Untitled

Nomura | Rates Weekly 22 November 2013

Nomura Securities International Inc.

See Disclosure Appendix A-1 for the Analyst Certification and Other Important Disclosures

Rates Weekly

Rates | North America

US rates can't escape the taper specter 22 NOVEMBER 2013

The tapering fear is back! We argue the Fed will not rush or taper aggressively because they still have to convince us that forward guidance will work as well as QE.

Note: The next Rates Weekly will be published on 12/7 after Thanksgiving.

The latest Fed developments, including the October FOMC minutes and comments

from various Fed speakers, imply that stronger forward guidance will eventually

replace QE. While this may be the end goal in the long-term, as of now, we question

whether strengthening forward guidance can actually result in the Fed achieving

success in all three mandates (employment, inflation and wealth effect).

In the weekly, we search for clues from the October minutes to assess our Fed

projections going forward (page 5). In particular, we look in detail at how the Fed can

enhance forward guidance (page 6). At this juncture, we don’t believe forward

guidance is a substitute to QE as forward guidance lacks the ability to generate the

same sort of wealth effect which boosts stocks and then growth (page 7).

We believe it is up to the Fed to convince the market participants that stronger

forward guidance will foster employment, prevent disinflation and help the economy

through wealth creation. Until people buy in, the FOMC cannot stop QE fully.

Special Topics: We recap a recent client trip to South Africa and the Middle East

(page 8) and review the September TIC data (page 9). Lastly, we project the FOMC’s

options and believe that tapering is most likely a Q1-14 event (page 10).

Market Focus:

USTs: We see value in 7yr but cautious of an earlier-than-expected tapering fear.

TIPS: We are in favor of front end TIPS ASW trade and slightly bearish on real yield

Futures: We provide a summary on December future calendar roll.

MM: Further discussion of stronger forward guidance.

Swaps: Recent positioning flush has tightened spreads to an attractive level.

Europe: We like paying 3yr swaps and long 5yr ASW in UK rates.

AEJ: We review and restate our positive carry spread trades.

$Bloc: We look at the new 20yr ACGB and recommend shorting 5s CANS.

Trade Portfolio Update

Despite stopping out of our long 10yr UST vs. Bunds and 5s7s UST flattener, our

portfolio managed to finish the week slightly in the green. We restocked with a short

in 2s5s10s CAN PCA-weighted fly, long 30yr spreads, and long Apr17s TIPS ASW.

Trade Watch: We stopped out of our long 10yr ACGB vs. CAN, but our two other

existing trade watches have performed. This week we add a small long 10yr spreads

The Week Ahead Calendar

SUPPLY: Next week, supply includes 2yr, 5yr and 7yr UST auctions.

CENTRAL BANK POLICIES: Next week there is a light schedule for central bank

policy makers, with a few speakers from Monday through Thursday.

ECONOMIC DATA: Investors should watch for a few regional Fed activities survey

results, and be mindful of consumer confidence index on Tuesday.

Fixed Income Research

Strategists

George Goncalves +1 212 298 4216

[email protected]

Stanley Sun +1 212 667 1236

[email protected]

Andy Chaytor +44 20 7103 1219

[email protected]

Martin Whetton +61 2 8062 8611

[email protected]

Vivek Rajpal +65 6433 6555

[email protected]

Jeffrey Young +1 212 667 1389

[email protected]

David Thielke +1 212 667 1389

[email protected]

Penglu Zhao +1 212 667 9516

[email protected]

This report can be accessed electronically via: www.nomura.com/research or on Bloomberg (NOMR)

mailto:[email protected]









2

Contents

US Rates Weekly Outlook 3

The Week Ahead (Nov 25 - Nov 29): Key Events for Rates Investors 3

The Week Ahead (Dec 2 - Dec 6): Key Events for Rates Investors 4

Rates Macro View 5

US rates cannot escape the taper specter, for now 5

Special Topics 8

Special Topic: Thoughts from South Africa and the Middle East 8

Special Topics: US TIC Large Foreign Net Purchases 9

Special Topics: Policy Evolution and Fed Paths 10

Market Focus 12

US Rates 12

European Rates 15

AEJ Rates 16

Dollar-Bloc Rates 17

Trade Portfolio 18

Trade Idea: Long 4/16s & 4/17s TIPS ASW 18

Rates Trade Watch 19

Trade Watch Tracker – Sub-Portfolio 19

Current Rates Trade Portfolio 20

Appendix 21

QE4 Round 11 - POMO Schedule 21

Nomura US, Canada and Australia Economic Rates Forecasts versus Forward Yields 22

Auction Tables 23

Recent Rates Strategy Publications 26


3

US Rates Weekly Outlook

The Week Ahead (Nov 25 - Nov 29): Key Events for Rates Investors

Note: Highlighted indicators mark critical data/events

Source: Nomura

Monday Nov 25 Tuesday Nov 26 Wednesday Nov 27 Thursday Nov 28 Friday Nov 29

Data

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US: Pending Home Sales MoM (10:00am): [Oct] {2.00%, n.a., -5.60%}

Canada: Bloomberg Nanos Confidence (10:00am): [Nov]

US: Dallas Fed Manf. Activity (10:30am): [Nov] {4.4, n.a., 3.6}

US: Sept./Oct. Housing Starts Released (8:30am)

US: Sept/Oct Building Permits (8:30am)

US: S&P/CS 20 City MoM SA (9:00am): [Sep] {0.90%, n.a, 0.93%}

US: Consumer Confidence Index (10:00am): [Nov] {72.1, n.a., 71.2}

US: Richmond Fed Manufacturing Index (10:00am): [Nov] {3, n.a., 1}

UK: GDP QoQ (4:30am): [3Q P] {0.8%, n.a., 0.8%}

US: MBA Mortgage applications (7:00am): [Nov]

Canada: Average Weekly Earnings (8:30am): [Sep]

US: Initial Jobless Claims (8:30am)

US: Durable Goods Orders (8:30am): [Nov] {-1.50%, n.a., 3.70%}

US: Chicago Fed Nat Activity Index (8:30am) [Oct] {0.10, n.a., 0.14}

US: Chicago Purchasing Manager (9:45am): [Nov] {60, n.a., 65.9}

US: Univ. of Michigan Confidence (9:55am): [Nov] {73, n.a., 72}

US: Leading Index (10:00am): [Oct] {0.00%, n.a., 0.70%}

Japan: Retail Trade YoY (6:50pm): [Oct]

Germany: CPI Saxony (3:00am): [Nov]

Germany: Unemployment Rate (3:55am): [Nov] {6.9%, n.a., 6.9%}

Eurozone: Money Supply (4:00am): [Oct]

Eurozone: Business Climate Indicator (5:00am): [Nov]

Germany: CPI (8:00am): [Nov]

Canada: Current Account Balance (8:30am): [3Q]

France: Jobseekers Net Change (12:00pm): [Oct]

Japan: Jobless Rate (6:30pm): [Oct]

Japan: National CPI YoY (6:30pm) [Oct]

Japan: Industrial Production MoM (6:50pm) [Oct P] {2.0%, n.a., 1.3%}

IT: Unemployment Rate (4:00am): [Oct]

IT: CPI (5:00am): [Nov]

Eurozone: Unemployment Rate (5:00am): [Oct] {12.2%,n.a., 12.2%}

Canada: Quarterly GDP Annualized (8:30am): [3Q] {2.5,n.a., 1.7}

Op

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US: US Fed to purchase USD2.75-3.50 Bln Notes (11:00am) (Feb.21- Nov.23) US: 3m & 6m Bills Auction (11:30am)

US: $32bn 2y Notes Auction (1:00pm)

AU: Bond Auction (7:00pm)

Japan: 40y Bonds Auction (10:45pm)

IT: Bonds Auction (5:00am)

US: US Fed to purchase USD1.25-1.75 Bln Notes (11:00am) (Feb.36 – Nov.43)

US: 4w Bills Auction (11:30am)


Germany: 10yr Bonds Auction (5:30am)

Canada: 30y Bonds Auction (12:00pm)



IT: Bonds Auction (5:00am)

UK: Bonds Auction (5:30am)

Po

licy

Spain: BoS Governor Linde Speaks (7:45am)

Japan: BoJ October 31 meeting minutes (6:50pm)

Eurozone: ECB’s Mersch Speaks (7:30am)

UK: BoE’s Bulley Speaks (8:45am)

Eurozone: Asmussen speaks (1:00pm)

Japan: BoJ Shirai speaks (8:30pm)

UK: BoE’s Gracie Speaks (4:20pm)

Eurozone: ECB’s Asmussen speaks (1:00pm)

UK: Carney Speaks (5:30am)


4

The Week Ahead (Dec 2 - Dec 6): Key Events for Rates Investors

Note: Highlighted indicators mark critical data/events

Source: Nomura

Monday Dec 02 Tuesday Dec 03 Wednesday Dec 04 Thursday Dec 05 Friday Dec 06

Data

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Eurozone: PMI Manufacturing (4:00am): [Nov]

US: Markit US PMI Final (8:58am): [Nov]

US: ISM Manufacturing (10:00am): [Nov] {55, n.a., 56.4}

US: Construction Spending (10:00am): [Oct]

AU: BoP Current Account Balance (7:30pm): [3Q]

AU: Retail Sales MoM (7:30pm): [3Q]

Eurozone: PPI (5:00am): [Oct]

US: ISM new York (9:45am): [Nov]

US: IBD/TIPP Economic Optimism (10:00am): [Dec]

US: Total Vehicle Sales (5:00am): [Nov] {15.70m, n.a., 15.15m}

AU: GDP (7:30pm): [3Q]

Eurozone: PMI (4:00am)

Eurozone: GDP SA QoQ (5:00am): [3Qp]

Eurozone: Retail Sales MoM (5:00am): [Oct]

US: MBA Mortgage Applications (7:00am): [Nov]

US: ADP (8:15am): [Nov] {175K, n.a., 130K}

Canada: Int’l Merchandise Trade (8:30am): [Oct]

US: Trade Balance (8:30am): [Oct] -$40.0B, n.a., -0.44B}

Canada: BoC Rate Decision (10:00am): [Dec]

US: ISM Non-Manf. Composite (10:00am): [Nov] {55.1, n.a., 55.4}

US: Sept./Oct. New Home Sales Released Jointly due to shutdown (10:00am)

US: New Homes Sales (10:00am): [Oct]

AU: Trade Balance (7:30pm): [Oct]

US: Household Change in Net Worth

France: Unemployment Rate (1:30am): [3Q]

UK: Unemployment Confidence (4:30am): [Nov]

UK: BoE Bank Rate (7:00am): [Dec] {0.50%, n.a., 0.50%}

US: Challenger Job cuts (7:30am): [Nov]

Eurozone: ECB Announces Interest Rates (7:45am): [Dec]

Canada: Building Permits (8:30am): [Oct]

US: GDP QoQ (8:30am): [3Q S] {3.10%, n.a., 2.80%}

US: Bloomberg Consumer Comfort (9:45am): [Dec]

Canada: Ivey Purchasing Managers Index (10:00am): [Nov]

US: Factory Orders (10:00am): [Oct] {-0.60%, n.a., 1.70%}

Russia: CPI [Nov]

France: Trade Balance (2:45am): [Oct]

UK: BoE/GFK Inflation Next 12 Mths (4:30am): [Nov]

US: Change in Nonfarm Payrolls (8:30am): [Nov] {185K, n.a., 204K}

US: Unemployment Rate (8:30am): [Nov] {7.2%, n.a., 7.3%}

US: Personal Income (8:30am): [Oct] {0.3%, n.a., 0.5%}

Canada: Unemployment Rate (8:30am): [Nov]

US: Univ. of Michigan Confidence (9:55am) : [Dec]

US: Consumer Credit (3:00pm): [Oct]

Op

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s

US: 3m & 6m Bills Auction (11:30am)

UK: Bonds Auction (5:30am)

US: 4w Bills Auction (11:30am)

China: 5y Bonds Auction (10:00pm)

Germany: Bonds Auction (5:30am)

Russia: Bonds Auction (7:00am)


Spain: Bonds Auction (4:30am)

France: Bonds Auction (4:50am)

Po

licy

Eurozone: ECB’s Constancio & Honohan speaks (3:30am)

US: Fed’s Plosser speaks – Hawkish (7:00pm)

AU: RBA cash rate target (10:30pm)

UK: BoE Publishes Record of Financial Policy Committee (4:30am)

Japan: BoJ Board Member Sato Speaks (8:30pm)

US: Federal Reserve releases Beige Book (2:00pm)

Canada: Bank of Canada Rate Decision (10:00am)

UK: BoE Rates Decision (7:00am)

Eurozone: ECB Rates Decision (7:45am)

US: Fed’s Lockhart speaks - Dovish

(8:15am)

Eurozone: ECB’s Draghi speaks (8:30am)

US: Fed’s Fisher speaks – Hawkish (12:15pm)

IT: BoI Report on Balance Sheet Aggregates (5:00am)

US: Fed’s Plosser speaks – Hawkish (9:30am)

US: Fed’s Evans to speak – Dovish

(3:00pm)


5

George Goncalves +1 212 298 4216 [email protected]

Jeffrey Young +1 212 667 1389 [email protected]

David Thielke +1 212 667 1389 [email protected]

Rates Macro View

US rates cannot escape the taper specter, for now

The tapering fear is back! We argue the Fed will not rush or taper aggressively

because they still have to convince us that forward guidance will work as well as QE.

It’s been a rough two weeks as rates markets continue to trade on their back-foot because of

tapering fears. In our prior weekly (see link pages 5-8) we suggested the tough uphill battle for

the Fed will come as a result of them trying to assure markets rates will remain anchored once

they taper. But, as seen by the price action and odd curve bear steepening moves, it’s clear that

they need more time to convince traders that forward guidance can work as well as QE, G-luck!

In the week ahead for US rates markets, the risk of an earlier-than-expected tapering and

illiquidity of a shortened week could deter some investors from bidding aggressively at the 7yr

auction. On the other hand, we expect much less saga to unfold for the 2yr and 5yr auctions

(page 12). In TIPS land, the 10yr TIPS had a very strong auction despite tails risks of a

December tapering and 10-year real should do well versus 5yr TIPS (page 12).

We hope that after a violent flushing of “long spreads” positions, they will be able to go back to

trading on fundamentals (page 14). Meanwhile, while we wait for the taper-to-forward-guidance

handoff, the front-end continues to look attractive as the Fed markets its message (page 14).

Lastly, we provide our views on the December Treasury futures calendar roll (page 13).

In global rates markets space, as we continue to provide views on the ever more correlated

global rates markets. In this weekly we introduce, in the market focus section, our views that

cover EMEA and AEJ rates. Specifically, we update our views in the UK rates market and

outline some of our favourite local and cross market trades in a rare and fascinating time (see

page 16).

In AEJ, we continue to advocate spread carry trades to ride things out, especially given the

recent FOMC developments. We also take a look at the new 20yr ACGB as well as the

upcoming debt ceiling fight down-under (page 17). In Canadian rates, we recommend to trade

dislocations on the curve while maintaining our neutral view in the market (page 17).

We included three special topics in the weekly (page 8 - 11). First, we provide our thoughts on

a recent client trip to South Africa and the Middle East (page 8). We then review the interesting

September Treasury International Capital (TIC) flows and found that foreign investors became

supportive of US assets after the FOMC’s decision not to taper (page 9). Lastly, we outline our

Fed policy evolution views and believe that tapering is most likely a Q1 2014 event (page 10).

FOMC Minutes Recap: Can Forward Guidance Help the Fed Achieve its 3 Mandates?

The October FOMC Minutes were perceived as being more hawkish and as per scenario 1 of

our policy evolution report (page 11), that is one of the criteria in our opinion that needs to

happen if the Fed is about to taper in December (i.e., they need to flag the market ahead of

time). Now having said that, there is nothing in the minutes that demonstrates a decision has

been made (see pages 10) and, furthermore, the Fed is actually exploring additional policy

options to anchor rates.

Perhaps the Fed wants to sound tough to prevent speculative behavior running amok. That

surely seems to be working for long-end duration players as nobody wants to touch anything

beyond the 5yr point. However, even after slight pullback, its equities that are going into vertical

phase lately and we argue that’s where the speculative flows from QE are heading.

The Fed needs to bite the bullet one day and taper and, in our view, it will be equity investors

that will be more let down that us bond folks (who have been moving to the sidelines for months

already and in many ways having been pricing in tapering). The one-trillion dollar question is

why the Fed would start the tapering process in December before financial and corporate year-

ends and why do such a thing one week before Christmas. (Evidence shows large amount of

shopping keeps getting further delayed, think last minute shoppers and post holiday sales

around Christmas.)

Bernanke has always viewed QE as a "credit easing" measure where QE worked to lower risk

premium by pushing long-term interest rates lower. But, if they are ignoring fact that QE also




http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=643841


6

displaced investors and pushed them into Credit, EM and ultimately into stocks, a quick taper

and/or starting with large cuts (greater than $5-10bn) could derail risk. If that were to happen at

the end of the year it makes no logical sense given that financial conditions would worsen at an

odd time in the calendar and economic evidence of a self-sustaining recovery still fleeting.

The October FOMC minutes revealed valuable clues on possible changes in the upcoming

meetings. Overall, there were not huge surprises in the minutes, and the Fed continued to

weigh QE vs. forward guidance. While the voices for a tapering of QE are growing louder, a

consensus is also forming to strengthen forward guidance (see link for our economists’ views).

The market took the minutes as slightly hawkish, given the FOMC’s commitment to reduce its

asset purchase if data turns. However, we don’t believe this is anything new and real progress

towards the strengthening of forward guidance should continue to see flows filter up to the 5yr

point. Eventually, 7s and 10s will benefit too, in our opinion, once tapering of QE is finally

implemented. (That is, a post relief rally after Fed starts the tapering process due to sell the

rumor / buy the fact.) One particular point we like to highlight is that while there are still

uncertainties on the exact method to strengthen forward guidance, it seems that there is

consensus in the FOMC that a strengthening is needed. It is not longer a question of “if”, but of

“when” and “how”.

Enhancing forward guidance – through thresholds and committing to lower rates

We do not think the Fed will rush its next move, but it needs to start to prepare the markets for a

world with eventually less QE. Looking at the four potential ways of strengthening guidance

outlined in the FOMC minutes, we are of the view that the Fed is most likely going to either

lower the unemployment rate threshold and/or resort to a quantitative inflation floor.

While Bernanke recently mentioned that progress has been made in the labor market from a

cumulative perspective, weakness still remains. Moreover, as show in Figure 1, the condition of

the labor market remains mixed, and metrics other than the unemployment rate do not paint as

rosy a picture. Specifically, the temporary worker as a percentage of labor force is closing in on

multi-decade highs and shows no signs of losing steam.

In the same vein, if we include marginally attached and part-time workers, the U6 rate of 13.8%

is still significantly above pre-crisis levels and dwarfs the 7.3% unemployment. This suggests

that many of the new jobs have been low quality and part-time in nature. (In the past two

recoveries as temp workers numbers rose, they were coming from the marginally attached; it’s

not really the case now.)

Overall, it’s clear that while the unemployment rate has declined, the quality of the jobs added is

unimpressive. Thus, the Fed should not rush to taper and could address the optically improving

unemployment rate by actually lowering the corresponding threshold of 6.5% on its rates

forward guidance. This could be the most “natural” way to add to forward guidance, given that

the unemployment rate threshold is in place. However, some FOMC members expressed

concern that adjusting existing thresholds damages creditability.

Fig. 1: Not a good sign, overall improvements in the labor market not uniform despite a falling unemployment rate

0.8

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1.2

1.4

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11

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12

20

13

Unemployed, Marginally Attached & Part-time % Temp worker % (RHS)

Source: Nomura, Haver

Fig. 2: Market expectation and Core PCE has been on a downwards trend – ending QE too early should be avoided

0.0

0.5

1.0

1.5

2.0

1.0

1.5

2.0

2.5

3.0

3.5

Jan

-09

Ap

r-0

9

Jul-

09

Oct

-09

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1

Jul-

11

Oct

-11

Jan

-12

Ap

r-1

2

Jul-

12

Oct

-12

Jan

-13

Ap

r-1

3

Jul-

13

Oct

-13

5y5y BEI Core PCE (RHS)%

QE 1 QE 1END

QE 2 QE 2END

QE 3%

Source: Nomura, Bloomberg



7

Wealth Effect – Fed’s third mandate, is it working as planned, can they stop QE fully?

The S&P500 continues to grind higher, tracking the Fed’s balance sheet (Figure 3). Rising

equities have always been correlated with a rise in household wealth, as seen in Figure 4 this

link is particularly strong in recent years, as a re-pricing of stocks driven most of the gains.

In most circumstances, an increase in household wealth leads to an increase in household

spending, and ultimately, economic growth. Unfortunately, as we have seen in recent times, the

increase in household wealth has failed to spur increases in household spending (Figure 5).

Therefore, it is not surprising that the Fed is looking for an exit to this controversial policy.

However, as seen over the summer, tapering had a profound effect on risk allocation and

market dynamics, the mere mention of tapering killed risk appetite and tightened financial

conditions. As shown in Figure 6, despite the new highs, US stocks have continued to lose

support from foreigner investors in recent months. Lackluster earning and reduced foreign

investment have left the Fed, essentially, to become the indirect a buyer of last resort for

equities. (This has been via the portfolio re-balancing channel where displaced fixed income

investors seek returns elsewhere.)

Bernanke recently mentioned that the biggest challenge to tapering is to conduct it in such a

way that causes minimal disruptions to markets, lest we see the same tightening of financial

conditions witnessed over the summer. A combination of higher rates and lower equity markets

would unwind a large benefit of what QE has done for the economy and runs the risk of stunting

growth again, thus the Fed will be careful and taper slowly so to full-fill its third mandate.

Fig. 3: S&P 500 vs. Fed’s balance-sheet: both continue to

rise– printing money it’s the siren call to go long equities.

700

900

1,100

1,300

1,500

1,700

1,900

1,500

2,000

2,500

3,000

3,500

4,000

Jan

-09

Ap

r-0

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-09

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-10

Ap

r-1

0

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Jan

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Ap

r-1

3

Jul-

13

Oct

-13

$bn SOMA Holdings S&P 500 (RHS)

Source: Nomura, Bloomberg, FOMC

Fig. 4: The S&P 500 correlates strongly with overall

household wealth as stocks rose faster than housing prices

-60%

-40%

-20%

0%

20%

40%

60%Difference SPX YoY % change HH Wealth YoY % change

-30%

-10%

10%

30%

De

c-9

0

Sep

-91

Jun

-92

Ma

r-9

3

De

c-9

3

Sep

-94

Jun

-95

Ma

r-9

6

De

c-9

6

Sep

-97

Jun

-98

Ma

r-9

9

De

c-9

9

Sep

-00

Jun

-01

Ma

r-0

2

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c-0

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Sep

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Jun

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Ma

r-0

5

De

c-0

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-06

Jun

-07

Ma

r-0

8

De

c-0

8

Sep

-09

Jun

-10

Ma

r-1

1

De

c-1

1

Sep

-12

Jun

-13

Source: Nomura, Bloomberg, Federal Reserve

Fig. 5: Increased in Household wealth is unfortunately not

translating into higher Household real spending

-4%

-2%

0%

2%

4%

6%

8%

10%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

96 98 00 02 04 06 08 10 12

USA HH Wealth 12m Chg USA HH Real Spending 12m chg (RHS)

Source: Nomura, Federal Reserve

Fig. 6: With reduced foreign investment in US stocks, equity

PE expansion more dependent than ever on the Fed’s QE

-50

0

50

100

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250

11

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Jan

-10

Ap

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Jul-

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Oct

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Jan

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Ap

r-1

1

Jul-

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Oct

-11

Jan

-12

Ap

r-1

2

Jul-

12

Oct

-12

Jan

-13

Ap

r-1

3

Jul-

13

Oct

-13

S&P 500 Price Earnings Ratio

Foreigners into US stocks 12m moving sum$bn

Source: Nomura, Bloomberg, US TIC


8


[email protected]

Special Topics

Special Topic: Thoughts from South Africa and the Middle East

Note: This is a reprint from our First Insights published on November 20 (see link)

This past week we have visited a number of fixed income investors – sovereign wealth funds,

central bank reserve managers and commercial banks – in South Africa and the Middle East

(specifically the UAE and Saudi Arabia). We shared our US and cross-rates market views and

came away with some interesting observations (especially on the Fed and EM), the most

interesting of which we deem worth sharing.

More Fed feedback from the road: Unsurprisingly, much discussion revolved around the path

of rates in coming quarters, if and when the Fed starts to reduce its asset purchases, and

whether the Fed can win back some of the credibility it lost when it decided not to taper in

September, when many thought it seemed fully committed to doing so but then ultimately got

cold feet. One witty client challenged us to conduct the meeting without mentioning the "T" word

(tapering), given how fed up they had become with US monetary policy and all the potential

scenarios.

Many investors expressed an annoyance and the view that the Fed had forgotten “about us”,

given that the rest of the world is beholden to the USD and USTs. Many were also unconvinced

that the Fed can control the yield curve as it once did during Operation Twist in late 2011. A

different investor agreed with us that yield curves will take a hockey-stick shape for years as

private foreign investors pile into the front end and that “somebody else” will need to buy the

back end at steeper levels if the Fed stops its QE quickly. A majority of those we spoke to

agreed that tapering is now a 2014 story, with a handful of clients expecting it to begin after

March (none believed in a December move btw), and at a slow and in an open-ended fashion

(i.e., the Fed will not commit to a tapering pace once it makes a move; we generally agree with

this notion as well).

EM economies won't bail out the West: As our plane dodged electrical storms high over the

desert sands, the clouds rained down an abundance of liquidity which is something we are

rarely greeted with when visiting clients in the Middle East. One bank portfolio manager (PM)

joked that the liquidity had been here since the Fed has been easing, as sourcing cheap USD

funding allows banks in the region to offer more credit. However, this PM said that just like the

rainfall in the Middle East, when it stops, the cost of staying hydrated goes back up. There was

a fear that the widening of spreads and EM FX under-performance during the summer – when

the Fed was just talking about tapering – was child's play. The same PM stated that just

because these countries (and he was speaking in relation to all EM, not just the Middle East)

have become more productive and better-balanced in handling another crisis, did not mean they

would survive unscathed because of all the embedded leverage in EM due to the Fed forcing

investors abroad to pick up yield. Where the irony may be seen, is in the fact that just when the

West wants to see broader balanced growth worldwide, led by faster growing economies, it is

the West's easy money policies that will stunt EM progress at just the time the West needs them

most.

Overall, it is fair to say that sentiment was pretty dour and that we are closer to an end than the

beginning of a new growth cycle. Some we spoke to made our “we are just muddling through”

view and rates staying contained, but in a wider range, seem like a positively bullish view.

However, although they do not think growth justifies valuations, as long as the Fed is in play

and easy money flows from all central banks, most investors are shying away from long-end

duration, in barbell front-end type trades, and staying long credit – all with the hope that the Fed

slowly changes policy (see link for our views used in the trip), or else matters are likely to get

worse again, maybe leaving the Fed having to resort to what the Bank of Japan is doing now.





9

Special Topics: US TIC Large Foreign Net Purchases

Note: This is a reprint from our Capital Flow Monitor published on November 18 (see link).

Foreign investors Net Buyers of UST

In September, foreign investors were net buyer of long-term US fixed income securities by

$36.4bn (including prepays). They were net buyers of USTs by $27.8bn, agencies by $4.3bn

(including net outflow of $10.4bn in repayment adjustments), and corporates by $4.3bn also.

In the USTs space, foreign official institutions continued to be net seller of USTs (by $23.2bn) in

the month of September as the private sector were large accumulators. This is the fourth

consecutive month of net selling of USTs by official accounts, despite a large rally in USTs,

trigged by Larry Summer’s withdrawal and further fueled by the FOMC’s surprising decision to

not begin tapering in September. However, the more nimble private sector clearly reacted to the

bullish USTs news. Flows in other assets by foreign official institutions were muted, as they

were net sellers in agencies (by $0.6bn) and net buyers in corporates ($1.9bn).

Looking at regional breakdowns for USTs, the majority of the purchases came from the

Caribbean ($19.3bn), a proxy for US hedge funds. Looking at CFTC non-commercial positioning

data in UST futures, the net purchase came in the last two weeks of the month, likely a direct

response to the Fed’s decision to not taper (see Rates Positioning Index: CFTC data slowly

returns, as some bearish flows surface, 27 October 2013). The other large regional net buyer of

USTs was Europe ($13.0bn), with large net purchases from France ($12.3bn) and UK ($13.6bn,

with a majority of the flows likely from Asia.

Latin America and Asia were overall net sellers of USTs by $4.9bn and $4.3bn respectively.

However, we believe the selling trend might reverse soon as EM central banks added FX

reserves and the pressure on EM currencies abated in October (see EM Reserves and

Pressure Index Update, 7 November 2013).In Asia, Japan was large net buyers of USTs (by

$10.6bn), as yield spreads got attractive. This was largely within our expectations as we

continued to believe Japanese buyers will eventually return to the USTs market. This trend was

also suggested in the release of Japanese investment in foreign securities by MOF Japan (RPI:

Shutdown = No CFTC data: ushering in bullish flows, 6 October 2013). However, the Japanese

net purchases were offset up net selling from Hong Kong ($6.8bn) and China ($5.6bn).

China was a large net buyer in Agencies (by $6.9bn), a trend we have seen over the past few

months as China switched to higher yielding US fixed income assets. This is also consistent

with our observation back in October that China has been adding its FX reserves as opposed to

other EM countries, which sold foreign currencies (see China Bucks EM Reserve Selling Trend,

15 October 2013). The other noticeable net buyers of agencies include the Caribbean (by

$2.3bn, the same “no-taper” trade) and UK (by $5.2bn, likely flows from China or rest of Asia).

Fig. 1: Foreign investment in USTs (long term)

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80

100

1/2010 7/2010 1/2011 7/2011 1/2012 7/2012 1/2013 7/2013

Foreign private investment in UST

Foreign of f icial investment in UST

($bn)

Source: Nomura, US Treasury

Fig. 2: US investment in foreign securities

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US investment in foreign bonds

US investment in foreign equities

($bn)


The Caribbean and UK were also the large net buyers in the corporate space, with $3.1bn and

$6.4bn net purchases respectively. US agencies and corporates both benefited from the “no-

taper” trade and a rally in rates, but foreign investors’ interest in them were secondary

compared to USTs as the flow data showed. This was expected as USTs (and equities) were

more directly affected by FOMC policy decisions and succession uncertainties.


[email protected]


[email protected]












10

Special Topics: Policy Evolution and Fed Paths

Note: This is a reprint of our Rates Insight published on November 14 (see link).

While some forecasters believe the economy is far out ahead of and on the path to recovery

(from fiscal drag, overseas shocks and recently from the financial tightening); Yellen says “no”

the economy is actually still falling “far short” of its potential. We agree and explore Fed policy

scenarios, market implications & trade ideas.

Over the past five years the Fed has pulled out, what seems like, all the stops moving from

liquidity provider of last resort, to buyer of first resort of MBS and USTs in an attempt to get the

credit channels open and the economy growing at full potential again. Yet, we haven’t achieved

“escape velocity” as the recovery has been more muddle-thru type growth as the economy has

faced some structural changes and has dealt with numerous external (eurozone crisis) and

internal (fiscal drag / fighting in DC) shocks.

This has obviously not helped the Fed’s cause and were it not for all the Fed support, most

would agree that things would have been different for sure. That said, although the Fed controls

the price of money (policy rate) and the quantity of money (QE), these tools have not bolstered

the economy as much as they would have hoped for nor have they been able to force

businesses to invest in the real economy (capital expenditure, human capital etc). Instead, the

financial economy has mostly benefited from Fed policy and in the end the Fed is resorting

(hoping) the wealth effect will get animal spirits going again.

We are at an interesting crossroad, in that Fed leadership is about to transition from a

Bernanke-led Fed to, most likely, Congress confirming Yellen (see link for economists’

thoughts). Meanwhile, calls for a policy mix shift, which we dub “Policy Evolution” have been in

the air lately. The Fed is sending more trial balloons that forward guidance is a substitute for

QE. See page 4 in full document for our thoughts on forward guidance options.

We strategists are skeptical and we get the fact that Fed policy pertains to the US economy,

given the dollar’s status in the world and search for yield. However, changes in Fed policy

transcend all markets/economies, as seen by the rout in carry trades and emerging markets

following recent hints at tapering. Moreover, it’s odd that the Fed moves away from the QE tool

now, when there is still uncertainty over how sustainable the recovery is, while the BOJ sees QE

as the way out after years of deflation.

That said, we hope tapering happens for the right reasons (not just because there is less supply

or operational concerns). We acknowledge that the Fed is determined to find a window of

opportunity to reduce asset purchases and move to new easing methods.

We provide a comprehensive outline and scenario analysis of the several paths that exist and

their corresponding Fed/market implications (see Figure 1 below). We explore conditions

(economic data, fiscal events and Fed views) that need to fall in place for tapering to start at

each of the upcoming FOMC meetings. We continue to believe that the right time for tapering

should be in 2014, with our base case for it to first occur sometime in Q1.

Trade Ideas: A December tapering is not priced-in and would be highly disruptive. We are

nonetheless looking for cheap hedges to our portfolio and are adding TYH4 put structure and

will look to use our one month carry in our portfolio to pay for this trade. Overall, we think

tapering will get dragged out and forward guidance will actually result in yields staying contained

in lower / tighter ranges ahead.


[email protected]

Stanley Sun +1 212 667 1236

[email protected]


[email protected]


[email protected]








11

Fig. 1: Tapering will likely occur in Q1-14 (January at the earliest) but several paths exists as we explore conditions needed for tapering to start at each of the upcoming FOMC meetings

Source: Nomura


12

Stanley Sun +1 212 667 1236

[email protected]

Penglu Zhao +1 212 667 9516

[email protected]

Stanley Sun +1 212 667 1236 [email protected]

Penglu Zhao +1 212 667 9516

[email protected]

Market Focus

US Rates

UST

We see value in 7yr but cautious of an earlier-than-expected tapering fear.

The upcoming month-end 2y/5y/7y UST auctions may be the highlight of the US thanksgiving

holiday week. All eyes will be on the 7yr in our view, as the auction could be a binary event

given recent price action.

We see value in the issue with 5s7s remaining stubbornly steep (Figure 1) but we could also

see investors throw in the towel on the trade heading into year-end. The risk of an earlier-than-

expected Fed tapering in December is the biggest concern for taking a block of 7yrs. This is

especially so because the November jobs’ report one week later might have a major impact on

steering tapering probability for December. For this reason, we expect more concession for the

7yr pre-auction, exacerbated by illiquidity of a shortened week. For the 2yr and 5yr auctions, we

expect much less saga. With the market pricing for further fine-tuning of the Fed’s forward

guidance, the 5yr auction could become boring just like the 2yr but well received regardless.

TIPS

We are in favor of front end TIPS ASW trade and are slightly bearish on real yield

10yr TIPS had a remarkable auction this week, considering a weak CPI report on Wednesday

and the lack of sponsorship for inflation recently (Figure 2). The attractive real yield level as well

as the steep real curve could have drawn interests from dip buyers and provided support for the

auction. The direct bids were the highest since September 2011 and accounted for better than

average non-dealer takedowns. The 10yr breakeven resurged back to Tuesday’s level post

auction, a reflection that the market was seemingly not concerned that the incoming November

job report could resume Fed’s tapering talk and suppress inflation expectation. However, the

continued fund outflows and bearish momentum could limit any further richening on the belly.

Carry investors instead should focus more on front end TIPS ASW trades amid a low realized

October CPI and the risk of a December tapering. Since TIPS ASWs are indexed to a floating

rate, any duration risk is hedged out if tapering does come. Investors could also swap out the

inflation accrual and stay relatively safe if there is a lack of realized inflation out to the TIPS

maturity. We identified cheap carry in the Apr16s and Apr17s and expected both ASWs to

richen as the search for carry continues, especially on any strengthening of forward guidance.

Fig. 1: 5s7s has been on a stretched level for a while.


Fig. 2: TIPS fund outflow could cap further richening on real yield

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$mln

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SeptemberNo Taper FOMC

October NFP






13

Futures

We provide a summary on December future calendar roll (see link for full document)

WN: We are neutral on the WN calendar roll. Asset managers’ longs in the WN contract

remain prominent and have stabilized around just north of 200k contracts. Interestingly in the

latest positioning data, commercials in the WN contract spiked up, likely driven by dealers and

levered funds trimming their shorts. Hence, we expect the usual cheapening pressure on the

WN calendar to remain intact during this roll cycle. With the open interest of the WN contracts at

historical high, we expect the impact on the calendar from asset managers rolling their long to

be meaningful, although the WN calendar may not exhibit much volatility given the front and

back contracts again share the same CTD, Aug39s.

US: We are mildly bearish given the front and back contracts share the same CTD.

Although asset managers have been the dominating longs in US contracts, it was levered funds

that drove the rally back in early October. During that time, levered funds covered all their shorts

while asset managers cut back longs. In contrast, the open interest vs. price relationship has

become much weaker in the selloff since late October, implying the long bias remains in the US

contracts, in our view.

This is bearish for the US calendar during the roll cycle, especially as asset managers actually

got longer during the selloff and their rolling activities should keep a lid on the calendar. From a

valuation perspective, the calendar is rich, both outright and vs. historical averages and,

according to our futures model, mostly thanks to the back contract being cheap. However, given

the front and back contracts have the same CTD, Aug29s, any big moves in the roll is limited.

TY: We are bearish on the calendar. Investors in TY contracts seem to have chased the trend

in price actions, as we see open interest rise in both rallies and selloffs. TY positioning should

be less offside this roll cycle as levered funds are not as long, mirrored by asset managers who

are not as short, and, hence, widening pressure on the calendar. On our futures model, TY

calendar is rich vs. fair value, as well as towards the richer end of the historical range. Any

convergence to fair value of the front contract should put downward pressure on the calendar.

Our bearish stance on TY calendar is encouraged by the cheapening of the front contract CTD

vs. the back contract CTD, likely that the RV community is positioning for a narrowing calendar.

FV: We expect the calendar to richen. Asset managers are actually near the longest ever.

The non-reportable category, which includes the likes of corporate treasurers and central banks,

which are less price-sensitive in our view, are still very net short. With dealers and levered funds

both pretty much flat on FV, this roll cycle may become a tug of war between asset managers

and non-reportables, the two investor categories with the “strong hands”. Therefore, valuation

may be extra important this time and our futures models indicate the FV calendar are cheap vs.

fair value and also hovering around the cheaper end of historical levels.

TU: We are leaning bullish on the TU calendar as shorts roll. The buy-on-dips mentality in

the front end, thanks to the Fed’s forward guidance, is self-evident in the open interest vs. price

action relationship of the TU contracts. Open interest fell as TU got expensive and yield

dropped, likely as a result of investors shunning the contract. In the same vein, the short base

seems to be driving price action as TU are likely used as a rate hedge for carry trades hiding in

higher-yielding fixed income. It is worth noting that positioning is very balanced in TU with all

investor categories being close to home. Our futures model is indicating an average valuation

vs. historicals, along with the CTD spreads, on Libor OAS, also right in the middle of the range.

Fig. 1: Summary of our December Future Calendar Roll

Contract Current Model

(Rich)/

Cheap

Hedge

Ratio

Model Delivery

Date

Delivery

Option Recommendation

WN 46.0 47.7 1.7 1.004 31-Dec-2013 Zero Neutral

US 47.0 45.7 (1.3) 1.001 31-Dec-2013 Zero Mildly bearish, longs roll early

TY 43.0 41.1 (1.9) 1.067 31-Dec-2013 Medium Bearish, longs roll early

FV 27.8 29.2 1.5 1.047 6-Jan-2014 Zero Bullish, shorts roll early

TU 5.8 6.6 0.9 1.130 6-Jan-2014 Zero Mildly bullish, shorts roll early

Source: Nomura, CM E As of 11/15/2013

Source: Nomura, CME


Penglu Zhao +1 212 667 9516

[email protected]





14

Money Markets

Further discussion of stronger forward guidance – a green light for front-end carry?

Front-end rates finished the week essentially flat from last week (EDZ6 +2bp richer w/w). The

lack of any real movement in this space reflects the market consensus that the October FOMC

minutes failed to reveal any new material information.

However, while the minutes were free of any real surprises and there is still no clear consensus

on the fate of QE, they did provide some hints regarding the evolution of forward guidance. The

Fed outlined at least four different methods of potentially strengthening forward guidance, but

there still doesn’t seem to be consensus building for any particular route. However, what stands

out to us is that despite the potentially contentious discussion, the idea of enhanced forward

guidance seems to have essentially no opposition.

At the end of the day, this is all that matters – that forward guidance will be renewed and the

Fed will likely commit to “lower for longer” in one form or another. As shown in Figure 1, blues

maintained the most longs compared with greens (the old favorite) and golds following the

surprisingly positive October NFP print. So to some extent, at least, the market has begun to

price in stronger forward guidance and a move towards “optimal control.”

However, the Fed’s apparent attitude towards forward guidance is that it is a relatively safe

option compared with QE. Thus the front end in and around blues continues to look attractive

given the substantial rolldown and relatively low beta to the rest of the curve in a sell-off.

Swap Spreads

Recent positioning flush has tightened spreads to an attractive level for year-end longs

After a number of quiet weeks, the past week saw dramatic movements in swap spreads as the

entire spreads curve tightened substantially. The moves have certainly raised a few eyebrows

as 5yr spreads have reached all-time tights and 10yr spreads threatened to dip back into

negative territory, reaching as low as 3.5bp.

The pressure on spreads, particularly in the long end, appears to be the result of a continued

steepening of the curve (including the first marked occurrence of a bear steepening in recent

memory) combined with relatively thin liquidity and poor positioning. Given the widespread

market bias towards being long spreads, the initial curve-driven tightening quickly accelerated

as stops were hit and old spread longs were closed.

For the past few months, spreads have traded in lock-step with curve movements, which has

also been reflected by the strong correlation with the rich/cheapness of the long end. As shown

in Figure 2, the recent tightening has overshot the cheapening of the 30yr point (in terms of

OAS to our 3-factor model). We, therefore, begin to leg into small longs on 30yr spreads at a

risk of $50k ’01 with a stop at -13bp. Our initial target is -5bp, but we may look to add another

$50k if spreads start to run around and reach -8bp.

Fig. 1: Blues seem more resistant to selloffs lately

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Eurodollar Positioning Bias

Greens Blues Golds

Long

Short


Fig. 2: Selling of 30yr ASW looks overdone vs. move in OAS

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30yr ASW 30yr CMT OAS (RHS, Inverted)



[email protected]

David Thielke +1 212 667 1389 [email protected]




15

European Rates

We recently published a European Rates Insights updating our views on the UK rates markets

as well as outlining out latest trades local and x-market trades (see link for the full document).

These are rare and fascinating times, and the UK is in a unique position. This should lead to

some very profitable strategies as the end of the year approaches and into 2014. However, we

have to be very clear in our minds as to what exactly will work.

Outright shorts are expensive. Carry and roll make a mockery of bearish trades expected to last

longer than a month or two unless you have extreme views on the size and smoothness of yield

rises. As in any bear market, timing is more important than view.

There is little justification to be short beyond 5yr unless it is based on a view of US (or perhaps

German) yields going higher. In which case why express the view in Gilts? We got out of

flatteners on 1 November, but the curve has steepened back up to interesting pivot points since

then and we want to go back into flattening views.

The long-end is rich and there may be more ‘normal’ levels of LDI activity for four months or so,

and thus a more normal beta between 10s30s and 5s. We want to pay long-end forwards.

(Again, we have been stopped out of this before but are trying again.) We also take a look at the

implications of the recently announced pension fund regulations (not a lot).

The cross-market remains an area of great interest to us. There is correlation breakdown in

nominal growth stories. However, history suggests that you only get the 100bp+ moves in front-

ends when central banks start moving in different directions. For now we recommend you trade

for a 40bp widening between 3yr Gilts and Bunds.

Taking the above into consideration, we like the following trades to supplement our current

trades of paying 3yr swaps and long 5yr on ASW:

Outright short linker 2017s: More attractive than real yield curve flatteners here and

now, front-end real yields may march significantly higher.

Greens/Golds flatteners: The best forward flattener we see. If you can’t do forwards

we recommend you trade 5s10s in swaps. If you can’t do derivatives we would not put

you off 3s7s flatteners in Gilts.

Long 1yr fwd 2s5s10s: Lovely roll, lovely relationship with US yields and marks the

clear differential between us and the bearish street consensus – that short trades

should be set in the front-end, not the belly (Figure 1).

Pay 20yr fwd 10yr: As betas go back to normal levels (or probably overshoot) the

long-end forwards will likely sell-off and 20f10y looks markedly better value than

15f15y or 10f20y (Figure 2).

Sell 3yr Gilts vs. Bunds: We have little idea why the street is very concerned with

short USTs vs. Bunds in 10yr. We think trading Bunds against Gilts is a much more

justifiable trade and doing it in the 3yr area makes much more sense than the 10yr.

Fig. 1: 1yr forward 2s5s10s vs. outright yields – Attractive entry levels to capture bullish belly thoughts

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%bp 1yr Fwd 2s5s10s 5y outright (RHS)

Source: Nomura

Fig. 2: Key long-end forwards – We believe the 20yr forward 10yr is the stand out structure to pay

3.2

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% FWD 10y_20y FWD 20y_10y FWD 15y_15y

Source: Nomura

Andy Chaytor +44 20 7103 1219 [email protected]




16

AEJ Rates

With recent market moves, especially the change in Fed’s communication, we review and

restate our positive carry spread trades in the AEJ rates space (see link for the full document).

In our last two notes (see Rates Strategy Update: Stick with ‘policy’ carry, 11 November 2013

and AEJ Rates Strategy: Let carry be the differentiating factor, 8 November 2013) we

highlighted two important points:

The Fed has started to set the stage for its forward guidance. As a result, the

difference between tapering (plus a strengthening in forward guidance) and tightening

is becoming increasingly clear to the market.

Recent economic data from the US demonstrate improved growth prospects.

The first point is being driven by the Fed’s communication and has been reinforced by Yellen

and Bernanke. Consequently, we are not surprised to see front-end rates finding new lows in

the US. Put another way, the market is becoming more comfortable with the notion of “Policy

Carry” – positive carry as a result of stable monetary policy. As see in Figure 1; the 2yr UST

yield is near its recent lows).

On the second point, our US economists have pushed up their Q4 US GDP tracking estimate

again, from 1.7% to 1.8%. Improving economic prospects are also compressing the risk premia

(as evident from indicators such as VIX, swap spreads and the LIBOR-OIS spread) and the

cumulative impact of these two factors can be seen in the term premium for yield curves being

driven higher. This is demonstrated in the 5s10s US curve also shown in Figure 1 (please also

see, Retail sales robust in spite of government shutdown, 20 November 2013).

In Asian rates, we deploy spread trading strategies that leverage 1) growth momentum and 2)

policy carry. Our conviction remains strong given the circumstances described above. In

particular, we recommend:

Pay Korea 5yr vs. receive Singapore 5yr: Pay Korea 5yr is a trade expression that

monetises growth momentum in Korea, while a Singapore 5yr swap receiver offers

high quality ‘policy carry’. We increase our target on this trade from -175bp to -180bp.

Pay Malaysia 2yr vs. receive Thailand 2yr: Our Asia economics team is more

sanguine about reforms and growth prospects in Malaysia, which argues well for a paid

bias in Malaysia swaps. Historically, the Bank of Thailand (BOT) has been more active

than Bank Negara Malaysia in fine-tuning monetary policy, but the widening in growth

between the two countries is significant. As a result, we expect the BOT to be on hold

for longer, which is beneficial in taking on attractive valuations by receiving the front

end in Thailand swaps (see also Taking the pulse of Asian growth, 7 November 2013,

by Rob Subbaraman and team).

Fig. 1: US 2yr rates at recent lows shows stable policy rate going forward; a steep 5s10s curve implies a high term premium

60

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US 2y Treasury Yield US 5y10y Curve (RHS) bp%


Vivek Rajpal +65 6433 6555 [email protected]








17

Dollar-Bloc Rates

Australia

We look at the new 20yr ACGB as well as the approaching debt limit

As Australia approaches its own moment on the Potomac, with arguments over the debt ceiling,

the highest yielding AAA rated market extended its curve, with the introduction of a 20yr ACGB.

We discussed the need for this issuance in early November before it was announced (see

Rates Insights - Australia: The case for a 30yr bond). The syndicated deal saw a book of

AUD9bn reached, for a launch size of AUD5.9bn. This is the largest single issuance from

Australia. This hugely successful deal priced at a yield of 4.86%, at an EFP of +70.5 over 10yr

futures, or ASW -8bp. The AOFM typically does not give distribution statistics, but in this case

provided the information that central banks took 28%, hedge funds took 9.7% and fund

managers took 35% of the issue.

We noted in First Insights - ACGB Rates RV- the new 20yr and First Insights - ACGB Rates RV-

the new 20yr that the 2033 bond is cheap on an asset swap basis, and rolls up the curve. When

compared with the current 10yr or the ACGB 2.75% April 2024, we see that the two bonds

represent the richest and cheapest points on the asset swap curve (Figure 1). Accordingly, we

recommend investors sell the ACGB 2.75% April 2024 to buy the ACGB 4.5% April 2033 on an

asset swap basis. This trades at -30, and we would expect to see this compress to -18bp.

Debt ceiling- What does it mean?

As of the end of the week (ending 22nd November), Australia’s gross debt counted under the

debt cap will sit at AUD295.6bn. This is 4.4bn from the cap. The AOFM would be able to issue

its regular auctions of 2 lots of AUD800m coupon bonds, AUD1bn in T-Notes and the scheduled

AUD200m in linkers, taking it to AUD298.4bn. At a practical level, this tiny buffer would be

impractical for further issuance. We outlined in Figure 2 the potential paths and options.

Canada

We recommend shorting 5s on the curve and maintain our neutral view on CANs.

The Canadian rates market had been trading in range recently, roughly between 2.5% and

2.65% on the 10yr. On Friday, rates rallied from the highs of the range as October CPI

(headline 0.7% Y-o-Y vs. 0.8% consensus) came in below market expectations (see link for

thoughts from our economist). In the coming week, the key data point is September GDP (Nov

29th) before the BOC meets on Dec 4th followed by employment data on Dec 6th.

We continue to hold our neutral view on Canadian rates and, bar a surprising December

tapering from the Fed, we expect CANs to range trade into year end. In such environments, we

look at our analytics to find attractive trades. In particular, the 5yr sector of the Canada curve

looks particularly rich, especially compared with 2s and 30s, on a PCA weighted scale (over 2.3

standard deviations from the 2yr average). Thus we enter the trade: short 5s vs. 2s and 30s

PCA weighted, (84%/100%/65%) at 121bp with target of 114 and stop of 124.5 at 1/6 risk.

Fig. 1: ACGB outstanding and corresponding ASW spread

9.30

13.30

12.00

14.8013.90

20.40

18.80

15.70

19.10

16.55

18.40 18.70

16.70

19.80

10.80

7.40

10.20

6.505.90

-45

-40

-35

-30

-25

-20

-15

-10

-5

0

5

10

15

20

25

bpAUD (bn)

Outstanding Asset Swap Spread (RHS)


Fig. 2: Australia Debt Ceiling Options and Path

Source: Nomura

Martin Whetton +61 2 8062 8611

[email protected]


[email protected]









18


Trade Portfolio

Trade Idea: Long 4/16s & 4/17s TIPS ASW

Cheap carry still exists in front end TIPS ASWs

Note: This is a reprint of our US Rates Trade Idea published on Nov. 22, 2013 (see

link).

After the Fed’s tapering fear cheapened TIPS ASW to the highs back in June, front

end TIPS ASWs are again approaching those attractive levels (Figure 1). Only this

time it has been driven by nominal spread tightening, thanks to all the front end carry

trades.

Front end TIPS, especially Apr16 and Apr17, have cheapened to about 3mL + 4bps

and 3mL + 9bps levels, respectively. It is worth noting that front end TIPS ASW are

carry trades by definition and for that reason, front end TIPS ASW typically do not

trade at 3mL positive territory for long. As Figure 2 shows, Apr16 and Apr17 TIPS are

both trading near the cheapest levels in history (given their remaining years to

maturity). We expect both ASWs to richen as the search for carry continues in earnest,

especially when other high-grade issuers have recently printed floaters at much tighter

levels.

TIPS ASW are indexed to a floating rate, which helps hedge any rate rises when

tapering does come. Also, investors swaps out the inflation accrual and should not

worry about any lack of realized inflation out to the TIPS maturity. Apr16 and Apr17

TIPS ASW both earn about 2.5bps carry and rolldown over 3 months (vs. only about

1.5bps for nominal UST ASW trades).

Target: 3mL flat (on Apr17s). Stop: 3mL + 13bps (on Apr17s).

Fig. 1: Front-end forward curves beyond 2y1y remain steep

-20

-15

-10

-5

0

5

10

4/1

/13

4/1

5/1

3

4/2

9/1

3

5/1

3/1

3

5/2

7/1

3

6/1

0/1

3

6/2

4/1

3

7/8

/13

7/2

2/1

3

8/5

/13

8/1

9/1

3

9/2

/13

9/1

6/1

3

9/3

0/1

3

10

/14

/13

10

/28

/13

11

/11

/13

Apr16 TIPS ASW Apr16 UST MMASWBps


Fig. 2: Still trading far above long-term history despite rally

-30

-20

-10

0

10

20

30

-4.0

-3.8

-3.6

-3.4

-3.2

-3.0

-2.8

-2.6

-2.4

-2.2

-2.0

-1.8

-1.6

-1.4

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

TIP

S A

SW (b

ps)

No. of Years till Maturity

Apr13 Apr14 Apr15 Apr16 Apr17





19

Rates Trade Watch

Trade Idea Level

Z-Score

Info Ratio

Abs Spread

3m RDC

Total Pickup

Comments Trade Watch

Portfolio?

Duration

Long 2.625 Aug20s 2.0% 3.0 15.9bp One of the cheapest USTs in terms of spline

spread z-score N

Inflation

5s10s BE Steepener 45bp 7.7bp Y

Curve

Long 1.75 May16 vs. 3.25 May16 2.01bp 0.9bp Highest z-score and info ratio with reasonable

return out of our tracked micro-switches Y

Spreads

Long 10yr Spreads 161bp 2.6 9.6 31bp 0.3bp Very strong information ratio and wide spread from

historical norms Y

Long 2yr NZGB vs. 5yr CAN 128bp 1.5 3.5 16bp 75bp Strong RDC with reasonably favourable z-

score/info ratio N

Source: Nomura

Trade Watch Tracker – Sub-Portfolio

Current Trades Opened Portfolio Entry Stop Target Current Level P&L ($)

Long 1.75 May16 vs. 3.25 May16 10/24/13 Curve 2.41bp 3bp 1.1bp 2.01 5k

5s10s BE Steepener 10/31/13 Inflation 36bp 30bp 45bp 37.6bp 42k

Long 10yr Spreads 11/22/13 Spread 4.7bp 3bp 15bp 4.7bp -

SUB-PORTFOLIO TOTAL

(144k)

Source: Nomura

Note: The Rates Trade Watch consists of various trades that we track for fundamental or relative value purposes but do not have entries we deem attractive enough to include in our primary portfolio on the next page. Many of the included trades are flagged from our various daily analytical publications and include relevant statistics when available. The Trade Watch Tracker is a sub-book of our primary portfolio which consists of trade watches with slightly higher conviction and are each assigned a very modest risk allocation ($20k DV01 where applicable). The total performance of this book is tracked alongside our primary portfolio and is included as an item on the following page.


20

Current Rates Trade Portfolio

Recent Portfolio Changes Portfolio Performance Performance Distribution

New Positions Opened Entry Risk (Fraction)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

0.0

5.0

10.0

15.0

20.0

25.0

30.0

8-J

an

8-F

eb

8-M

ar

8-A

pr

8-M

ay

8-J

un

8-J

ul

8-A

ug

8-S

ep

8-O

ct

8-N

ov

$MM VaR YTD P&L $MM

0%

5%

10%

15%

20%

25%

30%

35%

-56 -47 -38 -29 -19 -10 -1 8 17 26 36Daily P&L ($100K)

Daily P&L Frequency

Short 2s5s30s CAN (PCA wgts) 11/22/13 121bp $50k (1/6)

Long 30yr Spread 11/22/13 -11.5bp $50k (1/6)

Long 4/17s TIPS ASW 11/19/13 3mL+9bp $100k (1/3)

Long TYF4 123-121 Put Spread 11/14/13 12tk 600 lots

Rec 3y1y vs. 1y1y USD 11/7/13 173bp $50k (1/6)

Closed Positions Closed P&L ($) Reason

Long 10yr UST vs. Bund 11/21/13 (300k) Hit Stop

5s7s UST Flattener 11/20/13 (400k) Hit Stop

Long 5s10s30s UST 11/8/13 (634k) Hit Stop

Portfolio Statistics Performance Breakdown Portfolio Correlations

P&L $23,161,241 [+$401k w/w]

-5.00 0.00 5.00 10.00

Duration

Inflation

Curve

Spread

Vol

Net P&L ($MM)

3m 6m

-0.50 -0.25 0.00 0.25 0.50

S&P 500

USD

Commodities

UST 10yr

UST 2s10s

UST 10s30s

US 10yr BEI

USD 3m10y Vol

VIX

3m 6m

Rolling 1yr P&L $23,998,512

Current Risk / Reward 1.60

Gain / Loss 1.38

Required Hit Rate 42%

1d 99% VaR $1,340,053

Portfolio Size $1,023,161,241

Trades Closed 94

Avg. Holding Period 18d

Current Trades Opened Type Portfolio Publication Risk Entry Stop Target P&L (bp) P&L ($)

1y10y Payer Ladder 1/30/2013 Strategic Vol Trade Idea $100MM Zero Cost $350k $2MM - 1,193,454

1x2 EDZ6 Midcurve Call Spread 10/24/13 Tactical Vol Trade Idea 1000 lots 2bp -5bp 14.5bp (0.3) (7,500)

Rec 3y1y vs. 1y1y USD 11/7/13 Tactical Curve First Insight $50k 173bp 187bp 155bp;140bp 1.7 87,094

Long TYF4 123-121 Put Spread 11/14/13 Tactical Duration Rates Insight 600 lots 12tk HTE* 128tk 0tk 0

Long 4/17s TIPS ASW 11/19/13 Tactical Inflation Trade Idea $100k 3mL + 9bp 3mL + 13bp 3mL flat 0 0

Long 30yr Spread 11/22/13 Tactical Spread Rates Weekly $50k -11.5bp -13bp -2bp - -

Short 2s5s30s CAN (PCA wgts) 11/22/13 Tactical Curve Rates Weekly $50k 121bp 124.5bp 114bp - -

Trade Watch Tracker

(144k)

Source: Nomura – Portfolio as of 11/21/2013

Note: Trades in the current rates trade portfolio represent high conviction trades which are fully priced including carry, rolldown and repo considerations where applicable. The trade portfolio summary statistics do not include the Trade Watch Tracker sub-portfolio, which is a separate book of low conviction and pure relative value trades derived from our analytics. The trade types are denoted as strategic (trade horizon > 1m) and tactical (trade horizon < 1m). Trade portfolio types

include duration, curve, inflation, spread (including cross-market spreads), and volatility. *HTE: Hold To Expiry.


21

Appendix

QE4 Round 11 - POMO Schedule

Date Sector

Amt Accepted or Est.

($mlns)

Amt Submitted

($mlns)

Submitted/Accepted

Ratio

QE4 Sector Avg

Ratio

Nov 1 20s - 30s $1,565 $5,804 3.71x 2.82x

Nov 4 5¾s - 7s $3,718 $15,173 4.08x 3.76x

Nov 5 20s - 30s $1,565 $5,114 3.27x 2.82x

Nov 6 7s - 10s $3,171 $12,280 3.87x 3.52x

Nov 7 20s - 30s $1,474 $5,090 3.45x 2.82x

Nov 8 4¾s - 5¾s $5,247 $14,877 2.84x 2.75x

Nov 12 20s - 30s $1,565 $5,424 3.47x 2.82x

Nov 13 TIPS $1,390 $5,026 3.62x 3.34x

Nov 14 7s - 10s $3,171 $8,786 2.77x 3.52x

Nov 15 10s - 20s $917 $4,240 4.62x 3.81x

Nov 18 20s - 30s $1,474 $5,064 3.44x 2.82x

Nov 18 5¾s - 7s $3,718 $16,745 4.50x 3.76x

Nov 19 7s - 10s $3,171 $10,426 3.29x 3.52x

Nov 20 20s - 30s $1,565 $4,891 3.13x 2.82x

Nov 21 4s - 4¾s $4,811 $15,095 3.14x 2.73x

Nov 22 20s - 30s

Nov 25 7s - 10s

Nov 26 20s - 30s

$506,662 $1,565,752 3.09xQE4 Total

Source: Nomura, Federal Reserve

Note: POMO stands for Permanent Open Market Operations. On December 12, 2012, the Federal Open Market Committee

(FOMC) directed the Open Market Trading Desk at the Federal Reserve Bank of New York to purchase longer-term Treasury

securities after the maturity extension program is completed at the end of December 2012, initially at a pace of about $45 billion

per month. The program is indefinite in length and there is no formal indication on how many rounds the program will last.


22

Nomura US, Canada and Australia Economic Rates Forecasts versus Forward Yields

Source: Nomura

Security CurrentNMR

Forecast

Forward

Yield

Diff

(bp)

NMR

Forecast

Forward

Yield

Diff

(bp)

3m LIBOR 0.24 0.250 0.238 1 0.300 0.253 5

2yr UST 0.28 0.350 0.306 4 0.450 0.401 5

3yr UST 0.55 0.620 0.633 -1 0.900 0.786 11

5yr UST 1.35 1.350 1.468 -12 1.700 1.636 6

7yr UST 2.07 1.950 2.151 -20 2.250 2.300 -5

10yr UST* 2.74 2.500 2.861 -36 2.850 2.984 -13

30yr UST 3.83 3.550 3.901 -35 3.650 3.957 -31

2yr CAN 1.11 1.450 1.124 33 1.550 1.199 35

5yr CAN 1.76 2.200 1.859 34 2.300 1.969 33

10yr CAN 2.57 2.800 2.900 -10 2.850 2.792 6

2yr ACGB 2.76 2.400 2.877 -48 2.650 3.009 -36

5yr ACGB 3.58 3.100 3.611 -51 3.150 3.727 -58

10yr ACGB 4.32 3.900 4.343 -44 4.050 4.425 -37

2yr Bund 0.14 0.300 0.109 19 0.350 0.134 22

5yr Bund 0.69 0.800 0.695 11 0.950 0.796 15

10yr Bund 1.75 1.850 1.840 1 2.000 1.931 7

2yr Gilt 0.44 0.580 0.542 4 0.700 0.673 3

5yr Gilt 1.55 1.750 1.747 0 1.950 1.907 4

10yr Gilt 2.79 2.850 2.904 -5 3.000 3.012 -1

2yr JGB 0.10 0.120 0.098 2 0.150 0.106 4

5yr JGB 0.20 0.320 0.222 10 0.400 0.249 15

10yr JGB 0.63 0.800 0.656 14 0.950 0.692 26

*For 10yr UST, our Q4 end range is 2.35-2.75; and Q1 2014 end range is 2.50-3.00. As of 11/22/2013

DE

UK

JP

1Q20144Q2013

CA

US

AU


23

Auction Tables


Auction Size Coupon Stop Bid/Cover Tail Yld Gap Dealer% Direct% Indirect% Dlr Hit Dir Hit Indir Hit Grade

10/25/2011 $35.00 0.250% 0.281% 3.64x (0.7) 1.6 52.6% 8.2% 39.2% 20% 21% 64% B+

11/21/2011 $35.00 0.250% 0.280% 4.07x (0.6) 3.0 46.5% 11.2% 42.2% 17% 17% 58% A

12/19/2011 $35.00 0.125% 0.240% 3.45x (0.2) 1.1 63.7% 14.7% 21.6% 17% 28% 55% C

1/24/2012 $35.00 0.250% 0.250% 3.75x 0.0 0.8 58.8% 8.3% 32.9% 21% 17% 69% B

2/21/2012 $35.00 0.250% 0.310% 3.54x 0.0 2.0 54.7% 9.5% 35.8% 21% 23% 66% B

3/27/2012 $35.00 0.250% 0.340% 3.69x (0.5) 1.6 44.3% 21.4% 34.3% 17% 41% 63% A-

4/24/2012 $35.00 0.250% 0.270% 3.76x (0.3) 2.0 60.0% 7.8% 32.1% 22% 15% 70% B+

5/22/2012 $35.00 0.250% 0.300% 3.95x (0.3) 1.4 57.5% 9.0% 33.5% 19% 19% 69% B

6/26/2012 $35.00 0.250% 0.313% 3.62x 0.1 1.3 60.4% 7.9% 31.7% 22% 19% 70% B-

7/24/2012 $35.00 0.125% 0.220% 4.00x 1.0 0.8 59.2% 9.9% 30.9% 19% 22% 66% B

8/28/2012 $35.00 0.250% 0.273% 3.94x (0.1) 0.8 61.6% 16.1% 22.3% 21% 31% 44% B-

9/25/2012 $35.00 0.250% 0.273% 3.60x (0.2) 0.9 55.3% 17.5% 27.2% 21% 37% 60% B-

10/23/2012 $35.00 0.250% 0.295% 4.02x (0.9) 1.2 28.3% 38.2% 33.5% 10% 53% 65% A+

11/27/2012 $35.00 0.250% 0.270% 4.07x (0.3) 0.9 41.9% 23.6% 34.4% 14% 42% 66% A-

12/17/2012 $35.00 0.125% 0.245% 3.59x (0.1) 1.1 53.9% 28.4% 17.7% 19% 54% 67% B

1/28/2013 $35.00 0.250% 0.288% 3.77x (0.2) 1.9 52.0% 30.0% 18.0% 20% 47% 36% B+

2/25/2013 $35.00 0.250% 0.257% 3.33x (0.3) 0.8 46.4% 31.6% 22.0% 19% 48% 79% B+

3/26/2013 $35.00 0.250% 0.255% 3.27x (0.2) 1.1 57.6% 21.8% 20.6% 24% 42% 64% B-

4/23/2013 $35.00 0.125% 0.233% 3.63x (0.2) 1.3 51.6% 27.7% 20.7% 20% 44% 51% B

5/28/2013 $35.00 0.250% 0.283% 3.04x 0.3 1.2 65.5% 12.6% 21.9% 28% 29% 88% C

6/25/2013 $35.00 0.375% 0.430% 3.05x 0.0 2.6 56.3% 7.8% 35.8% 25% 19% 87% B

7/23/2013 $35.00 0.250% 0.336% 3.08x (0.4) 2.1 53.2% 16.4% 30.4% 24% 35% 73% B

8/27/2013 $34.00 0.375% 0.386% 3.21x (0.1) 1.4 54.6% 26.1% 19.3% 23% 45% 68% B+

9/24/2013 $33.00 0.250% 0.348% 3.09x (0.5) 1.8 54.2% 21.8% 24.0% 24% 38% 74% B+

10/28/2013 $32.00 0.250% 0.323% 3.32x (0.2) 1.8 40.0% 31.0% 29.0% 17% 49% 81% A-

Avg. Last 6 $34.00 0.292% 0.351% 3.13x (0.1) bp 1.8 54.0% 19.3% 26.7% 24% 36% 79%

2 Year Auction History Table


24



10/26/2011 $35.00 1.000% 1.055% 2.90x (1.1) 2.6 40.3% 10.4% 49.3% 20% 39% 79% A

11/22/2011 $35.00 0.875% 0.937% 3.15x (1.2) 3.7 45.1% 9.6% 45.3% 21% 29% 68% A-

12/20/2011 $35.00 0.875% 0.880% 2.86x (0.7) 6.0 40.3% 9.1% 50.6% 21% 34% 79% B

1/25/2012 $35.00 0.875% 0.900% 3.17x (1.6) 4.1 41.5% 15.1% 43.4% 19% 36% 75% A

2/22/2012 $35.00 0.875% 0.900% 2.89x (0.3) 5.0 45.3% 12.9% 41.8% 23% 41% 73% B

3/28/2012 $35.00 1.000% 1.040% 2.85x 1.4 5.0 46.8% 11.4% 41.9% 23% 33% 82% C+

4/25/2012 $35.00 0.875% 0.887% 3.09x (0.9) 4.2 43.1% 9.4% 47.5% 20% 24% 84% B+

5/23/2012 $35.00 0.625% 0.748% 2.99x 0.4 4.8 50.9% 6.5% 42.6% 24% 19% 81% B-

6/27/2012 $35.00 0.750% 0.752% 2.61x 1.8 5.3 54.1% 10.7% 35.2% 29% 35% 87% C

7/25/2012 $35.00 0.500% 0.584% 2.71x 0.9 4.2 52.2% 5.2% 42.6% 27% 21% 83% B-

8/29/2012 $35.00 0.625% 0.708% 2.92x 0.1 3.3 49.4% 11.0% 39.7% 24% 31% 79% B+

9/26/2012 $35.00 0.625% 0.647% 3.06x (0.5) 2.8 47.2% 10.7% 42.1% 22% 27% 81% B+

10/24/2012 $35.00 0.750% 0.774% 2.73x 0.3 3.9 42.2% 15.5% 42.4% 23% 38% 89% B

11/28/2012 $35.00 0.625% 0.641% 2.89x (0.7) 2.3 38.8% 15.9% 45.4% 20% 36% 88% A-

12/18/2012 $35.00 0.750% 0.769% 2.72x 0.5 3.1 37.2% 30.4% 32.4% 20% 58% 90% B

1/29/2013 $35.00 0.875% 0.889% 2.88x 0.0 3.2 43.5% 16.8% 39.7% 22% 41% 74% B+

2/26/2013 $35.00 0.750% 0.777% 2.85x 0.1 3.4 44.0% 14.3% 41.7% 23% 33% 89% B

3/27/2013 $35.00 0.750% 0.760% 2.73x (0.2) 3.5 37.1% 16.8% 46.1% 22% 38% 80% A-

4/24/2013 $35.00 0.625% 0.710% 2.86x (0.5) 3.2 42.4% 14.0% 43.6% 22% 34% 86% B

5/29/2013 $35.00 1.000% 1.045% 2.79x 0.0 3.5 32.6% 23.3% 44.0% 17% 58% 86% A-

6/26/2013 $35.00 1.375% 1.484% 2.45x (0.4) 5.5 43.5% 3.6% 53.0% 26% 19% 91% B-

7/24/2013 $35.00 1.375% 1.410% 2.46x 0.1 3.7 37.8% 8.3% 53.9% 23% 47% 88% B

8/28/2013 $35.00 1.500% 1.624% 2.38x 0.7 3.7 46.9% 12.7% 40.3% 28% 53% 89% B-

9/25/2013 $35.00 1.375% 1.436% 2.67x 0.6 3.8 43.4% 11.8% 44.9% 24% 33% 88% B

10/29/2013 $35.00 1.250% 1.300% 2.65x 0.1 3.3 41.9% 12.2% 45.9% 24% 33% 89% B

Avg. Last 6 $35.00 1.313% 1.383% 2.57x 7.1 bp 3.9 41.0% 12.0% 47.0% 24% 40% 89%



25

Source: Nomura, Treasury


10/27/2011 $29.00 1.750% 1.791% 2.59x 3.3 8.3 54.2% 11.9% 33.9% 28% 43% 87% C-

11/23/2011 $29.00 1.375% 1.415% 3.20x (2.3) 2.5 41.3% 18.9% 39.9% 19% 43% 69% A

12/21/2011 $29.00 1.375% 1.430% 2.68x 1.5 7.1 45.0% 12.9% 42.0% 25% 38% 83% B-

1/26/2012 $29.00 1.250% 1.360% 2.73x 0.9 6.9 56.6% 11.6% 31.8% 29% 37% 70% B-

2/23/2012 $29.00 1.375% 1.420% 3.11x (2.5) 2.8 38.9% 19.3% 41.9% 19% 44% 63% A

3/29/2012 $29.00 1.500% 1.590% 2.72x 0.3 6.1 43.8% 13.4% 42.8% 24% 41% 77% B

4/26/2012 $29.00 1.250% 1.347% 2.83x (0.4) 4.0 44.1% 17.6% 38.2% 22% 51% 81% A-

5/24/2012 $29.00 1.125% 1.203% 2.80x 0.5 4.4 41.6% 15.7% 42.7% 21% 46% 86% B+

6/28/2012 $29.00 1.000% 1.075% 2.64x 2.1 5.6 51.5% 6.5% 42.0% 27% 29% 80% C

7/26/2012 $29.00 0.875% 0.954% 2.64x 0.6 4.4 46.6% 7.1% 46.3% 26% 29% 81% B-

8/30/2012 $29.00 1.000% 1.081% 2.80x (0.1) 3.1 43.8% 17.9% 38.4% 22% 50% 84% B

9/27/2012 $29.00 1.000% 1.055% 2.61x (0.2) 3.2 48.1% 17.0% 34.9% 26% 48% 80% B-

10/25/2012 $29.00 1.250% 1.267% 2.56x 0.2 4.0 43.7% 18.0% 38.3% 24% 55% 96% B

11/29/2012 $29.00 1.000% 1.045% 2.81x 0.1 3.6 41.2% 19.7% 39.1% 21% 44% 92% B+

12/19/2012 $29.00 1.125% 1.233% 2.72x 0.0 3.3 37.0% 23.1% 39.9% 20% 57% 87% A-

1/30/2013 $29.00 1.375% 1.416% 2.60x 0.9 4.8 42.0% 19.7% 38.2% 24% 55% 83% C+

2/27/2013 $29.00 1.250% 1.260% 2.65x 0.3 4.0 48.4% 18.2% 33.4% 25% 46% 95% B-

3/28/2013 $29.00 1.125% 1.248% 2.56x 0.9 4.4 45.0% 19.5% 35.5% 25% 53% 93% B-

4/25/2013 $29.00 1.125% 1.155% 2.71x (0.5) 3.5 41.0% 19.7% 39.3% 22% 49% 83% B+

5/30/2013 $29.00 1.375% 1.496% 2.70x (1.6) 2.6 38.5% 20.7% 40.8% 21% 54% 79% A-

6/27/2013 $29.00 1.875% 1.932% 2.61x (0.9) 3.4 37.8% 15.7% 46.4% 23% 48% 69% B

7/25/2013 $29.00 2.000% 2.026% 2.54x 0.0 3.6 34.9% 16.6% 48.6% 21% 52% 87% B+

8/29/2013 $29.00 2.125% 2.221% 2.43x 0.3 3.1 36.8% 22.4% 40.8% 23% 70% 81% B

9/26/2013 $29.00 2.000% 2.058% 2.46x 1.0 4.1 40.2% 17.8% 42.0% 24% 57% 91% B-

10/30/2013 $29.00 1.750% 1.870% 2.66x (0.2) 3.3 33.8% 23.9% 42.3% 20% 47% 88% A

Avg. Last 6 $29.00 1.854% 1.934% 2.57x (0.2) bp 3.4 37.0% 19.5% 43.5% 22% 55% 82%



26

Recent Rates Strategy Publications

Rates Weekly

Date Title Link Summary

11/08/2013 Something for Nothing, Taper for Free? File Fed in straits as it wants to reduce the pace of QE while convincing short rates low for longer

11/01/2013 Spooky Stealth Rally Over? File We think the drop in 10-year rates of 3% was mostly short-covering..

10/25/2013 Taper, Fiscal Fight & Growth: Delayed? File Given the backdrop, the Fed isn’t in a position to taper its QE program.

10/16/2013 Markets lift-off on short-term solution? File Short-term solution should be met with short-term enthusiasm.

10/06/2013 Captive to Fiscal Gridlock File We downplay the fearmongering but caution investors to stay vigilant.

09/27/2013 3Q13Review and 4Q13 Outlook File Mixed economic data and fiscal issues suggest 10y will remain between 2.4% and 2.9%.

09/20/2013 Fed kicks the can, will DC as well? File Fed kicked the can on starting the QE unwind and fiscal fight will remain contentious.

First Insights


11/21/2013 $13bn 10yr TIPS Auction Review – Impressive Directs File Auction Grade: A+

11/20/2013 $13bn 10yr TIPS Auction Preview File We are leaning slightly bearish on the auction and expect a 1-2bps tail.

11/20/2013 Thoughts from South Africa and the Middle East File We are closer to an end than the beginning of a new growth cycle

11/14/2013 $16bn 30yr Auction Review File Auction Grade: B-

11/13/2013 $16bn 30yr UST Auction File We expect fairly decent auction as pros slightly outweigh the cons

Rates Insights


11/18/2013 US Treasury Future File Calendar Roll Outlook Dec13 – Mar14

11/17/2013 Positioning: Bearish US flows drove last sell-off but foreigners add File We look to hedge some of the tail risk to Dec Tapering through a TYF4 123-121 put spread

11/14/2013 Policy Evolution & Fed Paths File We see a greater chance of tapering in Q12014

10/27/2013 Positioning: CFTC data slowly returns; bearish flows surface File The uncertainty will reduce economic growth ahead; remain biased to rally.

10/25/2013 November UST Refunding Preview File We share our responses to the November Treasury’s quarterly refunding questionnaire.

10/24/2013 US Treasury Floating Rate Notes File We analyze their unique features, pricing, duration and the floor.

10/20/2013 Positioning: Flows turn bullish on record purchases File We still think yields have room to rally..

10/13/2013 Positioning: A defensive Posture in USTs Return? File Unless we get a long-term resolution, we believe the bullish dynamic for rates remains.

Rates Trade Ideas


11/19/2013 Long 4/16s & 4/17s TIPS ASW File Cheap carry still exists in front end TIPS ASWs

10/24/2013 Buying 1x2 Call Spreads on 3yr Eurodollar Midcurves File Attractive trade to leverage further downwards consolidation in front end rates.

10/10/2013 Debt Ceiling Hedge: TU Spread Widener File We recommend a conditional TU bear widener as a low-risk “doomsday” hedge.

07/01/2013 Q2-2013 US Rates Strategy Portfolio Performance File Net Gains This Qtr (bp): 10.5

06/13/2013 Buying Agency Callables on the Cheap File Capture wide agency spreads, gain long duration, and short vol exposures in a single package.



























27

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