Global Markets Research

Weekly Strategy

24 June 2013

Adam Donaldson Head of Debt Research T. +612 9118 1095 E. adam.donaldson@cba.com.au Philip Brown Quantitative Strategist T. +613 9675 7522 E. philip.brown@cba.com.au Alex Stanley Interest Rate Strategist T. +612 9118 1125 E. alex.stanley@cba.com.au Tariq Chotani Credit Research Analyst T. +612 9280 8058 E. tariq.chotani@cba.com.au Tally Dewan Credit Research Analyst T. +612 9118 1105 E. tally.dewan@cba.com.au

Important Disclosures and analyst certifications regarding subject companies are in the Disclosure and Disclaimer Appendix of this document and at www.research.commbank.com.au. This report is published, approved and distributed by Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945.

Time to buy the AUS-US 10Y spread amid a bear stampede

A US-led sell-off is adding bear steepening pressure to the Aussie curve. We take profit on our steepeners.

With entry levels now more attractive, we enter an Aus-US 10Y spread compression trade.

CDS spreads are volatile. While this is now impacting cash, we maintain selective long positions.

Aussie and US 10Y yields are 64bp and 43bp higher, respectively, than this time last week. The sell-off came despite significant weakness in credit and equities. Markets are now re-pricing the end to a five year period of extraordinary US monetary policy. We’ve long expected a move higher in long term yields, led by a re-pricing of the Fed’s policy intentions. While the sell-off has moved quicker than our base case forecasts, it is in line with our tactical views and has benefited our curve steepening positions.

We think the current momentum can run further in the short-term, but are of the view the Australian leg at least is running on momentum as much as fundamentals, so move to take profit on our AUD and NZD steepening trades.

Fed tapering fears have been building for some time. But the force of this week’s sell-off in bonds, credit and equities followed a direct signal for a regime shift in US policy in Bernanke’s post-FOMC comments. The Fed indicated that the economy really only needs to track in line with their (slightly more optimistic) forecasts for asset purchases to be wound back. This process is likely to begin in September 2013 and run through to mid-2014. Naturally, this assumption rests on data continuing to show a steady improvement, but also risk markets retaining some sense of calm. That’s not the case at present, so the risk of safe-haven flows re-emerging and providing some support to Treasuries is also present.

The sell-off in US Treasuries is being led by the 5-7Y part of the curve, as the market is re-pricing the future path for Fed funds rate as well as the pace of asset purchases. This combination is generating a big move in the USD butterfly, which augurs well for our AUD fly position.

As detailed recently, we think ACGBs will outperform in a rising US yield environment, given domestic (and Chinese) economic softness. The sharp fall in the AUD is a barrier for offshore ACGB buying and helps explain the back up in the Aus-US spread this week. Further currency-related selling is a key near-term risk, but we use the move wider to enter an Aus-US 10Y spread compression trade at 143bp (see page 2).

Coming into financial year-end credit is expected to maintain a holding pattern, as investors monitor the fallout from the Fed. While we see value at these levels, volatility is likely to persist in the short term. Sentiment has shifted in cash as well, but flow has been limited. Offshore selling persists in the long end as the AUD remains pressured. Technicals remain supportive of tighter cash spreads especially in the short end. However with year-to-date performance to protect and substantial increase in market volatility, we expect investors to remain on the sidelines for the time being.

Aus-US 10Y yield and unemployment spread

Source: CBA, Bloomberg

Key Strategy Views

Tactical (<2 mth)

Strategic (>6 mths)

Policy rate* 2.50% 2.50%

3yr bond 2.8% 3.2%

10yr bond 3.8% 4.0%

10yr BEI 240 260

3/10 curve 100bp 80bp

10yr v US 120bp 100bp

3yr EFP 25bp 20bp

10yr EFP 50bp 40bp

iTraxx 115 105*Note: Strategy Team views. CBA Economics have also lowered their forecast to a 2.5% cash rate.

-200

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400 03 06 09 12

U/e rate gap (lhs)Real 10yr spreadNominal 10yr spread

% pts bp

Global Markets Research | Fixed Income: Weekly Strategy

2

Key Trades: Bonds

Trade Entry Current Profit Target Stop Comment Buy the ACGB Apr-23 vs the UST May-23.

143bp (24-Jun-13) 143bp 0bp 100bp 155bp

New Trade: Fed repricing and RBA easing to tighten spread.

Buy the ACGB Aug-15i vs the Oct-15 Receive ZCS at 2.65%.

250bp (30-Mar-12)

Hold: The trade is now (close to) an 8bp per annum annuity.

Buy the QTC Feb-20 to the NSWTC Mar-19

36bp (13-Nov-12)

36bp 0bp+3.5bp carry = 3.5bp 10bp 50bp

Hold: S&P should keep Qld at AA+/Stable, but NSW AAA/neg to remain under pressure

Buy the Jan-18 ACGB vs the Feb-17 12bp (21-Nov-12)

20bp -8bp+2bp carry = -6bp 0bp 20bp

Stopped out: The steepening of the curve dominated the RV.

Buy the QTC Apr-16 against the ACGB Jun-16

54.5bp (4-Mar-13)

39bp +15.5bp +4.5bp carry = +20bp

30bp 65bp Hold: QTC Apr-16 looks cheap and the carry is attractive

Buy the TCV Nov-16 against NSWTC Apr-15

31.5bp (6-Mar-13) 37bp

+1.5bp+2bp carry = +3.5bp 15bp 37bp

Stopped Out: TCV was cheap in 2015-16 & NSWTC dear. But swamped in curve move.

Buy QTC Jul-23 on ASW basis 51bp (22-Apr-13)

35bp +16bp 25bp 42bp Hold: Positive credit & demand/supply dynamics Stop pulled in & target lowered.

Buy the NZ Sep-25 Linker against the 12Y Swap

286bp (27-May-13) 265bp -19bp 315bp 265bp

Stopped Out: The NZ Linker is likely to join the global index presently. But linkers have underperformed world-wide.

Buy the Apr-25 against the Apr-23 19bp (6-Jun-13)

20bp -1bp 10bp 23bp Hold: Apr-25 should richen as it approaches 10Y, the Apr-23 the opposite

2013 to date +37.5bp (including +0.5bp from closed trades)

Swap

Trade Entry Current Profit Target Stop Comment

Pay 5Y in the 1Y forward 2/5/10Y butterfly.

+4bp (5-Jun-13)

10bp +6bp +20bp -8bp Hold: Risks to swap fly are increasingly asymmetric.

2Y/4Y swap steepener 36bp (5-May-13) 60bp +24bp 45bp 30bp

Take profit: RBA cuts and US sell-off to steepen the curve.

3/10Y EFP box flattener 25bp (29-May-13) 22bp

-1bp (incl -4bp roll) 10bp 33bp

Hold : Long spreads room to compress given bond supply, credit etc.

NZD 1/3Y Swap Steepener 48bp (17-Jun-13) 70bp +22bp 70bp 35bp Take Profit: RBNZ pricing to be pushed

further out &global yields rising.

2013 to date 153.5bp (including +148.5bp from closed trades)

Credit

Trade Entry Current Profit Target Stop Comment Buy RIO 3.75% Sep-21 (U$) vs BHP 3.5% Nov-21 (U$) on ASW basis

43.0 (13-Feb-13)

53.5 -10.5 20bp 55bp Hold: RIO US$ long-end is steep relative BHP U$ curve

Buy EIB 6.00% Aug-20 (A$) vs EIB 6.25% Apr-15 (A$) on ASW basis

45.0 (15-Mar-13)

53.0 -8.0 25bp 60bp Hold: Initiated curve flattener

Buy WPLAU 8.75% Mar-19 (U$) on ASW v. 1.18x WPLAU 5yr CDS

62.0 (17-Apr-13)

29. +32.5 Hold: 2019 bonds offer value at current levels. Hedged via CDS (1.18x Notional)

Buy NAB 2.75% Mar-17 vs WSTP 2.00% Aug-17 on ASW

15.0 (13-May-13)

17.8 -2.8 5bp 25bp Hold: NAB U$ 2017 wide relative to WSTP U$ 2017

Buy TLS 4.80% Oct-21 on ASW v 1.60x TLSAU 5yr CDS

-0.6 (17-May-13)

-24.2 +23.6 Hold: 2021 bonds offer value at current levels. Long position hedged via CDS

Buy SGPAU 8.25% Nov-20 (A$) on ASW (s/s)

183.0 (24-May-13)

192.5 -9.5 170bp 195bp Hold: 2020 bonds offer value at current levels.

Buy WSTP 3.625% Feb 23C18 v WSTP 1.60% Jan 18 on ASW

125.0 (28-May-13)

134.0 -9.0 100bp 160bp Hold: Sub /Senior multiple to wide

Buy TLSAU 6.25% Apr 15 v TLSAU 4.00% Nov 17 on ASW

-10.0 (12-Jun-13)

-6.6 -3.4 -25bp 0bp Hold: Telstra short/mid A$ curve too flat

Buy SPNAU 7.50% Apr 21 v SPNAU 5.75% Jun 22 on ASW

2.0 (18-Jun-13)

-2.6 +4.6 -9bp 5bp Buy: A$ 21s offer good defence against a rise in interest rates on a 12M horizon

2013 to date +137.8bp (including +120.3bp from closed trades)

Global Markets Research | Fixed Income: Weekly Strategy

3

Short term interest rates

BBSW and OIS rates are trading just above record lows. The market remains comfortable with the view that further easing is needed, despite the fall in AUD and break higher in longer term yields.

We see distinct downside risks to the economy, as domestic demand fails to fill the large gap left by the pending peak in mining capex. Low inflation, fiscal tightening, deleveraging and limited credit growth all point to further easing.

We regard August as the most likely date for the next RBA cut. The soft Q1 GDP and other recent data, including disappointing figures out of China, mean July is also “live” (implied pricing is 18%).

However, the falling AUD puts less pressure on the RBA to ease right away. The RBA would want to see if the move extends further and whether the TWI settles well below recent elevated levels. Ultimately, the currency alone doesn’t absolve the need for easing entirely, given broader the range of risks to the macro outlook.

BBSW remains relatively tight to OIS, with the 3 month spread at around 15bp. Some short term widening is possible as we move into financial year-end. Beyond that point, we think bill spreads will trade relatively tight given limited issuance and ample liquidity.

Commonwealth bond curve

The massive US sell-off has been quicker than forecast (2.5% end-2012, 3.0% in 2013), but hardly a shock. The underlying trend has been clear given the strength of the US recovery and diminishing financial and fiscal tail risks. We look for yields to lift further this year as investors respond to the Fed’s evolving QE strategy and move more decisively into risk assets. However, second-round impacts on riskier assets are creating turbulence that suggests Treasuries will soon consolidate for a period on the back of safe-haven buying.

Our strategic view that ACGB bond yields have bottomed looks to have been confirmed with the large moves over the past week. While domestic pressure to ease policy further will linger, pricing has been pared as the AUD has dropped and global bond yields rise.

Longer bonds will track the US sell-off over time (but out-perform as per below). The front-end will retain more support given domestic and regional economic challenges, pointing to a generally steeper AUS curve. However, with the 3/10Y curve at 100bp, we’re not inclined to chase it further. We think 3-5yr bonds are at risk of playing catch-up to the rest of the market, but the very short-end could also start to move. We take profit on our front-end steepeners.

Commonwealth bond spreads

The Aus-US 10Y spread has widened in the sell-off, reflecting AUD-related selling and weaker liquidity in a highly volatile market.

That volatility, and the approach of Australia’s financial year-end, clearly warns against brave calls. However, we had been looking for a better entry point into the spread and today’s 140bp is attractive. We enter a tightening trade, targeting 100bp with a 155bp stop-loss.

With markets this volatile any trade has risk and the Aus-US spread is no exception. However, we see fundamental differences in the underlying direction of the US economy and Australia. In time, the relative weakness of the Australian economy will eventually pull the spread lower. AUD-related buying will probably be slow to emerge and the key risk is that further currency-related selling hits first.

AUD money market

Source: Bloomberg, CBA

ACGB curve

Source: Bloomberg, CBA

AUS-US 10Y bond spread

Source: Bloomberg, CBA

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Cash rate

3m OIS

3m BBSW

%

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bp

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(lhs)

3yr bond yield (lhs)

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Global Markets Research | Fixed Income: Weekly Strategy

5

Semi-governments

Semi spreads to bond have narrowed in line with swap spreads and we generally expect this to extend further as yields back up.

But the semi curve has also steepened relative to swap, with the front end well bid and the back end widening in line with trends in global credit markets and some uncertainty during ‘Budget season’. After tightening when QTC cut issuance guidance, the lower-rated semis have struggled amid the general rise in global credit spreads.

While revenue remains under pressure, we estimate semis new borrowing requirement will fall by more than $10bn in 2013-14 and sharply again in 2014-15 as states tighten up to protect their credit ratings. At the same time, bank demand should remain firm despite lack of clear (public) guidance from APRA that banks should further improve the composition of their liquid assets. AUD related selling should ease up before long, allowing semis to move sub swap.

Mid-curve swaps are attractive and underpin solid semi appetite around 4-7Y, where curves are steep and well over 2.75% cash. However, the back-end is now looking cheap by comparison.

We’re happy to hold our QTC 2016 trade to bond and the QTC 2023 ASW position on the view that semi spreads will tighten as supply/demand tightens and we move past Budget risk.

We have also held a QTC and TCV positions against NSWTC, but broader moves in the curve prevailed in the TCV position. We see NSW as remaining under pressure from S&P, but believe QTC will hold firm at AA+. WATC has probably cheapened enough from prior premium levels. But TCV isn’t being adequately rewarded for its ‘safe-haven’ status, as confirmed in the Budget.

SSAs

Spread widening continued with SSA A$ curves pushed out once again last week. Offshore selling persisted as the A$ weakened and US 10yr hit 2.53%. No respite for the long-end once again as it continued its underperformance to the short-end. Year to date issuance is A$10.03b (vs 2012 YTD A$11.51b).

Over the last couple of weeks, even the short-end has buckled under offshore selling pressure. While the 2014s have performed well, yields have pushed out between 10-16bp and are trading well above cash rates. We expect the short end to remain well bid as market technicals (maturity profile, offshore flows, global uncertainty and limited supply) persist.

The long-end of the A$ SSA curves remains steep. While sovereign downgrade risk and the ongoing macro and political risks in Europe should be the main drivers of sentiment for long-end of European SSAs, weaker A$ led offshore selling has been the main driver of yields and spreads wider for all A$ SSA issues.

We see value in the long-end of the SSA A$ curves. We bravely hold on to our EIB A$ 2020-2015 curve flattener to take advantage of this steepness and on the view that the back-end will catch up when AUD flows stabilise. We expect global appetite for AUD fixed income will remain strong following the widening in spread. However, foreign selling dominates for now. We have to wait and see if offshore participants share our view on the SSA A$ long-end and step in after the recent moves out. For example the EIB A$ 20s are now trading about 35bp wider than the EIB U$ 20s (on an A$ swapped basis).

2022 semi-govt to bond spread

Source: CBASpectrum

Semi to swap spread

Source: CBASpectrum

Select SSA A$ Curve

Source: Bloomberg

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180

Jul-11 Jan-12 Jul-12 Jan-13 Jul-13

QTC (21-Jul-22)TCV Semi (17-Oct-22)WATC Semi (15-Jul-21)NSWTC Semi (01-Mar-22)

bp

-20

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QTC (22-Jul-24)QTC (21-Jul-23)SAFA Semi (20-May-21)QTC (21-Feb-18)QTC (21-Apr-16)NSWTC Semi (01-Mar-22)TCV Semi (15-Nov-18)NSWTC Semi (20-Feb-17)

bp

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ASIA COEEIB EUROFIADB IBRD

Global Markets Research | Fixed Income: Weekly Strategy

6

Credit Markets

Credit indices gapped wider after the FOMC statement. Chairman Bernanke statements on the Fed’s bond buying programme were more definitive about timing of tapering (2H 13) than the market expected, including an expectation for conclusion of QE by mid-2014. The plan is of course predicated on incoming data being in line with Fed expectations.

Credit spreads continued to move wider last week as selling hit, especially in the financials and SSAs, with AUD markets under-performing other currencies. However there was no major rush for the door, as long-term investors held on to their positions riding the volatility for now. Flows especially in the non-financial space remained light with traders marking names wider in line with the move of the broader markets. The moves in US treasuries dominated airwaves with institutional investors preferring to remain on the sidelines given financial year-end is around the corner.

Limited supply, the improving global economic backdrop, and the large near term maturity profile (~A$40b worth of bonds maturing by August-end) are very supportive of tighter cash spreads in the near term and in the short-end.

Primary market saw no new deal last week as sentiment remained weak. Recent market activity has mainly been driven by kangaroo (SSA and FI) issuances, taking year-to-date 2013 primary issuance to A$50.93b, 2% higher than last year. The iTraxx Australia ended the week 14bp wider from last week.

Medium to longer term we remain optimistic and expect credit spreads – cash and CDS – to tighten given the relative health of corporate Australia and limited supply profile.

CDS Markets

The iTraxx Australia index widened 15bp last week in line with major CDS indices globally. But the index is still 31% tighter than its June 2012 levels. Since the start of 2013, the iTraxx Australia has performed very well relative to other major indices. However, the iTraxx Australia has underperformed the ITraxx Europe since mid-April. The iTraxx Australia is currently trading 19bp wider than iTraxx Europe.

The iTraxx Australia is well above our year-end target of 105bp, and while the move out from recent tights has been in line with our expectations expressed over the last few weeks, we have been surprised by the magnitude and speed of last week’s move. . While we are sellers of protection over the medium to long term, we expect the markets to remain volatile in the near term.

BHP sold a 15% stake in its Jimblebar iron ore mine to Itochu Corp and Mitsui & Co. and has raised another U$1.5b, taking the total cash raised from asset sale over the past 12 months to U$6.5b. This is credit positive for BHP. The company’s credit metrics are just below credit agency thresholds and this sale (expected to be completed by Sept 13) will most likely push its FY14 FFO/Debt ratio (under S&P calculations) even closer to the 60% mark. BHP 5yr CDS is currently trading 50bp tighter than RIO. BHP has progressed much quicker than RIO on the asset sale front. We, however, continue to prefer RIO over BHP.

Select CDS Indices

Source: Bloomberg

2013 Maturity Profile (Corp+SSA+Semi+ACGS)

Source: Bloomberg

iTraxx Australia RV performance to Major Indices

Source: Bloomberg

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Mar-12 Jul-12 Oct-12 Feb-13 Jun-13

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iTraxx Australia

iTraxx Europe

iTraxx AsiaXJ

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RV to iTraxx AsiaXJ

RV to CDX-NA

RV to iTraxx Europe

Global Markets Research | Fixed Income: Weekly Strategy

7

Financials

A continuation of last week’s theme, cash spreads moved out last week on the back of consistent selling pressure as the AUD faltered and the markets reacted to the moves in the US Treasuries. Steeper curves are here to stay for the time being. While A$ financial curves moved out, the short-end remains well supported mainly driven by limited supply, maturity profile and attractive yields compared to cash rate. We however saw some investors take advantage of the steep curves, but they were few and far between.

Australian banks maintain their strong position relative to global peers. Wholesale funding cost pressures have eased notably, even considering the moves over the last few weeks. The banks continue to strengthen capital and liquidity positions. Asset quality in the banks’ domestic book remains stable with NPLs at ~1.5% of total loans (well below the 1.9% post-GFC high). Although profitability and returns have been supported over the last 6 months by lower funding costs, lower credit costs and cost controls, the banks face earnings headwind in a slow credit growth environment. The risk in the near term is growing competition and impact on NIM.

The main concern for Australian banks from a regulatory point of view is the implementation of liquidity ratio under Basel III. APRA has confirmed it will not follow the Basel Committee by relaxing the Liquidity Coverage Ratio (LCR) implementation schedule. But is has adopted the bulk of the relaxed assumptions for cash inflows and outflows, pointing to a lower liquidity bill that we assess to be favourable for the banks.

Anaemic credit growth means Australian bank issuance should be limited to refinancing in 2013. The 4 Majors have consistently paid down debt and we do not expect this trend to change any time soon.

With that back drop, we expect domestic and international investor demand for 4M term paper to remain strong. At current levels we look to the short end (<2yr) of the 4M A$ curves for a yield pick up over cash rates. Relative to the seniors, we to prefer the callable pre-Basel III LT2 bonds as they offer great value at current spreads. We continue to hold on to our Sub-Senior RV trade.

Non-Financial Corporates

We expect supply of Australian corporate paper to be limited due to small capex plans (outside mining). Australian corporates will continue to be opportunistic in tapping domestic debt markets especially when equity markets are buoyant. Over the last few years Australian corporates have done well to manage and repair balance sheets.

While it is tempting to consider higher-yielding issuers and select names have performed well, we prefer to be positioned on an individual credit perspective. In select sectors we continue to expect best-in-class names to continue to outperform even though they trade at already tight spreads.

Rio Tinto (RIO) bucked the trend last week and raised U$3b in a 4 part bond issue in a volatile market. Rio Tinto Finance USA Plc issued a total of U$3.0b of fixed and floating rate bonds maturing in the 2015, 2016 and 2018. We continue to prefer RIO over BHP. RIO, however, still needs to deliver a couple of asset disposals this year to help it reduce its leverage and push its credit metrics over the line.

Moody’s downgraded Powercor Australia LLC by one notch to ‘Baa1’ from ‘A3’, after the company was placed on review for possible downgrade on 28 Mar 2013. The rating outlook is negative.

Select 5Yr Aus CDS - 3M Absolute Change

Source: Bloomberg

Select CDS and Bonds

Source: Bloomberg. Bonds – Spread to ASW

Corporate Spread to ASW

Source: CBA

-50 -30 -10 10 30 50

WBC

QBE

TAH

WPL

LLC

BHP

WES

CWN

QAN

WOW

RIO

iTraxx Aus

Tighter

Wider

50

150

250

350

Mar-12 Jul-12 Oct-12 Feb-13 Jun-13

bps NAB 7.25% 18WSTP 6.00% 17ANZ 5y CDSiTraxx Eu Sn FinCDX America Sn Fin

50

150

250

350

450

550

650

750

Jan-09 Feb-10 Mar-11 Apr-12 Jun-13

bps AA (5yrs) AA- (5yrs)

A- (5yrs) BBB (5yrs)

Global Markets Research | Fixed Income: Weekly Strategy

8

Moody’s downgrade reflects a “weakened financial profile relative to the tolerance set for the previous A3 rating” and the expectations that the financial metrics will remain relatively weak for the next few years.

Covered bonds

Covered bond spreads have narrowed by around 100bps since issuance in late 2011. That 4yr paper is currently trading at a 40% premium to senior unsecured notes. This premium has widened over the year and points to a cautious near-term outlook. At current levels we believe that covered bonds are trading at fair value relative to the seniors. Covered bonds are viewed as defensive in nature and therefore in a narrowing market we expect the covered bonds to underperform the seniors and vice-a-versa.

With year-to-date covered bond issuance of just ~A$9.5b, there is high possibility, barring a global liquidity crunch, that our earlier FY13 covered bond issuance forecast of A$35b will be not be reached. Although the 5 Australian banks have around A$94b of spare covered bond issuance capacity, the combination of limited wholesale funding requirement (limited to refinance needs) and the strength of other funding options such as RMBS has negatively impacted covered bond issuance volume. We have revised our FY13 covered bond issuance forecast down to A$15-20b.

Last week, the AUD senior unsecured notes with 4-5yrs maturity widened by another 5bps. Covered bonds lagged the rally. In this recent market dislocation, we expect the covered bonds to hold relatively better than the seniors as they are defensive in nature.

RMBS/ABS

We expect RMBS issuance to be highly opportunistic and driven by prevailing market conditions. The four major banks (~80% of lending market) are well funded. However, for the smaller ADI’s, RMBS should remain a key source of funding and their share of total securitisation should remain high.

ABS/RMBS issue margins lagged the tightening seen in the broader credit market in 2012. But they narrowed markedly late in 2012 and early 2013. Prime RMBS transactions for 2-3 WAL have compressed by around 30bps compared to end of last year. We believe that the observed rally on issue spreads has reached a plateau and do not foresee any major contraction in the near term.

The fourth ABS transaction of the year was issued by FlexiGroup Limited on 18 June 2013. ‘Flexi ABS 2013-1 Trust’ priced A$210m ABS transaction. Compared to BOQ’s ABS (1m BBSW+120bps, 1.4Y WAL) issuance in May 2013, the Class A Notes priced 20bps wider at 120bp (1.47Y WAL). We believe that the wider issue price was issuer specific and not related to the current credit market condition.

Bendigo and Adelaide Bank also tapped the securitisation market second time for the year with an A$500m ‘TORRENS Series 2013-2 Trust’ transaction. The Class A Notes priced at 1m BBSW+95bps – similar to Suncorp-Metway’s transaction in May 2013. Thus reinforcing our view that the rally in RMBS issue price has reached a plateau.

Aust banks A$ covered bonds vs senior debt

Source: CBASpectrum

Covered and Senior bonds

Source: Bloomberg, CBA

RMBS, ABS and CMBS Issue Margin (2-4yr)

Source: Bloomberg, CBA

30

60

90

120

150

180

210

Jul-11 Feb-12 Sep-12 Apr-13

bps WBC (18-Nov-16)

CBAC (25-Jan-17)

WBC (09-May-16)

WBCC (06-Feb-17)

WBC (20-Feb-17)

0

10

20

30

40

50

60

70

Aug-12 Nov-12 Feb-13 May-13

YTM

Sp

read

ove

r C

over

ed (b

ps)

WSTP 1.40% 2015 (U$)

WSTP 2.13% 2016 (€)

WSTP 5.75% 2017 (A$)

0

50

100

150

200

250

300

350

400

450

Jan-07 Aug-08 Mar-10 Nov-11 Jun-13

bps

CMBS

ABS

RMBS

Global Markets Research | Fixed Income: Weekly Strategy

9

iTraxx Australia: Key constituents and 3M snapshot

Source: Bloomberg, Prices as of 21 June 2013

5y CDS change over 3 months: 5y CDS performance over 3 months:

Issuer 3 month trend 21-Jun %: Absolute bps: Absolute %: Relative to A-iTrx bps: Relative to Index

(bps) (bps) + = CDS wider (- = CDS tighter) + = underperformed (- = outperformed)

A-iTraxx 141 +16.9% +20.4

ANZ 103 +11.1% +10.2 -5.8% -10.1

CBA 94 +0.3% +0.3 -16.6% -20.1

NAB 101 +8.9% +8.3 -8.0% -12.1

WBC 98 +5.7% +5.2 -11.2% -15.1

AMP 113 -2.7% -3.2 -19.6% -23.5

MBL 153 +9.8% +13.7 -7.1% -6.7

QBE 180 +2.8% +5.0 -14.0% -15.4

GPT 118 +4.2% +4.8 -12.6% -15.6

LLC 215 +3.0% +6.2 -13.9% -14.2

WFG 116 +6.9% +7.4 -10.0% -12.9

BHP 77 +17.4% +11.5 +0.5% -8.9

RIO 128 +23.6% +24.5 +6.8% +4.1

WPL 102 +8.7% +8.2 -8.2% -12.2

TLS 77 +17.7% +11.5 +0.8% -8.9

WES 77 +21.2% +13.5 +4.3% -6.9

WOW 76 +22.3% +13.8 +5.5% -6.6

CWN 162 +9.3% +13.8 -7.6% -6.5

TAH 178 +2.5% +4.4 -14.4% -16.0

AMC 101 +7.4% +7.0 -9.5% -13.4

CSR 108 +5.1% +5.2 -11.8% -15.2

AGL 91 +31.2% +21.6 +14.3% +1.2

QAN 214 +5.8% +11.8 -11.1% -8.6

Global Markets Research | Fixed Income: Weekly Strategy

10

Key Forecasts

Cash rate 24-Jun Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14

US 0.25 0.25 0.25 0.25 0.25 0.25 0.50Australia 2.75 2.50 2.50 2.50 2.50 2.50 2.75New Zealand 2.50 2.50 2.50 2.75 3.00 3.00 3.25United Kingdom 0.50 0.50 0.50 0.50 0.50 0.50 0.75Euro-zone 0.50 0.50 0.50 0.50 0.50 0.75 0.75Japan 0.10 0.10 0.10 0.10 0.10 0.10 0.10Canada 1.00 1.00 1.00 1.00 1.00 1.25 1.50

2-yr bond yield 24-Jun Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14

US 0.39 0.30 0.50 0.60 0.70 0.80 0.90Australia 2.75 2.60 2.65 2.75 2.90 3.00 3.05New Zealand 2.79 2.60 2.90 3.30 3.50 3.70 3.90United Kingdom 0.52 0.30 0.35 0.40 0.60 0.90 1.20Germany 0.26 0.10 0.20 0.60 0.90 1.30 1.40Japan 0.13 0.15 0.20 0.20 0.25 0.25 0.35Canada 1.23 1.20 1.30 1.50 1.70 1.90 2.0010-yr bond yield 24-Jun Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14US 2.57 2.30 2.50 2.70 2.80 2.90 3.00Australia 3.96 3.50 3.60 3.70 3.80 3.90 4.00New Zealand 4.23 3.70 4.00 4.20 4.40 4.60 4.70United Kingdom 2.40 2.00 2.10 2.20 2.30 2.50 2.60Germany 1.73 1.60 1.70 1.90 2.00 2.10 2.20Japan 0.88 0.90 1.00 1.00 1.10 1.10 1.10Canada 2.45 2.30 2.40 2.50 2.70 2.90 3.20

Global Markets Research | Fixed Income: Weekly Strategy

11

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