Dexia - Fixed Income Markets – Outlook 2013

Document Sample
Dexia - Fixed Income Markets – Outlook 2013 Powered By Docstoc
					Press Conference
Fixed Income Markets – Outlook 2013

Koen Van de Maele
Nicolas Forest


Brussels, 12 December 2012
    Summary
     Contents

    I.    Global Bonds Valuation


    II.   Euro Government Debt


    III. International Government Debt


    IV. Corporate Debt


    V.    Investment Recommendations




2
         A Government Bonds Bubble ?
         Another Fixed-Income Year


Asset classes performances                                                                  Total debt of G7 economies (average in % of GDP)
    80                                                                                       300   % 
         % 


    60      5 YR
                                                                                             250          Genera l  government gros s  debt (% of GDP)
            1 YR
                                                                                                          Domes ti c credi t to pri va te s ector (% of GDP)

                                                 39.3                           47.4
    40
                                                        25.8                                 200

                                          28.0                          31.7

    20                            33.5
                                                                17.2
                                                        23.3                                 150
                   21.9                          21.8                          19.2
          11.9            13.5            13.6                         12.6
                                                                9.9
                                  3.8
    0
          ‐5.1     ‐5.9
          US       GER     FR     US      EMU    BELG   ITA     SP      IG     Hi gh
                                                                               Yi el d       100

                          ‐37.4          GOVERNMENT BONDS              EURO CREDIT
‐20


                                                                                              50
                 EQUITY
‐40


                                                                                               0
‐60                                                                                             1980      1983   1986    1989     1992    1995    1998     2001   2004   2007   2010



3
         Source: Dexia AM – Bloomberg – DataStream – JP Morgan – IMF – World Bank – European Commission
    A Government Bonds Bubble ?
    Divergence of valuations


Activity Indices                                                                        Yield to Maturity of Government Bonds Indices
                                                                                         7.00      %
                             Expansion Territory


                                                                                         6.00




                                                                                         5.00




                                                                                         4.00


Ja n‐03 Ma r‐04 Ma y‐05   Jul ‐06   Sep‐07 Nov‐08 Ja n‐10 Ma r‐11 Ma y‐12
                                                                                         3.00
                                                                                                                                                            2.90%

                                                                                                   G7 average inflation (1992‐2012)                         2.33%
                                                                                         2.00


                                                                                                                                                           1.57%
                                                                                         1.00
                                                                                                                                                            1.08%

                            Recession Territory                                                               EMU        US           UK          JAPAN
                                                                                          ‐
            US
            EUR CORE                                                                            1997   1999    2001   2003    2005         2007    2009   2011
            EUR NON CORE



4
     Source: Dexia AM – Bloomberg – DataStream – JP Morgan – IMF – World Bank – European Commission
    A Government Bonds Bubble ?
    Divergence of valuations – US Treasuries are expensive


Euro Area Bond Yield & Fair Value                                                           US Area Bond Yield & Fair Value
6.00      %                                                                                   10.00       %

5.50                                                                                           9.00


5.00
                                                                                               8.00

4.50
                                                                                               7.00

4.00
                                                                                 EA bonds are 
                                                                                  globally too 
                                                                                                6.00
                                                                                    cheap…
3.50
                                                                                               5.00
                                                                                                                                                            … and US 
3.00                                                                                                                                                        treasuries 
                                                                                                                                                               too 
                                                                                               4.00
2.50                                                                                                                                                        expensive

                                                                                               3.00
2.00

                EA10Y Bond Yi el ds
                                                                                               2.00            US10Y Bond Yi el ds
1.50
                GER Bond Yi el ds
                EMU Nomi na l  Growth (5y a vera ge)                                                           US Nomi na l  Growth (5y a vera ge)
1.00                                                                                           1.00
       1998    2000      2002         2004    2006     2008     2010      2012                         1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012




5
        Source: Dexia AM – Bloomberg – DataStream – JP Morgan – IMF – World Bank – European Commission
    A Government Bonds Bubble ?
    Divergence of valuations within the Euro Area


Core Euro Area Bond Yield & Fair Value                                                     Non Core Euro Area Bond Yield & Fair Value
6.00      %                                                                                 10.00        %

5.50                                                                                         9.00


5.00                                                                                         8.00


4.50                                                                                         7.00


4.00                                                                                         6.00


3.50                                                                                         5.00

                                                                                                                                                                   Without risk 
3.00                                                                                         4.00                                                               premium, non core 
                                                                                                                                                                 bond yields could 
                                                                                                                                                                 drop significantly
2.50                                                                                         3.00


2.00                                                                                         2.00


               EA Core Bond Yi el ds                        Core bonds have not an 
1.50                                                                                         1.00            EA Non Core Bond Yiel ds
               Core Nomi na l  Growth (5Y a verga e)         attractive valuation…
                                                                                                             Non Core Nomi na l  Growth (5Y a verga e)
1.00                                                                                          ‐
       1999     2001       2003        2005       2007    2009       2011                           1999     2001       2003      2005       2007        2009      2011




6
        Source: Dexia AM – Bloomberg – DataStream – JP Morgan – IMF – World Bank – European Commission
    Summary
     Contents

    I.    Global Bonds Valuation


    II.   Euro Government Debt


    III. International Government Debt


    IV. Corporate Debt


    V.    Investment Recommendations




7
      EA – A Market Segmentation
      Historic evolution


Evolution of government bond yields                                                           Government bond yields and daily volatility
19.00                                                                                                                                                                                70
              %
                                                                                                                                                        Periphery
17.00
                                                                                                                                                                         Apr/Aug12 60
                                                                                                                                                               Oct/Dec11
15.00                                                                                                                                          Oct/Dec11
                                                                Portugal 
                                                                Bail Out                                                                                                             50
13.00




                                                                                                                                                                                          Average trading range (bp)
                                                                                                                                                                         Aug/Dec12
                                                           Ireland 
                                                                                                                                                     Ja n/Apr 12                     40
11.00                                                      Bail Out
                    Germa ny
                    Bel gi um
    9.00            Ita l y                                                                                        Oct/Dec11
                    Spa i n
                                                                                                  Core                                 Ja n/Apr 12                                   30
                    Portuga l                                                                                                 Apr/Aug12
    7.00            Irel a nd
                    Fra nce
                                                                                                                 Aug/Dec12                                                           20

    5.00                                                                                                    Apr/Aug12                                          Germa ny
                                                                                                                        Aug/Dec12
                                                                                                                 Ja n/Apr 12                                   Fra nce
                                                                                                                                                               Bel gi um             10
    3.00
                                                                                                                                                               Ita l y
                                                                                                                                                               Spa i n
    1.00                                                                                                                                                                             0
           2006     2007        2008     2009       2010        2011        2012                    0        1          2          3           4         5               6       7

                                                                                                                   Avera ge yi el d on the 10‐yea r bond (%)


8
           Source: Dexia AM – Bloomberg – DataStream – JP Morgan – IMF – World Bank – European Commission
         EA – A Market Segmentation
         Structural shift of the bond holders ?


Foreign debt holders                                                                       TARGET2 projections – contingent liabilities
    70                                                                                       2 000
         %                                                                                           bln
                                                                                                           Under the hypothesis that the ECB provides unlimited
    65                                                                                                     support to fill the funding gap of peripherals,
                                                                                             1 500
                                                                                                           contingent liabilities (TARGET2) could be expected to
                                                                                                           rise. In the case of strong outflows in the periphery
    60
                                                                                                           after the OMT, the size could reach around 2 000
                                                                                             1 000         billions of Euros
    55

                                                                                               500
    50
    Ja n 08         Ja n 09         Ja n 10        Ja n 11         Ja n 12

    45                                                                                           0
                                                                                                 Ja n 08     Ja n 09       Ja n 10     Ja n 11      Ja n 12     Ja n 13

    40
                                                                                              ‐500

    35
                                                                                            ‐1 000
    30
                    CORE
                    NON CORE                                                                ‐1 500
    25              Germa ny                                                                                           CORE
                    Ita l y                                                                                            NON CORE
                                                                                                                       CORE wi th OMT a nd s tronger outfl ows
    20                                                                                      ‐2 000                     NON CORE wi th OMT a nd s tronger outfl ows




9
          Source: Dexia AM – Bloomberg – DataStream – JP Morgan – IMF – World Bank – European Commission
       EA – Debt Sustainability
       Persistent economic divergences


EA Nominal GDP since 1999                                                                  Competitiveness – Unit Labor Cost
 180                                                                                       150


 170

                                                                                           140
 160


 150
                                                                                           130

 140


 130                                                                                       120


 120

                                                                                           110
 110


 100
                                                                                           100

 90                        Fra nce             Germa ny             Greece
                           Irel a nd           Ita l y              Portuga l                                   BELGIUM          FRANCE          GERMANY
                           Spa i n                                                                              IRELAND          ITALY           SPAIN
 80                                                                                          90
       1998     2000       2002        2004    2006       2008     2010         2012              1998   2000    2002     2004    2006    2008    2010     2012


10
        Source: Dexia AM – Bloomberg – DataStream – JP Morgan – IMF – World Bank – European Commission
       EA – Debt Sustainability
       Persistent economic divergences


EA Core Debt Ratio (% of GDP)                                                                 EA Non‐Core Debt Ratio (% of GDP)
 150%                                                                                        150%
                 Primary Budget Deficits & Forecasts                                                         FMI
                       2010            2011             2012                 2013
 140%                                                                                        140%            Europea n Commi s s i on
             2
             1                                                                                               Al terna ti ve Scena ri o
 130%        0                                                                               130%
            ‐1
            ‐2
 120%       ‐3                                                                               120%
            ‐4
            ‐5            FRANCE              NETHERLANDS      FINLAND
 110%       ‐6            AUSTRIA             GERMANY          BELGIUM                       110%


 100%                                                                                        100%


     90%                                                                                       90%           Primary Budget Deficits & Forecasts
                                                                                                               2010                2011           2012              2013
                                                                                                    10
     80%                                                                                       80%   5
                                                                                                     0
                                                                                                    ‐5
     70%                                                                                       70% ‐10
                                                         FMI
                                                                                                   ‐15
                                                         Europea n Commi s s i on                  ‐20
     60%                                                                                       60% ‐25
                                                         Al terna ti ve Scena ri o
                                                                                                   ‐30                IRELAND      SPAIN   PORTUGAL      GREECE     ITALY

     50%                                                                                       50%
       2002        2004       2006     2008      2010       2012      2014           2016         2002      2004       2006       2008     2010     2012     2014          2016




11
           Source: Dexia AM – Bloomberg – DataStream – JP Morgan – IMF – World Bank – European Commission
          EA – Debt Sustainability
          Peripherals interest rates are unsustainable


Which debt cost to stabilize debt ratio in 2013…                                                                                                          … or with a primary surplus of 3% ?

                                                                                                                                                                                                                         7.9%
                                                                                                                                 6.4%
                                                                                                                                                                                               6.8%
                                                                                                                                                           6.4%
                                                                                                                                    4.5%
                                                                                                                                                                                                                                          5.9%                     6.3%
                                                                                                                                                                        5.7%
                                                                    3.2%                                                                        3.4%                                                        5.4%
     2.5%                                                                                                      3.2%                             3.6%
                   2.2%                                                                                                                                                                                                                                4.6%          4.5%
                                                                                                                 1.9%                                                                4.2%
                                                                                                    1.5%
                                                                                                                                                                                                                                                                               3.6%
                                 1.0%                                                 0.7%
                0.7%                             0.8%                                                                                                                                                                                                                         2.8%
                                                                  0.6%             0.4% 0.6%                                                                                                                                                         3.2%
                                                                                                                                                                                                                                                                     2.3%
                                                                         Germany




                                                                                                                                                  Italy
                                        France




                                                                                                                                        Spain
                                                                                                                      Portugal
      Austria


                       Belgium




                                                                                                     Ireland
                                                        Finland




                                                                                      Netherlands




                                   ‐0.3%


                                                                                                                                                                                   1.0% 0.8%
                                                   ‐2.1%                                                                                                              0.7%                                0.6%                          0.6%
                                                                                                                                                                                                                       0.4%




                                                                                                                                                                                      France
                                                                                                                                   ‐3.4%




                                                                                                                                                                                                             Germany
                                                                                                                                                                         Belgium
                                                                                                                                                            Austria




                                                                                                                                                                                                                                                        Portugal


                                                                                                                                                                                                                                                                      Spain
                                                                                                                                                                                                                          Netherlands




                                                                                                                                                                                                                                                                                Italy
                                                                                                                                                                                                                                           Ireland
                                                                                                                                                                                                Finland
          Cos t of debt i n 2013 to s ta bi l i ze debt ra ti o
          5Y Bond Yi el d
                                                                                                                                                            Cos t of debt wi th a  Pri ma ry Surpl us  of 3%
                                                                                                                                                            5Y Bond Yi el d

12
                Source: Dexia AM – Bloomberg – DataStream – JP Morgan – IMF – World Bank – European Commission
     EA – Political Solution of a government debt crisis
     A changing landscape

                                                                                                           Implementation                     Implementation 
                                          Stated goal                             Risk
                                                                                                             2010‐2012                             2013
                                                                                                          In the midst of the Greek debt     The OMT program would allow 
                                      The ECB buys European             Inflation fears and moral        crisis, the ECB created the SMP     ECB to buy unlimited amounts 
                                  government debts to compensate        hazard are the two main          program whose goal was to buy      of EU Sovereign debt and would 
     Monetization                   for the lack of demand from            concerns related to          Government debt, thereby making        strongly reduce the funding 
                                       private debt investors                  monetization                the ECB Senior to other debt       costs for countries under bail 
                                                                                                                      holders                            out plans

                                                                                                                                            Various forms of debt 
                                                                                                    In 2010,the creation of the EFSF 
                                                                                                                                         mutualisation are currently 
                                                                     Moral hazard is the main        was a first step towards more 
                                   National debt burden sharing                                                                         being discussed: a European 
                                                                   concern for virtuous countries  solidarity at the European level. 
     Mutualisation                 would be jointly undertaken by 
                                                                    which would have to pay for           The ESM has further 
                                                                                                                                       redemption fund, blue and red 
                                          European states                                                                              bonds, Euro bonds…, but none 
                                                                         weaker countries         institutionalised this mechanism in 
                                                                                                                                        of them should be definitely 
                                                                                                                  2012.
                                                                                                                                            agreed upon in 2013

                                    Faced with unsustainable debt  Contagion to other countries in 
                                                                                                        The Greek PSI was designed to  Since 2012, the EU has formally 
                                         burden, a negotiated       the Euro zone and inflation are 
                                                                                                      make private investors contribute  renounced to the idea of other 
     Restructuration                 restructuration program is a    the main risks. History shows 
                                                                                                        to the debt relief, which raised  debt restructurings, as it carries 
                                    rapid solution to decrease the  that default generally occurs in 
                                                                                                      fears among speculative investors            too much risks
                                              debt load                          series.

                                   Higher interest rates reflect the 
                                                                                                                                      The EU Commission continues to 
                                   increased defiance of investors  Current austerity programs are  The EU‐designed Greek, Irish and 
                                                                                                                                          soften its imposed deficit 
                                      towards a highly indebted         under‐estimating fiscal      Portuguese programs were too 
     Austerity                     country. Deficit reduction must  multipliers and are leading to  demanding in terms of austerity 
                                                                                                                                       reduction targets, even if many 
                                                                                                                                        EU countries will have to face 
                                    therefore be a prerequisite for  protracted recession periods              measures
                                                                                                                                          another recession in 2013
                                        the return of growth.




13
       Source: Dexia AM – Bloomberg – DataStream – JP Morgan – IMF – World Bank – European Commission
     EA – OMT: Game Changer or Aspirin Dose ?
     Track-record of ECB actions


Evolution of the 3y Spanish bond yield
 8
      %                                                                                                                  7.44%

 7
                                                                         6.24%

 6
                                                   5.14%

 5




 4


                                                          3.62%                                    2.78%                                   3.40%
 3
                                                      Reactivation of               3Y LTRO with full                       Announcement of 
                                                      SMP program                      allocation                             OMT (0‐3y)

 2
 Jan 11             Apr 11                Jul 11               Oct 11               Jan 12             Apr 12   Jul 12            Oct 12



14
      Source: Dexia AM – Bloomberg – DataStream – JP Morgan – IMF – World Bank – European Commission
          EA – OMT: Game Changer or Aspirin Dose ?
          Limited purchases


Spanish and Italian debt distribution                                                         Projection of ECB liquidity programs
 200      bln  Total amount of Spanish debt with a maturity < 3 years                         8.0   %                     OMT                                        bln    1 600
                                                                                                                          SMP
                                                                                                                          LTRO
 180                                                                                          7.5                         10Y Spa ni s h bond yi el d                       1 400

 160                                                                                          7.0
                                                                                                                                                                            1 200
 140                                                                                          6.5

                                                                                                                                                                            1 000
 120                                                                                          6.0
                                                                    Spa ni s h Bonds
                                                                    Ita l i a n Bonds
 100                                                                                          5.5                                                                           800


     80                                                                                       5.0
                                                                                                                                                                            600

     60                                                                                       4.5
                                                                                                                                                                            400
     40                                                                                       4.0


     20                                                                                                                                                                     200
                                                                                              3.5


     0                                                                                        3.0                                                                           0
           2013     2014    2015    2016     2017    2018    2019      2020       2021          Ja n 10     Ja n 11   Ja n 12      Ja n 13       Ja n 14   Ja n 15




15
           Source: Dexia AM – Bloomberg – DataStream – JP Morgan – IMF – World Bank – European Commission
      EA – OMT: Game Changer or Aspirin Dose ?
      Valuation of the Draghi Cap


Probability of exercise of the Draghi Cap                                                  3Y Spanish Bond Yields Valuation 
 8                                                                                20%       2
      %




                                                                                                 Cheapness
                                                                                                                                                 LTRO 3Y                               OMT 
                                                                                  18%
                                                                                                                                                                                        3Y

 7         Proba bi l i ty of exerci s e wi th a  s tri ke 3%                               1
           Proba bi l i ty of exerci s e wi th a  s tri ke 4%                     16%
           Proba bi l i ty of exerci s e wi th a  s tri ke 5%
           3Y Spa ni s h bond yi el d
                                                                                  14%
 6                                                                                          1

                                                                                  12%


 5                                                                                10%       0
                                                                                            Ja n 11                  Jul  11                 Ja n 12                  Jul  12
                                                                                  8%

 4                                                                                         ‐1
                                                                                  6%


                                                                                  4%




                                                                                                 Expensiveness
 3
                                                                                           ‐1
                                                                                  2%


 2                                                                                0%
                                                                                           ‐2                    (3Y SP yi el d ‐ (3Y DE yi el d + (10Y SP yi el d ‐ 10Y DE yi el d)
 Ja n 12                  Apr 12                     Jul  12       Oct 12
     *The Draghi cap is the option to buy Spanish bonds with a maturity of 3 years.
     The call option has a maturity of 6 months and different strikes

16
        Source: Dexia AM – Bloomberg – DataStream – JP Morgan – IMF – World Bank – European Commission
     EA – OMT: Game Changer or Aspirin Dose ?
     Implementation risks


6th September announcement by the ECB                                                    2013 Implementation risks
On 6th September 2012, Mario Draghi announced the modalities
for undertaking OMT in secondary markets.                                                  Limited Application – Purchases will be limited by maturity and
                                                                                         free float constraints. Total redemptions of Spanish bonds with a
                                                                                         maturity < 3 years represents less than 200 billions of Euros. With
  Application – Transactions will be focused on the shorter part of                      the SMP, ECB bought more than 219 billions of Euros.
the yield curve (maximum 3 years maturity). No ex ante
quantitative limits are set on the size of Outright Monetary                               Strict Conditionality – Due to the conditionality, the ECB could
Transactions.                                                                            decide to stop purchases. A non‐intervention of ECB for these
                                                                                         countries could be dramatic if they have lost market access.
  Conditionality ‐ A necessary condition for Outright Monetary
Transactions is strict and effective conditionality attached to an                         Creditor Status – Seniority remains uncertain and Buba could be
appropriate European Financial Stability Facility/European Stability                     concerned if ECB decides to buy Italian debt
Mechanism (EFSF/ESM) program.
                                                                                          Contagion Risk – a successful OMT for Spain could put Italian
  Creditor Status ‐ The Euro system intends to clarify in the legal                      bonds under pressure in the case of an economical deterioration
act concerning Outright Monetary Transactions that it accepts the
same (pari passu) treatment as private or other creditors with                            End of the SMP – the SMP was an unconditional buying bonds
respect to bonds issued by euro area countries and purchased by                          program. Creation of OMT leads to the interruption of SMP.
the Euro system through Outright Monetary Transactions, in
accordance with the terms of such bonds
                                                                                         Creation of OMT has reduced liquidity risk. But implementation
                                                                                         risks are high and ECB will have to adapt its monetary framework
                                                                                         after new market tensions on the sovereign curve in Q2 2013.




17
      Source: Dexia AM – Bloomberg – DataStream – JP Morgan – IMF – World Bank – European Commission
       EA – European Solidarity
       Debt Mutualisation


Greek Debt Repartition                                                                           European Solidarity Capacity 
     400
            bln                                                                             600
                                                                                                     bln
                                              20
     350                                                                       17
                                              20          17                                                                                                                        500
                    23                                                         32           500
                                                          26
                    11
     300

                                              110
                    78                                                                      400                                                       Forecasts point 
     250
                                                                                                                                                    towards more than 
                                                                                                                                                        €300 bln of 
                                                                                                                                                    Government Bonds 
     200                                                 212                   220          300                                                   issuance for Spain and 
                                                                                                                                                       Italy in 2013

     150
                                                                                            200
                    218                       203
                                                                                                                           145                                           148
     100

                                                                                            100
                                                          71                   68                                                                  63
     50
                                                                                                                                       37
                                                                                                       26
                                                                                                                 18
                                                                                                                                                               4
                                              15          23                   23
      0              9                                                                       ‐
                   2010                   2011           2012                 2013                  Portuga l Irel a nd   Greece     Spa i n      Spa i n EFSF Ca s h EFSF         ESM
                  T‐Bi l l s                           Greek Sov. Bonds  i ncl udi ng PSI                                           current rema i ning Res erve rema i ni ng l endi ng
                  Europea n As s i s ta nce            IMF As s i ta nce                                                           Ba nk ba i l ‐ ma rgi n           ca pa ci ty ca pa ci ty
                  Other Loa ns                                                                                                         out

18
           Source: Dexia AM – Bloomberg – DataStream – JP Morgan – IMF – World Bank – European Commission
          EA – Political Risks
          Vox populi, Vox dei


German polls before elections of September 2013                                               Italian Polls before election of April 2013 
 50%                                                                                                35
                                                                                                         %                                                 Democratic Party
                                                                                                         When Berlusconi resigned in November
                                                                                                         2011, the 10 year Italian bond yield was
                                                                                                    30
                                                                                                         above 7.25%...
 40%                                                                       CDU /CSU

                                                                                                    25



 30%
                                                                                                    20
                                                                          SPD / Socialist

                                                                                                    15
 20%
                                                                                                                                                         People of Freedom

                                                                                                    10


 10%

                                                                                                    5


                CDU/CSU           SPD         Grune          Let Pa rty        FDP                               PdL           PD           LN           UdC        IdV
     0%                                                                                         ‐
      Ja n‐12       Ma r‐12      Ma y‐12        Jul ‐12      Sep‐12          Nov‐12                  Ja n‐12      Ma r‐12       Ma y‐12        Jul ‐12     Sep‐12


19
           Source: Dexia AM – Bloomberg – DataStream – JP Morgan – IMF – World Bank – European Commission
     EA – Euro Debt Scoring
     Economic & Fiscal Map

                                                         GREECE       IRELAND          ITALY     PORTUGAL   SPAIN   BELGIUM   FRANCE GERMANY

                           Employment

                           GDP Growth

     GROWTH                Production
     OUTLOOK
                           Retail Sales

                           Leading Indicators

                           Government Debt

                           Primary Deficit
     DEFICIT & 
     ABILITY TO 
                           Current Account
     REPAY ITS 
       DEBT
                           Households Savings

                           Private Debt




20
     Source: Dexia AM – Bloomberg – DataStream – JP Morgan – IMF – World Bank – European Commission
     EA – Euro Debt Scoring
     Government Bonds Valuation


Fundamental Scoring of EMU scoring & CDS                                                                           Fundamental Scoring – Fiscal & Macro
 1400                                                   In December 2012, only Portugal still                                                                            The biggest risk for EU
                                                                                                                                                          AT
                                                        seems to bear the IMF stigma … while                                                                             countries in 2013 is
                                                                                                                                                      7
                                                        the situation of Ireland seems to have                                          US                            BE growth … while the
                                                        normalised                                                                                    6                  US will need to tackle
 1200                                                                                                                                                                    fiscal issues
                                            PT                                                                                                        5
                                                                                                                              UK                                                  FI
                                                                                                                                                      4
 1000                                             2012
                                                                                                                                                      3
                                                                                                                    ES                                                                      FR
                                                                                                                                                      2

 800                                                                                                                                                  1
                                                            IR
             CDS Spread




                                 2013       PT                                                                                                        0
                                                                                                                   PT                                                                        DE
 600
                                                            IT


                                                  SP
 400                                             SP                                                                      NL                                                            GR
                          2012                                                       BE
                                                       IT
                          2011
                                                                               FR
                                                                 IR
                                                                                                  AT                               LU                                       IE
 200
                                                                                 NL                       GE
                                                                      BE FR              FI
                                                                                              AT GE                                              JP            IT
                                                                              FINL
             Funda menta l  s cori ng (from 0 to 10)
     0                                                                                                                                  FISCAL                      MACRO
         0                       1      2          3                  4              5                6        7

21
         Source: Dexia AM – Bloomberg – DataStream – JP Morgan – IMF – World Bank – European Commission
     Summary
      Contents

     I.    Global Bonds Valuation


     II.   Euro Government Debt


     III. International Government Debt


     IV. Corporate Debt


     V.    Investment Recommendations




22
       International Bonds in 2012
       Crisis has impacted the Euro


2012 performance of Bonds Indices                                                           EUR/USD & Spanish Spread

                                                   Currency variations have boosted        700                                                                       1.20
                              Ja pa n                                                              The Euro has depreciated 
                                                   returns for rightly diversified Euro 
                                                                                                   against all G10 currencies 
                                                   bond investors in 2012                  650                                                                       1.22
                                                                                                   in 2012,  excepted against 
                                                                                                   the Yen …
                        Germa ny                    Norway, Australia, Canada 
                                                   government bonds and US                 600                                                                       1.24
                                                   corporates were our 2012 trade 
                                                   recommendations
                                  US                                                       550                                                                       1.26


                                                                                           500                                                                       1.28
                        Aus tra li a
     Ra tes  Impact
                                                                                           450                                                                       1.30
     Currency Impa ct
                          Ca na da
                                                                                           400                                                                       1.32

                         Sweden
                                                                                           350                                                                       1.34


                                  UK                                                       300                                                                       1.36

                                                                                                                                 10Y Spa ni s h Sprea d (vs  Bund)
                                                                                           250                                                                       1.38
                          Norwa y                                                                                                EUR/USD
                                                                                           200                                                                       1.40
‐6%        ‐4%          ‐2%             0%   2%      4%         6%         8%        10%      Ja n 12            Apr 12              Jul  12              Oct 12


23
         Source: Dexia AM – Bloomberg – DataStream – JP Morgan – IMF – World Bank – European Commission
     US – Still a safe haven in 2013 ?
     Will the American growth act as a support for the USD ?


USD & Stock market performance                                                             USD & Short term rates differential
                                                                                         45                                                                   1.20
 1400                                                                          1.4
          Risk aversion has                                                                     Finally, the FX market will mainly focus 
          supported the US                                                                      on rates & growth differentials
                                                                                         40
          currency                                                                                                                                            1.22
 1350
                                                                                         35
                                                                               1.35                                                                           1.24

                                                                                         30
 1300
                                                                                                                                                              1.26
                                                                                         25

 1250                                                                          1.3
                                                                                                                                                              1.28
                                                                                         20



 1200                                                                                    15                                                                   1.30


                                                                               1.25
                                                                                         10
                                                                                                                                                              1.32
 1150
               US Stock ma rket Index                                                      5                                US‐EMU 2Y Govt Sprea d
                                                                                                                                                              1.34
               EUR/USD                                                                                                      EUR/USD (r.h.s .)
 1100                                                                          1.2         0
     Ja n 12            Apr 12             Jul  12            Oct 12                       Ja n 12            Apr 12                Jul  12          Oct 12


24
        Source: Dexia AM – Bloomberg – DataStream – JP Morgan – IMF – World Bank – European Commission
       US – Still a safe haven in 2013 ?
       Opposing forces


Speculative EUR positions                                                                     EUR/USD & Fair value
 150
                                                                                            1.6
                                                                                                   … but EUR/USD Purchasing Power Parity 
                                                                                                   remains  below 1.20 & LT Equation below 
 100                                                                                        1.5
                                                                                                   1.25

                                                                                            1.4
     50

                                                                                            1.3

      0
                                                                                            1.2


     ‐50                                                                                    1.1
              End of year position reversal 
              could occur in favor of the 
              euro…                                                                           1
 ‐100

                                                                                            0.9
 ‐150
                                                                                            0.8
                                                                                                                         EURUSD
 ‐200
                                                                                            0.7                          EURUSD PPP (80‐04 CPI a vg)
                                                                                                                         EUR/USD LT equa ti on
 ‐250                                                                                       0.6
       2005       2006      2007      2008     2009      2010      2011      2012              1982                   1992                       2002   2012



25
           Source: Dexia AM – Bloomberg – DataStream – JP Morgan – IMF – World Bank – European Commission
       US – The US debt
       Inconsequential Indebtedness


Holdings of Treasury Securities                                                                                    Government debt & Interest payments (% of GDP)
 5 000       bln                                                                                                                 5.0
                                           4 761                                                                                           % 

 4 500                                                                                                                           4.5


 4 000                                                                                                                           4.0                                                                     2014

                                                                                                                                                                                                  2017
 3 500                                                                                                                           3.5            Despite the sharp run in US 
                                       3 253                                                                                                    public debt since 2009, debt 
                                                                                                                                                servicing cost has remained 




                                                                                                     Interest payments on debt
 3 000                                                                                                                           3.0                       stable…
                                                                                       Q4 2008                                                                                             2012

 2 500                                                                                 Q1 2012                                   2.5
                                                                                                                                                                                                  2013

 2 000                                                                                                                           2.0                       2001
                                                                                                                                                                                              … in Spain, the interest 
                                                                                             1 661
                                                                                                                                                                                             payments depends on the 
 1 500                                                                                                                           1.5                                                                debt stock
                   1 308
                                                                                                                                                                  2007
                                                                                                                                                                                                   US 2011‐2012
                                 916
 1 000                     796                                                                                                   1.0                                                               US 2012‐2017
                                                                                                                                                                                                   Li nea r Projecti on
                                                         410         448               476
     500                                                                                                                         0.5                                                               SPAIN 2007‐2014
             257                                   257                           254
                                                               185         171

      0                                                                                                                          0.0
            Hous ehol ds   Mutua l  Forei gn  Commerci a l  Pri va te  Ins ura nce  Federa l                                           0              20            40         60           80           100              120
                           funds    i ns ti tuti ons    ba nks pens ion compa ni es   Res erve                                                                           Government debt
                                                                funds   


26
           Source: Dexia AM – Bloomberg – DataStream – JP Morgan – IMF – World Bank – European Commission
       US – The unavoidable change of monetary policy
       The end of Twist operation


FED holdings of treasuries in % of outstanding                                             Government debt & Interest payments (% of GDP)
 50%                                                                                        16%                                                                                ‐100
         %                                                                                         %
                                                                                                                                                                         bps




                                                                                                                                                                                   FLATTENING
 45%                                                 43%
                                                                                            14%

 40%
                                        37%                                                 12%                                                                                0
          Q4 2011                                                             34%
 35%                                          33%                 34%
          Q4 2012
                                                                                            10%
 30%                                                       29%
                           26%
 25%                 23%                                                                     8%                                                                                100


 20%
                                                                                             6%
                                 16%

 15%    13%
                                                                        12%
                                                                                             4%                                                                                200




                                                                                                                                                                                   STEEPENING
 10%

                                                                                             2%
 5%
                                                                                                         2s 10s  US yi el d (i nvers e s ca l e)
                                                                                                                                                                   TWIST 
               0%                                                                                        % of FED hol di ng                                      OPERATION
 0%                                                                                          0%                                                                                300
        2012‐2014    2015‐2019    2019‐2022    2023‐2027   2028‐2032    2032‐2042              2005       2006         2007          2008          2009   2010    2011


27
        Source: Dexia AM – Bloomberg – DataStream – JP Morgan – IMF – World Bank – European Commission
      US – The unavoidable change of budgetary policy
      Fiscal Cliff


Sovereign Stress in EU & US Treasuries                                                      Government Budgetary Balance (in % of GDP)
4.5                                                                                0        4.0
      %                                                                     bps                   % 

4.0                                                                                50
                                                                                            2.0                                          What will be the US 
                                                                                                                                        fiscal policy in 2013 ? 
                                                                                   100                                                  Despite the November 
3.5
                                                                                                                                        Presidential Election, 
                                                                                            0.0
                                                           The evolution of US                                                         budget choices for 2013 
                                                                                   150                                                   are still unanswered
3.0
                                                           Treasuries will also 
                                                             depend on the 
                                                            settlement of the      200     ‐2.0
                                                             Euro zone debt 
2.5
                                                                  crisis…
                                                                                   250            1999    2001    2003   2005   2007   2009     2011
                                                                                           ‐4.0
2.0
                                                                                   300
                                                                                           ‐6.0
1.5
                                                                                   350

1.0                                                                                        ‐8.0
                                                                                   400


0.5                                                                                450
              10y US bond yi el d                                                         ‐10.0
              10y GER bond yi el d
              10y Semi ‐Peri phera l s  Sprea d vs . Germa ny [R.H.S]
0.0                                                                                500                    US
                                                                                                          EURO AREA
  2010                       2011                        2012                             ‐12.0



28
         Source: Dexia AM – Bloomberg – DataStream – JP Morgan – IMF – World Bank – European Commission
     Norway – Diversification opportunity
     A solid AAA with positive carry

     70                                                                 25                    4.5
                     Publ i c Ba l a nce (%GDP) r.h.s .                                                                      Well managed public debt and significant fiscal 
                     Publ i c Debt (%GDP)                                                     4.0                            surplus could still be inflow drivers for the 
     60
                                                                        20                                                   Norwegian market…
                                                                                              3.5
     50
                                                                                              3.0
                                                                        15
     40                                                                                       2.5
                                                                                                           Unemployment
     30                                                                                       2.0
                                                                        10
                                                                                              1.5
     20
                                                                                              1.0
                                                                        5                               … while low unemployment remains a 
     10
                                                                                              0.5       support for internal growth

     0                                                                  0                     0.0
          2002    2004     2006       2008      2010      2012   2014                           2002            2004            2006        2008        2010            2012
     11                                                                                       2.5
           At current levels, EUR/NOK valuation does not appear                                        A comfortable carry  rewards investors, mainly on the short 
     10    excessive                                                                                   end of the curve
                                                                                                2
      9                                                                                                                          NOK      EUR

                                                                                              1.5
      8

      7
                                                                                                1

      6
                                                                                              0.5
      5            EURNOK
                   EURNOK PPP (1980‐04 CPI a vera ge)
      4                                                                                         0
     Jun‐82               Jun‐92                 Jun‐02            Jun‐12                              3M i nterbk yi el d       3Y govt yi el d     10Y govt yi el d

29
      Source: Dexia AM – Bloomberg – DataStream – JP Morgan – IMF – World Bank – European Commission
     Canada – An alternative to US Treasuries
     Yield differential compensates for the currency risk
     170                                                                                100%
              Canadian rates still give some yield pick up vs US 
                                                                                                       Res t of the world     16%
              government bonds mainly on the short end
     120                                                                                 80%           China

                                                                                                       Ja pa n
      70                                                                                 60%
                                                                                                       UK
                                                                                                                                         Canadian and 
                                                                                                       US                                American economies 
      20                                                                                 40%
                                                                                                                              75%        are closely linked


     ‐30                                                                                 20%
                   CAD‐USD 2Y s overei gn s prea d
                   CAD‐USD 10Y s overei gn s prea d
     ‐80                                                                                   0%
          2009                2010                2011              2012                                               Sha re % of Exports
     70                                                                    5             75%
                                                                                                Canadian dollar does not suffer from the 
            Canadian domestic conditions are sound; momentum 
                                                                                                extreme overvaluation of Australian dollar
            remains good which is CAD supportive
     65                                                                                  50%
                                                                           6
     60
                                                                                         25%

     55                                                                    7
                                                                                          0%
     50
                                                                           8                                                USD/CAD          USD/AUD
                                                                                        ‐25%
     45            PMI moving a vera ge 6Mth
                   Unemployment Ra te (rhs )
     40                                                                    9            ‐50%

       2002          2004        2006         2008        2010      2012                     2002            2004      2006           2008      2010      2012
30
      Source: Dexia AM – Bloomberg – DataStream – JP Morgan – IMF – World Bank – European Commission
     Mexico – An attractive currency
     The virtues of emerging markets
     550
              A high credit spread is still offered by                                 80    Low public indebtedness
              the Mexican government
     500                                                                               70

                                                                                       60           Public Debt (%GDP)
     450
                                                                                       50

     400                                                                               40

                                                                                       30
     350
                                                                                       20
     300              MX‐US 2Y s prea d
                      MX‐US 10Y s prea d                                               10

     250                                                                                0
          2010                   2011                     2012                               2002       2004      2006      2008     2010     2012
      0                                                                              2000                                                            7

     ‐1                                                                                         USD/MXN is far below                                 8
                                                                                     1800
                                                                                                its pre‐2008 level
     ‐2                                                                                                                                              9
                                                                                     1600
                                                                                                                                                     10
     ‐3
                                                                                     1400                                                            11
     ‐4
                            Current a ccount %GDP
                                                                                     1200                                                            12
     ‐5
                                                                                                                                                     13
                          Mexican current account                                    1000
     ‐6                   deficit is reducing                                                                                                        14
                                                                                                        S&P 500
     ‐7                                                                                800
                                                                                                                                                     15
                                                                                                        USD/MXN (r.h.s .)
     ‐8                                                                                600                                                           16
           1992        1996         2000         2004        2008    2012                Nov 02             Nov 05          Nov 08          Nov 11
31
      Source: Dexia AM – Bloomberg – DataStream – JP Morgan – IMF – World Bank – European Commission
     Summary
      Contents

     I.    Global Bonds Valuation


     II.   Euro Government Debt


     III. International Government Debt


     IV. Corporate Debt


     V.    Investment Recommendations




32
     A new record year for the credit market
     LTRO & OMT have boosted spread asset classes
                                                                                                         Risk premium has contracted by 180 bp in 2012
                                                             570                                                                                                                                                                                  8.0

                                                             520
                                                                                                        Spread to Govt
                                                             470                                                                                                                                                                                  7.0
                                                                                                        Yield 
                                                             420
                           Spread To Government (bp)
                                                                                                                                                                                                                                                  6.0




                                                                                                                                                                                                                                                        Yield To Maturity (%)
                                                             370

                                                             320
                                                                                                                                                                                                                                                  5.0
                                                             270

                                                             220
                                                                                                                                                                                                                                                  4.0
                                                             170

                                                             120                                                                                                                                                                                  3.0
                                                                    70

                                                                    20                                                                                                                                                                            2.0
                                                                             Jan‐99


                                                                                             Jan‐00


                                                                                                             Jan‐01


                                                                                                                             Jan‐02


                                                                                                                                             Jan‐03


                                                                                                                                                         Jan‐04


                                                                                                                                                                     Jan‐05


                                                                                                                                                                                Jan‐06


                                                                                                                                                                                          Jan‐07


                                                                                                                                                                                                    Jan‐08


                                                                                                                                                                                                              Jan‐09


                                                                                                                                                                                                                       Jan‐10


                                                                                                                                                                                                                                Jan‐11


                                                                                                                                                                                                                                         Jan‐12
                                                                     20                                                 Historical performance of the asset class 
                                                                     15
                                                                     10
                                                       Return (%)




                                                                         5
                                                                         0
                                                                                      1999            2000            2001            2002        2003        2004       2005      2006      2007      2008     2009     2010     2011    2012
                                                                     ‐5
                                                                                                                         Excess Return
                                                                    ‐10

                                                                    ‐15                                                 Total return

33
      Source: Dexia AM – Bloomberg – DataStream – JP Morgan – iBoxx
     2013, a low yield environment
     And now…?

                                             6
                                                            In 2012, Credit yield has melted by 300 bp, driven both by falling interest rate 
                                                                                   and declining credit risk premium 


                                             5



                                             4
                     Yield To Maturity (%)




                                             3


                                                                                                                                     2.28%
                                             2                                                                                       2.17%


                                             1
                                                                    Germany 5 Y
                                                                    JPM IG Govt*                                                     0.44%
                                                                    iBoxx Euro Corporate
                                             ‐
                                                 Oct‐ Jan‐ Apr‐    Jul‐   Oct‐ Jan‐ Apr‐     Jul‐   Oct‐ Jan‐ Apr‐     Jul‐   Oct‐ Jan‐ Apr‐        Jul‐   Oct‐
                                                  09   10   10      10     10   11   11       11     11   12   12       12     12   13   13          13     13
                                                 * Yield of JPM EMU IG Government adjusted to correct the differential duration with iBoxx € Corp


34
      Source: Dexia AM – Bloomberg – DataStream – JP Morgan – iBoxx
     A sluggish growth isn’t a threat for credit
     US companies will benefit from better macro environment
                                                                                 Credit asset class performance by GDP buckets

                                                                       Europe                                      US
                                                                 2.0

                                                                 1.5
                          Quarterly Excess R eturn (% )
                                                                 1.0

                                                                 0.5

                                                                 0.0
                                                                          ‐1‐0               0‐1                        1‐2                               2‐3                       >3
                                                           ‐0.5

                                                           ‐1.0
                                                                                                        Real GDP Bucket (1 Q lag)
                                                           ‐1.5

                                                                                                                                                                               US                      Europe
                                                                                                                                                          15.0                 Japan                   China
                                                                 50                                                                                       10.0




                                                                                                                                             GDP  YoY %
                                                                 45                            Sales breakdown of iBoxx Non‐                               5.0
                                                                                               Financial companies is well 
                                                                 40
                                  % sales by geographic region




                                                                                               diversified to higher growth areas                          0.0




                                                                                                                                                                  2008


                                                                                                                                                                             2009


                                                                                                                                                                                         2010


                                                                                                                                                                                                2011


                                                                                                                                                                                                          2012


                                                                                                                                                                                                                 2013
                                                                 35                                                                                        ‐5.0
                                                                 30                                                                                       ‐10.0
                                                                 25
                                                                 20
                                                                 15
                                                                 10
                                                                   5
                                                                   0
                                                                           Europe                  US                         Asia Pacific                           Other
35
      Source: Dexia AM – Bloomberg – DataStream – JP Morgan – iBoxx
     Current credit spreads price a sluggish growth, not the worse
     In Europe, Issuers’ selection dominates as the fundamentals begin to deteriorate
                                In 2013, Corporate credit leverage should increase to 2.4 x 
                                      through a fall of ‐2% of Ebitda and stable debt

                          2.8
                          2.7
                                                                                                                                                                                      Consensus on earnings is vulnerable
                          2.6
                                                                                                                                                                               European EPS forecast revisions, 2008‐2013 %
                          2.5
     Debt to Ebitda




                          2.4
                                                                                                                                                                 25%
                          2.3
                          2.2                                                                                                                                                                                                          2010
                                                                                                                                                                 20%
                          2.1
                            2                                                                                                                                    15%           2013
                          1.9
                                                                                                                                                                 10%
                                 2000

                                        2001
                                                2002

                                                        2003

                                                               2004
                                                                      2005

                                                                             2006
                                                                                     2007

                                                                                            2008
                                                                                                   2009

                                                                                                          2010

                                                                                                                 2011
                                                                                                                        2012

                                                                                                                               2013
                                                                                                                                                                                                                  2011




                                                                                                                                      E a r n in g s R ev isio n s
                                                                                                                                                                     5%
                                                 Risk premium doesn’t offer any extra buffer                                                                                                 2008
                                                                                                                                                                     0%
                          450                                                                                                                                              1   2       3    4    5     6    7     8      9   10   11     12
                                        Implied Spread                                 BE                                                                            ‐5%
                          400
                                        OAS
                          350                                                                                                                             ‐10%                                             2012
      Risk Premium (bp)




                          300
                                                                                                                                                          ‐15%
                          250                                                215
                                        209
                                                                                                                 187                                      ‐20%
                          200                                                           387
                          150                      BE                                                                    BE                               ‐25%
                          100                                                                                                                                                                          Months
                                                       142                                                               142
                           50
                            0
                                               2002                                 2009                           2013


36
           Source: Dexia AM – Bloomberg – DataStream – JP Morgan – iBoxx
                             Bank deleveraging is there to stay and is changing credit landscape
                                           Bondholder enjoy the balance sheets improvement
                                                       Deleveraging rhymes with derisking…                                                                                                                                                             Bank’s profitability to stay atone for a few more years 
                                                                                                                                                                                                        25.0                                           impacted by asset quality deterioration, deleveraging 
                                                      Based on the 25 largest european banks                                                                                                                                                                            and more regulation
                                                             2008
                                           1600                                                              500
                                                             2012                                                                                                                                       20.0                                                        Based on the 25 largest european banks




                                                                                                                                                         Return on equity (%)
     Average of 25 Eur Banks ( Millions)




                                                                                                                   Average of 25 Eur Banks ( Millions)
                                           1200                                                              400
                                                                                                                                                                                                        15.0


                                                                                                                                                                                                        10.0
                                            800                                                              300

                                                                                                                                                                                                                 5.0

                                            400                                                              200
                                                                                                                                                                                                                 0.0
                                                                                                                                                                                                                     Dec‐                Dec‐              Dec‐              Dec‐               Dec‐              Dec‐                Dec‐               Dec‐               Dec‐

                                              0                                                              100
                                                                                                                                                                                                                 ‐5.0 05                  06                07                08                 09                10                  11                 12                 13
                                                             Total Assets                       RWA

                                                                                                                                                                                                                                                               Financial disintermediation pushes non‐financial 
                                                          … and better loans to funding ratio                                                                                                                                                                           companies to the bond market




                                                                                                                                                                       European Corp Bonds Oustanding (Eur Bn)
                                           140%

                                           130%                                                                                                                                                                  2.4
                                                                                                                                                                                                                 2.2                 Private Non‐Fins
                                           120%
     Loans To Deposits (%)




                                                                                                                                                                                                                 2.0
                                           110%                                                                                                                                                                  1.8
                                                                                                                                                                                                                 1.6
                                           100%                                                                                                                                                                  1.4
                                                                                                                                                                                                                 1.2
                                           90%                                                                                                                                                                   1.0
                                                                                                                                                                                                                 0.8
                                           80%          Europe as of end 2008                                                                                                                                    0.6



                                                                                                                                                                                                                                                  Aug‐01




                                                                                                                                                                                                                                                                                      Aug‐04




                                                                                                                                                                                                                                                                                                                          Aug‐07




                                                                                                                                                                                                                                                                                                                                                              Aug‐10
                                                                                                                                                                                                                                Feb‐00
                                                                                                                                                                                                                                         Nov‐00



                                                                                                                                                                                                                                                                    Feb‐03
                                                                                                                                                                                                                                                                             Nov‐03



                                                                                                                                                                                                                                                                                                        Feb‐06
                                                                                                                                                                                                                                                                                                                 Nov‐06



                                                                                                                                                                                                                                                                                                                                            Feb‐09
                                                                                                                                                                                                                                                                                                                                                     Nov‐09



                                                                                                                                                                                                                                                                                                                                                                                Feb‐12
                                                                                                                                                                                                                                                                                                                                                                                         Nov‐12
                                                                                                                                                                                                                       May‐99




                                                                                                                                                                                                                                                           May‐02




                                                                                                                                                                                                                                                                                               May‐05




                                                                                                                                                                                                                                                                                                                                   May‐08




                                                                                                                                                                                                                                                                                                                                                                       May‐11
                                                        US as of July 2007
                                           70%
                                                  T                  10                20              30 
                                                                             Months after the peak

37
                                            Source: Dexia AM – Bloomberg – DataStream – JP Morgan – iBoxx
            Banking regulation is a long term trends
             A framework which is positive for covered and senior bank bond holder


               2013                2014            2015              2016      2017           2018                                          2019             2020              2021               2022
CAPITAL




            Start of                                                                         Full implementation of
            Basle III                                                                      Basle III capital requirement
                            Start of Subordinated debt grandfathering amortization
                                 90%              80%               70%        60%           50%                                       40%                 30%               20%                   10%
LEVERAGE




                           Monitoring of Basle III leverage ratio                                                                       More and more focus on Basel III criteria
                                                                                                                              14.0          Based on the 25 largest european banks
                                 Disclosure of Basle III Leverage                                                             13.0
                                        ratio (target 3%)




                                                                                                     Core Capital Ratio (%)
                                                                                                                              12.0
                                                                                                                              11.0
LIQUIDITY




                                                                                                                              10.0
                                         Liquidity                                   Net Stable                                9.0
                                       Coverage Ratio                                 Funding
                                                                                                                               8.0
                                           (LCR)                                       (NSFR)
                                                                                                                               7.0
                                                                                                                               6.0
            ECB to start           EU Resolution                                                                                     Dec‐     Dec‐    Dec‐ Dec‐       Dec‐   Dec‐      Dec‐ Dec‐       Dec‐
BK UNION




            integrated                Dir to be                                       Bail-in Tool                                    05       06      07       08     09     10        11       12     13
            banking                transposed to                                                                                                      Core tier 1                     Core tier 1 B3
            supervision            national laws
            (SSM)



     38
               Source: Dexia AM – Bloomberg – DataStream – JP Morgan – iBoxx
     Reduced systemic risk, meanwhile political game dominates
     Step by step but sword of Damoclès is still there
                                                                                       Strong correlation of non‐core credit with sovereign stress
                                              8.50
                                                                                TELEFO 4.75 17
                                              7.50                              SPGB 5.5 17
                                                                                                                                                                          LTRO                                                                            OMT
                  Mid Yield To Maturity (%)
                                                                                ENELIM 4.125 17
                                              6.50                              BTPS 5.25 17


                                              5.50


                                              4.50


                                              3.50


                                              2.50



                                                                                                                              Aug‐11




                                                                                                                                                                                                                                                     Aug‐12
                                                                                    Apr‐11




                                                                                                                                                                                                                 Apr‐12
                                                              Feb‐11




                                                                                                         Jun‐11




                                                                                                                                        Sep‐11

                                                                                                                                                     Oct‐11

                                                                                                                                                               Nov‐11

                                                                                                                                                                        Dec‐11



                                                                                                                                                                                               Feb‐12




                                                                                                                                                                                                                                   Jun‐12




                                                                                                                                                                                                                                                              Sep‐12

                                                                                                                                                                                                                                                                       Oct‐12

                                                                                                                                                                                                                                                                                Nov‐12
                                                     Jan‐11



                                                                           Mar‐11



                                                                                             May‐11



                                                                                                                     Jul‐11




                                                                                                                                                                                   Jan‐12



                                                                                                                                                                                                        Mar‐12



                                                                                                                                                                                                                          May‐12



                                                                                                                                                                                                                                            Jul‐12
                                                       Country rating at the heart of the correlation
                            AAA
                                                                                                                                                                                                                                    Prefer the senior debt of well diversified companies
                            AA+
                            AA                                                                                                                                                                                                      Short term debt supported by OMT




                                                                                                                                                                                            REESM
                                                                                                                                                 IBESM
                                                                       SANTAN




                                                                                                                                                              GASSM
                                                                                                                               TELEFO




                            AA‐

                                                                                                                                                                           REPSM
                                                                                                                                                                                                                                    Avoid subordinated banking debt
                                                                                                 CAIXA
                                                      SPAIN



                                                                                    BBVA




                            A+
                                                                                                                  BANKIA




                            A
                            A‐
                            BBB+
                            BBB
                            BBB‐
                            BB+
                                                                                                                                                                                 IG Border
                            BB

39                          BB‐
      Source: Dexia AM – Bloomberg – DataStream – JP Morgan – iBoxx
     A low yield environment …let’s have a look at Japan
     Returns of Japanese credit reflect a carry trade
                                                                                                                Japanese credit market performance

                                                                                                     2.50%
                                                                                                                        Total return (Y)
                                                                                                                        Excess Return (Y)
                                                                                                     2.00%
                                                   Interest rate evolution after crisis
                                           7                                                         1.50%

                                                             Japan as of 1992                        1.00%
                                           6
                                                             Germany as of end 2008
                                                                                                     0.50%
              Government 10 Yr Yield (%)




                                           5
                                                                                                     0.00%
                                                                                                                 Corp           Fi na nci a l   Indus tri a l s
                                           4

                                           3

                                           2

                                           1

                                           0
                                               0      20          40            60        80           100         120            140           160               180   200
                                                                                               Months after the peak




40
      Source: Dexia AM – Bloomberg – DataStream – JP Morgan – iBoxx
              Credit in 2013, a carry trade that could generate a minimum of 2%
                          Market tactical forces can support the asset class further
                                                                                                                                                              Limited supply and wall of maturities in 2013 & 2014 
                                                                                                                                                                               for non financials

                                     Expected return on 1 year : a minimum of 2%                                                                                                                                                           400
                                                                                                                                                                                                                                           300
                                                                                                                                                                                                                                           200
                          8.0                                                                       20




                                                                                                                                                                                                                                                  € Milliards
                          7.5                                                                                                                                                                                                              100
                          7.0                                                                       15                                                                                                                                     0
                          6.5                                                                                                                    2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 ‐100
                          6.0                                                                       10                                                                                                                                     ‐200




                                                                                                          Total Return
     iBoxx € Corp Yield




                          5.5
                                                                                                                                                                                                                                           ‐300
                          5.0                                                                       5
                          4.5                                                                                                                                                     Financials           Non‐Financials
                          4.0                                                                       0
                          3.5
                                                                                                                                                 8
                          3.0                                                                       ‐5
                                                                                                                                                                     Market segmentation is a reality that can bring 
                          2.5                                                                                                                    7       HY
                                                                                                                                                                     spreads lower than what fundamentals suggest
                          2.0                                                                       ‐10
                                                                                                                                                 6
                           Ja n‐00    Ja n‐02   Ja n‐04   Ja n‐06   Ja n‐08   Ja n‐10     Ja n‐12




                                                                                                                         Yield to Maturity (%)
                                                                                                                                                 5

                                                  Return Credi t                        Yi el d                                                  4            NON 
                                                                                                                                                              CORE




                                                                                                                                                                                                ABS
                                                                                                                                                 3




                                                                                                                                                                                      COVERED
                                                                                                                                                 2            GOVT
                                                                                                                                                                             IG                                         SUB SOV
                                                                                                                                                 1                                                    CORE GOVT

                                                                                                                                                 0
                                                                                                                                                     ‐               2 000            4 000             6 000           8 000     10 000
                                                                                                                                                                  Market Value of debt oustanding in Billion(Merrill Index)




41
                           Source: Dexia AM – Bloomberg – DataStream – JP Morgan – iBoxx
          Is there some value left in the IG credit ?
                    High Yield and Emerging corporate looks good

                                                                           Changes of the risk‐return over the last 12 months

                                  10.0                                                                                                   Lt2 & Sub (11)
                                                                                                                                                          BB‐ B Nfin (11)
                                    9.0

                                    8.0                                                                                                               Periph Fin (11)
     Today's YTM (%) adjusted 




                                    7.0
                                                                                                         EM Corp (11)
                                    6.0                                          Periph Nfin (11)        EM Global (11)
                                                                                                                      BB‐B US (11)
                                    5.0                                                                                                                    Lt2 & Sub
                                                      Covered (11)                                                                       BB‐B Nfin                          Periph Fin
                                                                       Bk senior (11)      EM Global
                                    4.0                                  IG US (11)   BB‐B US
                                                                                 EM Corp
                                                         Core Nfin (11)
                                    3.0                              IG US                                                 Periph Nfin

                                    2.0                       Covered
                                                                        Bk senior
                                                               Core Nfin
                                    1.0                                                 Bund
                                     ‐
                                          2.00                  4.00                     6.00                   8.00                 10.00                   12.00                  14.00
                                                                                                 Historical Realized Volatility 12 M




42
                                 Source: Dexia AM – Bloomberg – DataStream – JP Morgan – iBoxx
                                   US IG credit compares well with € IG Credit
                                      Sound credit metrics and larger remuneration
                                                                                                                                                                                                                                   Spread distribution favour investments in US Dollar
                                                                                                                                                                                                   40

                                                                                                                                                                                                   35

                                                                                                                                                                                                   30

                                                                                                                                                                                                   25




                                                                                                                                                                                         % Index
                                                           US corporates post better credit quality                                                                                                20

                                 0.40                                                                                                                                                              15
                                                      US
                                                                                                                                                                                                   10
                                                      W. Europe
                                 0.20
                                                                                                                                                                                                    5
Rating drift ( Up‐Down/ Total)




                                                                                                                                                                                                    0
                                  ‐




                                                                                                                                                                                                        <0




                                                                                                                                                                                                                                                                                                                                                                             >400
                                                                                                                                                                                                                                   0‐50



                                                                                                                                                                                                                                                   50‐100



                                                                                                                                                                                                                                                                      100‐150



                                                                                                                                                                                                                                                                                         150‐200



                                                                                                                                                                                                                                                                                                            200‐250



                                                                                                                                                                                                                                                                                                                               250‐300



                                                                                                                                                                                                                                                                                                                                                   300‐350



                                                                                                                                                                                                                                                                                                                                                                 350‐400
                                         Sep‐07




                                                                    Sep‐08




                                                                                               Sep‐09




                                                                                                                          Sep‐10




                                                                                                                                                     Sep‐11




                                                                                                                                                                                Sep‐12
                                                  Jan‐08
                                                           May‐08


                                                                             Jan‐09
                                                                                      May‐09


                                                                                                        Jan‐10
                                                                                                                 May‐10


                                                                                                                                   Jan‐11
                                                                                                                                            May‐11


                                                                                                                                                              Jan‐12
                                                                                                                                                                       May‐12
                                 ‐0.20
                                                                                                                                                                                                                                                            Euro                                                                                  US


                                 ‐0.40
                                                                                                                                                                                                                                   500                      C 4.375 18 EUR
                                                                                                                                                                                                                                   450                      C 6.95 18 USD




                                                                                                                                                                                                             Spread To Govt (bp)
                                 ‐0.60
                                                                                                                                                                                                                                   400
                                                                                                                                                                                                                                   350
                                 ‐0.80                                                                                                                                                                                             300
                                                                                                                                                                                                                                   250
                                                                                                                                                                                                                                   200
                                                                                                                                                                                                                                   150
                                                                                                                                                                                                                                   100
                                                                                                                                                                                                                                                             Apr‐11




                                                                                                                                                                                                                                                                                                                                         Apr‐12
                                                                                                                                                                                                                                                                                                   Oct‐11




                                                                                                                                                                                                                                                                                                                                                                    Oct‐12
                                                                                                                                                                                                                                          Jan‐11




                                                                                                                                                                                                                                                                                Jul‐11




                                                                                                                                                                                                                                                                                                                      Jan‐12




                                                                                                                                                                                                                                                                                                                                                        Jul‐12
 43
                                         Source: Dexia AM – Bloomberg – DataStream – JP Morgan – iBoxx
     USD High Yield, an alternative
        Attractive risk reward and low default rate
                                                                                                                                                                  Default rate around 3%
                                                                                                      16

                                                                                                      14

                                                                                                      12




                                                                                Default Rate (%)
                                                                                                      10

                   Spread compensates for insolvency risk                                                          8

                                                                                                                   6

                                                                                                                   4
                                                                          160
 4.50                                                 HY                                                           2
                   HY                                                     140                                            ‐
 4.00




                                                                                                                               Jan‐05



                                                                                                                                        Jan‐06



                                                                                                                                                  Jan‐07



                                                                                                                                                              Jan‐08



                                                                                                                                                                       Jan‐09



                                                                                                                                                                                Jan‐10



                                                                                                                                                                                         Jan‐11



                                                                                                                                                                                                  Jan‐12



                                                                                                                                                                                                            Jan‐13
 3.50                                                                     120
                            X 1.7                                X 2.2
 3.00                                                                     100
                                                                                                                                                 Moody's Default rate             Esti mated Default Rate
 2.50                         IG                                          80
                                                                  IG
 2.00
                                                                          60
 1.50                                                                                                                                                      Interest expense charge is low
                                                                          40
 1.00
                                                                                                                               24%
 0.50                                                                     20




                                                                                                   Interest expense % Ebitda
                                                                                                                               22%
 0.00                                                                     0
                   Debt To Ebitda                                                                                              20%
                                                    Spread Per Leverage
                                                                                                                               18%

                                                                                                                               16%

                                                                                                                               14%

                                                                                                                               12%
                                                                                                                               10%
                                                                                                                                        2005 2006 2007 2008 2009 2010 2011 2012

44
         Source: Dexia AM – Bloomberg – DataStream – JP Morgan – iBoxx
     Emerging debt , an opportunity
          Portfolio diversification and growing economy
                                                                                                                                                                                           Good saving rate
                                                                                                                                                               35                                 (% of  GDP)                            0

                                                                                                                                                                                                                                         20
                                                                                                                                                               30




                                                                                                                                                                                                                                              Government debt
                                                                                                                                      Gross national savings
                                                                                                                                                                                                                                         40
                                                                                                                                                               25
                                               Number of issuers in Iboxx € Corp                                                                                                                                                         60
                                                                                                                                                               20
                                                                                                                                                                                                                                         80
                                                            Growing number of Emerging Corp tapping                                                            15
                                                              the Eur credit market like VALE, TEVA,                                                                                                                                     100
                         400
                         350
                                                              PETROBRAS, IPIC, AMERICA MOVILES…
                                                                                                                                                               10                                                                        120
                         300
     Number of issuers




                                                                                                                                                                    1999      2002        2005         2008      2011      2014
                         250                                                                                                                                          Emerging Economies ‐ Savings               Advanced Economies ‐ Savings
                                                                                                                                                                      Advanced Economies ‐ Govt Debt             Emerging Economies ‐ Govt Debt
                         200
                         150
                         100                                                                                                                                                                             GDP
                          50                                                                                                                                                                     (Billion of US dollar)

                           0                                                                                                         60,000
                                                                                                                                                                             Advanced economies
                                1999

                                       2000

                                              2001

                                                     2002

                                                              2003

                                                                     2004

                                                                            2005

                                                                                    2006

                                                                                           2007

                                                                                                  2008

                                                                                                         2009

                                                                                                                2010

                                                                                                                       2011

                                                                                                                              2012
                                                                                                                                     50,000                                  Emergi ng a nd developing economies
                                                                                                                                                                             Difference
                                                     Financial issuers             Non Financial issuers                             40,000

                                                                                                                                     30,000

                                                                                                                                     20,000

                                                                                                                                     10,000

                                                                                                                                                               0
                                                                                                                                                                   1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016

45
                         Source: Dexia AM – Bloomberg – DataStream – JP Morgan – iBoxx
     Summary
      Contents

     I.    Global Bonds Valuation


     II.   Euro Government Debt


     III. International Government Debt


     IV. Corporate Debt


     V.    Investment Recommendations




46
     Investment Recommendations
     Government Bonds Strategies for 2013


Trades                                                                                  Risks 
As central banks limit tail risk and US economic growth will                             We see some risks to our baseline scenario.
gradually recover, global bonds yields will begin to increase.
                                                                                           Degradation of economic conditions – Uncertainty about fiscal
  Short Duration in 10Y Germany and US – US and German                                   cliff could weigh on US consumption. In Europe, the recession
Treasuries are expensive. Even if the monetary cycle will remain                         could be stronger due to higher‐than‐expected fiscal multipliers.
supportive in 2013, we expect that economic recovery will put core
government bonds under pressure                                                            Implementation risks of OMT – Conditionality and the targeted
                                                                                         “maturity coverage” (de facto limiting the firepower) are risks after
  Tactical opportunities to buy 3Y Spanish paper – An activation of                      the activation of OMT. As economic and fiscal imbalances will
OMT will temporary limit tail risks. Although debt sustainability                        remain present in 2013, the ECB will potentially have to adapt its
remains fragile in Spain, an ECB support will be supportive for the                      monetary framework.
short end segment.
                                                                                          Political risks – Upcoming German and Italian elections. The
  Underweight of France vs. Italy and Germany – A combination                            ongoing economic crisis leaves a more challenging outcome for
of Italy and Germany currently offers a better fundamental macro                         governing parties in the Euro‐zone while “extreme” parties are also
and fiscal scoring relative to France while offering an attractive                       gaining support.
carry.

  Long NOK, CAD & MXN – We recommend to diversify a global
portfolio towards issuers who offer the best fundamentals with an
attractive carry. In a low rate environment, the research of yield
will drive the evolution of exchange rates.




47
     Source: Dexia AM – Bloomberg – DataStream – JP Morgan – IMF – World Bank – European Commission
     Investment recommendations
     Corporate Bonds Strategies for 2013


                                                                           IG credit prices an atone growth but not worst, credit spread
                                        Current            Current     buffer is limited, in a low yield environment, investors should not
      27 November 2012                                                 expect more than the carry trade
                                        Yield   %          Spread bp
      € Corporate All                         2.19               175         Sharp earnings revisions, political risk, rating downgrades can
      € Non‐Financials                        1.89               150   create temporary volatility which should be seen as an entry point
                                                                       in the search for yield trend
      € Financials                            2.55               209
      € Collateralized                        2.21               173       Attractive alternative to € IG credit are :
      € Sub Sovereign                         1.35                77
                                                                                   US IG Credit
      $ Corporate All                         3.45               170               US High Yield
      $ Non‐Financials                        3.47               157               IG Emerging debt
      $ Financials                            3.40               200
                                                                           Bottom‐up selection will be a key performance driver. Based
      $ Sub Sovereign                         1.49                55   on risk‐return, some Senior Bank debt, covered debt and core non‐
      € ST Non‐Financials                     1.18               114   financial debt are interesting as a diversified portfolio basis
      € ST Financials                         2.03               201
                                                                                   Geographic diversification and strong credit metrics
      € ST Collateralized                     1.71               168               Take profit of attractive primary market
      € ST Sub Sovereign                      0.77                74               No junior subordinated debt from bank due to the
                                                                                   treatment uncertainty under Basel III




48
      Source: Dexia AM – Bloomberg – DataStream – JP Morgan – iBoxx
     Investment Recommendations
     2013 Strategies

                 Duration Allocation                                   Credit Allocation
                 US                                                                     Emergi ng

                       EURO 
                       CORE                                                             US Hi gh 
                                                                                         Yi el d
                                   EURO NON 
                                     CORE                                       Euro Hi gh 
                                                                                  Yi eld
                        UK
                                                                                            US 
                                                                                       Inves tmen
                       CANADA                                                            t Gra de
                                                                                   Euro 
                                                                               Inves tmen
                                   AUSTRALIA
                                                                                 t Gra de

         Underweight                            Overweight   Underweight                      Overweight

                 Currency Allocation
                                      USD

                AUD

                                      CAD

                             JPY

                                   NOK

                       CHF

                                               MXN

49       Underweight                            Overweight
     Investment Recommendations
     Synoptic

                                             Current   Q1 2013    Q4 2013

                   Fed Fund Target Rate       0.25      0.25        0.25
                   2 Years Interest Rate      0.25      0.25        0.60
        USA
     INTEREST      10 Years Interest Rate     1.60      1.70        2.20
       RATE
                   10 Years Breakeven Rate    2.45      2.60        2.40
                   2s10s Curve                135       145         160
                   ECB Target Rate            0.75      0.75        0.50
                   2 Years Interest Rate      0.02      0.05        0.30
     GERMANY
     INTEREST      10 Years Interest Rate     1.40      1.50        1.80
       RATE
                   10 Years Breakeven Rate    1.67      1.80        1.80
                   2s10s Curve                138       145         150
       EURO        10 Years French Rate       2.05      2.10        2.60
     INTEREST
       RATE        10 Years Belgian Rate      2.16      2.10        2.70
                   EUR/USD                    1.30      1.35     [1.20;1.25]
                   EUR/JPY                    107       115         113
                   EUR/AUD                    1.25      1.32        1.39
     CURRENCY      EUR/CAD                    1.30      1.32        1.28
                   EUR/MXN                    16.90     17.00      14.50
                   EUR/NOK                    7.36      7.30        7.20
                   EUR/GBP                    0.81      0.83        0.77
      CREDIT       Euro Corporate Spread      168       168         130




50
      Source: Dexia AM – Bloomberg 
     Addresses


     Luxembourg                  Australia                   Switzerland                      Bahrain
     Dexia Asset Management      Ausbil Dexia Ltd            Dexia Asset Management           Dexia Asset Management
     Luxembourg SA               Veritas House – Level 23    Luxembourg SA                    Luxembourg S.A., Middle East
     136, route d’Arlon          207 Kent Street             succursale de Genève             Representative Office
     1150 Luxembourg             Sydney NSW 2000             2, rue de Jargonnant             Bahrain Financial Harbour,
     Tel.: + 352 2797-1          Tel.: + 61 2 925 90 200     1207 Genève                      Financial Center, West Harbour
                                                             Tel.: + 41 22 707 90 00          Tower, Level 23
     Belgium                                                                                  King Faisal Highway
     Dexia Asset Management      Italy                       The Netherlands                  PO Box 75766
     Belgium                     Dexia Asset Management      Dexia Asset Management           Manama
     Place Rogier 11             Luxembourg SA               Nederlands bijkantoor            Tel.: + 973 1750 99 00
     B-1210 Bruxelles            Succursale Italiana         Lichtenauerlaan 102-120
     Tel.: + 32 02 222 11 11     Corso Italia 1              3062 ME Rotterdam                Canada
                                 20122 Milano                Tel.: + 31 10 204 56 53          Dexia Asset Management
     France                      Tel.: + 39 02 31 82 83 62                                    Luxembourg SA
     Dexia Asset Management SA                               Germany                          Canadian Representative Office
     40, rue Washington          Spain                       Dexia Asset Management           155, Wellington Street West
     75408 Paris Cedex 08        Dexia Asset Management      Luxembourg SA                    6th floor
     Tel.: + 33 1 53 93 40 00    Luxembourg SA               Zweigniederlassung Deutschland   Toronto, Ontario
                                 Sucursal en España          An der Welle 4                   M5V 3L3
                                 Calle Ortega y Gasset, 26   60422 Frankfurt                  Tel.: + 1 416 974 9055
                                 28006 Madrid                Tel.: + 49 69 7593 8823
                                 Tel.: + 34 91 360 94 75




51
     Disclaimer




     This document is published purely for the purposes of information, it contains no offer for the purchase or sale of financial instruments does not comprise investment advice and it is not confirmation of any
     transaction unless expressly agreed otherwise. The information contained in this document was obtained from a number of different sources. Dexia Asset Management exercises the greatest care when
     choosing its sources of information and passing on this information. Nevertheless errors or omissions in those sources or processes cannot be excluded a priori. Dexia AM cannot be held liable for any direct
     or indirect damage or loss resulting from the use of this document. The contents of this document may be reproduced only with the prior written agreement of Dexia AM. The intellectual property rights of Dexia
     AM must be respected at all times.

     Warning : If this document mentions the past performances of a financial instrument or index or an investment service, refers to simulations of such past performances or contains data relating to future
               performances, the client is aware that those performances and/or forecasts are not a reliable indicator of future performances.

                Moreover, Dexia AM specifies that:
                • in the case where performances are gross, the performance may be affected by commissions, fees and other charges;
                • in the case where the performance is expressed in another currency than that of the investor’s country of residence, the returns mentioned may increase or decrease as a result of currency
                  fluctuations.

     If this document makes reference to a particular tax treatment, the investor is aware that such information depends on the individual circumstances of each investor and that it may be subject to change in the
     future.

     This document does not comprise any investment research as defined in article 24, §1 of Directive 2006/73/CE dated 10 August 2006 implementing Directive 2004/39/CE of the European Parliament and
     Council.
     If this information is a marketing communication, Dexia AM wants to clarify that it was not designed according to the legal requirements to promote the independence of investment research, and it is not
     subject to any prohibition on dealing prior to the dissemination of the investment research.

     Dexia AM invites the investors to always consult the fund prospectus before investing in a fund. The prospectus and other information relating to the fund are available on our site at www.dexia-am.com.




     Money does not perform. People
     do.
52

				
DOCUMENT INFO
Shared By:
Categories:
Tags: 2013, outlook, Dexia
Stats:
views:48
posted:12/30/2012
language:
pages:52
Description: Fixed Income Markets – Outlook 2013