January/February 2016 (data as of February 5)

A review of financial market themes and developments

This monitor reflects the best interpretation of financial market developments and views of the staff of the Office of Financial Research (OFR). It does not

`n ecessarily reflect a consensus of market participants or official positions or policy of the OFR or the U.S. Department of the Treasury. Contributors: V

iktoria Baklanova, Ted Berg, Soumya Kalra, Daniel Maddy-Weitzman, Adam Minson, Thomas Piontek, William Shi, Daniel Stemp.

Markets Weaken in Response to Concerns About Global Growth and Oil Since the start of 2016, prices of equities and other risky assets have declined markedly. The proximate cause is an escalation of investor concerns about global growth and low oil prices. Global investors have been particularly sensitive to developments in China, due to its economic slowdown and the implications for global growth. As China’s authorities grapple with its downturn and record capital outflows, their August 2015 currency shift and more recent developments have fueled market concerns about the effectiveness of Chinese economic policies and communications. Meanwhile, oversupply in the oil market since mid-2014 has pushed prices to their lowest levels in more than 10 years, eroding the creditworthiness of U.S. energy producers and contributing to a broad repricing of U.S. corporate credit risk. In analysis by the Office of Financial Research (OFR), credit risk is elevated in the wider U.S. nonfinancial business sector, a potential financial stability threat discussed in OFR’s Financial Stability Report.

Developments since the November/December report

• Commodity prices fell further amid evidence of growing oversupply in oil markets and further weakness in global demand.

• Uncertainty about China’s policymaking increased because of authorities’ acceptance of greater currency depreciation and the failure of market circuit breakers to contain sharp declines in local equity markets.

• Global equity and corporate credit markets sold off sharply, and declines in emerging market currencies accelerated.

• The Federal Reserve began increasing interest rates as expected in December. It raised the federal funds target range 25 basis points. Global growth concerns and falling inflation since then have reduced market expectations of further rate hikes in 2016.

• The Bank of Japan unexpectedly cut its interest r ate on excess reserves to negative 10 basis points in pursuit of its 2 percent inflation target.

China concerns resurged due to policy surprises, equity sell-offs, and record capital outflows. Developments in China’s currency policy and equity market declines triggered a global retreat in risk sentiment in January. This retreat ended the period of stability in Chinese markets that prevailed since the shift in China’s currency policy last August (see the August Financial Markets Monitor). In January, market participants were again surprised as the People’s Bank of China signaled greater tolerance for faster depreciation of the renminbi by setting the USD-CNY fixing rate higher than the previous day’s close for successive sessions. The decision to let the currency weaken escalated concerns about the extent of China’s capital outflows and economic slowdown which drove a sharp sell-off in local

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Figure 1: Growth fears pushed Chinese stocks and currency lower Index value and currency spot price

USD-CNY (Onshore, right axis)

Note: The USD-CNY spot price is inverted to show a weakening currency alongside the declining equity index.Source: Bloomberg L.P.

Shanghai Composite (left axis)

OFR MARKETS MONITOR January/February 2016 | 2

equities (Figure 1). Newly established circuit breakers in Chinese equity indexes and the expiration of a six-month ban on company insiders selling shares exacerbated the selling at the start of the year. The circuit breakers were removed after twice halting trading. The insider share-selling ban was extended indefinitely. These policy reversals contributed to global investor fears about the effectiveness of Chinese policymaking. Chinese foreign exchange reserves declined by more than $200 billion in the last two months. Outflows for 2015 were about $500 billion, and were the first annual decline ever recorded. Total reserves are at their lowest since 2012 (Figure 2). The accelerating capital outflows bring a new challenge for Chinese policymakers, after years of strong capital inflows. New evidence of supply-demand imbalance prompts further declines in oil prices. Crude oil prices have declined 14 percent since the start of the year and reached their lowest levels since 2004. Oil price volatility spiked to levels that last occurred during the global financial crisis (Figure 3). Market participants attributed the price action to further evidence of supply growth — the dominant factor in oil’s decline since mid-2014. In recent months, analysts raised their projections for production by the Organization of Petroleum Exporting Countries and U.S. oil inventories rose. Also, analysts are now expecting U.S. production to remain near their current high levels. Concerns also rose about weakening demand from China and emerging markets. Developments in China and energy prices triggered broad-based declines across globalfinancial markets.

Year to date, global equity markets have had pronounced declines. Major stock indices have declined more than 20 percent from their 52-week highs (Figure 4). Listed U.S. companies are being affected by low oil prices and slowing foreign growth. Weak energy sector earnings have been a drag on overall S&P 500 earnings growth, but earnings in many other sectors have also been less than robust.

Figure 2: Record decline in Chinese foreign exchange reservesChinese foreign exchange reserves ($ billions)

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Figure 3. Oil volatility spiked as prices hit new lowsCrude oil prices ($US per barrel) and volatility (percent)

WTI (left axis)Brent (left axis)

Source: Bloomberg L.P.

OVX Oil Volatility (right axis)

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Figure 4: Global equity markets down sharply to start the year Global equity indexes (Index 100 = January 2, 2015)

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S&P 500MSCI Emerging MarketsHang Seng

Nikkei 225Euro Stoxx 50

Source: Bloomberg L.P.

OFR MARKETS MONITOR January/February 2016 | 3

Excluding energy firms, S&P 500 earnings in the fourth quarter of 2015 are estimated to grow only 1.5 percent. Earnings including energy are estimated to decline 5 percent. In comparison, overall S&P 500 earnings grew at a 5 percent compounded annual rate from the fourth quarter of 2010 through the fourth quarter of 2014. Equity valuations could remain under pressure due to weakening fundamentals, as discussed in the 2015 OFR brief, “Quicksilver Markets.” U.S. corporate bond spreads rose to multiyear highs, pricing in greater default risks in the energy sector and higher probability of a default cycle in the broader corporate debt market (see the OFR’s 2015 Financial Stability Report). Although lower-rated and energy-linked spreads have widened the most, non-energy high-yield spreads widened to their highest levels since 2012 (Figure 5). The deterioration largely reflects the same energy and global growth factors affecting other markets. It also reflects the market reaction to the unusual suspension of investor withdrawals by a Third Avenue Management credit mutual fund. Financial stress indexes surpassed levels of the August 2015 market sell-offs. Since the beginning of the year, financial conditions have tightened and financial stress indexes have risen markedly (Figure 6). The most notable changes in the index components have been the increased volatility in oil markets, continued appreciation of the dollar, and the widening in high-yield credit spreads. Emerging market assets remain under pressure. Since the beginning of the year, emerging market currencies are 1.5 percent lower on average, led by 6-to-8 percent declines in commodity-sensitive currencies such as the Colombian peso, Russian ruble, and Mexican peso (Figure 7). Slowing growth and falling commodity prices continue to depress a broad set of emerging market asset prices. At the same time, idiosyncratic events have increased the political risk premium in countries such as Poland, South Africa, Turkey, and Brazil.

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Figure 5: Sharp drop in energy prices weighed on corporate creditOption-adjusted spread (basis points)

Barclays High Yield Barclays High Yield ex-Energy Barclays High Yield EnergyBoAML High Yield CCC and Lower Rated

Sources: Bloomberg L.P., Haver Analytics

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Figure 6: Sell-off spurred tighter financial conditions Index value

Sources: Bloomberg L.P., Haver Analytics, JPMorgan Chase & Co., OFR analysis

Note:↑ Higher financial stressand tighter conditions↓ Lower financial stressand looser conditions

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Figure 7: Pressure on emerging market currencies continued(foreign exchange unit per $US, index 100 = January 2, 2015)

RussiaMexicoColombia

JPM EM Currency Index

Note: The JPMorgan Chase & Co. EM Currency Index is inverted to provide the same interpretation as for the other currency indexes.Source: Bloomberg L.P.

South Africa

OFR Financial Stress Index (right axis) Goldman Sachs Financial Conditions Index (left axis)

OFR MARKETS MONITOR January/February 2016 | 4

The Federal Reserve raised the federal fundstarget range and reinforced expectations for agradual pace of rate hikes.

At its December 2015 policy meeting, the Federal Open Market Committee (FOMC) increased the federal funds target range to 0.25 percent to 0.50 percent. This increase was the first in almost 10 years. The market reaction has been orderly. The effective fed funds rate has largely traded within the new range, guided by the Federal Reserve rates for its reverse repo facility and excess reserves (Figure 8). Other short-term market rates also have moved higher since mid-December (Figure 9). Overnight Treasury general collateral financing (GCF) repurchase agreement rates spiked at year-end, driven by dealer balance-sheet contraction. In January, GCF rates receded to more stable levels as funding conditions returned to normal. The three-month USD London Interbank Offered Rate (LIBOR), which had been rising since the end of October, also stabilized in mid-January. The market-implied path of the Federal Reserve’s policy rate flattened further (Figure 10). Market participants saw the January FOMC statement as more accommodative than the December statement. They interpreted the statement as reflecting increased downside risks to the outlook for U.S. growth and inflation. Futures markets imply that market participants now expect the FOMC to raise rates just 25 basis points in 2016. By contrast, the median FOMC forecast in December projected 100 basis points in increases during 2016.

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Figure 8: Effective federal funds rate trading in new target rangeOvernight interest rates (percent)

Interest on Excess ReservesFederal Funds Effective RateReverse Repo Facility Rate

Source: Bloomberg L.P.

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Figure 9: Funding rates rose and stabilized following Fed rate hikeShort-term interest rates (percent)

DTCC GCF Treasury Repo Index 3-month LIBOR 1-month T-bill

Source: Bloomberg L.P.

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Figure 10: Market-implied path of Fed Policy Rate flattened further3-month Eurodollar futures (percent)

February 5, 2016December 15, 2015

Federal Funds Target Rate Expectations by FOMC

Note: FOMC expectations are from the 12/16/2015 meeting.Sources: Bloomberg L.P., Federal Reserve Board

As of:

OFR MARKETS MONITOR January/February 2016 | 5

The Bank of Japan surprised markets by adopting a negative interest rate. The Bank of Japan adopted a negative interest rate on new excess reserves at its January meeting. The move was significant and unexpected. The central bank explained that the further declines in oil prices and uncertainty stemming from the Chinese economy have made raising the country’s very low inflation rate more difficult. Bank of Japan officials had earlier said that they would not introduce negative policy rates. Following the news, the Japanese yen depreciated sharply, but has since retraced. The 10-year Japanese government bond yield fell 10 basis points, a six standard deviation move (Figure 11) and recently reached negative levels. In addition to communications from the Bank of Japan and Federal Reserve in January being more accommodative than expected, markets also are pricing in further easing by the European Central Bank at its March policy meeting.

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Figure 11: Japanese yen and yields fell after Bank of Japan rate cutPercent and currency spot price

USD/JPY (right axis)Japanese Government Bond 10-year yield (left axis)

Source: Bloomberg L.P.

OFR MARKETS MONITOR January/February 2016 | 6

FEATURE: Hedge Fund Exposure to Credit Markets (data as of September 30, 2015)

Reports in December of substantial investor redemptions at certain funds that manage high-yield credit portfolios intensified concerns about credit quality and market liquidity. The redemptions hit both mutual funds, notably Third Avenue Management’s Focused Credit Fund, and hedge funds, notably Stone Lion Capital Partners.1 These events highlighted the liquidity mismatch risks inherent in some asset management activities. Liquidity mismatch occurs when funds promise prompt, including daily, liquidity to investors while investing in relatively illiquid assets, such as certain high yield bonds and leveraged loans. It is important to note that the large majority of hedge funds, unlike mutual funds, do not offer daily redemption terms to investors.2 In this feature, we examine hedge fund exposures to credit markets and the use of leverage by these funds, using non-public Form PF data. OFR analysis shows that, not surprisingly, several individual hedge funds have material net long positions in credit markets. More importantly, several such funds are much larger and more highly leveraged than the funds noted above that recently had redemptions. Credit market exposures data available for analysis in Form PF include long and short holdings of corporate bonds (including high-yield, investment grade, non-convertible, and convertible bonds), loans, and credit derivatives (single name credit default swaps [CDS], index CDS, and exotic CDS). We limited our focus to the largest hedge funds, a group of more than 1,600 funds managed by advisors required to file Form PF quarterly.3 As of the third quarter of 2015, these hedge funds had a total long exposure of $777 billion, comprising $309 billion of bonds, $134 billion of loans, and $334 billion of credit derivatives (Figure 12). These positions were largely offset by short exposures totaling $506 billion, comprising $46 billion of bonds, $2.5 billion of loans, and $458 billion of credit derivatives. The net exposure, or the aggregate long minus the aggregate short position, was $271 billion (Figure 13).4 This exposure is relatively small compared to the overall U.S. corporate bond market ($8.2 trillion) and to the total gross assets of these hedge funds ($5 trillion).

Figure 12: Notional credit exposures, long value ($ billions)

CDS Loans

Note: CDS includes single name, index, and exoticSources: SEC Form PF, OFR analysis

High-yield Investment grade

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Figure 13: Notional credit exposuresLong, short, net ($ billions)

LongShort

Sources: SEC Form PF, OFR analysis

Net

1 See Rob Copeland, “Stone Lion Capital Partners Suspends Redemptions in Credit Hedge Funds,” Wall Street Journal, December 11, 2015. 2 Hedge funds use redemption restrictions, such as initial lockups and redemption notice periods, to manage investor redemption risk. Measures, such as gates, suspensions and side pockets are additional tools available to hedge funds. 3 Large hedge fund advisors must file quarterly Form PF reports detailing portfolio exposures for each “qualifying” hedge fund that an advisor manages. Broadly speaking, qualifying hedge funds are funds that have at least $500 million in net assets under management (individually or in combination with any feeder funds and parallel funds). 4 With respect to credit derivative exposures, a long CDS exposure constitutes selling default protection and a short CDS exposure constitutes buying default protection.

OFR MARKETS MONITOR January/February 2016 | 7

However, several hedge funds had material net long positions. To better analyze this group, we segmented the Form PF hedge fund data into a smaller group of funds with net long exposures (based on corporate bond and loan positions) that approximate 50 percent or more of a fund’s net assets. We excluded any funds with net assets of less than $500 million. This filter resulted in slightly more than 100 funds that manage approximately $180 billion in total net assets and $435 billion in total gross assets. These funds had a net long exposure to corporate bonds and loans of $188 billion and a net short exposure to credit derivatives of $17 billion. Overall, these funds had relatively low leverage. The median leverage ratio (gross assets divided by net assets) of 1.3 for the sample was below the overall median ratio of 1.9 for the broader universe of hedge funds. However, the 95th percentile leverage ratio for the sample was almost 5, and the five most leveraged funds in the sample had a simple average leverage ratio of 10.4.5 In short, many of these credit-focused hedge funds are much larger and much more leveraged than comparable mutual funds that face regulatory restrictions on traditional balance sheet leverage and on the amount of illiquid assets held. Further, the combination of leverage and less liquid asset holdings may create vulnerabilities that can threaten financial stability.6

5 Form PF is confidential, nonpublic data. Therefore, Form PF information provided above is aggregated, rounded, and/or masked to avoid potential disclosure of proprietary information of individual Form PF filers. 6 See Office of Financial Research, 2015 Financial Stability Report, Washington pp. 15-16 for a discussion on market liquidity risk.

OFR MARKETS MONITOR January/February 2016 | 8

LATEST LEVEL 30-DAY CHANGE 30-DAY CHANGE YTD CHANGE 12-MONTH RANGE**(2/5/2016) (bps or %) (standard (bps or %)

deviations)*

EQUITIESS&P 500 1880 -6.8% -1.7 -8% ––O–––––––––––––––––––|––––––––U.S. KBW Bank Index 61 -13.9% -2.1 -16% ––O–––––––––––––––––|––––––––––Russel 2000 986 -11.2% -2.1 -13% O–––––––––––––––––––|––––––––––Nasdaq 4363 -10.8% -1.7 -13% O––––––––––––––––––––|–––––––––Euro Stoxx 50 2879 -9.4% -1.8 -12% O–––––––––––––––––|––––––––––––Shanghai Composite 2763 -15.9% -1.4 -22% –O–––––––––––|–––––––––––––––––Nikkei 225 16820 -8.5% -1.5 -12% –––––O––––––––––––––|––––––––––Hang Seng 19288 -9.0% -1.3 -12% ––O––––––––––––––|–––––––––––––FTSE All World 242 -6.2% -1.5 -8% –––O––––––––––––––––|––––––––––

RATESU.S. 2-Year Yield 0.72% -29 -1.1 -33 –––––––––––|O––––––––––––––––––U.S. 2-Year Swap Rate 0.82% -32 -1.1 -36 –––––––––O––––|––––––––––––––––U.S. 10-Year Yield 1.84% -40 -1.4 -43 O––––––––––––––|–––––––––––––––U.S. 10-Year Swap Rate 1.75% -39 -1.3 -44 –O–––––––––––––––|–––––––––––––U.S. 30-Year Yield 2.67% -33 -1.3 -35 ––––––––O––––––––|–––––––––––––U.S. 2y10y Spread 111 -11 -0.6 -11 O––––––––––––––|–––––––––––––––U.S. 5Y5Y Inflation Breakeven 1.62% -24 -1.0 -19 ––––O–––––––––––––|––––––––––––U.S. 5Y5Y Forward Rate 2.59% -26 -0.8 -26 –––––O–––––––––|–––––––––––––––Germany 10-Year Yield 0.30% -24 -1.1 -33 –––––––O––––––––|––––––––––––––Japan 10-Year Yield 0.03% -23 -1.3 -24U.K. 10-Year Yield 1.56% -32 -1.2 -40 –––O––––––––––––|––––––––––––––Euro area 5Y5Y Inflation Breakeven 1.52% -12 -1.2 -16 ––O––––––––––––––|–––––––––––––

FUNDING1M T-Bill Yield 0.21% 1 0.1 9 –––––––|––––––––––––––––O––––––DTCC GCF Treasury Repo 0.50% 2 0.2 -14 ––––––––|––––––––––––––O–––––––3M Libor 0.62% 0 0.1 1 –––––––|––––––––––––––––––––––OLibor-OIS Spread 23 0 0.0 0 ––––––––––|–––––––––––––––O––––EURUSD 3M CCY Basis Swap -21 -1 0.0 -2 ––––––––––––––––––––––––|––O–––

U.S. MBSFNMA Current Coupon 2.62% -37 -1.3 -38 ––O––––––––––––|–––––––––––––––FHLMC Primary Rate 3.72% -29 -1.3 -29 ––––––––O––––––––|–––––––––––––

CREDITCDX Investment Grade 5-Year CDS Spread 110 19 1.4 21 –––––––––|–––––––––––––––––––O–CDX High Yield 5-Year CDS Spread 529 45 0.4 55 ––––––––––|–––––––––––––––O––––CDX Itraxx Euro 5-Year CDS Spread 107 25 1.7 30 ––––––––––|–––––––––––––––––––OU.S. 5-Year Sovereign CDS Spread 20 3 0.4 3 –––––––––––|––––––––––––––––––O

IMPLIED VOLATILITYVIX Index 23 21% 0.9 28% –––––|––––––O––––––––––––––––––V2X Index 30 15% 0.6 36% ––––––––|–––––––O––––––––––––––VDAX Index 28 13% 0.6 34% –––––––––––––|––––––––––––O––––MOVE Index 82 14% 0.8 20% –––––––––––––|–O–––––––––––––––3M2Y Swaption Volatility 63 12% 0.6 13% ––––––––––––––|–––O––––––––––––3M10Y Swaption Volatility 82 10% 0.8 12% –––––––––––––|–O–––––––––––––––DB G10 FX Volatility Index 11 9% 0.8 13% ––––––––––––––|––––O–––––––––––JPM EMFX Volatility Index 13 12% 0.8 10% ––––––––––––––|––––––––––––O–––

FOREIGN EXCHANGE & COMMODITIESU.S. Dollar Index*** 97 -2.4% -1.0 -2% –––––––––––––––|O––––––––––––––EUR/USD 1.12 3.8% 1.3 3% ––––––––––––––|–––O––––––––––––USD/JPY 117 -1.8% -0.6 -3% O––––––––––––––|–––––––––––––––GBP/USD 1.45 -1.2% -0.5 -2% ––––––O––––––––––––|–––––––––––USD/CHF 0.99 -1.8% -0.5 -1% ––––––––––––––|–––––O––––––––––Brent Crude 34 -9.8% -1.5 -12% ––––O––––––––––––––|–––––––––––Gold 1173 8.9% 1.8 11% –––––––––––––––|––––O––––––––––S&P GSCI Commodities Index 292 -5.1% -0.9 -6% –––O––––––––––––––|––––––––––––

EMERGING MARKETSJPM EMFX Index 65 0.1% 0.2 -1% –––––O––––––––––––|––––––––––––MSCI Emerging Market Equity Index 740 -3.8% -0.6 -7% ––––O––––––––––––|–––––––––––––CDX EM 5-Year CDS Spread 375 12 0.2 18 –––––––––––|––––––––O––––––––––

* 30-Day change standard deviations based on monthly data from January 1994 or earliest available thereafter.** Trailing 12-month range. Latest (O); Mean ( | ).*** Dollar index from Bloomberg (ticker: DXY); averages the exchange rates between the U.S. Dollar and major world currencies.Sources: Bloomberg L.P., OFR analysis

Selected Global Asset Price Developments

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U.S. T reasury yields and yield curve

S ource: Bloomberg L.P .

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S ource: Bloomberg L.P .

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S ource: Haver Analytics

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U.S. corporat e credit gross issuance ($ billions)

S ource: S ecurities Industry and Financial Markets Association, S tandard & Poor'sLeveraged Commentary & Data

Investment Grade High Yield Leveraged Loans

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High Yield Leveraged Loans

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Leveraged loan issuance by use of proceeds (percent )

Note s: 2016 is ye ar-to-date as of Fe bruary 5th.S ource: S &P LCD, OFR Analysis

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Primary and Secondary Mortgage Markets

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MBS yield and opt ion-adjust ed spread t o U.S. T reasurysecurit ies

S ource: Bloomberg L.P .

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S ource: Bloomberg L.P .

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Note s: Inde x 100 = Fe bruary 01, 2015S ource: Bloomberg L.P .

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S ource: Haver Analytics

Prime Subprime

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Equity Markets

Global equit y indices

Note s: Inde x = Fe bruary 01, 2015S ource: Bloomberg L.P .

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Note s: Inde x 100 = Jan 1, 2000S ource: Bloomberg L.P .

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Nov2015

Feb2016

12

14

16

18

20

2.3

2.5

2.7

2.9

3.1

Price-to-Book 10YR Avg

Price-to-Earnings 10YR Avg

S&P 500 cyclically adjust ed price-t o-earnings (CAPE) rat io

Note s: CAPE is the ratio of the monthly S&P 500 price le ve l to trailing 10-ye arave rage e arnings (inflation adjuste d)S ource: Haver Analytics, OFR analysis

1920 1940 1960 1980 20000

10

20

30

40

50

Two Standard Deviations

Average

S&P 500 implied volat ilit y and opt ion skew(percent )

Note s: Option ske w is the diffe re nce be twe e n 3-month implie d volatility of outof the mone y puts and calls with strike s e qual distance from the spot price (+/-20% ). Highe r value s re fle ct gre ate r de mand for downside risk prote ction.S ource: Bloomberg L.P .

VIX 80% - 120% Skew

Feb2015

May2015

Aug2015

Nov2015

Feb2016

5

15

25

35

45

5

Volatility

Implied volat ilit y by asset class (z-score)

Note s: Note : Z-score re pre se nts the distance from the ave rage , e xpre sse d instandard de viations. Standardization use s data going back to Jan 1, 1993.S ource: Bloomberg L.P .

U.S. Equities (VIX) Global Currencies (JPMVXYGL)U.S. Treasuries (MOVE) Average

Feb2015

May2015

Aug2015

Nov2015

Feb2016

-2

-1

0

1

2

3

Realized volat ilit y by asset class (z-score)

Note s: 30 Day re alize d volatility. Equitie s base d on S&P 500 inde x, inte re strate s base d on we ighte d ave rage of T re asury yie ld curve , FX base d on we ightsfrom JPMVXY inde x. Standardization use s data going back to Jan 1, 1993.S ource: Bloomberg L.P ., OFR Analysis

Global FX U.S. Interest Rates U.S. EquitiesAverage

Feb2015

May2015

Aug2015

Nov2015

Feb2016

-1

0

1

2

3

4

Volat ilit y risk premium by asset class (percent )

Note s: 1-month option-implie d volatility minus 1-month mode l-pre dicte dvolatility. T he latte r is compute d base d on re alize d volatility, using a he te ro-autore gre ssive mode l with 1, 5, and 22 day lags. U.S. Inte re st Rate s re pre se ntsthe ave rage volatility risk pre mium of 2- and 10-ye ar swap rate s. Equitie s base don S&P 500 inde x. Curre ncie s base d on we ights from JPMVXYGL Inde x. S ource: Bloomberg L.P ., OFR Analysis

U.S. Equities U.S. Interest RatesGlobal Currencies

Feb2015

May2015

Aug2015

Nov2015

Feb2016

-20

0

20

40

Slopes of implied volat ilit y curves(basis point s)

Note s: 7-day moving ave rage . Slope re pre se nts diffe re nce be twe e n 1ye ar and1month maturitie s. G10 FX base d on we ights from De utsche Bank's CVIX inde x.S ource: Bloomberg L.P ., OFR Analysis

G10 FX (Left Axis) S&P 500 (Left Axis)2Y USD Swaption Rate (Right Axis)10Y USD Swaption Rate (Right Axis)

Feb2015

May2015

Aug2015

Nov2015

Feb2016

-1000

-800

-600

-400

-200

0

200

400

600

800

-50

-40

-30

-20

-10

0

10

20

30

40

Opt ion skew by asset class (z-score)

Note s: Option ske w is the diffe re nce be twe e n 3-month implie d volatility of outof the mone y puts and calls with strike s e qual distance from the spot price (+/-10% ). Highe r value s re fle ct gre ate r de mand for downside risk prote ction.Equitie s re pre se nts S&P500 inde x. Inte re st rate s re pre se nt we ighte d ave rageske w of T re asury future s curve . Curre ncie s re pre se nt dollar ske w against majorcurre ncie s base d on JPMVXY inde x we ights. Z-score standardization use s datagoing back to Jan 1, 2006.S ource: Bloomberg L.P ., OFR Analysis

U.S. Equities U.S. Interest RatesGlobal Currencies Average

Feb2015

May2015

Aug2015

Nov2015

Feb2016

-3

-2

-1

0

1

2

3

Volat ilit y of equit y volat ilit y

Note s: VVIX Inde x me asure s the e xpe cte d volatility of the 30-day forward priceof the CBOE VIX Inde x.S ource: Bloomberg L.P .

Feb2015

May2015

Aug2015

Nov2015

Feb2016

60

80

100

120

140

160

180

6

Advanced Economies

T wo-year sovereign bond yields (percent )

S ource: Bloomberg L.P .

US Germany UK Japan

Feb2015

May2015

Aug2015

Nov2015

Feb2016-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

T en-year sovereign bond yields (percent )

S ource: Bloomberg L.P .

US Germany UK Japan

Feb2015

May2015

Aug2015

Nov2015

Feb2016

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Breakeven inflat ion (percent )

S ource: Bloomberg L. P .

US 10y Germany 10y UK 10y Japan 10y

Feb2015

May2015

Aug2015

Nov2015

Feb2016

0

1

2

3

10-year Euro Area periphery government bond spreadsover German Bunds (basis point s)

S ource: Bloomberg L.P .

Italian Govt (Left Axis) Spanish Govt (Left Axis)Portuguese Govt (Left Axis) Greek Govt (Right Axis)

Feb2015

May2015

Aug2015

Nov2015

Feb2016

40

80

120

160

200

240

280

320

360

0

400

800

1200

1600

2000

Major currency indexes

Note s: Fore ign curre ncie s incre ase s re pre se nt gre ate r stre ngth ve rsus the USDollar. DXY incre ase s re pre se nt gre ate r stre ngth of the US Dollar ve rsus abaske t of major world curre ncie s. Inde x 100 = Oct 1, 2014.S ource: Bloomberg L.P .

DXY (US Dollar) Euro British PoundJapanese Yen Swiss Franc

Feb2015

May2015

Aug2015

Nov2015

Feb2016

80

90

100

110

U.S. dollar long posit ioning vs. major currencies(net speculat ive posit ions, t housands of cont ract s)

Note s: Positive value s re pre se nt ne t U.S. dollar long positions. T he DollarInde x (DXY) is a future s contract base d on the U.S. dollar's value against abaske t of major world curre ncie s. T o e xpre ss a U.S. dollar long position in anon-U.S. dollar contract, the contract must be shorte d.S ource: Bloomberg L.P .

DXY (US Dollar) Euro British PoundJapanese Yen Total

Feb2015

May2015

Aug2015

Nov2015

Feb2016

-100

0

100

200

300

400

7

Emerging Markets

Emerging market currencies(foreign currency unit s per $US)

Note s: Incre asing value s indicate we ake ning ve rsus the U.S. Dollar. T he J.P.Morgan EM Curre ncy Inde x is inve rte d to provide the same inte rpre tation asothe r curre ncy inde xe s. Inde x 100=Fe bruary 01, 2015.S ource: Bloomberg L.P .

RussiaChina OffshoreBrazilEM Currency Index

Feb2015

May2015

Aug2015

Nov2015

Feb2016

60

70

80

90

100

110

120

130

140

150

160

Spreads t o T reasuries (basis point s)

Note s: EM sove re ign and corporate spre ads to worst come from the dollarde nominate d J.P. Morgan Eme rging Bonds Inde x Global and CorporateEme rging Marke t Bond Inde x. U.S. High-Yie ld Option-adjuste d spre ads comefrom the Bank of Ame rica Me rrill Lynch inde x.S ource: Bloomberg L.P .

EM SovereignsEM CorporatesUS Corporate High Yield

Feb2015

May2015

Aug2015

Nov2015

Feb2016

200

300

400

500

600

700

800

900

Equit y price indexes

Note s: Note : Inde x 100 = Fe bruary 01, 2015. T he US e quity inde x is the S&P500 Inde x. T he Chine se e quity inde x is the Shanghai Composite Inde x. T heDe ve lope d Economie s inde x is the MSCI World Inde x and the Eme rgingMarke ts inde x is the MSCI EM Inde x (both are in local te rms).S ource: Bloomberg L.P .

US China Developed EconomiesEmerging Markets

Feb2015

May2015

Aug2015

Nov2015

Feb2016

80

90

100

110

120

130

140

150

160

170

Emerging market s local currency bond yields

Note s: Yie lds are de rive d from J.P. Morgan Gove rnme nt Bond Inde x - Eme rgingMarke ts (GBI-EM) and re late d single e ntity inde xe s.S ource: Bloomberg L.P .

EuropeLatin AmericaMiddle East & AfricaAsia

Feb2015

May2015

Aug2015

Nov2015

Feb2016

4

6

8

10

12

One-mont h realized emerging market s volat ilit y (percent )

Note s: Re alize d volatility is the annualize d standard de viation. Hard curre ncysove re ign de bt base d on the J.P. Morgan Eme rging Bonds - Global Price Inde xand curre ncie s base d on a we ighte d ave rage of EM curre ncy re turns against thedollar using we ights from J.P. Morgan VXY-EM curre ncy volatility inde x.S ource: Bloomberg L.P ., OFR Analysis

EM Sovereign Hard Currency Debt EM Currencies

2010 2011 2012 2013 2014 2015 20160

10

20

IIF port folio f lows t o emerging market s ($ billion)

Note s: Data re pre se nts the Institute of Inte rnational Finance 's monthly e stimate sof non-re side nt flows into 30 EM countrie s. Data for late st obse rvations arede rive d from IIF's e mpirical e stimate s using data from a smalle r subse t ofcountrie s, ne t issuance and othe r financial marke t indicators.S ource: Bloomberg

Debt Flows Equity Flows

2010 2011 2012 2013 2014 2015 2016-20

-10

0

10

20

30

40

8

Commodit ies

Major commodit ies prices

Note s: Inde x 100 = Jan 01, 2010S ource: Bloomberg L.P .

Bloomberg Commodities IndexCrude Oil Front Month (Brent) Gold Front Month

2010 2011 2012 2013 2014 2015 20160

50

100

150

200

Crude oil

Note s: WT I and Bre nt are front-month contracts.S ource: Bloomberg L.P .

$/Barrel Million BarrelsWTI (Left Axis)Brent (Left Axis)U.S. Inventories (Right Axis)

2011 2012 2013 2014 2015 201620

50

80

110

140

300

350

400

450

500

550

Oil and nat ural gas fut ures curves

Note s: Data as of Fe b 5th, 2016S ource: Bloomberg L.P ., OFR Analysis

$/barrel $/mmbtu

Brent (Left Axis) Natural Gas (Right Axis)

1mo 2mo 6mo 12mo 24mo 60mo20

30

40

50

60

2.0

2.5

3.0

3.5

Oil supply and demand fact ors

Note s: Global production and consumption are e stimate s by the Inte rnationalEne rgy Age ncy.S ource: Bloomberg L.P .

Million Barrels per Day

Global Production (Left Axis)Global Consumption (Left Axis)US Rig Count (Right Axis)

2010 2011 2012 2013 2014 2015 201685

90

95

100

400

600

800

1000

1200

1400

1600

1800

Speculat ive fut ures posit ioning(t housands of cont ract s)

Note s: Positive value s re pre se nt ne t long positions and ne gative value sre pre se nt ne t short positions.S ource: Bloomberg L.P .

Brent (Left Axis) Gold (Left Axis)Copper (Left Axis) Steel (Right Axis)

Jan2014

Jul2014

Jan2015

Jul2015

Jan2016

-100

-50

0

50

100

150

200

250

-20

-10

0

10

20

30

40

50

Met als spot price indexes

Note s: Inde x 100 = Jan 01, 2010S ource: Bloomberg L.P .

Copper Steel Precious Metals

2010 2011 2012 2013 2014 2015 20160

50

100

150

200

250