbc.com.mx

Credit

Europe Lior Jassur Head of Credit Research, Europe +44 20 7991 5632 lior.jassur@hsbcib.com

Dominic Kini +44 20 7991 5599 dominic.kini@hsbcib.com

Laura Maedler +44 20 7991 1402 laura.maedler@hsbcib.com

Remus Negoita, CFA +44 20 7991 5975 remus.negoita@hsbcib.com

Anna Schena +44 20 7991 5919 anna.schena@hsbcib.com

Peng Sun, CFA +44 20 7991 5427 peng.sun@hsbcib.com

Pavel Simacek, CFA +44 20 7992 3714 pavel.simacek@hsbcib.com

Reza-ul Karim +44 20 7992 3703 reza-ul.karim@hsbcib.com

Raffaele Semonella +971 4423 6554 raffaele.semonella@hsbcib.com

Asia Dilip Shahani Head of Global Research, Asia-Pacific +852 2822 4520 dilipshahani@hsbc.com.hk

Zhiming Zhang +852 2822 4523 zhimingzhang@hsbc.com.hk

Devendran Mahendran +852 2822 4521 devendran@hsbc.com.hk

Philip Wickham +65 6658 0618 philipwickham@hsbc.com.sg

Keith Chan +852 2822 4522 keithkfchan@hsbc.com.hk

Louisa Lam +852 2822 4527 louisamclam@hsbc.com.hk

Yi Hu +852 2996 6539 yi.hu@hsbc.com.hk

Crystal Zhao +852 2996 6514 crystalmzhao@hsbc.com.hk

Alex Zhang +852 2822 3232 alexdzhang@hsbc.com.hk

Kelly Fu +852 3941 7066 kellyyfu@hsbc.com.hk

Americas Sarah R Leshner +1 212 525 3231 sarah.r.leshner@us.hsbc.com

Global Fixed Income Research Team Steven Major, CFA Global Head of Fixed Income Research +44 20 7991 5980 steven.j.major@hsbcib.com