16 March 2012 Fixed Income Research http://www.credit-suisse.com/researchandanalytics European Strategy and Trades Interest Rate Strategy Research Analysts Moderately bearish Michelle Bradley • While we view the recent retracement in yields as overdue, we believe it is too +44 20 7888 5468 firstname.lastname@example.org early to go very short duration. We remain moderately bearish and expect Bunds to trade towards the upper end of the recent range. Panos Giannopoulos +44 20 7883 6947 • The Greek debt exchange has been notable for the fact it has been a non- email@example.com event. We believe the precedents set warrant attention, however, and the ECB Helen Haworth looks set to be repaid par on €4.67 billion of the 20 March bond next week. +44 20 7888 0757 firstname.lastname@example.org • The EFSF issuance pipeline is growing – we discuss pricing of the new 30y. Given uncertainty surrounding the future structure of the EFSF, we expect the Thushka Maharaj 30y EFSF to trade around 150bp above Germany. +44 20 7883 0211 email@example.com European Governments: We recommend two flies in the SPGB curve. Buying Marion Pelata Jan17 vs. Oct14 and Apr20 for those who are bullish Spain and selling Oct14 +44 20 7883 1333 vs. Oct13 and Jan17 for those who are bearish Spain. firstname.lastname@example.org David Sneddon UK Strategy: We maintain our bearish bias in the UK. We recommend paying +44 20 7888 7173 GBP 2y2y versus EUR as a positive carry way of being short GBP. We provide email@example.com a provisional gilt issuance schedule for the first quarter of the 2012-13 fiscal Florian Weber year. In our view, it is unlikely that the old 5y, the UKT 1T 17s is tapped this +44 20 7888 3779 quarter and recommend buying this issue versus UKT 2s 16s. We recommend firstname.lastname@example.org taking profits in our pay GBP 2y1y versus NOK position recommendation Sabine Winkler following the rate cut by the Norges Bank this week. +44 20 7883 9398 email@example.com Derivatives Strategy: We recommend risk reversals in EUR 30y tails (buying OTM payers vs. receivers). Money Market Strategy: We recommend buying 3y FRA-Eonia versus 5y as ”cheap” risk-off hedge (or 2y1y versus 4y1y). We recommend buying L5-L7 versus ED5-ED7, as our assessment of risks suggests that the MPC could hike first. We finally recommend selling [ERH3-ERM3] versus [ERU3-ERZ3], as more hikes ought to be priced by the ECB in the second half of 2013 than the first half. Covered Bonds: The rally in the secondary market rolls on for now, grinding covered bond asset swap spreads (ASW) tighter. However, ASW of covered bonds from most countries remain above the levels seen at the start of 2010. Secondary market liquidity is low and thus investors often have no choice but to focus on new covered bond issues. Year to date, benchmark covered bond gross supply reached EUR 45bn and USD 15bn. Technicals: German Curve to extend steepening. ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES ARE IN THE DISCLOSURE APPENDIX. FOR OTHER IMPORTANT DISCLOSURES, PLEASE REFER TO https://firesearchdisclosure.credit-suisse.com. 16 March 2012 Table of Contents Summary of views 3 Trade Performance 4 Events Calendar 5 Trading the range (from the bearish side) 6 Duration view: no change; remain moderately bearish ...................... 6 Greek nonchalance ............................................................................ 7 EFSF: regular issuance ahead........................................................... 8 European Governments 10 SPGB curve analysis........................................................................ 10 Netherlands – 30s into 5s cash for cash spread .............................. 12 Belgium Syndication......................................................................... 13 UK Strategy 14 100y gilts and downgrade risk – we maintain our bearish bias ........ 14 Derivatives Strategy 18 EUR vol – analyzing risk reversals; Buy 30y OTM payers versus receivers........................................................................................... 18 EUR curvature update – take profit in receiving 1y 2s5s10s30s condor conditionally via receivers .................................................... 19 Money Market Strategy 21 Buy 2y1y Euribor-Eonia versus 4y1y ............................................... 21 Buy L-ED 5-7 box (buy short-sterling; sell Eurodollars) ................... 23 Sell [ERH3-ERM3] versus [ERU3-ERZ3] @ -2bp ............................ 24 Covered Bonds 26 Primary market: Steaming ahead..................................................... 26 Secondary market: Mainly out of stock ............................................ 27 Technicals 29 2s10s and 2s5s German should extend their steepening ................ 29 EUR and UK Supply Analysis 30 Forecasts 35 European Strategy and Trades 2 16 March 2012 Summary of views Exhibit 1: Summary of Views Market View Moderately bearish Bunds. We think they may move towards Outright the higher end of the recent range. Position for EUR long-end normalisation aided by lower front Curve end. Pay EUR 2s10s 10y forward as current best expression of the view. Curvature Receive a 5s10s30s proxy fly (such as 2s7s20s 2y fwd). Core ASW Buy 30y DBR versus swap. Buy DBR Jan 21 versus RXM2. Short Austria versus France in the 30y sector and versus Core Spreads Germany in the 10y sector. 5s10s Box France Netherlands. The Italian curve appears too steep ─ we like 2s10s flatteners. Peripheral Spreads Tactical 3s5s flattener in Spain. Buy 2y protection in Ireland. Pay GBP 2s5s10s. Turning bearish the gilt market as we UK approach end of QE. Buy EUR 3m10y straddles as protection against event risk and as a cheap way to position for a turn in rates. Receive EUR Vol 2s7s20s 2Y Fwd via OTM payer. Buy EUR OTM payers versus receivers on 30y tails. Receive 5y5y EUR versus CHF. Pay CHF 2s4s7s as a long CHF, SEK straddle position. Source: Credit Suisse New trades we recommend this week • Buy EUR OTM payers on 30y tails vs. OTM receivers • Buy UKT 1T17s versus 2s16s • Pay GBP 2y2y versus EUR • Buy SPGB Jan17 versus Oct14 and Apr20 (bullish SPGB trade) • Sell SPGB Oct14 versus Oct13 and Jan17 (bearish SPGB trade) • Netherlands – 30s into 5s cash for cash spread • Buy 3y FRA-Eonia widener versus 5y FRA-Eonia tightener • Buy L-ED 5-7 box (buy SS; sell ED) • Sell [ERH3-ERM3] versus [ERU3-ERZ3] Positions we recommend closing this week • Pay GBP 2y1y vs NOK • EUR Receive 1y 2s5s10s30s condor via receivers • Sell UKT 4H 19s vs UKT 3T 20s European Strategy and Trades 3 16 March 2012 Trade Performance Exhibit 2: Current trade recommendations Category Idea Name Start Date End Date CCY P&L (EUR) As Of France-Netherlands 5s10s box (OAT flattener) and alternative European Governments Macro 09-Mar-12 EUR 467,902 14-Mar-12 expressions of the view 5s10s Flattener in Belgium 08-Mar-12 EUR 157,851 14-Mar-12 Sell 30Y Austria versus 30Y France 05-Jan-12 EUR 64,810 14-Mar-12 Sell 10Y Austria vs 10Y Germany 23-Feb-12 EUR -521,842 14-Mar-12 3s5s Flattener in Spain 12-Jan-12 EUR -1,234,507 14-Mar-12 2s10s Flattener in Italy 05-Jan-12 EUR -1,310,096 14-Mar-12 European Governments - RV Shorten DBR 42s into 34s 02-Mar-12 EUR 1,046,908 14-Mar-12 UK Macro Receive EUR 1y 2s5s10s fly vs GBP 14-Dec-11 EUR 845,990 14-Mar-12 Pay GBP 2y1y vs NOK 09-Mar-12 14-Mar-12 GBP 496,306 14-Mar-12 Pay GBP 2s5s10s fly 01-Mar-12 GBP 108,821 14-Mar-12 Derivatives Pay EUR 10s30s 2y forward 01-Dec-11 EUR 2,592,149 14-Mar-12 USD 3y10y-10y10y payer spread 01-Jun-11 USD 2,271,822 14-Mar-12 EUR Receive 1y 2s5s10s30s condor via receivers 14-Dec-11 13-Mar-12 EUR 1,429,922 13-Mar-12 3y into EUR 5s20s bull steepener 14-Dec-11 EUR 983,754 14-Mar-12 Receive EUR 2s7s20s 2y fwd 10-Feb-12 EUR 575,703 14-Mar-12 Buy 30y DBR vs swap 19-Jan-12 EUR 462,331 14-Mar-12 Pay EUR 2s10s 10y fwd 27-Jan-12 EUR 426,682 14-Mar-12 GBP 2y2y straddles versus selling EUR 2y2y straddles 16-Feb-12 EUR 354,680 14-Mar-12 EUR 10y into 2s5s bull steepener 27-Jan-12 EUR 279,421 14-Mar-12 Receive EUR 2s7s20s 2y fwd conditionally via OTM payers 02-Mar-12 EUR 122,070 14-Mar-12 Buy EUR 2y2y vega vs 2y5y 27-Jan-12 EUR 105,316 14-Mar-12 Pay CHF 2s4s7s 29-Feb-12 CHF 52,157 14-Mar-12 Buy EUR 6m30y 2.8%/3.1%/3.4% payer fly 02-Feb-12 EUR 44,635 14-Mar-12 Pay CHF 10s15s30s 29-Feb-12 CHF -21,205 14-Mar-12 Receive 5y5y EUR vs CHF 10-Feb-12 EUR -212,055 14-Mar-12 Volatility GBP 3m10y straddles vs 3m30y 20-Feb-12 GBP 49,068 14-Mar-12 Buy EUR 3m10y straddles 19-Jan-12 EUR -1,330,215 14-Mar-12 Money Markets Sell UKT 4H 19s vs UKT 3T 20s 09-Feb-12 14-Mar-12 GBP 237,579 14-Mar-12 Sell UKT 4s 22/5s 25/4T 30s fly 09-Feb-12 GBP 198,413 14-Mar-12 Receive Oct-12 ECB dated 1m Eonia 23-Feb-12 EUR 4,108 14-Mar-12 Please see the Structured Securities, Derivatives, and Options Disclaimer. Source: Credit Suisse Exhibit 3: Current year-to-date PnL of portfolio (EUR) YTD PnL 20,522,749 WTD PnL 2,882,869 Last year Pnl 75,461,181 Source: Credit Suisse European Strategy and Trades 4 16 March 2012 Events Calendar Exhibit 4: Meetings, economic events, auctions and redemptions Date Day Meetings / Events Economic Data Auctions Redemptions Ctry Ctry Type € bn Ctry Type € bn 19/03/2012 Mon US NAHB Housing Market Index (Mar) SK SLOVGB 16 0.3* EA Current Account &Construction Output (Jan) IT Industrial Orders/Sales (Jan) 20/03/2012 Tue US Housing Starts/Permits (Feb) DE PPI (Feb) BE Consumer Confidence (Mar) UK CPI (Feb), RPI (Feb) & CBI Trends 21/03/2012 Wed Bank of England Minutes US Existing Home Sales (Feb) DE Schatz 14 5.0 UK PSNCR/PSNB (Feb) 22/03/2012 Thu US Initial Jobless Claims (Mar 17) FR BTF 8.52 US Leading Indicators (Feb) EA Industrial New Orders (Jan) EA Plash PMIs & Consumer Confidence (Mar) BE Business Confidence (Mar) UK Retail Sales (Feb) 23/03/2012 Fri US New Home Sales (Feb) GR GTB 1.6 ES PPI (Feb) PT PTB 2.78 FR Business Confidence Indicator (Mar) ES SGLT 9.5 IT Retail Sales (Jan) 26/03/2012 Mon US Chicago Fed Nat Activity (Feb) US Pending Home Sales (Feb) ES Mortgages (Jan) DE IFO Business Climate (Mar) IT Consumer Confidence (Mar) 27/03/2012 Tue US Consumer Confidence (Mar) IT BTPei 5Y* 1.4* DE Gfk Consumer Confidence (Apr) IT CTZ 2Y* 2.9* FR Consumer Confidence (Mar) UK GDP (Q4 F) & CBI Reported Sales (Mar) 28/03/2012 Wed US Durable Goods Orders (Feb) BE BGB 3.84 FR GDP (Q4 F) DE Bubill 5.0 EA M3 (Feb) IT Business Confidence (Mar) DE CPI (Mar P) 29/03/2012 Thu US Initial Jobless Claims (Mar 24) & GDP (Q4) IT BTP 10Y* 2.5* FR BTF 4.44 ES CPI (Mar P) IT BTP 5Y* 3.5* DE Unemployment Change/Rate (Mar) IT CCT 5Y* 5.0* EA Consumer/Industrial/Services Conf (Mar) UK Net Consumer Credit (Feb) UK Mortgage Approv & M4 Money Supply (Feb) UK Gfk Consumer Confidence (Mar) 30/03/2012 Fri Informal Ecofin meeting (up to Sat) US Personal Income/Spending (Feb) US Chicago PMI & NAPM Milwaukee (Mar) NE DTC 9.96 US University of Michigan Confidence (Mar Fin) IT BOT 8.80 FR PPI & Consumer Spending (Feb) ES Real Retails Sales (Feb) IT PPI (Feb) & CPI (Mar) DE Retails Sales (Feb) EA CPI Estimate (Mar) Source: Credit Suisse, National Treasuries, ECB, Bank of England, the BLOOMBERG PROFESSIONAL™ service European Strategy and Trades 5 16 March 2012 Trading the range (from the bearish side) Helen Haworth +44 20 7888 0757 Duration view: no change; remain moderately bearish firstname.lastname@example.org While we view the recent retracement in yields as overdue, we believe it is too early to Panos Giannopoulos increase the risk on bearish trades – however, we do remain moderately bearish and +44 20 7883 6947 expect Bunds to trade towards the upper end of the recent range. email@example.com Thushka Maharaj If our expectation of the sell-off continuing is correct, since the front-end remains +44 20 7883 0211 anchored, we would expect the curve to steepen, with the steepening likely be led by 2s5s firstname.lastname@example.org and 10s30s, in our view. We would also expect curvature (2s5s10s) to increase. Our Florian Weber expectation is for Bobl spreads to contract in a rising yield environment as the safe haven +44 20 7888 3779 premium of Germany dissipates. We continue to like being long 30y DBR ASW, and email@example.com therefore think that a 5s30s ASW box is another trade that should work well in a rising yield environment. Following the large rally in the second and third quarters of 2011, we changed the bullish duration stance we held through much of 2011 to recommend going neutral at the beginning of October. More specifically, later that month, for those able to trade the range, we recommended positioning for Bunds to trade in a 1.7% - 2.3% range. As we published in our year ahead outlook, Exhibit 5: Range trading our view was, and remains, that on a 12- 10 year German yield, % month view, German yields should be higher, and we were looking for the catalyst for yields to break out of the range to the upside. 3.0 In the meantime, we remained neutral to moderately bearish (within the range), watching events. Trading the range has 2.5 been the right position, and overall our range has held well since we recommended it. However, this year Bund 2.0 yields have remained low and compressed to trade in the bottom half of the range: between 1.7% and 2.0%, as shown in 01-Apr-11 01-Jul-11 30-Sep-11 31-Dec-11 Exhibit 5. 10Y Germany 1.7 2.3 2.0 We are not quite as optimistic as the Source: Credit Suisse Locus German and French finance ministers – the road ahead is unlikely to be smooth, and suggesting that the worst is behind us, at this stage, is a little premature, in our opinion. However, against the LTRO-improved backdrop, as the uncertainty overhang generated by the Greek debt restructuring dissipated, our view, as we reiterated two weeks ago (EST: LTRO indigestion, 2 March 2012), was to be moderately bearish Bunds, expecting them to trade towards the upper end of our range. There are few obvious catalysts in the near term for a return to the risk averse sentiment that took us to the yield lows of last autumn. And so, of course, despite the (surprisingly) smooth passage of the Greek debt exchange, yields ground lower. The fast reversal of the last couple of days, to our mind therefore overdue, speaks mainly to positioning, in our opinion. Absent a return of systemic concerns, we continue to think German yields should be higher, but with few convinced that the structural issues in the euro area are close to being sustainably resolved, the sell- off for now will be contained, in our opinion. We therefore remain moderately bearish, seeing nothing yet to suggest to us that our range is likely to be broken. European Strategy and Trades 6 16 March 2012 “Know your credit” Beyond Germany, we believe the “know your credit” requirement that has been extending from the periphery continues to increase in importance. Credit risk remains just one of the drivers of European governments, and its importance varies by issuer and with time. As fewer and fewer countries can be considered as safe-haven assets, understanding the risk factors by country is essential and now extends to include the Netherlands. We recommended steepeners in Netherlands 5s10s last week – as a box vs. France, or swap, given the increased risk we saw that the Netherlands would cease to be viewed purely as a safe-haven asset. This position has worked well – see our trade summary table for details – and we continue to like it. This week we further suggest taking an outright short position in Netherlands via selling 30s into 5s (cash weighted). We also assess the implications of Belgium’s recent syndication on our recommended 5s10s flattener in Belgium – Belgium has now completed 50% of expected supply for 2012, more than any other country, which we view as supportive for the trade. With the recent underperformance of Spain vs. Italy, we consider “cheap” flies to position for a bullish or bearish view in Spain. We find the 2.5y-3y sector rich (as a result of the LTRO), while the 5y-6y sector is cheap and the 9y sector is rich. Receiving a 3s6s9s fly in Spain has a bullish bias in terms of Spanish yields, while paying a 1.5y-3y-6y fly is a “cheap” way to express a negative view on Spain. We also reiterate our bearish view on the UK. Two weeks ago we turned bearish on the UK market for three main reasons: MPC members openly discussing the end of QE, rising commodity prices (in sterling terms), and stabilization in the European periphery. We continue to like paying GBP 2s5s10s as recommended two weeks ago. This week we explore this theme further and recommend paying GBP 2y2y versus EUR as a positive carry way to position for higher GBP rates. We outline a prospective schedule for gilt issuance for the first quarter of the fiscal year. Greek nonchalance Greece’s debt exchange has proceeded much as we expected in terms of the timing, the mandatory nature (through the CACs), the valuation, and the triggering of the CDS. What has surprised us, however, is that such a huge, and historical, debt restructuring is a total non-event. True, it has been a long time coming, viewed as inevitable by many for nigh on two years, and the market has been ready to move on for some time, but the successful completion of the exchange offer and the forthcoming CDS auction warrant barely a consideration outside those directly involved. We too are very happy to put the Greek situation behind us (for the time being). As we wrote in Greece’s debt exchange, 27 February 2012, the debt restructuring has bought Greece, and Europe, more time, and so in the near term, we expect developments in Greece to have limited direct impact on the remainder of the euro area sovereigns – we watch rhetoric from the IMF and on the domestic political front for any indication that this is likely to change. That said, the events of the last few weeks, and those of next week, have and will set many precedents that, for better or worse, now form part of the euro area landscape and have implications far beyond Greece. Now that the Greek-law debt exchange has been completed, there remains just the question of the foreign-law bonds (the deadline to exchange has been extended to 23 March) and the CDS auction on 19 March 2012. Price action between now and then in the strip of 20 new Greek bonds is likely to be driven by the dynamics of the CDS auction and rotation of the investor base – we provide a run in Exhibit 6. Yields range from 17.6% for the 10-year to 14% on the 30-year bond, compared to 13.3% and 10.5%, respectively, for 10- and 30-year Portuguese bonds. European Strategy and Trades 7 16 March 2012 Exhibit 7: Outstanding “official” Greek bond Exhibit 6: New Greek bond bid/offers holdings – ECB, NCBs, EIB 15 March 2012; prices 16 30% 14 25% 12 20% 10 8 15% 6 10% 4 5% 2 0 0% 0 - 1 year 1 - 2 years 2 -3 years 3 - 4 years 4 - 5 years 5 - 10 years 10 - 30 years Amount (€ bn) % of total (rh axis) Source: Credit Suisse Source: Credit Suisse Next week also sees the long-awaited 20 March bond maturity – of relevance now, only in as much as it reiterates the different treatment of private creditors (who received the exchange package worth ~25% of face value) and the ECB (and NCBs, EIB) who are set to receive par on their holdings. The details of the debt exchange offer provide us with a full breakdown of the €56.6 billion of Greek bonds held by the “official sector” – we provide a breakdown in Exhibit 7. Of note, Greece will be repaying €4.67 billion of the 20 March bond in full, and, unless there is a further restructuring in coming months, a total of €11.6 billion this year. EFSF: regular issuance ahead With the successful completion of Greece’s debt exchange and approval of the second bailout package, the EFSF is expected to be in the market more frequently – the head of the EFSF, Regling, has said that the EFSF is likely to be on the hook for about €100 billion in aid for Greece, and may be in the market three times next week. Press reports suggest that the three issues next week include a short-term bill, a five-year bond, and a 25- to 30- year bond to finance Greece and Ireland. We outline in Exhibit 8 outstanding EFSF Exhibit 8: EFSF issues outstanding issuance – both that issued directly into the Outstanding amount market and that created as part of the EFSF Bills 12.4 bn Greek debt exchange offer. Issued in market 6.9 bn If press reports are true, next week’s Created for accrued 5.5 bn issuance could be an interesting test of EFSF Bonds 49.0 bn investor interest – it will be the first time the Issued in market 19.0 bn EFSF will look to issue multiple bonds in Created for PSI sweetener 30.0 bn one week, and the first issuance with a Total 61.4 bn maturity greater than ten years. Since the Source: Credit Suisse EFSF has only been able to issue short- maturity debt recently, our assumption is that if long-maturity issuance is planned, it is based on known investor demand. Exhibit 9 shows the term structure for outstanding EFSF bonds versus the on-the-runs for France and Germany. With the large size of the 1- and 2-year notes issued as sweeteners for the Greek debt exchange, outstanding issuance is currently skewed towards the front end. European Strategy and Trades 8 16 March 2012 On average, across the term structure, EFSF bonds are trading 50bp above France and closer to 100bp over Germany. The 2.75% of Dec 16 bonds look a little rich relative to other issues, particularly if there is likely to be further supply at this point next week. Exhibit 9: EFSF yield vs. Germany / France and Exhibit 10: EFSF 10y vs. theoretical levels based on outstanding issues AAA or all 14 guarantors 15 March 2012 Expected issue 5.0 4 3.5 France 5.0 bn 3.0 bn 4.5 EFSF Expected issue 3 Germany 4.0 2.5 3.0 bn 5.0 bn 2 3.5 3.0 bn 1.5 15.0 bn 3.0 15.0 bn 1 2.5 0.5 0 2.0 1y 2y 3y 4y 5y 9y 10y 15y 30y 24-May 23-Jun 23-Jul 22-Aug 21-Sep 21-Oct 20-Nov 20-Dec 19-Jan 18-Feb 14 Guarantors AAA Guarantors EFSF 2021 Source: Credit Suisse, EFSF, the BLOOMBERG PROFESSIONAL™ service Source: Credit Suisse, EFSF In Exhibit 10 we further calculate synthetic 10-year EFSF yields based on the guarantors. The red line takes into account all (non stepping-out) guarantors – including the most risky ones; the grey line includes all countries with at least one AAA rating (i.e., including France and Austria). Since EFSF bonds have a 160% over-guarantee structure, and the AAA bonds account for roughly 100% of the guarantee between them; from a valuation standpoint, the EFSF should trade closer to the synthetic AAA yield than the yield implied by all guarantors. Offsetting this, however, is the considerable expected issuance ahead and uncertainty around the future and size of the EFSF vs. the ESM. In order to model the long end premium we first use the 30y France versus Germany spread. Thirty-year France trades around 100bp above Germany. To this we add a further liquidity and credit premium for the EFSF of approximately 40bp (this is the average spread of EFSF above France). So we would expect the 30y EFSF to be priced around 140-150bp over Germany. Comparing it directly to Germany – currently, in the 10y, EFSF trades at a 130bp spread. So we expect the 30y to be at least 150bp over Germany. We would therefore see value in a new 30y issue if it is priced at around 150-160bp above Germany. European Strategy and Trades 9 16 March 2012 European Governments Panos Giannopoulos +44 20 7883 6947 SPGB curve analysis firstname.lastname@example.org The debate is heating up regarding Spain. In this report we analyze the curve and provide trade ideas for both the bullish and bearish camps. We update our vol-adjusted excess returns for the riskier 10y European govies, see Exhibit 12. Interestingly, we see that 10y Spain is currently offering the highest vol-adjusted return. This is because even though volatility of spreads has fallen, 10y SPGB has barely tightened. We interpret this as the market remaining cautious on Spain. We take a look at the SPGB curve, see Exhibit 11. We observe that the 2.5y-3y sector is rich and we think this is driven by the LTRO. We also think that the 5y-6y sector is cheap while the 9y sector appears rich, in our view. We recommend the following trades: • Buy SPGB Jan17 versus Oct14 and Apr20, Exhibit 13, trade details in Exhibit 15. This ought to work in a bullish Spain environment. The 0-3y sector has already rallied a lot. Further outperformance of Spain ought to be led by the 5y sector. Note that this fly is slightly short cash, but we nonetheless expect it to outperform if SPGB spreads tighten because the fly is long the higher beta 5y sector. • Sell SPGB Oct14 versus Oct13 and Jan17, Exhibit 14, trade details in Exhibit 16. This ought to work if concerns about the periphery re-emerge as the 2.5y-3y is most at risk. Again, note that the fly is slightly positive cash; however, it ought to outperform, in our view, in a bearish SPGB environment due to the different betas of the various sectors. The risks to both trades are sector and bond specific. For example, as with any bond trade, there are repo risks when multiple legs are involved. In terms of sector risk, the main risk to the first trade is the market pricing an even stronger hump in the 5y sector of the credit curve. The main risk of the second trade is the market flattening even further in the 0-3y part of the curve and steepening further out. We find the risk/reward profile attractive for both trades. Exhibit 11: SPGB curve – the LTRO has caused the 2.5y sector to richen. The 5y-6y sector is cheap while the 9y sector is rich 5.00 4.00 3.00 2.00 1.00 30-Dec-14 31-Dec-19 30-Dec-24 30-Dec-29 30-Dec-34 31-Dec-39 Live Yield Source: Credit Suisse Locus European Strategy and Trades 10 16 March 2012 Exhibit 12: Spain is currently offering the best risk-adjusted return. Spreads have not tightened much despite the reduction in volatility 10y spread to Germany divided by 3m realized vol (bp/ann) 2.5 2.0 1.5 1.0 0.5 01-Jul-10 30-Sep-10 30-Dec-10 01-Apr-11 01-Jul-11 30-Sep-11 31-Dec-11 Germany vs. Austria, 10Y ASW vol adjusted Germany vs. Belgium, 10Y ASW vol adjusted Germany vs. Italy, 10Y ASW vol adjusted Germany vs. Spain, 10Y ASW vol adjusted Source: Credit Suisse Locus Exhibit 13: Receive 2.5y-5y-9y SPGB fly Exhibit 14: Pay 1.5y-2.5y-5y SPGB fly 40 -25 30 20 -50 10 0 -75 30-Dec-10 01-Jul-11 31-Dec-11 30-Dec-10 01-Jul-11 31-Dec-11 SPGB Oct14-Jan17-Apr20 SPGB Oct13-Oct14-Jan17 Source: Credit Suisse Locus Source: Credit Suisse Exhibit 15: Trade details: Buy SPGB Jan17 versus Oct14 and Apr20 Security Direction Amount (mm) Price Yield Cash Amount SPGB Jan-17 Buy 100 99.615 3.886% 99,615,000 SPGB Oct-14 Sell -85.75 101.86 2.552% -87,344,950 SPGB Apr-20 Sell -33.85 95.26 4.715% -32,245,510 50.6bp -19,975,460 Source: Credit Suisse Exhibit 16: Trade details: Sell SPGB Oct14 versus Oct13 and Jan17 Security Direction Amount (mm) Price Yield Cash Amount SPGB Oct-14 Sell -100 101.86 2.552% -101,860,000 SPGB Oct-13 Buy 79.97 100.725 2.552% 80,549,783 SPGB Jan-17 Buy 29.15 99.615 4.715% 29,037,773 -81.8bp 7,727,555 Source: Credit Suisse European Strategy and Trades 11 16 March 2012 Netherlands – 30s into 5s cash for cash spread Florian Weber The view: +44 20 7888 3779 email@example.com In our last EST we turned moderately bearish Netherlands and showed a cheap way of expressing this view. We maintain this view and explore another way of expressing it. We Panos Giannopoulos +44 20 7883 6947 recommend 30s into 5s cash for cash (Exhibit 17). firstname.lastname@example.org The rationale: • As discussed in last week’s EST, the Netherlands is facing economic challenges. Our economists expect a negative real GDP growth of -0.5% for 2012. • The Netherlands has an expected deficit of 4.5% of GDP in 2012. This is above the Maastricht Treaty criteria. Thus the Netherlands now has to enter into an austerity program, which further exacerbates the weakening growth outlook. • We are bearish yields outright. Trade expression: Exhibit 17: 5s into 30s cash for cash 4.00 3.75 3.50 3.25 3.00 31-Jul-11 31-Aug-11 30-Sep-11 31-Oct-11 30-Nov-11 31-Dec-11 30-Jan-12 29-Feb-12 5s30s fwd yield Source: Credit Suisse Locus We like to be short Netherlands 30 years versus 5 years cash for cash. We think the 30- year bond is rich versus 30-year Germany compared to the 5-year spread (Exhibit 18). The spread to 5-year Germany is 50bps while the spread to 30-year Germany is only 16bps. Looking at the 5s10s curve in the Netherlands and Germany, the 30-year bond seems to be rich. The Netherland curve is still very flat compared to the German curve (Exhibit 19). European Strategy and Trades 12 16 March 2012 Exhibit 18: 5s and 30s Germany versus Netherlands Exhibit 19: 5s30s Germany versus Netherlands -40 140 -7.5 180 -50 130 -10.0 120 -60 170 110 -70 -12.5 160 100 -80 -15.0 90 150 31-Jul-11 31-Aug-11 30-Sep-11 31-Oct-11 30-Nov-11 31-Dec-11 30-Jan-12 29-Feb-12 31-Jul-11 31-Aug-11 30-Sep-11 31-Oct-11 30-Nov-11 31-Dec-11 30-Jan-12 29-Feb-12 5s Germany vs Netherlands 30s Germany vs Netherlands (RHS) 5s30s Netherlands 5s30s Germany (RHS) Source: Credit Suisse Locus Source: Credit Suisse Locus The risks: • The main risk for the trade is that yields move in the opposite direction. • There is always flow risk when trading the long end in Holland. Belgium Syndication • In our last week’s EST we highlighted the possibility that Belgium would cancel its March auction and issue a new benchmark via syndication, which might be a longer-dated bond. • On Wednesday, Belgium issued a new €4.0 billion 20-year bond via syndication. The yield of the bond at issue was 4.064%, or 133bps over mid swaps. • The supply dynamics are positive for Belgium. Including this syndication, Belgium has issued €12 billion in 2012 and is now 50% through its 2012 funding program. Spain and the Netherlands are the only countries that are almost as far in their issuance program. • We still like the 5s10s flattener in Belgium. European Strategy and Trades 13 16 March 2012 UK Strategy Thushka Maharaj Exhibit 20: Summary of views +44 20 7883 0211 email@example.com Metric View Outright level of yields Expect some resistance to these low yields Curve Change in BoE basket consistent with 5s30s curve steepening Curvature 2s5s10s set to remain driven by European sovereign performance and rising commodities Long end curve/ASW Change in BoE basket favour long 5-10y ASW GBP-EUR spreads GBP long end set to underperform EUR Source: Credit Suisse 100y gilts and downgrade risk – we maintain our bearish bias Recent news reports (FT etc.) indicate that the government may issue a perpetual or 100y bond to lock in low long-end rates. From an economic perspective, we see the rationale for such a move, but from a market perspective, this is another reason to start turning bearish UK gilts, in our view. If the government wishes to fix financing costs at these levels, to us this implies that they do not expect yields to remain at such low levels for much longer. So we see this as more of a negative signaling mechanism for the market. We turned bearish on the UK market two weeks ago and recommended paying GBP 2s5s10s as an expression of this view (see EST (02-Mar-12). We maintain this recommendation – the recent US-led improvement in sentiment further supports this view. Our understanding is that the government and DMO will consult with the market for the first quarter of 2012-13. The obvious source of demand is the pension sector – we are not sure such low levels of yields would garner strong interest. We also expect recent rating action to temper demand for a perpetual bond. Fitch joins Moody’s in revising the UK rating outlook to Negative. This once again brings into focus the risks to the UK market and calls into question the “risk-free” status implied in a perpetual bond or ultra long bond issuance. Fitch cites “very limited space Exhibit 21: Gross Debt to GDP expected to peak to absorb further adverse at 94% in 2014-15 General Government Gross Debt (% Of GDP economic shocks in light of 100 such elevated debt levels” as one reason for the revision of 95 the rating Outlook from Stable to Negative. Exhibit 21 shows 90 the current forecasts for Gross 85 Debt to GDP from the OBR. Debt is expected to peak at 80 Nov-11 forecast 93.9% in 2014-15. 75 Mar-11 forecast The OBR will release new forecasts following the Budget 70 next Wednesday. Any 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 significant revisions to the debt profile will be obviously negative for the UK. Source: OBR, Credit Suisse European Strategy and Trades 14 16 March 2012 Fitch notes three triggers that would prompt a rating downgrade: • Discretionary fiscal easing; • Adverse shocks that implied a higher level of government borrowing; and • Material downward revision of medium-term growth potential. We will be watching the OBR growth forecasts in March for any signs of more pessimism – less likely now following stabilization in Europe. Focus next week turns to 2012-13 Budget and gilt issuance remit In our latest Sterling Investor (13-Mar-12) we updated our expectations for gilt issuance. Our economists expect the budget deficit to be £5bn better than the OBR forecasts due to pre-funding this year. We expect this to imply a small drop in gilt issuance versus this fiscal year. We expect gross gilt issuance of £172bn versus £179bn this year. As discussed in the above publication, we expect the DMO to skew issuance marginally towards longs and linkers. We expand on this here by looking at a prospective gilt issuance calendar. Exhibit 22 shows our expected Exhibit 22: Prospective issuance calendar issuance calendar for the first quarter Date Sector Prospective bond of 2012-13 fiscal year. This forecast is April largely the same as this year’s Tues 03-Apr-12 10y UKT 4s 22 schedule. We expect the DMO to start Wed 04-Apr-12 Linker with 10y issuance (given that this year Wed 11-Apr-12 5y UKT 1s 17s ended with shorts and longs). Thurs 12-Apr-12 Linker Wed 18-Apr-12 30y UKT 4H 42s We expect May • 3 short auctions with the UKT 1s 17s Thurs 03-May-12 10y UKT 22s/UKT 3T 21s Tues 08-May-12 Linker tapped twice and possibly the UKT Thurs 10-May-12 30y UKT 4H 42s 5s 18s or 2s 16s tapped once. Thurs 17-May-12 5y UKT 1s 17s • 3 medium auctions with taps of the 21-25th May Syndication? Linker UKT 4s 22s and possibly the UKT June 3T 21s. Thurs 07-Jun-12 10y UKT 22s/UKT 3T 21s Tues 12-Jun-12 Linker • 4 long auctions with at least two Thurs 14-Jun-12 Long UKT 25s or UKT 27s taps of the UKT 4H 42s. Tues 19-Jun-12 5y UKT 2s 16s/UKT 1s 17s/UKT 5s 18s • One linker and one conventional Thurs 21-Jun-12 Linker syndication towards the end of the 25-28th June Syndication? Conventional quarter. We think either the Source: Credit Suisse conventional UKT 3T 52s or the 4s 60s (or 100y bond) are syndicated in June. In the front end, we think it is more likely that the DMO taps the UKT 2s 16s than the UKT 1T 17s. The main reason for this is that there is a new UKT 1s 17s which is likely to be re-opened twice – this makes it less likely that another 17s maturity is tapped this quarter. We recommend buying the old UKT 1T 17s versus the UKT 2s 16s. Exhibit 23 and Exhibit 24 show that the 1T 17s has cheapened versus surrounding bonds in the recent sell off. European Strategy and Trades 15 16 March 2012 Exhibit 23: UKT 2s 16s/1T 17s spread cheapening Exhibit 24: UKT 1T 17s cheap versus neighbours 10 30.0 9 27.5 8 25.0 7 6 22.5 31 Aug 11 31 Oct 1130 Nov 11 31 Dec 11 30 Jan 1229 Feb 12 29 Feb 12 03 Mar 12 06 Mar 12 09 Mar 12 12 Mar 12 15 Mar 12 UKT 2s16/1T 17s yield UKT 2s 16/1T 17/1s 17 Source: Credit Suisse Locus Source: Credit Suisse Paying GBP frontend versus EUR is still positive roll In previous publications we discussed being long GBP vol versus EUR (see EST (16-Feb- 12). We still favour long EUR positions, particularly in the front end. We now favour short GBP and find that paying GBP versus EUR still offers positive roll. Exhibit 25 shows the forward curves for GBP-EUR 1y and 2y swaps. Paying GBP versus EUR 2y2y rolls positive by 9bp per year. Exhibit 25: Paying GBP in the front end versus EUR is still positive carry 30 Roll on 1y to preceding (annualised) 25 Roll on 2y to preceding (annualised) GBP-EUR spreads and Rolldown 20 GBP - EUR 1YR 15 GBP - EUR 2YR 9 9 9 10 6 3 3 4 4 5 2 1 0 -5 -3 -10 -9 -15 -20 -16 -19 -25 6m 1y 2y 3y 4y 5y 6y Forward horizon Source: Credit Suisse Locus We do acknowledge that the GBP-EUR 2y2y spread has already moved higher since the start of this year. We expect the EUR front end to remain fairly anchored with all the excess liquidity – thus in a sell off, the EUR front end is expected to lag. Thus, for investors who think this is the start of a bear market for fixed income, then paying the front end of GBP versus EUR still makes sense at these levels. European Strategy and Trades 16 16 March 2012 Exhibit 26: GBP-EUR 2y2y has already started to move Exhibit 27: Annualised roll/120bd delivered vol Roll to preceding (annual) 6M 1Y 2Y 3Y EUR-GBP 1y 0.09 0.07 0.13 0.12 200 300 EUR-GBP 2y 0.09 0.14 0.14 0.08 EUR-GBP 5y 0.1 0.07 0.01 -0.07 200 100 100 0 0 31-Dec-99 30-Dec-04 30-Dec-09 GBP - EUR 2y 2y GBP - EUR 2y rhs Source: Credit Suisse Locus Source: Credit Suisse We also show the risk-adjusted roll down in Exhibit 27. This table shows the annualized roll divided by the 120 business-day delivered vol. The GBP-EUR 2y1y and 2y2y spreads still offer positive risk-adjusted roll-down. Take profit in long NOK 2y1y versus GBP Last week we recommended Exhibit 28: NOK 2y1y fell 15bp versus GBP paying GBP 2y1y versus NOK to 2.15 NOK 2y1y vs GBP 2y1y position ahead of the Norges Bank meeting. We expected the 2.05 Bank to be more dovish than the 1.95 market was pricing – paying GBP versus NOK was one positive 1.85 carry way to position for this. 1.75 In fact the Norges Bank cut rates 1.65 in a surprise move – and our recommendation moved 15bp in 1.55 Nov-11 Nov-11 Mar-12 Jan-12 Jan-12 Feb-12 Feb-12 Dec-11 Dec-11 our favour following the move. We now recommend taking profits on this recommendation. Source: the BLOOMBERG PROFESSIONAL™ service Take profit in short UKT 4H 19s versus UKT 3T 20s We had recommended selling the Exhibit 29: UKT 4H 19s/3T 20s spread tightened UKT 4H 19s versus the UKT 3T 20s on the 9th Feb. This was a recommendation to position for 40 the 19s falling out of mediums into the short basket for QE buybacks. The UKT 4H 19s/3T 20s tightened Avg: 35.17 35 by 5bp since trade initiation. We recommend taking profits following the move of the 19s out 30 of the medium basket on the 7th 30 Sep 11 30 Nov 11 30 Jan 12 UKT 4H 19s/3T 20s spread March. Avg(UKT 4H 19s/3T 20s spread) Source: Credit Suisse Locus European Strategy and Trades 17 16 March 2012 Derivatives Strategy Panos Giannopoulos +44 20 7883 6947 EUR vol – analyzing risk reversals; Buy 30y OTM payers firstname.lastname@example.org versus receivers The recent strength of risky assets has caused a bit of re-pricing in rates and vol (with both moving higher in the last couple of days). Our view is that the recent strength of economic data coupled with the (still) low starting level of rates suggests that payer skew should be higher than receiver skew (in other words, OTM payer vol ought to be higher than the receiver one), in our view. We analyze the 100-wide risk reversal (table in Exhibit 30) to see whether the vol market is in line with our view and find that it is mainly in agreement. We do notice, however, that the risk reversal is still negative for 30y tails (Exhibit 31). We think this is wrong. Our reasoning is as follows: • Reflation risk as a result of CB action. See the thoughts from our market strategies regarding reflation: MT – taking reflation more seriously. • Potential long-end supply by EFSF, new DBR 30y in April suggesting risks are on the upside I terms of yields. • Very low level of 30y by historical standards. • Continued appetite for long-end steepeners. • If (despite the above) the 30y does manage to rally, we think it will be a slow grinding rally and vol ought to sell-off. We therefore recommend buying a 3m30y 50bp OTM payer and selling a 3m30y 50bp OTM receiver. Trade details are shown in Exhibit 32. Alternative ways to express the trade would be simply to sell an OTM 3m30y receiver option. The risk reversal can also be done via 6m or 1y options. The risk to the trade is a disorderly unwind of long-end steepening positions the causes 30y swap and vol to rally. Exhibit 30: 100-wide risk reversal (50bp OTM payer-50bp OTM receiver, bp/ann) Receivers still rich to payers in 30y tails – we expect this to reverse. Expiry\Tenor 2y 5y 10y 30y DU OE RX 3m 25.6 7.3 0 -5 5.9 6.8 3.5 1y 21.5 8.3 2.8 -1.4 2y 15.7 6.1 3.1 0.7 Source: Credit Suisse European Strategy and Trades 18 16 March 2012 Exhibit 31: 3m30y, 1y5y risk reversal. Both have been rising, but the risk reversal is still negative for 30y tails 15.0 3m30y Risk reversal 10.0 1y5y risk reversal 5.0 0.0 -5.0 -10.0 -15.0 -20.0 -25.0 16-Mar-07 15-Mar-08 15-Mar-09 15-Mar-10 15-Mar-11 14-Mar-12 Source: Credit Suisse Locus Exhibit 32: Trade details: EUR 3m30y risk-reversal – Buy OTM payer, sell OTM receiver Par Src Side Product CCY Notional Expiry Tenor Strike Fwd Value DV01 Delta N Vega Gamma Buy Payer EUR 50,000,000 3m 30y 3.1680% 2.6680% 185,968 105,920 10,317 9,545 476 Sell Receiver EUR -50,000,000 3m 30y 2.1680% 2.6680% -262,162 105,920 11,842 -9,855 -466 -76,194 22,159 -310 Source: Credit Suisse EUR curvature update – take profit in receiving 1y 2s5s10s30s condor conditionally via receivers In short, our curvature view in the EUR curve is as follows: • We continue to recommend receiving proxy 5s10s30s flies, such as 2s7s20s 2y fwd. We like this trade in delta space and via OTM payers. • We do not see value in receiving 2s5s10s 1y fwd, and we have already closed our recommendation there. In fact, if the back-up in yields were to gather pace, the 2s5s10s 1y fwd would also move higher, in our view. In our 2012 outlook we recommended receiving EUR 1y into 2s5s10s30s condor (receive 5s and 10s, pay 2s and 30s) conditionally via receivers. The idea behind this trade recommendation was that curvature in the EUR curve was too high and as a result any further rally would be led by the belly. The trade was essentially driven by three sub- components: 2s5s10s 1y fwd, 5s10s30s 1y fwd, and the conditional aspect. As explained above, we do not see huge value in receiving 2s5s10s 1y fwd. We also see an increased risk of a back-up in yields (which would reduce the delta of the trade and hence cause it to underperform). We therefore recommend closing the trade. European Strategy and Trades 19 16 March 2012 Exhibit 33: EUR 1y into 2s5s10s30s condor has worked – take profits 100 50 0 31-Dec-07 30-Dec-08 30-Dec-09 30-Dec-10 31-Dec-11 spot 2s5s10s30s condor 1y forward 2s5s10s30s condor Source: Credit Suisse Locus European Strategy and Trades 20 16 March 2012 Money Market Strategy Panos Giannopoulos +44 20 7883 6947 Buy 2y1y Euribor-Eonia versus 4y1y email@example.com • In today’s LTRO-driven environment, finding the new normal shape of money market Marion Pelata curves can be quite challenging. We find it interesting to look at the breakdown +44 20 7883 1333 between rates pre and post maturity of the two three-year LTROs. firstname.lastname@example.org • In our view, the Euribor-Eonia basis is too high near the 5y sector, while it is too low near the 2y-3y sector. In the event of a further “blow-up” in the near future, we would expect 3y FRA-Eonia to widen relative to 5y. Thus, buying Euribor-Eonia 2y1y versus 4y1y or a 3s5s basis spread flattener is a cheap hedge towards the possibility of a renewed funding stress episode (LTRO not working). • The risk to this trade is a steepening of the 3s5s curve because of fixings dropping too far and pushing the front end of the curve close to the 10bps level. Although we believe investors will still consider the risks of potential ratings downgrades of some LIBOR panel members as well as risks due to LIBOR scrutiny investigations, we think this risk is worth taking. • Note that the slope of FRA-Eonia could go positive if the front-end basis comes in a lot (as then a risk premium ought to be priced further out). This is a bigger risk when trading 2y versus 5y basis, for example. It is less of a risk when trading 2y1y versus 4y1y, in our view. Looking at our principal component analysis (PCA) latest residuals for the various FRA- Eonia forwards (Exhibit 34 and Exhibit 35), we find that the current level is too high relative to our reconstructed dataset for the 4y1y basis and too low for the 2y1y basis. This suggests that the 4y1y-2y1y spread is probably too rich by about 4bps compared to our model. It is worth noting that the roll is currently flat. Exhibit 34: Principal component analysis, latest residuals █: Residuals as of 14th of March close; ▲: as of the day before; ●: as of the week before ; * : as of last month Source: Credit Suisse European Strategy and Trades 21 16 March 2012 For those preferring to trade spot FRA-Eonia spreads, our model suggests that 3y FRA- Eonia is too low relative to the 5y. Since the announcement of Exhibit 35: 4y1y and 2y1y basis PCA residuals these three-year LTROS, rates in both secured and unsecured markets have been falling drastically as 2.5 well as the spread between both. The 1y Euribor-Eonia basis is currently around 0.0 39bps, far from its Nov-11 high of almost 80bps. If funding stresses continue to show positive signals, one -2.5 might expect this spread to continue falling, but it is 01-Apr-11 01-Jul-11 30-Sep-11 31-Dec-11 unlikely to us that the basis EE 2y1y PCA residuals EE 4y1y PCA residuals will drop much more from Source: Credit Suisse here (the LTRO is priced in). In the event of another “blow-up”, we still might expect some unconventional measures by the ECB and probably some additional LTROs. In that environment we would expect flattening of the MM term structure. Looking at Exhibits 36-39, we find a good RV opportunity in selling the 4y1y Euribor- Eonia basis versus the 2y1y, or similarly, in selling the Euribor-Eonia 5y basis versus the 3y basis. Exhibit 36: Euribor-Eonia 4y1y basis is too high Exhibit 37: 2y1y-4y1y basis spread is too high near versus 2y1y -2bp 50 35 -5 40 30 -10 30 25 -15 01-Apr-11 01-Jul-11 30-Sep-11 31-Dec-11 01-Apr-11 01-Jul-11 30-Sep-11 31-Dec-11 EE 2y1y basis EE 4y1y basis,rhs EE 4y1y vs 2y1y basis Source: Credit Suisse Source: Credit Suisse European Strategy and Trades 22 16 March 2012 Exhibit 38: ... and a similar pattern can be seen in 3y Exhibit 39: … with a 3s5s basis spread approaching versus 5y basis zero 60 70 0 60 50 -5 50 40 -10 40 30 30 -15 30-Dec-08 30-Dec-09 30-Dec-10 31-Dec-11 30-Dec-08 30-Dec-09 30-Dec-10 31-Dec-11 EE 3s basis EE 5s basis, rhs EE 3s5s basis spread Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Buy L-ED 5-7 box (buy short-sterling; sell Eurodollars) • Following the decent steepening in the Eurodollars curve since January, we believe this ought to be temporary and find the reds too steep relative to the short-sterling curve. We constrain ourselves within a window that is well within the Fed’s “commitment window” and find the best opportunities between Mar-13 and Sep-13 (H3 versus U3). • Looking at the current levels, we find an interesting trade in buying the box short sterling-Eurodollar 5th-7th contracts. • We view the balance of risks in terms of hikes in 2013 as tilted slightly towards the MPC, as it has not pre-committed to maintaining rates at current levels. As shown in Exhibits 40 and 41, we find that markets have steepened in both Eurodollars and short-sterling but that the move in short-sterling has more room to steepen than in Eurodollars. This view is in line with our US colleagues who recently recommended a 1s2s flattener. Looking at the SS- ED box (buying the SS 5-7 spread and selling the ED spread), we find a certain correlation with the spread of UK and US surprise index. It appears to us that relative to this index, the box appears too low. Similarly, relative to the 1y GBPUSD basis swap, we find that the SS-ED spread has tightened in the last month and has diverged with the cross-currency basis swap. We note that this trade currently has a positive roll of 5bps. A risk to this trade as highlighted previously is that the Fed decides to hike rates between Mar-13 and Sep-13 while the MPC is on hold, which really does not appear likely. European Strategy and Trades 23 16 March 2012 Exhibit 40: 5-7 spread in ED is too high relative to Exhibit 41: Sep13 contracts are rich relative to SS Mar13 0.3 0.3 -0.3 -0.3 -0.4 -0.4 0.2 0.2 -0.5 -0.5 0.1 0.1 -0.6 -0.6 0.0 -0.7 0.0 -0.7 31-Jul-11 30-Sep-11 30-Nov-11 30-Jan-12 01-Jul-11 30-Sep-11 31-Dec-11 SS 5-7 spread ED 5-7 spread, rhs SS vs ED 5th SS vs ED 7th, rhs Source: Credit Suisse, Credit Suisse Locus Source: Credit Suisse Exhibit 42: SS-ED box has room for improvement as Exhibit 43: Relative to the 1y GBPUSD basis swap, predicted by the UK – US surprise index SS-ED box should correct 0.1 20 0.1 0.1 0.0 0.0 0.0 -0.1 10 -0.1 -0.1 -0.2 -0.3 0 -0.2 -0.2 01-Jul-10 30-Dec-10 01-Jul-11 31-Dec-11 30-Dec-10 01-Jul-11 31-Dec-11 SS-ED 5-7 box, rhs UK - US suprise index SS-ED 5-7 box, rhs GBPUSD 1y basis swap, invtd Source: Credit Suisse, Credit Suisse Locus Source: Credit Suisse Sell [ERH3-ERM3] versus [ERU3-ERZ3] @ -2bp The recent sell-off in rates has caused the Euribor curve to steepen uniformly within 2013 maturities. However we think that risks of hikes are not uniform; they are greater in the second half of 2013. We recommend positioning for this view by selling H3-M3 spreads and buying U3-Z3 spreads at -2bp. If we assume there are 1bp- 2bps of “turn” adjustment in Z3, this essentially suggests that the same amount of hikes are priced in Q2 and Q4 of 2013, which we believe is incorrect. The risk to the trade is the FRA-Eonia term structure. However, we do not see this as a big risk in the near term. European Strategy and Trades 24 16 March 2012 Exhibit 44: Euribor term structure: Clear steepening for the 2013 contracts 2.00 1.92 2.06 1.78 2.00 1.66 1.54 1.50 1.40 Yield 1.29 1.00 1.17 1.07 0.96 1.00 0.00 0.85 0.88 0.80 0.75 0.70 0.70 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 ER (Trade) ER Z-score(Trade) ER (1 month ago) Source: Credit Suisse Locus Exhibit 45: ERH3-ERM3 spread has widened to a Exhibit 46: The box is at the higher end of the last larger extent recently compared to ERU3-ERZ3; the eight month range – we think that range should hold spread between them is still too high 0.150 0.05 0.20 0.125 0.100 0.15 0.00 0.075 0.10 -0.05 0.050 01-Jul-11 30-Sep-11 31-Dec-11 30-Dec-09 30-Dec-10 31-Dec-11 ERH3-ERM3 ERU3-ERZ3, rhs ER Box Source: Credit Suisse, Credit Suisse Locus Source: Credit Suisse European Strategy and Trades 25 16 March 2012 Covered Bonds Sabine Winkler +44 20 7883 9398 Primary market: Steaming ahead email@example.com The EUR-benchmark covered bond primary market picked up the pace. Since the start of the week, Bankinter (BKTSM) launched a EUR 1bn five-year covered bond at m/s +268bp, the fourth EUR-benchmark covered bond of a Spanish lender this year. Norway’s DNB Boligkreditt (DNBNO) was also in the market issuing a EUR 2bn ten-year covered bond at m/s +61bp. It is the lender’s second appearance in the market in 2012, following a EUR 2bn five-year offering priced at m/s +68bp in January. Additionally in the EUR-benchmark covered bond market, Sweden’s Stadshypotek (SHBASS) priced a EUR 1.5bn five-year covered bond at m/s +30bp (Exhibit 47). Exhibit 47: New EUR-benchmark covered bond supply (sorted by country) Issue date ISIN Country Issuer Maturity Coupon EURbn ASW (bp) TTM (years) Collateral Legal background 01/02/12 XS0743547183 AT ERSTBK 08/02/22 3.500 1.000 130 10 Mortgages Special-law-based 09/01/12 XS0731129234 AU ANZ 18/07/22 3.625 1.000 130 11 Mortgages Special-law-based 04/01/12 XS0729014281 AU CBAAU 12/01/17 2.625 1.500 100 5 Mortgages Special-law-based 05/01/12 XS0730559894 AU NAB 13/01/17 2.625 1.000 100 5 Mortgages Special-law-based 09/02/12 XS0747205101 AU WSTP 16/02/16 2.125 1.750 72 4 Mortgages Special-law-based 11/01/12 XS0732551550 CH CS 18/01/17 2.125 1.250 60 5 Mortgages General-law-based 03/01/12 XS0728789578 CH UBS 10/01/17 2.250 1.500 61 5 Mortgages General-law-based 12/03/12 ES0413679178 ES BKTSM 22/03/17 4.125 1.000 268 5 Mortgages Special-law-based 08/02/12 ES0440609040 ES CABKSM 16/02/17 4.000 1.000 248 5 Mortgages Special-law-based 06/02/12 ES0413860281 ES SABSM 16/02/15 3.625 1.200 250 3 Mortgages Special-law-based 01/02/12 ES0413900285 ES SANTAN 17/02/15 3.250 2.000 210 3 Mortgages Special-law-based 10/01/12 XS0731649660 FI NBHSS 17/07/17 2.375 2.250 65 6 Mortgages Special-law-based 04/01/12 FR0011179852 FR ACACB 17/01/22 4.000 1.500 165 10 Mortgages Special-law-based 06/02/12 FR0011200849 FR BPCECB 16/02/17 2.750 1.250 120 5 Mortgages Special-law-based 09/01/12 FR0011181171 FR CFF 19/01/22 4.250 1.000 190 10 Mixed Special-law-based 10/02/12 FR0011201995 FR CFF 21/08/15 2.250 2.000 95 4 Mixed Special-law-based 10/01/12 FR0011182542 FR CMCICB 19/01/24 4.125 1.250 172 12 Mortgages Special-law-based 03/01/12 FR0011178946 FR CRH 17/06/22 4.000 2.000 160 10 Mortgages Special-law-based 27/02/12 FR0011213453 FR CRH 08/03/24 3.600 1.750 120 12 Mortgages Special-law-based 05/01/12 FR0011180017 FR SOCSFH 18/01/22 4.000 1.250 170 10 Mortgages Special-law-based 01/03/12 FR0011215516 FR SOCSFH 14/03/19 2.875 1.500 107 7 Mortgages Special-law-based 15/02/12 XS0748955142 GB BACR 22/02/17 2.250 2.000 78 5 Mortgages Special-law-based 04/01/12 XS0729188606 GB LLOYDS 11/01/17 3.500 1.250 180 5 Mortgages Special-law-based 11/01/12 XS0732631824 NL ABNANV 18/01/22 3.500 1.000 120 10 Mortgages Special-law-based 03/01/12 XS0728783373 NL INTNED 10/01/22 3.375 1.750 110 10 Mortgages Special-law-based 04/01/12 XS0728790402 NO DNBNO 11/04/17 2.375 2.000 68 5 Mortgages Special-law-based 12/03/12 XS0759310930 NO DNBNO 21/03/22 2.750 2.000 61 10 Mortgages Special-law-based 23/01/12 XS0738895373 NO SPABOL 01/02/19 2.750 1.250 77 7 Mortgages Special-law-based 13/03/12 XS0760243328 SE SHBASS 21/03/17 1.875 1.500 30 5 Mortgages Special-law-based Source: Credit Suisse Year to date, 34 lenders from 13 jurisdictions have raised EUR 45bn through the sale of EUR-benchmark covered bonds (-43% from the same period in 2011) and USD 15bn through the sale of USD-benchmark covered bonds (+152% from the same period in 2011). With EUR 29bn and USD 3bn falling due, EUR- and USD-benchmark covered bond net supply was positive. The new benchmark covered bonds have an initial maturity of up to 12 years; their average initial term is seven years. All the new benchmark covered bonds, except two, are mortgage covered bonds – i.e., covered bonds backed by real estate loans (Exhibits 47 an 48). European Strategy and Trades 26 16 March 2012 Exhibit 48: New USD-benchmark covered bond supply (sorted by country) Issue date ISIN (144A) Country Issuer Maturity Coupon USDbn ASW (bp) TTM (years) Collateral Legal background 05/03/12 US20271AAB35 AU CBAAU 16/03/17 2.250 2.000 115 5 Mortgages Special-law-based 23/01/12 US063679ZT48 CA BMO 30/01/17 1.950 2.000 76 5 Mortgages General-law-based 20/01/12 US06415CAC38 CA BNS 30/01/17 1.950 2.500 77 5 Mortgages General-law-based 28/02/12 US12800UAL44 CA CCDJ 06/03/17 1.600 1.500 51 5 Mortgages General-law-based 05/03/12 US891145TN42 CA TD 13/03/17 1.500 3.000 45 5 Mortgages General-law-based 01/03/12 US225448AL32 CH CS 06/03/15 1.625 2.000 105 3 Mortgages General-law-based 19/01/12 US902674MY32 CH UBS 23/01/15 1.875 1.500 135 3 Mortgages General-law-based Source: Credit Suisse Secondary market: Mainly out of stock The rally in the secondary covered bond market rolls on for now, grinding covered bond ASW tighter. Tighter covered bond ASW mean lower funding costs for lenders affecting covered bond primary market activities. As Exhibit 49 shows, ASW of covered bonds from most countries remain, however, above the levels seen at the start of 2010. Secondary market liquidity is low and thus investors often have no choice but to focus on new covered bond issues. Exhibit 49: Covered bonds’ asset swap spread performance ASW ASW Change (YTD) ASW Change (2011) ASW Change (2010) CBI All 151 -65 10 90 CBI AT 91 -23 45 43 CBI CA 36 5 8 -17 CBI CH 47 -3 12 - CBI DE 34 -16 16 17 CBI DK 59 -3 16 13 CBI ES 306 -109 12 221 CBI FI 37 -14 9 7 CBI FR 82 -67 34 50 CBI GB 89 -56 -25 -46 CBI IE 393 -119 -83 223 CBI IT 255 -156 123 210 CBI LU 134 -9 43 86 CBI NL 60 -14 9 8 CBI NO 38 -14 4 7 CBI NZ 70 -23 5 - CBI PT 696 -285 244 636 CBI SE 29 -17 -2 -8 CBI US 141 -20 45 23 CBI SLB 154 -67 10 97 CBI GLB 96 -40 2 -28 CBI Public 103 -51 32 65 CBI Mortgage 165 -72 -4 93 CBI Mixed 90 -54 37 53 CBI AAA 61 -95 -49 12 CBI AA 198 -86 -44 84 CBI A 354 -192 -79 - Source: Credit Suisse European Strategy and Trades 27 16 March 2012 While risk-affine investors are exploring opportunities in higher-yielding covered bonds, risk-averse investors still favour covered bonds that have experienced a more moderate ASW widening and covered bonds of lenders with a superior credit history and business profile and from non-peripheral European countries. From the beginning of 2012, our EUR Covered Bond Index (CBI) has tightened by 65bp. In the same period, the ASW of Canadian covered bonds have widened by 5bp, while those of Portuguese covered bonds have tightened by 285bp (Exhibit 49). In mid-March 2012, our EUR CBI was at m/s +151bp. It was at m/s +61bp at the start of 2010. We think that further episodes of higher market volatility are likely until economic recovery and fiscal consolidation are firmly secured. Thus, we caution investors to be prepared for more negative headlines and pressure on sovereigns’ and banks’ credit strength. Spread differentiation by country and issuer remains high by historical standards. European Strategy and Trades 28 16 March 2012 Technicals David Sneddon +44 20 7888 7173 2s10s and 2s5s German should extend their steepening firstname.lastname@example.org The dramatic move higher in yields this week has seen curves reprice sharply. In Germany, our immediate focus is on 2s5s and 2s10s, although we may also be close to a break in 10s30s. We have maintained the view that while support at 152bps holds, the choppy January/March range for the 2s10s German bond curve is a consolidation/corrective phase following the completion of a base last year. The sharp steepening this week suggests we may be set to see a resumption of the underlying steepening trend. A close above the late January high at 178bps should add weight to this steepening story, with 61.8% retracement resistance at 181bps then seen as the trigger to a move back to the 195bps late November high. Our broader bias and core objective remains for an eventual break through here to target 207/213bps – the measured target from the base and late 2010 high. Near-term support is pegged at 178/176bps, then 169bps. For the 2s5s German bond curve, the close above 68bps has seen a “head & shoulders” reversal complete, which already leaves the curve 10bps higher. We look for steepening to extend to 85/86bps – the target from the base and late November high. This will then present the next major challenge. A close above 86bps is needed to suggest a more significant reversal has been established, clearing the way for further steepening to 94bps, then 101bps – the 61.8% retracement of the 2009/2011 flattening. With the 108bps highs of 2011 not far above, we would look for this to then cap. Support for 2s5s should now be found from the “neckline” to the base at 68bps. The 10s30s German bond curve has extended its steepening to retest key resistance at 68bps – the high for the year from January and the 38.2% retracement of the 2011 flattening. A close above here is needed to suggest the steepening bias can be maintained here also for a test of 75bps next, then back to what should be tougher resistance at 81/82bps – the 61.8% retracement of the 2011 flattening and November high. Support at 65.5bps needs to hold to keep the immediate risk steeper. Exhibit 50 2s10s German Bond Curve – Weekly Source: CQG, Credit Suisse European Strategy and Trades 29 16 March 2012 EUR and UK Supply Analysis Exhibit 51: Forward supply calendar Bonds Week Day Date T-bills Issues 2/3y 5/7y 10y 15/20y >=30y Linkers Issues 12 Mon 19-Mar DTC 3M & 6M 1.7* SK SLOVGB 16 0.3* 12 Mon 19-Mar BTF 7.5* 12 Tue 20-Mar SGLT 12M & 18M 5.5* 12 Tue 20-Mar GTB 3M 1.6* 12 Wed 21-Mar PTB 4M & 6M 0.875 DE Schatz 14 5.0 12 Thu 22-Mar UK UKTi 42 0.9* 12 Thu 22-Mar US TIPS 10Y 11* 12 Fri 23-Mar UK EUR total 17.18 EUR total 5.0 0.3 13 Mon 26-Mar BTF 7.5* 13 Mon 26-Mar Bubill 12M 3.0 13 Tue 27-Mar SGLT 3M & 6M 3.0* US 2Y Note 35* 13 Tue 27-Mar IT CTZ 2Y* 2.9* BTPei 5Y* 1.4* 13 Wed 28-Mar BOT 9.0* US 5Y Note 35* 13 Thu 29-Mar IT CCT 5Y* 5.0* 13 Thu 29-Mar IT BTP 5Y* 3.5* BTP 10Y* 2.5* 13 Thu 29-Mar US 7Y Note 29* 13 Fri 30-Mar UK EUR total 22.5 2.9 8.5 2.5 1.4 14 Mon 02-Apr DTC 3M & 9M 1.7* 14 Mon 02-Apr BTF 7.5* 14 Tue 03-Apr BGB 3M & 12M 3.0* 14 Wed 04-Apr DE/ES SPGB 2Y* 3.0* Bobl 17 3.0 14 Wed 04-Apr ES SPGB 5Y* 2.0* 14 Thu 05-Apr FR OAT 10Y* 4.0* OAT 15Y* 2.0* OAT 30Y* 1.5* 14 Fri 06-Apr UK EUR total 12.2 3.0 5.0 4.0 2.0 1.5 15 Mon 09-Apr Bubill 3M 4.0 15 Mon 09-Apr BTF 7.5* 15 Tue 10-Apr GTB 1.6* NL/US 3Y Note 32* DSL 10Y* 2.0* DSL 20Y* 1.0* 15 Tue 10-Apr AT RAGB 5Y* 0.9* RAGB 15Y* 0.9* 15 Wed 11-Apr BOT 7.5* DE Bund 22 5.0 15 Wed 11-Apr US 10Y Note 24* 15 Thu 12-Apr IT/US BTP 3Y* 3.5* BTP 8Y* 2.5* 30Y Bond 16* 15 Fri 13-Apr UK BE BGB ORI 0.25* EUR total 20.6 EUR total 0.9 9.5 5.65 16 Mon 16-Apr DTC 3M & 6M 1.7* SK SLOVGB 3Y* 0.3* 16 Mon 16-Apr BTF 7.5* 16 Tue 17-Apr SGLT 12M & 18M 5.5* 16 Tue 17-Apr GTB 1.6* 16 Tue 17-Apr BTB 3.0* 16 Wed 18-Apr DE Schatz 14 5.0 16 Thu 19-Apr FR BTAN 3Y* 2.5* BTAN 4Y* 2.0* OATei 15Y* 1.8* 16 Thu 19-Apr FR/US OAT 5Y* 3.0* TIPS 5Y 12* 16 Thu 19-Apr ES SPGB 10Y* 2.0* SPGB 15Y* 1.5* 16 Fri 20-Apr UK EUR total 19.3 EUR total 7.8 5.0 2.0 1.5 1.8 *Estimates/Likely auction dates, **Syndications/Tenders/Mini-Tenders, *** USD denominated; Source: Credit Suisse, National Treasuries; European Strategy and Trades 30 16 March 2012 Exhibit 52: Cash flow analysis – Europe R ed em p tio n s (€ To tal N et D V01 Su p p ly (€ b n ) bn) C o u p o n s (€b n ) To tal C ash N et (€ m n p er W eek D ate D ay C n tr y Am t C n tr y Am t 0-2 2-5 5-7 7-10 10y+ Cpn In flo w Su p p ly Su p p ly bp) 12 19-M ar M on 0.30 - - 0.03 - - - 0.03 0.03 0.30 0.27 (0.00) 12 20-M ar T ue - - - - - - - - - - - - 12 21-M ar Wed DE 5.00 - - - - - - - - 5.00 5.00 0.99 12 22-M ar T hu - - - - - - - - - - - - 12 23-M ar F ri - - - - - - - - - - - - 13 26-M ar M on - - - - - - - - - - - - 13 27-M ar T ue IT 4.30 - - - - - - - - 4.30 4.30 1.04 13 28-M ar Wed - BE 3.84 1.10 1.55 0.84 0.56 2.35 6.41 10.25 - -10.25 (5.29) 13 29-M ar T hu IT 11.00 - - - - - - - - 11.00 11.00 5.48 13 30-M ar F ri - - 0.00 - - - - 0.00 0.00 - 0.00 (0.00) 14 2-Apr M on - - 0.22 - - - - 0.22 0.22 - -0.22 (0.04) 14 3-Apr T ue - - - - - - - - - - - - 14 4-Apr Wed DE, ES 8.00 - - - - - - - - 8.00 8.00 2.90 14 5-Apr T hu FR 7.50 - - - - - - - - 7.50 7.50 8.59 14 6-Apr F ri - - - - - - - - - - - - 15 9-Apr M on - - - 0.50 - - - 0.50 0.50 - -0.50 (0.21) 15 10-Apr T ue AT , N L 4.80 - - 0.43 - - - 0.43 0.43 4.80 4.37 3.38 15 11-Apr Wed DE 5.00 - 0.43 - - - - 0.43 0.43 5.00 4.57 (0.09) 15 12-Apr T hu IT 6.00 - 0.60 - - - - 0.60 0.60 6.00 5.41 2.49 15 13-Apr F ri BE 0.25 DE 16.00 0.64 - - - - 0.64 16.64 0.25 -16.39 0.28 16 16-Apr M on 0.30 IT 15.06 1.29 1.06 0.38 0.98 0.29 4.00 19.06 0.30 -18.76 (1.13) 16 17-Apr T ue - - - - - - - - - - - - 16 18-Apr Wed DE 5.00 - 0.30 0.47 - 0.53 - 1.30 1.30 5.00 3.70 0.49 16 19-Apr T hu ES, F R 12.80 - - - - - - - - 12.80 12.80 5.71 16 20-Apr F ri - - - - - 0.29 - 0.29 0.29 - -0.29 (0.26) TO TA L S 70.25 34.91 4.58 4.03 1.22 2.37 2.64 14.84 49.75 70.25 20.50 24.33 Source: Credit Suisse. Exhibit 53: Issuance, coupon & redemptions summary (€, bn) Issuance Coupon Redemption Net Supply 19 Mar-23 Mar 5.30 0.03 0.00 5.27 26 Mar-30 Mar 15.30 6.41 3.84 5.04 02 Apr-06 Apr 15.50 0.22 0.00 15.28 09 Apr-13 Apr 16.05 2.59 16.00 -2.54 16 Apr-20 Apr 18.10 5.59 15.06 -2.55 Total 70.25 14.84 34.91 20.50 Source: Credit Suisse, Greece will restructure its debt. Exhibit 54: Year-to-date bond issuance (€, bn) Amount issued Expected issuance % completed Amount issued Country YTD in 2012 for 2012 year-to-date in 2011 Austria 8 22 34% 17 Belgium 13 26 50% 41 Finland 3 15 20% 14 France 59 178 33% 208 Germany 38 170 22% 189 Italy 58 209 28% 223 Netherlands* 25 60 42% 53 Spain 38 86 44% 97 Total 241 766 32% 841 Source: Credit Suisse, National Treasuries, * USD issuance included European Strategy and Trades 31 16 March 2012 Exhibit 56: Euro issuance, coupon & redemptions by Exhibit 55: Nominal supply vs. DV01 week (€, bn) 20 14 25 18 12 16 20 € million per bp 10 € bn 14 15 12 8 10 10 € bn 6 8 5 6 4 4 0 2 2 0 0 -5 19 Mar- 23 Mar 26 Mar-30 Mar 02 Apr -06 Apr 09 Apr-13 Apr 16 Apr -20 Apr 19-Mar-23-Mar 26-Mar-30-Mar 2-Apr-6-Apr 9-Apr-13-Apr 16-Apr-20-Apr Issuance Coupon Redempt ion Net Supply Nominal Supply DV01 Source: Credit Suisse, National Treasuries Source: Credit Suisse, National Treasuries Exhibit 57: Net supply by country for the next five weeks ─ from 19-Mar-12 to 20-Apr-12 (€, bn) Exhibit 58: Euro weekly net supply (€, bn) 20 17 40 30 15 20 10 8 10 4 0 5 3 -1 -10 € bn 0 -20 2 -1 -1 -30 -5 -40 -50 -10 29 Oct-02 Nov 05 Nov-09 Nov 12 Nov-16 Nov 19 Nov-23 Nov 26 Nov-30 Nov 01 Oct-05 Oct 08 Oct-12 Oct 15 Oct-19 Oct 22 Oct-26 Oct 02 Jul-06 Jul 09 Jul-13 Jul 16 Jul-20 Jul 23 Jul-27 Jul 03 Dec-07 Dec 10 Dec-14 Dec 17 Dec-21 Dec 24 Dec-28 Dec 02 Jan-06 Jan 09 Jan-13 Jan 16 Jan-20 Jan 23 Jan-27 Jan 30 Jan-03 Feb 06 Feb-10 Feb 13 Feb-17 Feb 20 Feb-24 Feb 04 Jun-08 Jun 11 Jun-15 Jun 18 Jun-22 Jun 25 Jun-29 Jun 30 Jul-03 Aug 06 Aug-10 Aug 13 Aug-17 Aug 20 Aug-24 Aug 27 Aug-31 Aug 28 May-01 Jun 27 Feb-02 Mar 02 Apr-06 Apr 09 Apr-13 Apr 16 Apr-20 Apr 23 Apr-27 Apr 30 Apr-04 May 07 May-11 May 14 May-18 May 21 May-25 May 03 Sep-07 Sep 10 Sep-14 Sep 17 Sep-21 Sep 24 Sep-28 Sep 05 Mar-09 Mar 12 Mar-16 Mar 19 Mar-23 Mar 26 Mar-30 Mar -10 -15 AT BE FI FR DE IT NL PT ES Source: Credit Suisse, National Treasuries Source: Credit Suisse, National Treasuries Exhibit 60: UK issuance, coupon & redemptions by Exhibit 59: Issued amount % completed YTD week (₤, bn) 60% 1.0 50% 0.8 50% 44% 0.6 42% 40% 0.4 34% 33% £ bn 0.2 30% 28% 22% 0.0 20% 20% -0.2 -0.4 10% -0.6 19 Mar-23 Mar 26 Mar-30 Mar 02 Apr-06 Apr 09 Apr-13 Apr 16 Apr-20 Apr 0% Issuance Coupon Redemption Net Supply BE ES NL AT FR IT DE FI Source: Credit Suisse, National Treasuries Source: Credit Suisse, UK Treasury European Strategy and Trades 32 16 March 2012 Exhibit 61: Cash flow analysis – UK To tal N et D V01 Su p p ly R ed em ptio n s C o up o n s (b n ) To tal C ash N et (€ m n p er W eek D ate D ay C n try Am t C ntry Am t 0-2 2-5 5-7 7-10 10y+ Cpn In flo w Su p p ly Sup p ly b p) 12 19-M ar M on - - - - - - - - - - - - 12 20-M ar T ue - - - - - - 0.09 0.09 0.09 - -0.09 - 12 21-M ar Wed - - - - - - - - - - - - 12 22-M ar T hu UK 0.90 - - - - - - - - 0.90 0.90 2.62 12 23-M ar F ri - - - - - - - - - - - - 13 26-M ar M on - - - 0.34 - - - 0.34 0.34 - -0.34 - 13 27-M ar T ue - - - - - - - - - - - - 13 28-M ar Wed - - - - - - - - - - - - 13 29-M ar T hu - - - - - - - - - - - - 13 30-M ar F ri - - - - - - - - - - - - 14 2-Apr M on - - - - - - - - - - - - 14 3-Apr T ue - - - - - - - - - - - - 14 4-Apr Wed - - - - - - - - - - - - 14 5-Apr T hu - - - - - - - - - - - - 14 6-Apr F ri - - - - - - - - - - - - 15 9-Apr M on - - - - - - - - - - - - 15 10-Apr T ue - - - - - - - - - - - - 15 11-Apr Wed - - - - - - - - - - - - 15 12-Apr T hu - - - - - - - - - - - - 15 13-Apr F ri - - - - - - - - - - - - 16 16-Apr M on - - - - - 0.08 - 0.08 0.08 - -0.08 - 16 17-Apr T ue - - - - - - - - - - - - 16 18-Apr Wed - - - - - - - - - - - - 16 19-Apr T hu - - - - - - - - - - - - 16 20-Apr F ri - - - - - - - - - - - - TOTA L 0.90 0.00 0.00 0.34 0.00 0.08 0.09 0.52 0.52 0.90 0.38 2.62 Source: Credit Suisse, UK Treasury Exhibit 62: UK weekly issuance, coupon & redemptions (£, bn) Issuance Coupon Redemption Net Supply 19 Mar-23 Mar 0.90 0.09 0.00 0.81 26 Mar-30 Mar 0.00 0.34 0.00 -0.34 02 Apr-06 Apr 0.00 0.00 0.00 0.00 09 Apr-13 Apr 0.00 0.00 0.00 0.00 16 Apr-20 Apr 0.00 0.08 0.00 -0.08 Total 0.90 0.52 0.00 0.38 Source: Credit Suisse, UK Treasury Exhibit 63: Year-to-date UK bond issuance (fiscal year, £, bn) Amount issued Amount issued Expected issuance % completed Country in 2010-11 YTD in 2011-12 for 2011-12 year-to-date UK 166,132 177,587 178,900 99.27 Source: Credit Suisse, National Treasury European Strategy and Trades 33 16 March 2012 Exhibit 64: Total issuance fiscal year-to-date (£, mn) Short Term Medium Term Long Term Total Conventional Index Linked YTD Total Sales 60,579 40,122 39,097 139,798 37,789 Target for the Year 60,600 39,800 39,500 139,900 39,000 % completed 100% 101% 94% 98% 97% % Remaining 0% -1% 1% 0% 3% Source: Credit Suisse Exhibit 65: DMO issuance calendar Operation Date Gilt Name Nominal Amount Issue (₤, mn) 22-Mar-2012 0 5/8% Index-linked Treasury Gilt 2042 900 Source: DMO, Credit Suisse European Strategy and Trades 34 16 March 2012 Forecasts Exhibit 66: Credit Suisse interest rate forecasts Euro - German Benchmarks Current 2012 Q1 2012 Q2 2012 Q3 2012 Q4 ECB Repo 1.00 1.00 1.00 1.00 1.00 2-Yr Yield 0.22 0.20 0.20 0.20 0.40 5-Yr Yield 0.86 1.00 1.10 1.35 1.45 10-Yr Yield 1.87 2.00 2.20 2.45 2.55 30-Yr Yield 2.48 2.60 2.80 3.00 3.20 2s5s 64 80 90 115 105 2s10s 166 180 200 225 215 10s30s 61 60 60 55 65 2s5s10s -37 -20 -20 5 -5 5s10s30s 40 40 50 55 45 UK Gilts Current 2012 Q1 2012 Q2 2012 Q3 2012 Q4 Base Rate 0.50 0.50 0.50 0.50 0.50 2-Yr Yield 0.46 0.45 0.45 0.50 0.50 5-Yr Yield 1.05 1.00 1.10 1.25 1.30 10-Yr Yield 2.23 2.20 2.25 2.30 2.35 30-Yr Yield 3.28 3.30 3.40 3.50 3.55 2s5s 59 55 65 75 80 2s10s 178 175 180 180 185 10s30s 105 110 115 120 120 2s5s10s -60 -65 -50 -30 -25 5s10s30s 14 10 0 -15 -15 Source: Credit Suisse Exhibit 67: European inflation forecasts Euro Area HICP ex-tobacco French CPI ex-tobacco UK RPI Index YoY MoM Index YoY MoM Index YoY MoM Mar-12 114.60 2.22 0.94 124.14 1.84 0.45 240.80 3.57 0.46 Apr-12 115.00 2.00 0.35 124.46 1.75 0.26 241.70 3.11 0.37 May-12 115.10 2.09 0.09 124.80 1.96 0.27 242.80 3.23 0.46 Jun-12 115.10 2.09 0.00 124.81 1.89 0.01 243.30 3.44 0.21 Jul-12 114.40 2.10 -0.61 124.30 1.94 -0.41 242.90 3.49 -0.16 Aug-12 114.60 2.09 0.17 124.85 1.84 0.44 243.80 3.26 0.37 Sep-12 115.10 1.79 0.44 124.46 1.61 -0.31 244.50 2.77 0.29 Oct-12 115.70 1.99 0.52 125.19 2.00 0.59 244.70 2.82 0.08 Nov-12 115.70 1.91 0.00 125.36 1.92 0.14 245.10 2.77 0.16 Dec-12 116.10 1.92 0.35 125.91 1.94 0.44 245.90 2.72 0.33 Source: Credit Suisse European Strategy and Trades 35 INTEREST RATE STRATEGY Eric Miller, Managing Director Global Head of Fixed Income and Economic Research +1 212 538 6480 email@example.com US RATES EUROPEAN RATES US DERIVATIVES Carl Lantz, Director Helen Haworth, CFA, Director George Oomman, Managing Director US Head European Head Derivatives Head +1 212 538 5081 +44 20 7888 0757 +1 212 325 7361 firstname.lastname@example.org email@example.com firstname.lastname@example.org Ira Jersey, Director Michelle Bradley, Director TECHNICAL ANALYSIS +1 212 325 4674 +44 20 7888 5468 email@example.com firstname.lastname@example.org David Sneddon, Managing Director +44 20 7888 7173 Scott Sherman, Vice President Sabine Winkler, Director email@example.com +1 212 325 3586 +44 20 7883 9398 firstname.lastname@example.org email@example.com Steve Miley, Director +44 20 7888 7172 Michael Chang, Vice President Panos Giannopoulos, Director firstname.lastname@example.org +1 212 325 1962 +44 20 7883 6947 email@example.com firstname.lastname@example.org Christopher Hine, Vice President +1 212 538 5727 Carlos Pro, Associate Thushka Maharaj, Vice President email@example.com +1 212 538 1863 +44 20 7883 0211 firstname.lastname@example.org email@example.com Pamela McCloskey, Vice President +44 20 7888 7175 Eric Van Nostrand, Associate Florian Weber, Associate firstname.lastname@example.org +1 212 538 6631 +44 20 7888 3779 email@example.com firstname.lastname@example.org Cilline Bain, Associate +44 20 7888 7174 Marion Pelata, Analyst email@example.com +44 20 7883 1333 marion.pelata @credit-suisse.com LOCUS ANALYTICS (US AND EUROPE) Jennifer Drag, Director Locus Analytics Specialist +1 212 538 4303 firstname.lastname@example.org PARIS SINGAPORE TOKYO Giovanni Zanni, Director Jarrod Kerr, Director Kenro Kawano, Director European Economics – Paris +65 6212 2078 Japan Head +33 1 70 39 0132 email@example.com +81 3 4550 9498 firstname.lastname@example.org email@example.com Shinji Ebihara, Vice President +81 3 4550 9619 firstname.lastname@example.org Disclosure Appendix Analyst Certification The analysts identified in this report each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. 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Within each category, creditworthiness is further detailed with a scale of High, Mid, or Low – with High being the strongest sub-category rating: High AAA, Mid AAA, Low AAA – obligor's capacity to meet its financial commitments is extremely strong; High AA, Mid AA, Low AA – obligor's capacity to meet its financial commitments is very strong; High A, Mid A, Low A – obligor's capacity to meet its financial commitments is strong; High BBB, Mid BBB, Low BBB – obligor's capacity to meet its financial commitments is adequate, but adverse economic/operating/financial circumstances are more likely to lead to a weakened capacity to meet its obligations; High BB, Mid BB, Low BB – obligations have speculative characteristics and are subject to substantial credit risk; High B, Mid B, Low B – obligor's capacity to meet its financial commitments is very weak and highly vulnerable to adverse economic, operating, and financial circumstances; High CCC, Mid CCC, Low CCC – obligor's capacity to meet its financial commitments is extremely weak and is dependent on favorable economic, operating, and financial circumstances. 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