Barclays Capital - Summertime blues by riteshbhansali


• The decline in commodity prices and inflation expectations gives room for central banks to be more accommodative. We recommend reinitiating 7s-30s curve flatteners in the US. Given current valuations, we also recommend being long 10y US Treasuries and JGBs relative to France.

• In Europe, core yields look low, but with the BoJ moves and weak data, they are unlikely to back up much near term. In Sweden, we stay positive following the dovish Riksbank.

• In the UK, data are coming in weaker as well, but the MPC is unlikely to give any more stimulus for now: we stick with steepeners.

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									                                                                                                                  Interest Rates Research
                                                                                                                                    18 April 2013

Global Rates Weekly
Summertime blues
• The decline in commodity prices and inflation expectations gives room for
     central banks to be more accommodative. We recommend reinitiating 7s-30s                  Views on a Page                                    7
     curve flatteners in the US. Given current valuations, we also recommend being             Trade Portfolio Update                         58
     long 10y US Treasuries and JGBs relative to France.
                                                                                               Global Supply Calendar                         68
• In Europe, core yields look low, but with the BoJ moves and weak data, they are              Global Bond Yield Forecasts                    69
     unlikely to back up much near term. In Sweden, we stay positive following the
     dovish Riksbank.
                                                                                               United States
• In the UK, data are coming in weaker as well, but the MPC is unlikely to give any            TIPS: Global linkers Risk-Parity               11
     more stimulus for now: we stick with steepeners.                                          Agencies: A dam too far                        19

Global                                                                                         Volatility: For a flatter tomorrow             23
                                                                                               Money Markets: Clearing the fog in interbank
Summertime blues                                                                  2            lending                                    26
The decline in commodity prices and inflation expectations gives room for central
banks to be more accommodative. We recommend reinitiating 7s-30s curve flatteners              Europe
in the US. Given current valuations, we also recommend being long 10y US Treasuries
                                                                                               Sovereign Spreads: Political rally in Italy    32
and JGBs relative to France.
                                                                                               Money Markets: The ECB’s options               35
United States                                                                                  SSA: EFSF – to tap or not to tap               42
Treasuries: Opportunity knocks twice                                                    8      Scandinavia: Unchanged policy rates, but
We recommend initiating 7s30s curve flatteners as the term premium embedded in the             significantly softer forward looking policy
                                                                                               guidance                                       48
long end looks too high, given subsiding inflation worries, as evidenced by the sharp
decline in long-term breakevens. We also reiterate our long Tsys vs OIS view in the front      European Inflation-Linked: Viva l’Italia…
                                                                                               again!                                         50
end and believe the 4y sector looks too cheap with respect to the intermediate sector.
                                                                                               UK Inflation-Linked: Supply me to the
Euro Area                                                                                      moon                                           52
                                                                                               Volatility: Conditionally hedged               53
Resiliency                                                                               30
The resiliency of peripheral markets recently has been impressive, with yields/spreads to
Germany near YTD lows. The IMF Fiscal Monitor and Global Financial Stability Reports (FM
and GFSR) include analysis that help explain this, and other moves in financial markets.

UK                                                                                              INSTITUTIONAL INVESTOR ALL-AMERICA
                                                                                                FIXED INCOME RESEARCH TEAM SURVEY
Decline and fall                                                                         40     2013
As realised volatility declines, increased interest in positive roll-and-carry structures is    Voting has begun in the Institutional
becoming a driver of investment, this favours the 10-15y sector of the gilt curve and           Investor All-America Fixed Income
                                                                                                Research Team Survey 2013. Barclays
consequentially, a re-steepening over Q2 13.                                                    would welcome your support.
                                                                                                If you have not received a ballot, please click
Japan                                                                                           on Institutional Investor's Rankings
                                                                                                Assistance Page to request one.
How the BoJ can achieve a ¥175trn current account balance                            55
The BoJ plans to increase its current account balance to ¥175trn by end-2014.
Domestic banks will have to cut their ¥160trn in JGB holdings to around ¥70trn. For this
to be accomplished smoothly, yields might have to decline somewhat further.

Barclays | Global Rates Weekly


                                               Summertime blues
Rajiv Setia                                    The decline in commodity prices and inflation expectations gives room for central banks
+1 212 412 5507                                to be more accommodative. We recommend reinitiating 7s-30s curve flatteners in the                       US. Given current valuations, we also recommend being long 10y US Treasuries and JGBs
                                               relative to France.
Laurent Fransolet
                                               The rally in global rates that began in the middle of March continues, with 10y US yields
+44 (0)20 7773 8385
                                               about 40bp lower than their recent peak and 10y bunds within striking distance of their all-
                                               time lows from last summer. The latest leg of the rally has largely been the result of
                                               economic data surprising to the downside globally: GDP growth in China surprised to the
Amrut Nashikkar
                                               downside (at 7.7%, compared with consensus of 8%), while signs of an economic
+1 212 412 1848
                                               slowdown have emerged in the US. The regional manufacturing indices (Empire State and
                                               the Philadelphia Fed) were weaker than expectations. Retail sales, which had shown signs of
                                               strong growth in the first quarter, were revised lower, and it is now clear that the payroll tax
                                               hikes are beginning to take effect.

                                               Also, as our economists have indicated, consumer spending in the first quarter was buoyed
                                               by higher-than-expected utility spending due to the cold winter, posing downside risks to
                                               Q2 consumption. Several leading indicators of activity – such as new orders, consumer
                                               confidence indices, and base metals prices – have declined, suggesting that data are likely
                                               to be soft for the next few months. Moreover, the drag from sequestration has yet to show
                                               up in the data.

                                               In response to the softer tone of recent data, consensus forecasts for Q2 GDP have
The rally in rates has continued               decreased by almost 50bp (in line with the Barclays view) over the past few months;
because of weaker-than-                        however, in our view, consensus estimates for the second half still look too high (Figure 1).
expected US economic data,                     Given the backdrop of slowing global growth, we are hard-pressed to see US rates move
declining commodity prices                     higher on a sustained basis over the next few quarters. Rather, we believe that rates have
and signs of a global economic                 room to rally, especially if the commodity complex continues to soften and the stock market
slowdown                                       also undergoes its customary summer swoon, as has been the case over the past few years.

FIGURE 1                                                                     FIGURE 2
Consensus growth forecasts have decreased, in line with our                  Commodities back to their lows of last year, while rates,
expectations                                                                 stocks and inflation expectations have held up

  Real GDP Growth expectations, %                                             Apr 2012 =
 2.8                                                                  2.70       100
                                                               2.60           120
 2.6                                           2.50
 2.4                                    2.30
 2.2                    2.10                                                  105
                                 2.00                   2.00
 2.0                                                                          100
 1.8                                                                           95
                 1.60                                                          90
 1.6      1.50
 1.4                                                                           80
 1.2                                                                            Apr-12          Jul-12          Oct-12    Jan-13       Apr-13
                                                                                             Ind metals                  Gold
               Q213              Q313                       Q413                             CRB                         S&P500
       Barclays     Consensus (Latest)             Consensus (1M Ago)                        10y breakevens
Source: Bloomberg, Barclays Research                                         Source: Bloomberg, Barclays Research

18 April 2013                                                                                                                               2
Barclays | Global Rates Weekly

FIGURE 3                                                              FIGURE 4
Inflation expectations declining across developed markets             Wage growth has not accelerated through the recovery, thus
with the exception of Japan                                           tempering real growth and inflation

 bp change                                                              yoy %                                                        yoy %
since 1/18                                                              15                                                              5.0
 50                                                                     10                                                              4.0
 40                                                                       5
 30                                                                                                                                     3.0
 20                                                                       0
 10                                                                      -5
  0                                                                                                                                     1.0
-20                                                                    -15                                                              0.0
-30                                                                       1990 1993 1996 1999 2002 2005 2008 2011
                                                                                      Bank loans, LHS
  Jan-13          Feb-13       Mar-13       Mar-13          Apr-13
                  JP BE swap               France BE swap                                     Avg hrly earnings - prod & n.s., RHS
                  US BE swap               UK BE swap                                         Avg hrly earnings, all pvt, RHS
Source: Barclays Research                                             Source: Haver Analytics, Barclays Research

                                        The most significant market move over the past week was the dramatic decline in gold
                                        prices and the overall commodity complex (Figure 2). While commodity prices have likely
                                        declined for a variety of reasons, expectations of slower global growth and a stronger USD
                                        have likely contributed. Despite worries about a mid-year slowdown, growth prospects in
                                        the US look far better than those in Europe or Japan. Also, with the Fed arguably closer to
                                        the end of its easing cycle than other central banks, dollar strength should persist in coming
                                        quarters. The BoJ will likely be expanding its balance sheets for the next few years, while at
                                        the ECBs press conference, President Draghi opened the door to rate cuts if growth
                                        continues to underwhelm. In contrast, although we think it is premature, the FOMC minutes
                                        revealed that members are busy discussing the tapering of asset purchases.

We believe that the decline in          Despite this extensive discussion of tapering, speeches that have followed the most recent
inflation expectations gives            payroll report suggest that any such move remains distant. Fed Vice-Chair Yellen suggested
room for the Fed to be more             there were few signs that the low rate environment was leading to excessive risk taking. St.
accommodative.                          Louis Fed President Bullard suggested that the Fed might need to defend its inflation target
                                        from the downside, and that a further decline in inflation expectations might even lead to an
                                        increase in the pace of asset purchases.

                                        Our view on near-term growth has long been that the market was incorrectly concerned
                                        with tapering; rather, given the subdued inflation backdrop, the real question should be
                                        what the Fed would do next if growth and/or inflation stayed below desired levels. More
                                        generally, inflation expectations have been declining globally, with the notable exception of
                                        Japan (Figure 3). This has occurred even as central banks globally have continued to provide
                                        unprecedented amounts of monetary accommodation.

                                        In our view, the failure of extremely accommodative monetary policy to translate to inflation
                                        is likely the result of two factors. First, financial systems have been constrained because of
                                        private sector deleveraging in the aftermath of the financial crisis; further, the pro-cyclical
                                        regulatory response – raising capital and liquidity requirements via Basel 3 – has not helped
                                        either. For instance, Figure 4 shows that bank loan growth has been stuck well below pre-
                                        crisis levels. Second, wage growth has been extremely low even during the recovery (Figure
                                        4), translating into low real income growth as well as downward pressure on inflation. A
                                        recent IMF study also suggests that an inflation spike is unlikely even as the recovery

18 April 2013                                                                                                                            3
Barclays | Global Rates Weekly

FIGURE 5                                                                         FIGURE 6
The IMF forecasts debt load to be higher in France and                           France 10y rates looking rich relative to US and Japanese
Belgium relative to other core European countries                                yields
debt/GDP                                                                           2.4                                                                        4.0
 90                                                                                                                                                           3.5
 80                                                                                2.0
 70                                                                                                                                                           3.0
 50                                                                                1.6                                                                        2.5
 30                                                                                                                                                           2.0
 20                                                                                1.2
   2010     2011    2012    2013     2014   2015    2016    2017     2018
                                                                                   1.0                                                                        1.5
                    Belgium                        Netherlands                       Apr-11 Aug-11 Dec-11             Apr-12 Aug-12 Dec-12
                    Germany                        France
                    Austria                                                                        JGB+US 10y avg, LHS                 France 10y, RHS
Source: IMF WEO, Barclays Research                                               Source: Barclays Research

                                            progresses1 because inflation has been less sensitive to economic slack through this
                                            recession and recovery than was historically the case. From a policy perspective, this implies
                                            global central banks should remain accommodative.

                                            Trade: Long 10y US and 10y JGBs versus 10y France
                                            If the commodity complex continues to weaken and stocks falter, we see some room for
                                            10-year breakevens to cheapen; however, given the large decline over the past few days, we
                                            see far more room for 10-year real yields (currently at -58bp) to decline. If worries about
                                            tapering recede, and growth slows as we expect, real yields could easily decline 25bp or
                                            more from current levels. However, with nominal yields below 1.7% despite no signs of risk
                                            aversion from Europe, we are wary of initiating outright long duration trades in nominal
                                            treasuries at current levels. We would rather recommend 7s30s flatteners in the US (see the
                                            US Treasury section of this publication).

The prospect of a real yield-               We also believe the sharp moves in global duration markets in recent weeks have opened a
driven rally in the US, a reversal          few interesting trades. First, after a sharp decline in the immediate aftermath of BoJ
of Japan’s most recent rate                 announcing it would expand the pace of its asset purchases from JPY2trn to JPY7trn per
sell-off and the richness of core           month, JGB yields have backed up significantly. 30y JGBs are now about 1.6%, above their
Euro rates leads us to                      level before the BoJ surprised markets, making them attractive once more to Japanese
recommend being long USTs                   private buyers. As portfolios rebalance on the back of JGB purchases, Japanese yields should
and JGBs against France                     drift lower over time.

                                            Second, our European strategists believe that core European rates are too rich relative to
                                            fundamental value and have also recommended selling France against Netherlands (See
                                            “The new range”, April 11, 2013). Buying an equally weighted basket of Japan and US 10y
                                            treasuries and selling French debt is also attractive, in our view (Figure 6), and we are
                                            initiating this trade in our portfolio at a level of 65bp and a target of 80bp (the pre-BoJ level).
                                            We believe that amongst the core European countries, selling France is better. If the decline
                                            in inflation and growth expectations continues, it would worsen the fiscal outlook for
                                            countries with higher debt loads. This could again bring about greater differentiation within
                                            core European sovereigns, which would cause France to underperform in a rally (Figure 5).

                                             See “The dog that didn’t bark: Has inflation been muzzled or was it just sleeping?”, from the IMF’s World Economic
                                            Outlook, April 2013.

18 April 2013                                                                                                                                                     4
Barclays | Global Rates Weekly

                                 Further, as we suggested in Shock and Awe, Kuroda style, April 5, 2013, the rally in French
                                 debt that immediately followed the BoJ’s announcement was likely the market overreacting
                                 to the recent history of private portfolio purchases from Japan. At current levels, it is quite
                                 possible that actual flows from Japan in the weeks ahead are focused more on either the US
                                 (where MBS remains an attractive asset class) or domestically, which should also favor our
                                 recommended trade.

                                 Europe: Resilient and watching the PMIs
                                 European rate markets continued to rally across the board, in line with their global
                                 counterparts as equities and commodities came under pressure. Remarkably, though,
                                 peripheral markets have remained very resilient, generally outperforming the core countries.
                                 We look at some of the reasons behind this in the Euro rates strategy section of this
                                 publication. The bottom line is that we believe this good performance of peripherals will
                                 continue, with the belly of the curves in particular likely to outperform. In our view, in a low-
                                 yield environment with limited volatility and relatively few event risks on the horizon, the
                                 attraction of the carry available in peripheral curves will continue or actually widen, with
                                 some foreign investors (e.g., Japanese, North Europeans) who sold in 2011 eventually
                                 showing signs of coming back.

The resilience of peripheral     Some technical factors have also helped this good performance, particularly in Italy. First,
markets should continue          Italy managed to raise EUR17bn of retail funds in two days via the so-called BTP Italia. In the
                                 Euro inflation-linked section, we look at the implication this may have on other Italian
                                 inflation BTPs. A second positive factor is that the post-election uncertainty might come to
                                 an end (albeit temporary) soon, as a compromise seems to have been reached between the
                                 two biggest political parties regarding a presidential candidate (See the Euro Sovereign
                                 Spread section of this publication). Lastly, the recent volatile moves in commodities,
                                 currencies and stocks might have led to some leveraged investors closing positions, which
                                 have typically been short on peripheral debt markets. We stay long Italy and Spain in the 3-
                                 5y sector.

Core yields look low, but with   Core markets bond yields have continued to benefit from the spill-over of the BoJ
the BoJ moves and weak data,     announcement: they are trading at their lows and look rich against fundamentals (by up to
they are unlikely to back up     50bp in 10y Bunds). To be sure, there has not been a wall of buying: the moves have been
much near term                   driven by expectations rather than actual flows at this stage, as investors are a bit reluctant
                                 to chase the market at current low yields. However, with the economic data having lost the
                                 little positive momentum from earlier in the year and the ECB open to additional easing, we
                                 do not expect much of a back-up in coming weeks.

The ECB is not out of options    The PMI data in the coming week will be important in that respect: a further weakening
yet, and the PMIs will be key    would strengthen expectations of an ECB response. In the Euro Money Markets section, we
                                 look at the ECB’s various options. While the issue of SME financing is key, there is no ‘magic
                                 wand’ to solve it. In our view, the most likely response would be a refi rate cut as early as
                                 May (although its effect would be limited, there would be some signalling value in it) or new
                                 LTROs around the summer (to counteract the passive tightening of liquidity conditions that
                                 is likely to occur as banks keep repaying the maturing LTROs). Both actions would support
                                 the back end of the money market curve. In any case, we expect short-end rates to remain
                                 low for a long period of time.

In Sweden, we stay positive      Following the Riksbank meeting, in which the forward-looking policy guidance was
following the dovish Riksbank    significantly softer than the market expected (but in line with our view), we continue to see
                                 value in receiving SEK10y swaps versus EUR despite recent outperformance (See the
                                 Scandinavia Rates Strategy section). We prefer expressing a bullish view in such cross
                                 market positions (e.g, Sweden, peripherals) rather than by being long outright 10y Bunds or
                                 core markets.

18 April 2013                                                                                                                  5
Barclays | Global Rates Weekly

In the UK, data are coming in     In the UK, the Minutes of the April MPC meeting offered little news to the market as the
weaker as well, but the MPC is    Committee seems at an impasse between members looking for more support for the economy
unlikely to give any more         and those concerned by the persistence of inflation. We expect Q1 13 GDP to be 0.0% q/q but
stimulus for now: we stick with   with risks to the downside. While carry and roll are highest in the steepest part of the curve,
steepeners                        further curve steepening may be driven by longs in the 10-15y part of the curve, where carry-
                                  vol ratios are historically high. In the UK inflation linked section of this publication, we also
                                  cover the upcoming heavy supply and highlight some relative value opportunities.

18 April 2013                                                                                                                   6
Barclays | Global Rates Weekly

              US                                                                         EUROPE                                                                   JAPAN
 Direction    • Economic data in the US remain modest, with the fiscal deal and • The EGB market continues to be resilient, supported by the bold                 • The decline in liquidity resulting from the BoJ’s latest
                   the sequester likely to exert significant drag.                          BoJ action. Peripheral supply is limited to an Italian linker and         easing has raised volatility across the entire yield curve. If
              • Bigger-than-expected easing by the BoJ is likely to be supportive           CTZ zero coupon auctions next week. As such, the focus will               yields through the intermediate sector stabilize, we also
                   of US yields as well.                                                    stay on political developments ie, the election of a new President        expect long-term yields to stabilize, which would make a
                                                                                            in Italy, which could lead to a new government being                      bull-flattening position attractive. In terms of direction, we
              •    We remain neutral on duration.                                           established, likely further supporting Italian and other perpiehral       recommend a long position. We also see room for 10y-
                                                                                            EGB markets.                                                              20y flattening.
 Curve/       • We recommend 7s30s curve flatteners, as the curve looks too              • Hold on to receive EUR 5y5y/5y10y/5y15y fwds.                      • 5x5-10x10 flattener
 curvature         steep, given inflation expectations.                                  • UK: longer-dated nominal gilt yields remain rich, underpinned by • 5s10s steepener
              • We maintain our long front-end Tsy vs. OIS view, given                     low real rates. Reset Gilt 5/30s or Gilt 10/30s steepeners into Q2 • 10s20s flattener
                   improving financing conditions. The 4y sector looks cheap.               13 supply. Declining realised volatility supports carry-and-roll
              •    Shorten on the Cs STRIPS curve into the 10-12y area; switch out          structures – carry: vol ratios are at their cheapest in the 10-15y
                   of rich 20y Tsy P STRIPS to 20y REFCO P STRIPS.                          part of the curve.
 Swap         •    Neutral on 30y spread wideners, considering risks from risky          • EUR: Hold on to short Bobl ASW on Ger 5s/30s ASW box                   • 20s30s box (20y long)
 spreads           asset underperformance.                                               • GBP: APF transfer may improve the fiscal position, but                 • 10s20s box (20y long)
              •    1y1y Libor-OIS tightener hedged with 1y1y 3s1s widener.                  fundamentals remain poor. We remain negative on 10y gilt ASW.
                                                                                            Long 5y ASW versus OIS or versus 10y (both versus 6mL).
 Other        •    We continue to favor long-end agency-Treasury spread             •       SEK: Hold SEK/EUR 10y tighteners in swaps and longs in SEK Sep •          Pay USD/JPY 1yx1y basis
 spread            tighteners but find the most upside potential only in the super-         ’13 3m FRA tighteners.                                         •          Pay USD/JPY 4y basis.
 sectors           long end. 7s have underperformed along the curve and now         •       Hold Spain and Italy 2s/5s/10s.
                   offer over 20bp of spread pickup to Treasuries; shorten duration
                   to 10s with no spread give-up.
                                                                                    •       Hold Spain 5s/10s/30s.

              • We remain constructive on Canadian covered bonds, given their • Long 5-8y Netherlands versus France
                relative isolation from Europe and continued significant spread • Long FRTR Oct 19/Oct 22/Apr 26 fly
                   pickup to agencies. Pockets of value persist in USD SSA space.
 Inflation    • Long 5y5y breakevens, given the recent decline and dovish Fed. • Long 10y Euro HICPx swaps                                          • Breakevens have started to rise even with negative carry
                Neutral on spot breakevens. 5y and under breakevens could      • IL22/IL62 breakeven steepeners or real yield flatteners attractive   intact, and we expect this trend to continue for now.
                   narrow further.                                                          in UK. The long-end remains cheap on the curve, and supply                Over the short term, there is probably an opportunity for
              • The recent uncertainty argues for lower real yields, given the              favours an outperformance of long linkers versus nominals.                capital gains. However, it is difficult to determine where
                   slower payroll growth and low realized inflation.                                                                                                  levels will settle over the medium to long term. In
                                                                                                                                                                      establishing long positions over such a horizon, we
              • Should risk aversion increase, we would expect April18s to                                                                                            recommend paying attention to levels.
                   richen versus Jan18s as the real yield curve flattens and the floor
                   on April18s richens.
 Volatility   • Sell 1y*10y straddles to benefit from range-bound rates and              • Buy EUR1y*30y 100bp wide risk reversal (long receivers) to             • Look to long vol when market stabilizes in late April
                   supply from callables.                                                   hedge a risk flare in the eurozone.
              •    Long 3y*2y vs. 3E and 4E mid curve straddles as a limited-loss        • Buy 1y*5y receivers funded with 1y SL 5-30y curve cap to
                   way to benefit from a tight range in rates.                              benefit from EUR rates staying low for long.
              •    Long 3x13 Libor cap-floor vs 3y10y swaption straddle to               • Buy EUR 6y*5y versus 1y*(5y5y) to position for steepening of
                   position for a steepening of the vol surface.                            the vol surface and monetise the range in rates.

Source: Barclays Research

18 April 2013                                                                                                                                                                                                                   7
Barclays | Global Rates Weekly


                                          Opportunity knocks twice
Anshul Pradhan                            We recommend initiating 7s30s curve flatteners as the term premium embedded in the
+1 212 412 3681                           long end looks too high, given subsiding inflation worries, as evidenced by the sharp               decline in long-term breakevens. We also reiterate our long Tsys vs OIS view in the front
                                          end and believe the 4y sector looks too cheap with respect to the intermediate sector.

The Treasury market rallied on            The Treasury market rallied over the week as economic data surprised to the downside and
the back of weaker economic               inflation worries subsided. Retail sales at the end of last week came in much weaker than
data and subsiding inflation              expected, with revisions to previous months’ prints suggesting that the tax hike was finally
worries                                   having an adverse affect on consumer spending; our economists’ estimate for personal
                                          consumption in Q1 was revised lower to 2.3% from 3% and they expect it to fall further to
                                          1% in Q2. Michigan consumer confidence also surprised to the downside. The highlight of
                                          the week, however, was the move in commodities and inflation expectations. Figure 1
                                          shows that the aggregate commodities index has declined 5% since the beginning of the
                                          month, with gold still 13% lower. While weaker-than-expected global growth is certainly
                                          playing a role, it seems that investors are less worried about the unintended consequences
                                          of easy monetary policy, given that inflation has been well behaved, declining to below the
                                          Fed’s target; core PCE inflation has been only 1.25% over the last year.

We recommend initiating                   Not surprisingly, the latest decline in nominal rates has been driven by TIPS breakevens;
7s30s curve flatteners, as the            Figure 2 shows that even as 10y real yields have risen modestly, 10y breakevens have
curve looks too steep, given              tightened 25bp from the beginning of the month (Figure 2). We had turned neutral on our
inflation expectations                    7s30s Treasury curve flattening view after the sharp reaction to BOJ’s easing on April 5,
                                          which brought the curve closer to fair value (see Bold action, bold response). However, with
                                          long-term inflation expectations having fallen quite sharply since then, we believe the long
                                          end is again looking attractive. We recommend reinitiating 7s30s curve flatteners, which
                                          should also benefit if renewed concerns about global growth filter through into the equity
                                          markets. Figure 3 shows that after accounting for inflation expectations and the monetary
                                          policy embedded in the intermediate sector, the 7s30s curve is trading 9bp too steep. With
                                          limited room for front-end rates to rally, were 10y inflation expectations to decline further to
                                          their July 2012 level, the fair value of the curve would be another 3bp lower.

FIGURE 1                                                                FIGURE 2
Commodities have sold off across the board                              The rally has been driven by decline in inflation expectations;
                                                                        real rates have risen modestly
 310                                                             1800     2.7                                                           -0.4

 305                                                             1700     2.6                                                           -0.5

 300                                                                      2.5
                                                                 1600                                                                   -0.6
 295                                                                      2.4
                                                                 1500                                                                   -0.7
 290                                                                      2.3
                                                                 1400                                                                   -0.8
 285                                                                      2.2

 280                                                             1300     2.1                                                           -0.9

 275                                                             1200     2.0                                                          -1.0
   Jan-13            Feb-13          Mar-13          Apr-13                 Oct-12              Dec-12         Feb-13             Apr-13
                    CRY Index, lhs            GOLD ($/oz), rhs                     10y breakevens, %, lhs      10y real rates, %, rhs
Source: Bloomberg                                                       Source: Barclays Research

18 April 2013                                                                                                                             8
Barclays | Global Rates Weekly

FOMC members have recently                Further, the most hawkish FOMC member, St. Louis Fed President Bullard, has suggested that
become vocal about defending              the Fed should defend inflation from the low side as well. He noted that were inflation to fall
inflation from the low side               further, he would favor more purchases. With modest inflation trends, it is likely that the term
                                          premium at the long end of the curve could decline substantially in that scenario. The latest
                                          primary dealer survey suggests that expectations are actually skewed toward a tapering of Fed
                                          purchases, so an increase in purchases would be a surprise to the market. Figure 4 shows that
                                          that median and even the 75th percentile expectations are for the status quo until the end of
                                          the year and the 25th percentile is for the Fed to taper Treasury purchases to an average of
                                          $30bn/m in Q4 13 (from the current $45bn/m) and agency MBS purchases to an average of
                                          $28bn/m (from the current $40bn/m). The median expectation is for the Fed to not buy any
                                          agency MBS after 2013.

Term premium at the back end              Figure 5 shows the term premium embedded in the long end of the curve against 10y CPI
of the curve is too high                  swap rates. Even as long-term inflation expectations have fallen, the term premium has
                                          remained elevated; the last time 10y CPI swap rates were trading at similar levels, the slope

FIGURE 3                                                                  FIGURE 4
7s30s curve is trading too steep, given inflation expectations            Expectations are skewed towards a tapering of purchases
  15                                                                      Monthly Run
                                                                          Rate, $bn                   Q313                     Q413
  10                                                                                       Tsys       Agency MBS        Tsys       Agency MBS
                                                                          25th Pctl.         45           40            30              28
                                                                          Median             45           40            45              40
   0                                                                      75th Pctl.         45           40            45              40



   Apr-12     Jun-12    Aug-12   Oct-12    Dec-12   Feb-13      Apr-13
                            7s30s curve residual, bp
Source: Barclays Research                                                 Source: New York Fed

FIGURE 5                                                                  FIGURE 6
Term premium at the back end is too high                                  2y Tsy-OIS basis is too wide, given near-term financing
 0.70                                                              3.05    14                                                                   10
 0.65                                                              2.95
                                                                           10                                                                   8
 0.60                                                              2.85     8
 0.55                                                              2.75     6
 0.50                                                              2.65                                                                         4
 0.45                                                              2.55     0                                                                   2
 0.40                                                              2.45
                                                                           -4                                                                   0
 0.35                                                              2.35     Jul-12        Sep-12     Nov-12         Jan-13        Mar-13
                                                                                              2y Tsy-OIS basis, bp, lhs
 0.30                                                              2.25
    Apr-12        Jul-12    Sep-12        Dec-12       Mar-13                                     3M Futures implied GC-FF spread, bp, lhs
          10y1y-7y1y curve, %, lhs         10y cpi swap rates, %, rhs                             Spread, bp, rhs
Source: Barclays Research                                                 Source: Barclays Research

18 April 2013                                                                                                                                       9
Barclays | Global Rates Weekly

                                                of the back end of the curve was 15bp lower. Also, as Figure 2 shows, real yields have not
                                                declined in this move, which suggests that were expectations of asset purchases to rise,
                                                there would be room for real yields to fall. Hence, even though the curve is trading close to
                                                the lows following the BOJ announcement, we believe it looks quite steep and recommend
                                                re-initiating 7s30s curve flatteners.

                                                Opportunities in the front end
We reiterate our front-end Tsy-                 We continue to recommend being long Treasuries vs. OIS in the front end, and with the
OIS view                                        relative cheapening of the 4y sector, we believe investors should also consider overweighting
                                                the 4y sector vs. the 6y sector.

                                                We have argued in the past that the funding premium embedded in 2y Tsy-OIS is too wide,
                                                Figure 1 shows that the even as the 2y Tsy-OIS basis has steadily tightened from Operation
                                                Twist levels, the funding premium has actually widened, as the basis has not kept pace with
                                                the improvement in financing conditions. Even though the 3m GC-FF basis is priced to trade
                                                at close to 0 over the next three months (and 1bp over the next year), the 2y Tsy-OIS basis
                                                still looks wide at ~7bp, as it implies a 1y1y spread of almost 12bp. Alternatively put, it is
                                                highly unlikely, in our view, that were GC to average close to FF for a year, the market would
                                                still price it to trade 12bp above FF over the subsequent one year. If the forward basis was
                                                wide due to the expectation of reserve draining, then it should have tightened, as weaker-
                                                than-expected economic data and subsiding inflation worries have pushed out hike
                                                expectations. We therefore continue to like being long Tsy vs. OIS in the front end.

The 4y-6y inversion of the Tsy-                 Similarly, the 4y sector now appears too cheap versus the intermediate sector. Figure 7
OIS curve is overdone                           shows that the 4y Tsy-OIS basis is now trading at 10bp, compared with just 4bp for
                                                securities in the 6y area; it used to trade 1-2bp cheaper. The discrepancy is even starker in
                                                the forward space. Figure 8 shows that the 1y Tsy-OIS basis 3y forward is still trading at
                                                15bp, even as the 1y basis 5y forward has tightened to -10bp. The improvement in Treasury
                                                borrowing prospects with the sequester going into effect should have benefited the 4y
                                                sector as well. Under the CBO’s baseline, net borrowing needs over the coming years would
                                                be lower than net coupon issuance were the Treasury to keep auction sizes unchanged.
                                                This would either translate into negative net T-bill issuance or the Treasury would end up
                                                reducing front-end auction sizes, in our view. Either of these scenarios is likely to benefit the
                                                front end as well. Hence, we think the inversion of the Tsy-OIS basis curve is overdone.

FIGURE 7                                                                       FIGURE 8
4y sector looks cheap on the Tsy-OIS curve, especially with                    Forward Tsy-OIS curve is sharply inverted (bp)
respect to the 6y sector (bp)

  Spd vs OIS                                                                     40

                                                     years to maturity
        1.0   1.4   1.7    2.1   2.6    3.0   3.5   4.0   4.5   5.0    5.8
                                                                                  Oct-12     Nov-12 Dec-12      Jan-13    Feb-13 Mar-13
               2y series               3y            5y               7y
                                                                                         1y Tsy-OIS basis, 3y fwd        1y Tsy-OIS basis, 5y fwd
Source: Barclays Research                                                      Source: Barclays Research

18 April 2013                                                                                                                                       10
Barclays | Global Rates Weekly


                                      Global linkers Risk-Parity
Michael Pond                          This article was previously published in the Global Inflation-linked Monthly, 18 April 2013.
+1 212 412 5051
                                      We apply a Risk-Parity framework to a global linkers portfolio. Here, our findings indicate
                                      that equal risk allocations would have outperformed market-value based portfolios in
                                      spite of having an almost identical vol profile. Similarly, for each of the global regions, we
Chirag Mirani
                                      found that Risk-Parity portfolios outperform market-value portfolios.
+1 212 412 6819            Continuing on the Risk-Parity theme
                                      In The Real Risk Parity article, we highlighted that a TIPS-Equities Risk-Parity (RP) portfolio
                                      outperforms an Equities-Nominals RP portfolio, and the latter also outperforms a 60/40
                                      Equities-Nominals portfolio. In other words, over the past 15 years (and over a 40-year
                                      period using simulated TIPS returns), a TIPS-Equities RP portfolio significantly outperformed
                                      a traditional 60/40 Equities-Nominals portfolio, while maintaining the same level of risk. In
                                      our previous exercise, we recognised that such allocations may not always be optimal given
                                      varying economic conditions (especially in terms of absolute returns) and the use of
                                      leverage may also be suboptimal in flight-to-liquidity events, as TIPS are less liquid than
Using US TIPS-nominals Risk-          comparable nominals. However, monthly resets on relative RP weights and a close watch on
                                      economic conditions should give active investors some comfort in this asset allocation
Parity as a framework, we set
                                      approach. In this article, we set out to explore and answer a number of questions, namely:
out to explore Risk-Parity
                                      1) with the significant improvements in the Sharpe ratio with RP-based allocations in the
allocation results in the global
                                      US, whether the RP approach backtested well within a global linkers market; 2) within
linkers market…
                                      individual global linkers markets, do RP linkers-nominals portfolios outperform market-
                                      value(MV) based linkers-nominals portfolios? and 3) if they do, what linkers versus
                                      nominals allocation should each of the global region have?

                                      Does RP approach backtest well within a global linkers market? Yes.

                                      The key premise of a RP portfolio is that for a portfolio to be truly diversified, the diversification
                                      must occur at the risk level and not at the dollar amount invested. In other words, the risk
                                      contribution from each asset must be identical or close to it in an ex-post analysis.

FIGURE 1                                                              FIGURE 2
WGILB MV portfolio risk factors dominated by the asset with           WGILB Risk-Parity portfolio is truly diversified in terms of
the highest market value, the portfolio is not diversified in         risk in an ex-post historical analysis
terms of risk
     MV Risk                                                                       RP Risk
      Profile                                                                      Profile
 100%                                                                   100%
  90%                                                                    90%
  80%                                                                    80%
  70%                                                                    70%
  60%                                                                    60%
  50%                                                                    50%
  40%                                                                    40%
  30%                                                                    30%
  20%                                                                    20%
  10%                                                                    10%
   0%                                                                     0%
    Jan-02 Jul-03 Jan-05 Jul-06 Jan-08 Jul-09 Jan-11 Jul-12                Jan-02 Jul-03 Jan-05 Jul-06 Jan-08 Jul-09 Jan-11 Jul-12
            Aus      CAD    Sweden   UK   US     EUR Govt                         Aus        CAD   Sweden    UK     US    EUR Govt
Source: Barclays Research                                             Source: Barclays Research

18 April 2013                                                                                                                            11
Barclays | Global Rates Weekly

A market value portfolio’s                 A global linkers portfolio (WGILB), like all benchmark portfolios, is weighted to each asset’s
variance is typically explained            total market-value (MV) outstanding (certain other conditions also apply in terms of securities
by the largest market values;              that make it into the benchmark portfolio). Thus, a single asset class can potentially explain a
the portfolio is not diversified in        large amount of portfolio variation depending on its market value relative to total MV.
terms of return volatility                 Currently, in the global linkers portfolio (ex-Japan), Australian, Canadian, Sweden, UK, US and
                                           Euro govt linkers are weighted 1.42%, 3.25%, 1.80%, 29%, 48.6% and 16%, respectively.
                                           Building from intuition, all else equal, in a WGILB MV portfolio’s historical returns variation
                                           timeseries, we would expect US, UK and EUR government linkers to contribute most of the
                                           variation. Indeed, Figure 1 shows, ex-post, that UK, US and EUR Govt linkers dominated the
                                           risk-contribution in the MV WGILB portfolio.

Risk-Parity portfolios are                 Meanwhile, Figure 2 shows that the RP portfolio risk decomposition is starkly different than
balanced in terms variance                 the MV WGILB portfolio. In the RP portfolio’s risk profile, over time, the risk contribution
contributions…                             from each linker’s asset class has been roughly the same. Specifically, we constructed an RP
                                           portfolio using equal vol weights. Monthly reweighting were such that each asset class
                                           would have a reciprocal weight with respect to the previous year’s standard deviation (this
                                           is just a monthly return standard deviation over the previous 12 months), in the context of
                                           total standard deviations. In this exercise, we use 1y rolling standard deviation rather than
                                           3y (as was done in the previous US focused exercise) rolling because of the shorter total
                                           return series available for most ex-US linkers markets. Simply stated, in a RP portfolio, a
                                           risky asset will have a lower weight while a less risky asset would have a higher weight. For
                                           this intuition development exercise, we operate under the assumption that all global linkers
                                           are independent and therefore have a low correlation and covariance structure. At the
                                           current vol levels (at the end of March 2013), a RP portfolio assigns Australian, Canadian,
                                           Swedish, UK, US and Eur Govt linkers 13.6%, 12.6%, 21.9%, 9.9%, 23% and 19% weights,
                                           respectively. We realize that such weights may not be feasible for a very large notional
                                           portfolio given the smaller market size of Australian, Canadian and Swedish linkers.
                                           However, for this exercise, we use these RP weights to gain intuition about how RP linkers
                                           portfolios have behaved over time. Next, we examine return and risk characteristics of
                                           aggregate RP portfolios versus MV WGILB portfolio.

                                           We are diversified in terms of risk in a RP portfolio, but did that deliver better returns
                                           versus market value portfolio? Yes.

                                           While the RP portfolio’s risk profile is aesthetically appealing (Figure 2), the key question
                                           investors may have is whether the RP portfolio outperforms a MV WGILB portfolio? Figure 3

FIGURE 3                                                                 FIGURE 4
RP WGILB portfolio has significantly outperformed MV                     RP WGILB portfolio broadly has the same vol profile as MV
WGILB portfolio                                                          WGILB portfolio, in spite of a leverage factor
 240                                                                      12%


 160                                                                       6%

   Dec-00        Jun-03     Dec-05       Jun-08    Dec-10                  0%
                                                                            Dec-01     Dec-03        Dec-05   Dec-07     Dec-09     Dec-11
               MV WGILB              Risk-Parity WGILB                                          WGILB Vol              Risk-Parity Vol

Source: Barclays Research                                                Source: Barclays Research

18 April 2013                                                                                                                                12
Barclays | Global Rates Weekly

                                           shows that, indeed, an RP WGILB portfolio has significantly outperformed MV WGILB
                                           portfolio since 2000. But, a RP portfolio does use leverage and so the risk must be higher. In
                                           fact, in Figure 4, we see that the ex-post standard deviation of a RP WGILB portfolio is
                                           almost identical to a MV WGILB portfolio’s historical standard deviation, notwithstanding
                                           the 2008 crisis. In other words, RP portfolios offer higher risk-adjusted returns or Sharpe
                                           ratios relative to standard MV portfolios. As a reminder, the leverage factor is calculated by
                                           dividing the 1y standard deviation of the monthly RP returns by 1y standard deviation (of
                                           monthly returns) of the MV WGIB portfolio.

Despite having the same total              Figure 5 summarizes key aspects of the RP versus MV WGILB portfolios over the past decade.
variance as market-value                   A few highlights stand out in this table: one is that the RP portfolio has outperformed the MV
global linkers portfolio, RP               portfolio in seven out of the past 10 years and by a significant margin (which is confirmed in
global linkers portfolios have             Figure 3 as well). Returns have always been positive, though this is a function of global real
delivered higher returns                   yields declining sharply over the past decade. Second is that Swedish linkers have typically
                                           held the highest weight, given their low volatility, while UK and European linkers have had
                                           lower weight recently, likely on European uncertainty and, for the UK, the recent formula
                                           uncertainty. One caveat to note is that in 2012, the RP WGILB portfolio underperformed the
                                           MV WGILB portfolio by almost 240bp; however, the leverage factor for the portfolio was only
                                           0.85, which means that the 15% of RP portfolio was in cash or it could have been invested
                                           somewhere else. Based on the table below, it is likely that RP investors can choose the lowest
                                           risk-profile linkers such as the US TIPS and Swedish linkers and significantly outperform the
                                           MV WGILB portfolio when a relative vol leverage factor is applied.

                                           2) Within individual global linkers markets, do RP linkers-nominals portfolios outperform
                                           market-value (MV) based linkers-nominals portfolios? and 3) if they do, what linkers
                                           versus nominal allocation should each of the global region have in a nominal/linkers
                                           portfolio? Yes, and see table and discussion below for RP linkers-nominals weights in
                                           individual markets.

                                           From the above exercise, we learned that there is historical merit to balancing risk across
                                           assets in a global linkers portfolio. In “The real Risk Parity” article, we only tested the RP
                                           approach in a US TIPS/Nominals portfolio. There, we showed that US TIPS should have
                                           close to 55% allocation versus comparable nominals in a RP portfolio, with a leverage factor
                                           of 1.12. A 12% additional cash-borrowing is needed, at which point the RP portfolio would
                                           have the same risk level as the market-value (MV) TIPS-Nominals portfolio.

Risk-Parity (RP) versus Market-Value (MV) WGILB portfolio details, vol, returns, RP leverage factor, RP weights for each region
                             Vol                    Returns                                                 RP Weights
                            RP WGILB                                Return
                           Stdev (with                            Differential
                  MV WGILB leverage    MV WGILB          RP WGILB between MV Leverage
Date               Stdev     factor)    returns           returns   and RP     factor        Aus   CAD Sweden     UK     US   EUR Govt
12/31/2002           5.0%          5.6%        11.6%       14.4%        2.8%        1.20     26     14     16      15    13      17
12/31/2003           6.7%          6.6%        6.5%           6.5%      0.0%        1.19     18     18     18      17    12      17
12/31/2004           4.4%          4.4%        8.0%        11.3%        3.3%        1.17     16     14     14      20    12      25
12/31/2005           3.5%          3.7%        5.6%           8.6%      3.0%        1.08     19     13     15      21    16      17
12/31/2006           4.0%          4.0%        1.4%           1.8%      0.4%        1.02     18     12     19      15    18      18
12/31/2007           3.9%          3.5%        7.6%           5.8%      -1.7%       1.16     20     15     17      14    14      21
12/31/2008           10.5%         10.0%       0.5%           4.3%      3.8%        1.44     25     9      29      10    11      16
12/31/2009           5.8%          5.8%        8.5%           7.3%      -1.2%       1.41     19     10     26      11    14      20
12/31/2010           3.7%          4.1%        5.3%           6.8%      1.5%        1.07     17     19     19      13    16      17
12/31/2011           2.9%          3.5%        10.5%       10.5%        0.0%        0.85     17     13     23      14    21      13
12/31/2012           3.6%          3.2%        5.4%           3.0%      -2.4%       0.93     14     14     24      12    22      13
Source: Barclays Research

18 April 2013                                                                                                                         13
Barclays | Global Rates Weekly

Global linkers-nominals RP                    Given the outperformance in the US RP linkers-nominals portfolio, we wondered how RP
portfolios show higher                        linkers/nominals portfolios have fared in the UK, European, Sweden, Australian and
risk-adjusted returns relative                Canadian markets versus the respective MV portfolios. The table below confirms the same
to their counterpart                          findings for non-US linkers markets: in each region, RP portfolios deliver higher returns
market-value portfolios                       adjusted for risk. Clearly, for a large portfolio and/or portfolios that do not allow for
                                              leverage, RP allocations may not be feasible. But, the method and results are certainly worth
                                              investigating as a starting point. One can augment this analysis by forecasting individual
                                              market economic regimes (inflation, real growth) and adjusting RP weights based on
                                              anticipated asset class volatility. Barring flight-to-liquidity episodes, smaller portfolios stand
                                              to benefit from a RP weighting approach, in our view. In the subsequent section, we discuss
                                              nuances, including vol profiles, of each of the regional RP linkers-nominals portfolios. We
                                              also learn that relative liquidity of assets is a key factor in determining subsequent periods’
                                              RP portfolio returns.

                                              FIGURE 6
                                              RP Linkers-Nominals portfolio outperformance, weights and leverage recommendations
                                                                   Risk-Parity Weight         MV Weight

                                                                                                                 RP outperformance         Leverage to
                                                                                                                 versus MV portfolio      replicate MV
                                              Country              Linkers    Nominal     Linkers     Nominal       (cumulative)            Portfolio
                                              US                    55%        45%           14%        86%              25%                  1.13
                                              UK                    47%        53%           26%        74%              10%                  1.02
                                              Euro Govt             47%        53%           5%         95%              4%                   1.00
                                              Sweden                55%        45%           27%        73%              8%                   1.05
                                              Australia             51%        49%           11%        89%              33%                  1.00
                                              Canada                46%        54%           14%        86%              32%                  0.95
                                              Source: Barclays Research

                                              UK: RP UK Linkers/Nominals portfolio outperforms MV UK Linkers/Nominals
                                              In the UK, linkers make up about 26% of the total government bond market, in terms of
                                              market-value (MV). Our analysis indicates that since 1998, UK fixed income investors
                                              forming a linkers-nominals bond portfolio would have benefited significantly by employing
                                              the risk-parity (RP) weighting approach. Relative to a MV weight approach, the RP portfolio
                                              has had a cumulative outperformance of almost 975bp since 1998 (Figure 7), while

FIGURE 7                                                                         FIGURE 8
UK RP linkers-nominal portfolio outperforms MV linkers-                          UK RP portfolio achieves this outperformance while
nominals portfolio                                                               maintaining the same level of risk
 350                                                                                 12%

 300                                                                                 10%

 150                                                                                    2%

 100                                                                                    0%
   Jan-98      Jul-00       Jan-03   Jul-05   Jan-08      Jul-10     Jan-13              Jan-99     Jul-01    Jan-04   Jul-06   Jan-09   Jul-11
                                                                                                    UK MV (Linkers-Nominal) Index vol (annualized)
                             UK MV (Linkers-Nominal) Index
                                                                                                    UK Risk-Parity vol (annualized)
                             UK Risk-Parity
Source: Barclays Research                                                        Source: Barclays Research

18 April 2013                                                                                                                                        14
Barclays | Global Rates Weekly

                                  maintaining the same risk-level as the MV portfolio. This outperformance is again similar to
                                  what we found in the US RP TIPS-Nominals portfolio. In the UK, the RP portfolio (on 1y
                                  standard deviation rolling basis) recommends having 47% of the allocation to UK linkers
                                  and the rest in comparator nominal index, with the current leverage factor of 1.02 (2%
                                  additional cash-borrowing). In Figure 8, we see that the outperformance was achieved while
                                  maintaining the same level of risk.

UK RP linkers-nominals            Like all RP linkers-nominal portfolios, the UK RP minus MV cumulative outperformance
portfolio outperformed MV         profile indicates a significant drop in gains during the 2008 financial crisis (Figure 9).
linkers-nominals portfolio from   Subsequently, the RP portfolio regained almost all of the returns. In 2012, the RP portfolio
1998-2012                         took some losses as UK linkers suffered versus nominals on the back of UK inflation formula
                                  uncertainty. Our conclusion from these performance gains is that the relative dislocations in
                                  the underlying assets matter a great deal in determining performance of an RP portfolio. We
                                  recommend that investors suspend RP portfolios if they anticipate significant dislocations
                                  between the underlying assets. The RP approach recommends overweights (relative to MV
                                  allocations) for both UK and Swedish linkers. These are the two markets where the linking
                                  inflation measure incorporates mortgage interest payments, and therefore insulates to
                                  some extent performance against central banks hiking rates.

                                  FIGURE 9
                                  UK RP linkers-nominals portfolio returns minus UK MV Portfolio returns, profile shows
                                  gains overtime
                                      Jan-98            Jul-00   Jan-03        Jul-05       Jan-08          Jul-10    Jan-13
                                                                 UK Risk-Parity Cumulative Outperformance
                                  Source: Barclays Research

                                  European: RP portfolio outperforms but during liquidity events it
                                  underperforms sharply
                                  In European linkers versus nominals, we have the most interesting case of RP
                                  implementation because of the relative illiquidity faced by linkers versus nominals in the
                                  2008 financial crisis and European sovereign debt crisis. On a MV basis, European linkers
                                  constitute about 5% of total sovereign coupon debt, which makes linkers-nominals RP
                                  portfolio very susceptible to systemic liquidity changes between linkers and nominals. From
                                  2001, the RP portfolio has outperformed (Figure 10) but since the financial crisis, the RP
                                  portfolio has significantly underperformed a market-value based linkers-nominals portfolio
                                  (Figure 12). The underperformance of the RP portfolio (Figure 12) coincided with spikes in
                                  RP vol relative MV vol (shown in Figure 11).

18 April 2013                                                                                                                  15
Barclays | Global Rates Weekly

FIGURE 10                                                                    FIGURE 11
European RP linkers-nominals portfolio outperforms                           European RP portfolio mostly tracks MV portfolio but during
European MV linkers-nominals portfolio pre 2008 but has                      the 2008 financial crisis and European sovereign debt crisis,
faltered recently due to relative liquidity changes                          RP vol spiked relative to MV vol
 200                                                                         9%
 190                                                                         8%
 180                                                                         7%
 170                                                                         6%
 130                                                                         3%
 120                                                                         2%
 110                                                                         1%
 100                                                                         0%
   Dec-01         Jun-04      Dec-06     Jun-09       Dec-11                  Dec-01          Jun-04      Dec-06        Jun-09      Dec-11

                   Euro MV (Linkers-Nominal) Index                                          Euro MV (Linkers-Nominal) Index vol (annualized)
                   Euro Risk-Parity                                                         Euro Risk-Parity vol (annualized)
Source: Barclays Research                                                    Source: Barclays Research

                                        Just prior to the 2008 financial crisis, the European RP portfolio had a linkers weight of 55%
                                        and had a leverage factor of 1.17 (17% additional cash borrowed). In the financial crisis, the
                                        sovereign bond market became more fragmented due to lower liquidity of linkers relative to
                                        nominals and as inflation expectations declined, the RP portfolio underperformed
                                        significantly. Similar issues also transpired around the European sovereign crisis in 2010-
                                        2012. We think investors should exercise a good amount of caution and economic intuition
                                        in the face of liquidity events and opt for the most liquid assets if they are likely to face
                                        acute cash needs during those times. Clearly, the RP employed leverage and the relative
                                        liquidity of assets can be the biggest pitfalls in a RP-based allocations. In fact, a diversified
                                        European-based RP portfolio likely underperformed in the European sovereign financial
                                        crisis, as peripheral yields sold off, and equity markets and commodities declined. In
                                        summary, while RP linkers-nominal portfolio have outperformed since 2001 in Europe, over
                                        the past four years it has underperformed sharply, especially during European sovereign
                                        liquidity events. Currently, in a linkers-nominals RP portfolio, European linkers are assigned
                                        a weight of 47% with a portfolio leverage factor of 1 (No leverage is employed).

                                        FIGURE 12
                                        European RP linkers-nominal portfolio has lagged MV linkers-nominal portfolio since
                                        2008 financial crisis due to relative illiquidity between linkers and nominals








                                             Dec-01                 Jun-04               Dec-06              Jun-09              Dec-11

                                                                             Euro Risk-Parity Cumulative Outperformance
                                        Source: Barclays Research

18 April 2013                                                                                                                                  16
Barclays | Global Rates Weekly

                                         Australia: RP AUD linkers/nominals portfolio versus MV AUD
                                         In Australia, the linkers (Treasury Indexed Bonds, TIBs) market is about 10% of the
                                         government bond market, with a total TIBs market value of about AUD27.28bn
                                         (USD28.66bn). Using a MV approach, investors can construct a 10% AUD linkers and 90%
                                         comparable nominal portfolio. Our analysis (Figure 13) indicates that investors in the
                                         Australian linkers and comparable nominal bond market could have benefited significantly
                                         by employing a RP portfolio approach when assigning relative asset allocation weights. The
                                         outperformance of a RP weighting approach relative to a MV approach is very similar to the
                                         one we found in the US TIPS/Nominals portfolio in “The real Risk-Parity” article. This gives
                                         us some confidence that small active investors can benefit significantly by assigning higher
                                         weight inflation-linked assets relative to the nominal assets. In this case, a RP asset
                                         allocation approach assigns a 51% allocation to linkers versus 49% to comparable
                                         nominals, with a leverage factor of 1 (ie, no additional borrowing).

                                         Also worth noting is that the RP portfolio attains this outperformance with the same level of
                                         risk as the market-value portfolio (Figure 14), ie, the RP linkers/nominals portfolio has a higher
                                         Sharpe ratio relative to a MV linkers/nominals portfolio. Around 2003, the RP portfolio had
                                         large spikes in vol relative to the more nominal concentrated MV linkers/nominal portfolio.
                                         This is because in 2003, the Australian TIB program was suspended (until 2009) due to the
                                         lack of fiscal funding needs. As we saw earlier, liquidity is an important factor to keep in mind
                                         for RP investors. Given the leverage factor applied in a RP portfolio, relative liquidity differential
                                         changes (between linkers and nominals) can cause a large draw-down.

                                         Canada: RP Canada linkers/Nominals portfolio versus MV Canada
                                         Similar to US and Australian RP Linkers-Nominals portfolio, we also backtested Canadian
                                         linkers versus their nominal counterparts.

                                         Canadian linkers make up about 14% of total coupon bonds outstanding. Here too, as can
                                         be seen in Figure 15 and Figure 16, a Canadian RP portfolio significantly outperforms MV
                                         portfolio while maintaining the same level of risk since 1998. Looking at the past year’s
                                         standard deviations, the RP portfolio recommends a 46% weight in Canadian linkers and
                                         54% in Canadian nominals, with a leverage factor of 0.95, which means the left over 5%
                                         cash can be invested in cash or other instruments. Here too, the smaller size of the

FIGURE 13                                                                FIGURE 14
Australian RP (Linkers/Nominals) portfolio significantly                 Australian RP (Linkers/Nominals) portfolio maintains the
outperforms Australian MV Linkers/Nominals portfolio                     same risk level as the MV (Linkers/Nominals) portfolio
 350                                                                      10%
 300                                                                       8%
 250                                                                       6%
 200                                                                       4%
 150                                                                       2%
 100                                                                       0%
   Apr-99        Jan-02     Oct-04     Jul-07   Apr-10      Jan-13          Apr-99        Jan-02     Oct-04      Jul-07      Apr-10   Jan-13

                     AUS MV (Linkers-Nominal) Index                                       AUS MV (Linkers-Nominal) Index vol (annualized)
                     AUS Risk-Parity                                                      AUS Risk-Parity vol (annualized)
Source: Barclays Research                                                Source: Barclays Research

18 April 2013                                                                                                                               17
Barclays | Global Rates Weekly

FIGURE 15                                                                 FIGURE 16
Canadian RP (Linkers/Nominals) portfolio significantly                    Canadian RP (Linkers/Nominals) portfolio generally
outperforms Canadian MV Linkers/Nominals portfolio                        maintains the same risk level as the MV (Linkers/Nominals)
 400                                                                      12%

 350                                                                      10%

 300                                                                       8%

 250                                                                       6%

 200                                                                       4%

 150                                                                       2%

 100                                                                       0%
   Dec-98       Sep-01      Jun-04       Mar-07   Dec-09     Sep-12         Dec-98        Sep-01      Jun-04    Mar-07        Dec-09   Sep-12

                    Canada MV (Linkers-Nominal) Index                                   Canada MV (Linkers-Nominal) Index vol (annualized)
                    Canada Risk-Parity                                                  Canada Risk-Parity vol (annualized)
Source: Barclays Research                                                 Source: Barclays Research

                                            Canadian linkers market may prevent large investors from executing the RP methodology
                                            but to the extent US real yields move with Canadian real yields, large investors can construct
                                            a US TIPS-Canadian nominals proxy RP portfolio.

                                            Sweden: Swedish RP linkers-nominals portfolio outperforms MV portfolio
                                            The Swedish linkers market, in terms of market-value (MV), is about 27% of the central
                                            government debt. For Sweden, the RP linkers-nominals portfolio optimal allocation is also
                                            55% in linkers and 45% in nominals with a leverage factor of 1.05 (5% additional cash
                                            borrowing). Similar to other sovereigns, here too, the risk-parity portfolio has outperformed
                                            over the past 15 years, though the large part of the performance came in the early years
                                            (+800bp, 1998-2008) and post the financial crisis (+300bp, 2009-2012). During the 2008
                                            financial crisis, the Swedish RP portfolio underperformed by 250bp.

FIGURE 17                                                                 FIGURE 18
Sweden (linkers-nominals) RP portfolio outperforms a                      Sweden Risk-Parity (linkers-nominals) portfolio maintains
market-value portfolio                                                    the similar risk-level to the MV portfolio – ie, RP portfolio
                                                                          offers a higher Sharpe ratio
 270                                                                       9%
 250                                                                       8%
 230                                                                       7%
 210                                                                       6%
 190                                                                       5%
 170                                                                       4%
 150                                                                       3%
 130                                                                       2%
 110                                                                       1%
  90                                                                       0%
   Dec-98       Sep-01      Jun-04       Mar-07    Dec-09    Sep-12         Dec-98       Sep-01       Jun-04   Mar-07         Dec-09   Sep-12

                   Sweden MV (Linkers-Nominal)                                           Sweden MV (Linkers-Nominal) vol (annualized)
                   Sweden Risk-Parity                                                    Sweden Risk-Parity vol (annualized)
Source: Barclays Research                                                 Source: Barclays Research

18 April 2013                                                                                                                                   18
Barclays | Global Rates Weekly


                                         A dam too far
James Ma                                We believe potential TVA privatization is politically infeasible and would encounter
+1 212 412 2563                         fiscal and practical obstacles. As such, we recommend fading the budget-related                   widening, but acknowledge an unclear near-term impetus for valuations to improve.

                                         Significant obstacles to privatizing TVA
                                         After the President’s 2014 Budget included an intent “to undertake a strategic review of
                                         options for addressing TVA’s financial situation, including…possible divesture…in part or as
                                         a whole,” the market for TVA paper has remained dislocated, as the name widened 10-20bp
                                         in the immediate aftermath (Figure 1).

                                         In the absence of further details on the strategic review, including a timeline and action
                                         plan, Moody’s and S&P maintained their ratings for TVA in line with the US government’s.
                                         However, the former warned that a multiple-notch downgrade was possible if the entity
                                         was sold in full to a private company, consistent with its previous analyses showing TVA’s
                                         financial ratios would imply a standalone rating of A2 (Figure 2).

                                         We believe there are enough significant obstacles to TVA privatization (political and
                                         otherwise) that investors should ultimately fade the paper’s widening to Treasuries and
                                         expect spreads to return to pre-budget levels. Of course, in the near term, the paper could
                                         remain at or near presently wide levels, potentially until it becomes apparent that further
                                         steps to privatizing TVA are not forthcoming or are politically infeasible.

                                         A toxic political environment
Privatization would encounter           In our view, while the administration has presented the idea of TVA privatization in the
fierce political resistance and a       budget, its fiscal motivations to pursue TVA reform may be stymied by political
lack of bipartisan support              considerations. Powerful Republicans representing TVA’s coverage area have expressed
                                        their reservations, including Senate Banking Committee (SBC) Ranking Member Shelby (R-
                                        AL) stating, “I don’t believe TVA’s going to be sold right now…that’s just a gesture.”
                                        Tennessee Senators Corker, an SBC member, and Alexander (on the Appropriations
                                        Committee) have concurred, with the latter describing it as “one more bad idea in a budget
                                        full” of them. TVA privatization has been repeatedly resisted, from as recently as the Clinton
                                        administration to as far back as helping end Barry Goldwater’s presidential aspirations.

FIGURE 1                                                                  FIGURE 2
TVA dislocations along the curve                                          TVA metrics comparisons

 Gov spd, bp                                                                                        CFO ex-    CFO ex-     Debt to
                                                                                                    WC Int     WC to       Book Cap
 200                                                                                                Coverage   Debt
 160                                                                                 TVA            2.5x       7.6%        85.6%
 140                                                                        A        Alliant        5.6x       21.9%       40.6%
 100                                                                                 Southern       6.2x       21.7%       46.2%
                                                                                     PSE&G          6.2x       30.9%       39.3%
  40                                                                        BBB      Con Edison     5.2x       20.0%       44.4%
                                                                                     Dominion       4.6x       16.8%       54.4%
       0            10         20        30           40             50              Duke Energy    4.6x       18.3%       41.2%
                                    Maturity, y
         TVA 4/17        TVA 4/10   FRE 4/17      Elec Util A 4/17
Source: Barclays Research                                                 Source: Moody’s

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                                              To add to Congressional resistance, the legislative environment includes a lack of
                                              bipartisanship across all issues, from the budget and housing finance reform to gun control
                                              and the economy. In our view, TVA’s operational independence ranks it far down the list of
                                              priorities. As any changes to the TVA Act would require Congressional approval, we find
                                              progress on any privatization proposals extremely unlikely, especially if pushed beyond the
                                              next 18 months and into the following election cycle.

                                              Precedent may outweigh fiscal considerations
                                              Furthermore, we believe fiscal motivations for TVA privatization are more optical in nature.
                                              The budget cites TVA’s capex spending expectations of $25bn as conflicting with its
                                              Congressionally set $30bn limit on debt outstanding (of which it uses $25bn). Moreover,
                                              because TVA is fully US government owned, its obligations are included in “debt held by the
                                              public,” although they do not count towards the debt ceiling.

                                              At the same time, TVA is operationally independent, and the Treasury receives no part of
                                              cash flows from its operations, save for a periodic repayment of direct appropriations
                                              (roughly $7mn/y) as a return on $258mn of paid-in capital from pre-1999 activities. This is
                                              in direct contrast to the situation at FNM/FRE, which are not included in the public debt.
                                              Despite this, the Treasury owns a $180bn combined senior preferred equity stake in the two
                                              housing GSEs, and all but $3bn each from their net assets each quarter is swept to the
                                              Treasury beginning in 1Q13.

Government protection of                      As such, we would not be surprised if the administration’s goal was simply to avoid having
implicitly guaranteed bond                    to ask Congress to increase the $30bn debt cap. However, precedent suggests the
holders undoes the fiscal benefit             government would move to protect existing holders of TVA debt issued as a GSE:

                                              • When REFCORP’s wind-down ended more quickly than expected, its liabilities’ principal
                                                  became fully defeased with Treasury securities, while the interest payments were paid
                                                  by the FHLB system (and any shortfall was explicitly guaranteed by the Treasury).

                                              • Sallie Mae’s transition to a private company left it with explicitly guaranteed debt to
                                                  1982 and implicitly guaranteed debt issued during 1982-1996; all of this was either
                                                  bought back or fully defeased, and a firewall cut off recourse of SLM Corp (the private
                                                  entity) creditors to the GSE debt. Of course, Sallie Mae shares were privately held instead
                                                  of 100% government owned, and these shareholders pushed for full privatization.

FIGURE 3                                                                    FIGURE 4
Subsidized TVA service area boasts below-average rates…                     …as electricity costs remain a high percentage of incomes
  Average retail rate, $0.01/kWh                                              Average electric bill per disposable income

                         2008          2009           2010           2011                          2008           2009            2010           2011
  New York (max)         18.3          17.5           18.7           18.3     Alabama (max)        5.2%           5.3%            5.7%           5.4%
  US Average             11.3          11.5           11.5           11.7     S. Carolina          4.8%           5.1%            5.6%           5.3%
  Alabama                10.4          10.7           10.7           11.1     Mississippi          5.4%           5.3%            5.6%           5.3%
  Georgia                9.9           10.1           10.1           11.1     Georgia              4.3%           4.5%            4.9%           4.9%
  Virginia               9.6           10.6           10.5           10.6     Tennessee            4.3%           4.4%            4.7%           4.7%
  NC                     9.5           10.0           10.1           10.3     N. Carolina          4.0%           4.4%            4.8%           4.4%
  Mississippi            10.4          10.2           9.9            10.2     Kentucky             3.9%           4.0%            4.4%           4.2%
  Tennessee              8.9           9.3            9.2            10.0     Virginia             3.5%           3.9%            3.9%           3.7%
  Kentucky               7.9           8.4            8.6            9.2      US Average           3.4%           3.6%            3.7%           3.6%
  Idaho (min)            7.0           7.8            8.0            7.9      DC (min)             1.8%           1.9%            2.1%           1.8%
Note: TVA services AL, GA, KY, MS, NC, SC, and TN. Source: BEA, Moody’s     Note: TVA services AL, GA, KY, MS, NC, SC, and TN. Source: BEA, Moody’s

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                                      In either case, investors in implicitly guaranteed debt were eventually protected by the
                                      government in various ways, a solution echoed in the present FNM/FRE conservatorships. If
                                      defeasance were the method of choice for TVA, government spending and the size of the
                                      public debt would remain unchanged because of the additional Treasuries sales needed.

                                      On the other hand, the government could reduce its ownership of TVA to the same 79.9%
                                      stake it holds in FNM/FRE and skirt concerns over the public debt, but would be unlikely to
                                      receive a price that would be accretive to taxpayers. In exchange for TVA’s effective
                                      monopoly over its geographic operating area, it adheres to the Congressional mandate that
                                      “power shall be sold at rates as low as feasible” and, as such, has kept its rates below the
                                      national average for its entire service area (Figure 3).

                                      Practical considerations may hinder acquisition
                                      Similarly, TVA sells its power to distributors (mainly regional co-ops) under contracts that
                                      require 5-15y notice before termination, and it is unclear if the contracts could be
                                      renegotiated in the event of a full divesture. While residents of TVA’s service area receive a
                                      clear subsidy, electricity is still a disproportionately high percentage of their disposable
                                      income relative to the national average (Figure 4).

                                      Lastly, because of its mission and government ownership, TVA’s leverage ratios and other
                                      financial metrics suffer compared with publicly traded utilities within its A rated peer group.
                                      These would presumably worsen if funding costs rose to become more in line with that peer
                                      group. Any potential acquirers would have to address both issues while continuing to meet
                                      the 8-12% ROE targets common in the industry.

                                      Thus, we believe the TVA strategic review indicated in the president’s budget should not be
                                      interpreted as an imminent move towards privatization. The budget itself provides only the
                                      barest of details and no timeline, and any plan that emerged would likely encounter
                                      considerable, consistent political resistance.

Expect TVA eventually to              As such, we would fade related cheapening of TVA paper to pre-budget levels, which
return to pre-budget spread           would provide 10-20bp of upside at roughly T+70bp from the 15y sector on out the curve.
levels                                We acknowledge that the market could remain dislocated until further details emerge or the
                                      plan’s political infeasibility becomes apparent.

FIGURE 5                                                            FIGURE 6
Central bank demand for 5y agency bellwethers increases             5-7y sector shows lingering signs of indigestion
 100%                                                                A-T spd, bp
  90%                                                                50
  80%                                                                45
  70%                                                                40
  60%                                                                35
  20%                                                                10
  10%                                                                 5
    0%                                                                0
            2008     2009   2010   2011      2012   2013    FN 5y         2y           3y       5y        7y         10y        20y
                Fund Mgr    Comm Bk       Ctrl Bk   Other                           4/3/13           4/10/13          4/17/13
Source: Barclays Research                                           Source: Barclays Research

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                                 Relative value update
                                 Primary activity remained continued in the agency bellwether market last week, with Fannie
                                 Mae placing a new 5y (5/18s, $5.5bn). Intermediate spreads seemed to reflect some
                                 indigestion of the new issue, despite high (foreign) central bank demand (Figure 5). We
                                 continue to recommend owning 5y agencies at T+19bp matched-date and 7y at T+27bp, which
                                 appear cheap to surrounding sectors and offer considerable spread roll-down (Figure 6).

18 April 2013                                                                                                           22
Barclays | Global Rates Weekly


                                                 For a flatter tomorrow
Piyush Goyal                                   Buy 3m*(3y1y) – 3m*30y bull flattener to hedge a further significant decline in yields.
+1 212 412 6793                                The trade seeks to benefit from attractive rate and vol entry levels.
                                               Given the ongoing occurrences in the commodity market and the uncertain political
                                               landscape in Italy, we like hedging a large decline in yields. However, rates are already quite
                                               low; as a result, outright receivers do not offer attractive risk-reward.

                                                 To come to this conclusion, we compared a few structures across the yield curve (Figure 1).
                                                 As shown in the column labelled p&l (bp, carry), most of the receivers do not re-coup the
                                                 cost of the option in a carry scenario and some are barely profitable even if yields decline to
                                                 the low levels seen mid last year. For example, a 3m*7y ATM receiver would cost about
                                                 11bp (in underlying swap01) and would recoup only 9bp in a carry scenario, implying a
                                                 loss. Further, if 7y swaps decline to their lowest level ever of 1.14%, the receiver would
                                                 generate only 2.55 times the premium outlay.

                                                 The main reason outright receivers do not offer attractive risk-reward is the high implied
                                                 vol. Figure 2 plots the implied to realized vol ratio across tails on the gamma surface.
                                                 Despite the recent decline in implied vol, the implied to realized vol ratio is quite high,
                                                 especially in 5y and 10y tails. Essentially, option investors remain wary of a change in Fed
                                                 stance, and keep implied vol from coming off to levels where owning options to position for
                                                 a drift in rates (lower or higher) would be profitable.

                                                 Admittedly, as highlighted by Figure 1, some structures are better than others to position
                                                 for a decline in yields.

3m*30y receivers offer                         Across tails, in general, options on longer rates offer better risk-reward. Within vanilla
the best risk-reward                           options, 3m*30y will recoup four times the premium outlay if the lows of July 2012 are
for a decline in yields                        achieved. On the other hand, a 3m*2y receiver would barely profit if yields rally significantly.
                                               Similarly within mid-curve options, 3m*(5y5y) will perform best. Essentially, while yields
                                               have come down, the yield curve is still quite steep.

3m*30y receiver offers the best risk-reward if rates fall to record lows; even better 3m*5y5y receiver

                              spot      fwd         vol      cost ATM      3m Carry   p&l (bp,   lowest rate   p&l if lowest   p&l if lowest rate /
  vanilla options (3m)        rate      rate      (bp/y)   receiver (bp)     (bp)      carry)       level          rate                 cost

            2y               0.37% 0.40%            20           4             3         (1)       0.35%            5                 1.24
            5y               0.86% 0.95%            42           8             9         1         0.74%            21                2.57
            7y               1.31% 1.41%            53          11             9         (1)       1.14%            27                2.55
            10y              1.85% 1.93%            62          12             8         (4)       1.55%            39                3.12
            30y              2.78% 2.82%            70          14             3        (11)       2.26%            56                4.01
mid-curve options (3m)
           2y1y              0.68% 0.78%            40           8            10         2         0.56%            22                2.74
           3y1y              1.16% 1.30%            65          13            14         1         0.94%            36                2.76
           2y2y              0.92% 1.04%            51          10            12         2         0.75%            29                2.81
           5y5y              2.94% 3.01%            90          18             7        (11)       2.38%            63                3.50
Note: As of 4/18/13. Source: Barclays Research

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Barclays | Global Rates Weekly

                                                Across vanilla and mid-curve options, 3m*30y is better than 3m*5y5y to own protection
                                                against a large decline in yields. It is noteworthy that 5y5y has more room to decline
                                                compared to a 30y swap rate (63bp vs. 55bp); however, due to much higher vol, a
                                                3m*(5y5y) receiver offers less attractive risk-reward.

Mid-curve options are more                      The relatively higher implied vol for mid-curves is probably driven by demand for these
expensive than vanilla                          options as investors move further out on the yield curve for Fed-on-hold or hawkish-Fed
swaptions                                       trades. As a result, in general, the entire mid-curve sector is at a higher premium to realized
                                                vol compared to vanilla swaptions. Figure 2 shows the implied vol of mid-curve options on
                                                RED, GREEN, BLUE and GOLD eurodollar futures. While 30y tail vanilla options are at a
                                                discount to delivered vol, the mid-curve options are expensive across the underlying rates.

                                                Put together, a steep yield curve and relatively expensive mid-curve vol bring us to the
                                                following bull flattener:

                                                • Long $100mn 3m*30y low-strike receiver
                                                • Short $2bn2 3m*3y1y ATM receiver
Buy 3m*30y low-strike                           For historical context, Figure 3 compares the 30y swap rate with 3y1y forward swap rate
receivers funded with 3m*3y1y                   since early last year. The key takeaway from the chart is the two rates decoupled in
mid-curve receivers                             September last year, probably on the back of Fed’s open-ended QE. Due to the decoupling,
                                                30y rates have more room to rally than 3y1y rates. In other words, a large rally, maybe due
                                                to a risk-flare in the eurozone would likely be led by the 30y rate. Accordingly, 3m*30y vol
                                                should be much higher than 3m*3y1y vol. However, current pricing suggests the former is
                                                only at a slight premium to mid-curve option vol. Thus, we like the bull flattener.

                                                The chief risk to the trade is if the Fed is able to communicate the possibility of Fed-on-hold
                                                beyond what is currently priced. A new dovish tool might cause the 3y1y rate to fall more
                                                and 30y rates to lag the decline as inflation expectations rise. This would mean a bull
                                                steepening of the curve, hurting the above structure. While possible, the Fed came up with
                                                its latest tool of “data-base guidance” only four months ago and may wait awhile before
                                                pumping more monetary stimulus. As the above structure is short-dated, it would have
                                                expired in a few months and would be able to avoid such scenario.

FIGURE 2                                                                                FIGURE 3
Implied vol is higher than delivered; more in mid-tails, more                           3y1y rates decoupled from 30y swaps last September, have
in mid-curve options                                                                    little room to rally
Imp Vol    2y     5y     10y      30y   Imp Vol       1st    2nd    3rd    4th            2.1                                                                      3.2
   1m       19     40     61       70     RED           17     20     28     30                                                                                    3.1
   3m       20     42     62       70   GREEN           38     39     47     53           1.9
   6m       23     48     68       73    BLUE           59     68     74     78
   1y       32     57     74       76   GOLDS           76     85     90     91           1.7
20d rlzd                                20d rlzd                                          1.5                                                                      2.7
           2y     5y     10y      30y                 1st    2nd    3rd    4th
  vol                                     vol                                                                                                                      2.6
   1m       17     33     57       78     RED           13     15     18     24           1.3
   3m       18     34     58       79   GREEN           29     36     40     47
   6m       18     38     61       80    BLUE           52     57     62     67           1.1
   1y       22     47     66       83   GOLDS           71     74     77     78                                                                                    2.3
                                                                                          0.9                                                                      2.2
Imp/rlz                                                                                     Jan-12       Apr-12        Jul-12       Oct-12       Jan-13   Apr-13
           2y     5y     10y      30y   Imp/rlzd 1st         2nd    3rd    4th
                                                                                                                       3y1y (L)              30y (R)
   1m      1.11   1.22   1.06   0.90      RED         1.31   1.34   1.52   1.28
   3m      1.15   1.22   1.07   0.89    GREEN         1.32   1.10   1.19   1.13
   6m      1.26   1.26   1.11   0.90     BLUE         1.12   1.19   1.20   1.17
   1y      1.42   1.23   1.12   0.92    GOLDS         1.07   1.15   1.17   1.16
Source: Barclays. As of 4/17/13                                                         Source: Barclays. Data period: 1/2/12 – 4/18/13

                                                    3y1y has a dv01 of 1cts vs. 20cts for 30y swaps, implying a hedge ratio of 20

18 April 2013                                                                                                                                                      24
Barclays | Global Rates Weekly

                                 Change to exchange
                                 The trade could also be initiated via exchange future options, in the following form:

                                 • Long $100mn 6/14/13 – 30y receiver low-strike

                                 • Short 4000 3EM3C 99 call

                                 • Short 4000 4EM3 98.375 call

                                 The expiry on the 30y swaption receiver is changed to June 14, 2013 to match the expiry of
                                 the exchange options. More importantly, the reason a mid-curve option on the 3y1y rate
                                 can be replicated with the exchange option on EDH7 and EDH8 is the correlation and beta
                                 between the 3y1y rate and average of 3y3m, 4y3m is ~ 1. So, a long position in the 3y1y
                                 option is the same as a long position in the two options on the exchange.

18 April 2013                                                                                                            25
Barclays | Global Rates Weekly


                                        Clearing the fog in interbank lending
Joseph Abate                            There is surprisingly little data on tenors, volumes or borrowing rates in the interbank
+1 212 412 7459                         loan market. Some of this information can be imperfectly inferred from other markets.               But data from Fedwire might provide more clarity.

                                        • Detailed data on term interbank lending activity is not available. Even information on the
                                             overnight fed funds market is sparse.

                                        • Some sense of overall interbank activity can be inferred from the commercial paper
                                             market, but the sample size and issuance is limited.

                                        • An algorithm designed to match, send, and receive payment instructions over Fedwire
                                             might capture broader detail on interbank loan terms, rates, and volumes.

                                        In real time, these data might be used to confirm the transacted rate figures derived from
                                        money fund holdings and the CP market.

                                        Filling in the gaps
Information on interbank                Despite intense scrutiny over the past five years, information on the interbank lending
lending is surprisingly thin            market is surprisingly sparse. The Federal Reserve collects weekly data on the total amount
                                        of interbank loans reported as assets by all US commercial banks. Fed funds and reverse
                                        repos make up nearly all of the roughly $130bn outstanding, but it is unclear what the
                                        distribution is between them, although our sense based on observations of the brokered fed
                                        funds market suggests most of this total is in the collateral market.3

                                        Similarly, the Fed collects data on borrowing reported by commercial banks from other
                                        banks in the US (a liability). It is unclear what form this borrowing takes – for instance,
                                        commercial paper or perhaps a brokered wholesale deposit. Like the asset holdings, this, too,
                                        has fallen sharply since the financial crisis, from about $400bn to about $160bn (Figure 1).
                                        Beyond the outstanding amounts, however, neither series provides clues as to the maturity
                                        distribution of these loans or their underlying rates.

FIGURE 1                                                                      FIGURE 2
Bank borrowings from US banks ($bn)                                           Money fund financial CP holdings (% total fin CP)
 600                                                                            46
 500                                                                            44

 100                                                                            37
    0                                                                           35
    Jan-00         Jan-03      Jan-06       Jan-09       Jan-12                      Oct-11     Jan-12      Apr-12        Jul-12     Oct-12       Jan-13
Source: Federal Reserve                                                       Source:, Federal Reserve
                                         For a recent review of activity levels in the fed funds market, see, “An Empirical Study of Trade Dynamics in the Fed
                                        Funds Market”, G. Afonso, and R. Lagos, Federal Reserve Bank of New York, February 2012.

18 April 2013                                                                                                                                                26
Barclays | Global Rates Weekly

                                 To fill in the gaps, analysts have turned to other data sources, including commercial paper and
                                 money market fund holdings. Although commercial paper rates are close to unsecured term
                                 interbank loans rates, they are not exact matches, as CP is typically sold to investors outside
                                 the commercial banking sector. Indeed, except for their own acceptances, commercial banks
                                 hold no CP. Instead, a far larger share of bank CP is held by money market funds. At the end of
                                 March, financial CP outstanding totalled $550bn, and money fund holdings across all bank
                                 issuers were $230bn, or 42% of the market (Figure 2). But while money fund holdings are
                                 extremely transparent, the aggregate figures are only available once a month.

                                 Transacted rates
CP rates may be a bit            Given the nearly $600bn in outstanding financial commercial paper of all maturities, it
misrepresentative                should be fairly reasonable to use published commercial paper rates from the Federal
                                 Reserve as a proxy for interbank funding rates. But for a variety of reasons, these rates may
                                 misrepresent true interbank lending rates a bit. First, the rates are very noisy since they
                                 reflect changing samples of issuers each day; after all, the same banks do not consistently
                                 issue 3m CP every day (Figure 3). More significantly, the daily volume of newly issued CP is
                                 small. Financial paper issuance across all maturities has averaged just $1.25bn per day this
                                 year, down from an already low $1.5bn/day in 2012. And the pace of issuance for paper
                                 with more than 80d to maturity has barely exceeded $0.7bn this year (Figure 4). This
                                 thinness is compounded by the fact that the Fed publishes data only for AA issuers, even
                                 though money market funds and other investors have modestly expanded their purchases
                                 to include slightly lower-rated financial issuers. As a result, published CP rates from the
                                 Federal Reserve may not be representative of overall interbank rates, which cover a wider
                                 array of borrowers across deeper issuance. But there may be another approach.

Much of interbank lending        Fedwire is a real-time gross settlement system for large dollar value wholesale payments
occurs over Fedwire              between financial institutions (including the GSEs) in the US. The US branches of foreign
                                 banks are also participants.4 Given that much of the interbank lending done by banks in the
                                 US occurs over Fedwire, it should theoretically be possible to capture a large enough sample
                                 from the Fedwire payment instructions to gather a precise sense of the volume, tenor, and
                                 rate on interbank borrowing. With this in mind, the Federal Reserve has developed a
                                 modified algorithm designed to sift through the millions of daily Fedwire instructions to look

FIGURE 3                                                                FIGURE 4
Financial CP rate, 3m (bp)                                              Daily financial CP issuance ($mm)
 32                                                                       5,000
 30                                                                       4,500

 28                                                                       4,000
 20                                                                       1,500
 18                                                                       1,000
 16                                                                         500
 14                                                                            0
                                                                               Jan-12      Apr-12       Jul-12     Oct-12       Jan-13   Apr-13
  Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13                                                       >80d           Total
Source: Federal Reserve                                                 Source: Federal Reserve

                                     Fedwire is not the only payment settlement mechanism in the US; CHIPS is the other major network.

18 April 2013                                                                                                                                 27
Barclays | Global Rates Weekly

                                     for matching sets of interbank loans and their repayments.5 Essentially, the algorithm
                                     matches each set of “send payment” instructions with a future “return payment” between
                                     bank A and bank B.6 The send payment is limited to transactions in fixed increments above
                                     a fixed amount (say, $10mn) designed to capture most wholesale interbank lending. It looks
                                     for a return payment that is slightly larger than the size of the candidate send payment, by
                                     an amount equal to the interest it might have earned at an interest rate in whole basis
                                     points within, say, 100bp of the prevailing Libor rate. Kuo et al. do not attempt to identify
                                     the type of transaction, although the algorithm has been applied specifically to overnight
                                     transactions in an attempt to gauge fed funds market activity, although with disappointing

Does the algorithm capture           Of course, the algorithm is useful only if it captures genuine interbank lending transactions.
interbank loans well?                Indeed, given the huge volume of daily transactions, it is possible that unrelated matching send
                                     and receive instructions could be identified as interbank loans. Misidentification, as either a false
                                     positive (labelling a random transaction as a bank loan) or a false negative (missing interbank
                                     loans entirely) is one problem with the algorithm. Both Armantier and Copeland and Kuo et al.
                                     benchmark the output of their algorithms to known data on interbank lending from other
                                     sources. Armantier and Copeland find very large misidentification errors – particularly false
                                     positives – in analyzing overnight transactions. That is, the algorithm identifies more ‘fed funds’
                                     trades than the true volume. But Kuo et al. seem to find fewer of these types of errors, perhaps
                                     because they are mainly interested in any term unsecured bank loan between banks A and B.
                                     Instead, Kuo et al. find that the algorithm captures a fairly large (75%) portion of actual
                                     brokered interbank lending transactions in 2000-04.

                                     There are two additional types of errors. First, the algorithm is applied just to the Fedwire data;
                                     to the extent that any interbank loans settle on CHIPS the output of the data sifting will be too
                                     small. More significantly, the algorithm cannot identify the final borrower in a transaction.
                                     Thus, in a correspondent transaction, while the payment may round-trip between Bank A and
                                     B, the ultimate borrower may in fact be Bank C, or more discouragingly, Company C, which
                                     could have a different risk profile than Bank B. It is unclear if the inability to capture
                                     intermediary transactions biases the implied rate higher or lower. Nevertheless, we estimate
                                     that omitted error bias and the difficulty in capturing intermediary transactions accounts for
                                     much of the 25% of loan transactions missed by the algorithm.

The algorithm does well in           In their analysis of pre-crisis term unsecured interbank markets, Kuo et al. note that the
capturing interbank lending          implied rates from the algorithm were clustered around the prevailing Libor rates. They
trends before and after the crisis   interpret this to indicate that the algorithm is not capturing random pairs of Fedwire
                                     transactions but actually tracking interbank lending. Moreover, they observe that the
                                     estimated daily volume of transactions is $90-150bn (about the size of the market as
                                     reported by the Fed) and matches the observed behavior of other lending markets such as
                                     CP in terms of post-crisis tenor shrinkage and volume declines.

                                     Real time
The data might be best used          Obviously, trying to match transactions instructions real time is impossible: we can monitor
as confirmation of trends in CP      the send legs but will not know the return legs until, say three months, later. In the
and money fund holdings              meanwhile, it will still be useful to examine the money fund figures, as well as the daily
                                     interest rates from the commercial paper market. Only in hindsight will the algorithm

                                       See, “Identifying Term Interbank Loans from Fedwire Payments Data”, D. Kuo, D. Skeie, J. Vickery, and T. Youle,
                                     Federal Reserve Bank of New York, March 2013 and the original algorithm in “The Microstructure of the Fed Funds
                                     Market,” Financial Markets, Institutions, and Instruments, 1999.
                                       We ignore the technical issue of what to do when a send instruction matches several potential return instructions. In
                                     these situations, some kind of “tiebreaker” rule needs to be applied. These decisions are fairly common, probably
                                     because of the standardization or clumping in transaction sizes.
                                       See, “Assessing the Quality of Furfine-based Algorithms”, O. Armantier and A. Copeland, Federal Reserve Bank of
                                     New York, October 2012.

18 April 2013                                                                                                                                             28
Barclays | Global Rates Weekly

                                 provide more clarity on interbank lending activity in terms of the distribution of rates and
                                 tenors. Nevertheless, we think that making this data available will improve the market’s
                                 sense of the overall level of activity over the current mix of money fund, CP and bank
                                 asset/liability data, even if they might be stale.

18 April 2013                                                                                                             29
Barclays | Global Rates Weekly


Laurent Fransolet                  This is an edited extract from the Global Macro Daily, 18 April 2013
+44 (0)20 7773 8385
                                   The resiliency of peripheral markets recently has been impressive, with yields/spreads to
                                   Germany near YTD lows. The IMF Fiscal Monitor and Global Financial Stability Reports (FM
                                   and GFSR) include analysis that help explain this, and other moves in financial markets.

The frontloading of the budget     Figure 1 (Figure 10 of the FM) shows the 10 advanced economies that require the biggest
adjustments helps to explain       changes in cyclically adjusted primary balance. The right-hand axis shows how much of the
some of the resilience of          total adjustment is being frontloaded (in 2011-13) vs what remains to be done in 2014-20.
peripheral markets                 Italy (and Greece) fare well on that measure (with about 70% of the primary balance
                                   adjustment done), with other euro countries (Spain, France, Belgium) around the 50% mark.
                                   In our view, this fundamental improvement, also apparent on the current account front, is one
                                   of the reasons why these markets have been quite resilient in the past few quarters, even as
                                   headline news on the eurozone has picked up (eg, Cyprus, Italian elections, etc).

                                   FIGURE 1
                                   Advanced economies with largest adjustment requirements in the cyclically adjusted
                                   primary balance (% of GDP)
                                   18%                        2011–13            2014–20                    % frontloaded (RHS)                          80%
                                   16%                                                                                                                   70%
                                   14%                                                                                                                   60%
                                   12%                                                                                                                   50%
                                    4%                                                                                                                   20%
                                    2%                                                                                                                   10%
                                    0%                                                                                                                   0%
                                   -2%                                                                                                                   -10%




                                                                                           United States

                                                                                                                     United Kingdom

                                   Source: IMF

Italy is in the best position on   The chart also illustrates the relatively better position of Italy compared with Spain in terms
that metric, in both absolute      of progress and the absolute size of the adjustment that is needed. Indeed, despite the
and relative terms                 political uncertainties and the slower progress on the structural reform side, international
                                   investors have been, and will likely remain, much more comfortable with the Italian
                                   government debt market than with the Spanish. While Spain has tightened vs Italy in recent
                                   months, it is still higher in yields, and anecdotal evidence suggests that the search for yield
                                   (from displaced ‘safe-haven’ investors, including Japanese ones) will benefit Italy more than
                                   Spain in the near to medium term. In contrast, Portugal (and, to a lesser extent, Ireland) is
                                   lagging on these metrics, and international investors will likely remain much more cautious
                                   than in Spain and Italy until there is a clear turnaround in the economy (even if the data
                                   show some small net foreign buying since September 2012).

Large developed countries          The other large developed countries (the US, the UK, Japan) have a lot of fiscal adjustment to do,
have a lot more to do, but have    but the bond markets there are (and should remain) fundamentally more stable than they were in
more stable investor bases         the euro area periphery. Hence, the necessity for a large and fast adjustment is less urgent, and the
                                   risk of a sudden stop ‘demand’ induced sell-off is inherently much lower, even without the
                                   prospects of QE buying. This can be seen in Figure 2 (Box 3 of the FM), which shows the (pre-
                                   crisis) proportion of ‘stable’ ownership of each government bond market (defined as domestic

18 April 2013                                                                                                                                              30
Barclays | Global Rates Weekly

                                               and foreign central banks’ ownership, as well as domestic non-bank financial institutions’
                                               ownership) and the volatility these markets experienced in the past few years. Clearly, Japan, the
                                               US and the UK benefitted (and continue to benefit) from much more ‘stable’ investor bases than
                                               most euro countries and vs peripheral countries’. The IMF notes, though, as we have frequently
                                               highlighted, that foreign ownership of peripheral markets has stabilized, if not slightly increased,
                                               recently (eg, Figure 1.12 of the GFSR, updated in Figure 3 below), and this has been a key driver of
                                               the resiliency of peripheral markets, even at times of risk-off sentiment.

                                               FIGURE 2
                                               Real-money investors before the crisis, 2007
                                                                                           Central banks, national and foreign
                                                                                           Domestic nonbank financial institutions
                                                  80%                                                                                                     16
                                                                                           Bond yield volatility (RHS, bp)
                                                  70%                                                                                                     14

                                                  60%                                                                                                     12

                                                  50%                                                                                                     10

                                                  40%                                                                                                     8

                                                  30%                                                                                                     6

                                                  20%                                                                                                     4

                                                  10%                                                                                                     2

                                                  0%                                                                                                      0
                                                            GRC   PRT    IRL   ITA    BEL       ESP     FRA    DEU    SWE        CAN   JPN     USA   UK
                                               Source: IMF

Some technical factors have                    Several more short-term technical factors also help to explain this resiliency. First, Italy has just
helped peripheral markets                      raised €17bn of a retail BTP Italia, highlighting the strength of domestic demand (and almost
as well                                        enough to fully cover the increased issuance needs due to the decision to repay arrears to SMEs,
                                               a positive for the economy). Second, as we have highlighted before, leveraged investors still have
                                               short positions in peripheral debt markets, and the recent moves in equities and commodities
                                               might have induced some knock-on short covering.

We stay positive on peripheral                 We stay positive on peripheral bond risk, with a focus on the short ends and 5y sectors in
bond markets                                   Italy and Spain; the forward spreads embedded in the 3-5 year part of the spot curve are still
                                               elevated and offer attractive yields compared with the safe-haven markets, as illustrated in
                                               Figure 4 (Figure 1.13 of the GFSR).

FIGURE 3                                                                         FIGURE 4
Foreign ownership of Spanish and Italian government debt                         2y bond spreads vs Germany (bp)

70%                                                                                  800

60%                                                                                  700
50%                                                                                                                                     Forwards
40%                                                                                  400
30%                                                                                  300
10%                                                                                   0
  0%                                                                             -100
    Jun09 Jan10        Jul10    Jan11     Jul11    Jan12     Jul12   Jan13       -200
                                                                                    Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
                    Spanish debt securities held by foreigners (ex ECB)
                    % of BTPs owned externally (ex ECB)                                                   France             Italy     Spain         Belgium
Source: Italian and Spanish Treasuries, Barclays Research                        Source: IMF

18 April 2013                                                                                                                                             31
Barclays | Global Rates Weekly


                                            Political rally in Italy
Huw Worthington                             Intra-day volatility of Italian and Spanish yields has decreased recently such that the
+44 (0)20 7773 1307                         yields are approaching December’s very low levels. Spreads appear a little cheap,                particularly in 10y. Politics in Italy are likely to remain a driver of spreads and have the
                                            potential to drive spreads and yields a little lower.
Cagdas Aksu
                                            Notwithstanding a small re-widening correction in the past week (likely supply related), the
+44 (0)20 7773 5788
                                            period since the end of March has been characterised by a re-tightening of EGB spreads in
                                            highly rated core and peripheral issuers. A major catalyst in the move was the BoJ
                                            announcement a fortnight ago that in particular supported the highly rated core. France
                                            was the major beneficiary, leading the move tighter, with outperformance of 19bp in 10y
                                            bonds, followed closely by Belgium at c.17bp tighter again in 10y. In the periphery, Italian
                                            bonds have tightened across the curve, with 47bp of outperformance in the 10y area and
                                            55bp in the front end. Spanish bonds managed similar figures.

                                            The recent moves in Spain and Italy have also been accompanied by a further decrease in
                                            the underlying intra-day volatility. Figures 1 to 2 chart 10-day moving average intra-day
                                            yield moves in 5y and 10y Spanish and Italian bonds since the start of 2011 against the yield
                                            spreads in these maturities versus bunds.

Intra-day volatility has                    In Spain and Italy, 5y and 10y intra-day volatility has now fallen to the extent that with the
fallen recently                             10-day moving average is in single digits for the first time since the end of December 2012
                                            when lows of 5-9bp in both maturities were registered, markets where at their quietest and
                                            supply was much less of a factor than now.

Previous episodes have had                  As can be seen in the charts, past reductions and increases in intra-day volatility can be a
much higher volatility in                   good indication of improved underlying liquidity, and thus sentiment, in EGB markets. As
intra-day yields                            such, other things being equal, peripheral EGB spreads appear to be on the cheap side,
                                            particularly in Spain and in Italy in the 10y area.

FIGURE 1                                                                  FIGURE 2
10-day moving average SPGB yield changes vs 10y SPGB                      10-day moving average BTP yield changes vs 10y BTP Bund
Bund spread                                                               spread

 40             10y Mvg Avg yield volatility                       800     45                10y Mvg Avg yield volatility             700
                10y SPGB Bund Spread (RHS)                                                   10y BTP Bund Spread (RHS)
 35                                                                700     40
 30                                                                600
 25                                                                500
                                                                           25                                                         400
 20                                                                400
                                                                           20                                                         300
 15                                                                300
 10                                                                200
   5                                                               100                                                                100
   0                                                               0        0                                                       0
   Apr-10     Nov-10      Jun-11       Jan-12   Aug-12    Mar-13            Sep-10 Jan-11May-11Sep-11 Jan-12May-12Sep-12 Jan-13May-13

Source: Bloomberg, Barclays Research                                      Source: Bloomberg, Barclays Research

18 April 2013                                                                                                                           32
Barclays | Global Rates Weekly

                                           Politic and, supply dynamics
                                           The better environment in general, particularly following the BoJ announcement, has been a
                                           key driver of the lower volatility. However, several other factors seem likely to drive spreads,
                                           not least of which will be political developments in Italy. The election of a new president is a
                                           pre-requisite to forming a new administration after almost two months of impasse. In this
                                           regard, the decision by both centre-left leader Pier Luigi Bersani and centre-right leader
                                           Silvio Berlusconi to support former Senate Speaker Franco Marini as a candidate is
                                           potentially positive because it could lead to the swift formation of a new grand coalition
                                           administration with electoral law reform high on its agenda. Whether Marini could secure
                                           the two-thirds majority required in the early voting rounds remains to be seen as the centre-
                                           left PD party is split over his candidature; whether Marini would be proceed without this
                                           level of support also remains unclear. Nevertheless, a swift decision on a new president,
                                           with a new administration being formed soon thereafter, would, in our opinion, be taken
                                           positively by markets, regardless of whether the new government may be inherently
                                           unstable and, in reality, only delay elections to 2014 as opposed to later this summer.

                                           Prior to the elections in February, we felt that a clear Bersani-Monti majority in both houses
                                           could see 10y Italy rally towards 4%; at the time of writing, 10y BTPs yield 4.25%. While a
                                           relatively unstable grand coalition may not be as enticing as a stable centre-left
                                           government, 10y BTPs could still move lower from current levels on the news. In reality,
                                           investment flows into Italy from ex-euro area foreign investors (and the periphery in
                                           general) in the wake of the BoJ announcement may take longer to come to fruition.
                                           However, any political stability may mean the mere anticipation of such flows, particularly in
                                           shorter-dated bonds and bills, should provide support in Italy.

                                           Politics aside, a number of other factors may also help explain the resiliency of peripheral
                                           markets, and Italy in particular. On the supply front, this week Italy issued €17bn of a retail 4y
                                           BTP Italia, highlighting the underlying strength of domestic demand for Italian debt even at a
                                           time of political uncertainty. However, the issuance will not result in cancelled or reduced
                                           auction sizes because, at the same time, the head of the Italian Treasury, Maria Cannata,
                                           announced an increase in total gross funding requirements for this year to €450bn from
                                           €415bn previously. The revision reflects the repayment of arrears designed to act as a much-
                                           needed stimulus to the economy (€20bn this year likely in late summer and €20bn next year;
                                           see Italy: Set to liquidate EUR40bn accounts payable – Potential effects on public finances,
                                           growth and debt management, 8 April 2013), and takes into account fiscal slippage (see
                                           Italy: Risks of fiscal slippage loom this year, 12 April 2013). As such, we now expect gross

FIGURE 3                                                                   FIGURE 4
Evolution of BTP forward yields vs Germany                                 Selected core yield spreads vs Germany
              1y Spain vs Germany                                          30                                 France 2y                  100
              Average 2 to 5y Spain fwd vs Germany                                                            Belgium 2y
 8                                                                         28                                                            95
              1y Italy vs Germany                                                                             France 10y (RHS)
 7            Average 2 to 5y Italy fwd vs Germany                         26                                 Belgium 10y (RHS)          90
                                                                           24                                                            85
                                                                           22                                                            80
                                                                           20                                                            75
                                                                           18                                                            70
                                                                           16                                                            65
                                                                           14                                                            60
 1                                                                                                   BoJ Announcement
                                                                           12                                                            55
 0                                                                         10                                                            50
 Jan-10    Jul-10   Jan-11    Jul-11   Jan-12   Jul-12   Jan-13   Jul-13    Jan-13                 Feb-13            Mar-13
Source: Bloomberg, Barclays Research                                       Source: Bloomberg, Barclays Research

18 April 2013                                                                                                                             33
Barclays | Global Rates Weekly

                                              bond issuance of c.€215bn (net c.€57bn), with net t-bills issuance of c.€4bn (previously
                                              -€11bn). However, the frontloading of supply already this year (Italy is currently 41% funded
                                              for 2013 on the higher issuance target), the success of the BTP Italia (with another expected
                                              in the autumn) and higher CCT-eu supply mean that BTP supply will not necessarily need to
                                              increase from the levels seen in the scheduled auctions carried out thus far in 2013. As such,
                                              supply pressure on the BTP nominal curve can remain contained, in our opinion.

EGB issuance progress YTD

                                                                                                % of 2013                Actual   Estimated
                                                                  All         Net issuance   estimated gross Difference funding - funding -
Up to 18/04/13              2-3       5       7-10       15+   maturities      YTD €bn           issuance     vs 2012     2012      2013
Germany                     24.0     17.0     16.0       2.0     59.0             13.0            32%           0%          183         184
France (inc buybacks)       13.0     24.0     27.7      13.7     78.4             52.5            41%           8%          202         190
Italy                       25.4     37.5     12.9      12.2     88.0             46.1            41%          13%          232         215
Spain                       16.7     11.0     21.9       1.9     51.5             30.1            43%           1%          98          121
Belgium                     0.0      6.2       5.3       1.2     12.7             -0.6            34%           4%          44           37
Holland                     7.8      5.2       6.5       3.5     23.0             6.7             46%           2%          65           50
Portugal                    0.0      2.5       0.0       0.0      2.5             2.4             36%           NA          0               7
Finland                     0.0      0.0       4.0       1.0      5.0             5.0             38%          12%          13           13
Austria                     0.0      0.6       5.0       2.8      8.4             8.8             36%          -6%          21           23
Greece                      0.0      0.0       0.0       0.0      0.0             NA              NA            NA          0               0
Ireland                     0.0      2.5       5.0       0.0      7.5             7.5             75%          75%          4            10
Eurozone Aggregates         86.8    106.5     104.2     38.4     336.0           171.5            40%           6%          862         850
Percentages                 26%     32%       31%       11%
Difference vs. 2012         -7%      6%        0%        1%
Source: Barclays Research

                                              Next week’s cash flows
                                              Next week should be quiet in terms of scheduled supply, with Italy conducting a linker
                                              auction linker on Wednesday, while Germany taps its 30y bond for €2bn the same day.
                                              Support for the market will come in the form of €16.2bn of coupon and €21.7bn of
                                              redemption flows, primarily in France.

Barclays cash flow expectations for week beginning 22 April 2013
                   Beginning                                   Auction Date       Issuance      Redemptions      Coupons         Net Cash Flow
                                    08-Apr             0.45     Germany              2.00           0.00             0.00            2.00
Weekly                              15-Apr           -22.85       France             0.00          21.73          15.62             -37.34
Net                                22-Apr            -32.46        Italy             3.50           0.00             0.23            3.27
Cash flow                            29-Apr          -15.45       Spain              0.00           0.00             0.00            0.00
                                    06-May            10.52      Belgium             0.00           0.00             0.01            -0.01
                                                                  Greece             0.00           0.00             0.08            -0.08
 Net Cash Flow is issuance minus redemptions minus               Finland             0.00           0.00             0.00            0.00
 coupons. Negative number implies cash returned to
                                                                  Ireland            0.00           0.00             0.00            0.00
 the market.
                                                                 Holland             0.00           0.00             0.00            0.00
                                                                 Austria             0.00           0.00             0.29            -0.29
Total issuance                                         5.50      Portugal            0.00           0.00             0.00            0.00
Total redemptions                                     21.73       Total              5.50          21.73          16.235            -32.46
Total coupons                                         16.24
Net cash flow                                         -32.46
Source: Barclays Research

18 April 2013                                                                                                                                   34
Barclays | Global Rates Weekly


                                             The ECB’s options
Giuseppe Maraffino                           Increasing 3y LTRO repayments has raised the risk of passive tightening for liquidity
+44 (0)20 3134 9938                          conditions. The ECB has several options to counteract any rise in short rates. The              current bull flattening of the curve is likely to continue.

                                             Since mid-March the pace of 3y LTROs reimbursement has increased. With last week’s
Laurent Fransolet
                                             €10.8bn repayment, the total is now about €264bn (about 53% of the total net new liquidity
+44 (0)20 7773 8385
                                             injected by the two 3y LTROs). We noted also an increase in the average repayment,
                                             suggesting that at present the payback is mainly from the biggest banks (which borrowed
                                             from the domestic central bank or via central banks in other eurozone countries) after the
                                             initial phase (in January-February) which was characterized by a larger participation of small
Increase in the 3y
                                             banks. This is an important aspect to take into account: as we highlighted “The 3y LTROs’
LTRO repayments
                                             “big payback”: a bottom-up approach”, 23 January 2013, the borrowing at the ECB’ 3y
                                             LTROs is very concentrated: the top 20 banks have borrowed on average €30bn each,
                                             giving a total of €600bn. Therefore, the decision by a few banks to repay or not can have a
                                             large impact on the total.

                                             Figure 1 shows our estimates for the breakdown of repayments by country on a monthly
                                             basis up to the end of March.

3y LTROs payback: estimated country breakdown (€bn)
                                                                                                                                  Borrowing at other ECB's
            Payback - end Payback - end Payback - end of                Est. 3y LTRO      Payback - % tot.        3y LTRO               operations
              of January   of February      March                        borrowing          borrowing            Remaining            (end of March)

                                                                                                                                        MRO           LTROs

DE                21                45                  46                    69                 67%                  23                  1              0
FR                52                57                  59                   165                 36%                 106                 10              7
IR                 0                 6                  15                    60                 25%                  45                  9              1
SP                44                58                  68                   305                 22%                 237                 21              8
GR                 0                 0                   0                    0                  0%                    0                 75              0
PT                 4                 5                   5                    50                 10%                  45                  3              1
BE                11                21                  24                    40                 59%                  17                  0              1
IT                 0                 0                   0                   255                 0%                  255                  6              7
HO                 0                10                  10                    20                 50%                  10                  0              0
Lux                3                 3                   3                    5                  50%                   3                  0              0
AT                 3                 8                  10                    17                 56%                   8                  0              0
Tot               138               213                 238                  981                                     748                 125            25
Note: Breakdown figures are based on the monthly changes of the borrowing in the period January-March 2013, Source: National Central Banks. Barclays Research

                                             We note the following factors.

                                             1)    For peripheral countries, there is still no evidence of repayment from Italian banks. While
                                                   they are currently in a good position both in terms of liquidity and eligible collateral, their
                                                   choice of not repaying yet is probably related to political uncertainty and more medium-
                                                   term plans for a gradual exit. Spanish banks continued to repay in February and March after

18 April 2013                                                                                                                                                   35
Barclays | Global Rates Weekly

                                        the first big repayment of €44bn on January 30 (mainly from major banks)8. Probably also
                                        medium and small Spanish banks have started to reimburse part of their 3y liquidity, given
                                        the improvement in access to the interbank funding market9. In Portugal, after the initial
                                        repayment by larger banks, Portuguese banks have not repaid any part of their 3y
                                        borrowing in February and March. In Ireland, banks have repaid a total of €15bn, this likely
                                        has come mainly from foreign banks that borrowed via the Irish Central bank.

                                 2)     Regarding the core countries, the pace of repayment by French banks slowed down in
                                        February and March, after the initial big repayment of €52bn on January 30. This is
                                        consistent with the plan announced by the major banks in January of a gradual exit from the
                                        two operations. With about €100bn of liquidity still at the 3y LTROs, there is scope for the
                                        continuation of the recent repayment trend for the French banks. March data for German
                                        banks are not available yet, but we expect a small repayment in March after the big ones in
                                        January and February (about 30% of their total 3y LTROs borrowing in each month, likely
                                        because smaller banks repaid). With just about €20bn left, further repayment by German
                                        banks should not represent a game-changer for liquidity conditions. The same holds true
                                        for banks in other core countries.

                                 Therefore, according to our analysis, banks’ repayment decisions in France, Italy and Spain
                                 (with remaining liquidity in the 3y LTROs at €106bn, €232bn and €255bn respectively) will
                                 be crucial for the evolution of the liquidity conditions.

                                 Figure 2 outlines the possible evolution of the liquidity surplus depending on the pace of
                                 repayments in the next few months. Our analysis relies on assumptions of stable
                                 autonomous factors (the main source of volatility for liquidity needs)10 and stable roll of the
                                 other ECB’s refinancing operations (ie, no change in the current outstanding balance).

                                 FIGURE 2
                                 Liquidity surplus: possible evolution (€bn) and EONIA dynamics under the most
                                 aggressive payback scenario (bp)
                                                               Liquidity Surplus
                                                               €4bn payback
                                                               €4bn payback till June
                                                               €8bn payback till year end
                                 1,200                         Eonia vs refi rate, bp, rhs                                                         0
                                                               EONIA vs refi, under the most aggressive scenario




                                     -200                                                                                                          -75
                                        Jun-09          Apr-10            Jan-11            Dec-11            Sep-12            Aug-13
                                 Source: EBF, ECB, Barclays Research

                                   See Focus II in the April 15 euro Money Markets Weekly
                                   Indeed, activity in the repo market by Spanish banks has increased significantly over the recent months. MEFF repo
                                 data show a rising trend in market volume, with March reporting the highest level of activity since the beginning of the
                                 series (January 2010).
                                    As we stressed several times in our publications, such a component of liquidity needs is hard to predict as it is the
                                 result of the sum of several factors which move in different directions. Government deposits are the main source of
                                 volatility but they would be unlikely to trigger a particular trend in autonomous factors as a whole. In our opinion, the
                                 item in the Eurosytem’s balance sheet which is worth noting is “Liabilities to non-euro area residents denominated in
                                 euro”. It posted a significant increase last summer, which has been the main driver of the rising trend posted by
                                 autonomous factors.

18 April 2013                                                                                                                                            36
Barclays | Global Rates Weekly

Evolution of the liquidity          The grey line refers to a scenario of total repayment by the end of Q2 of €300bn
surplus under different             (corresponding to an average payback of €4bn until the end of June and no repayment
repayment scenarios                 afterwards). This would bring the liquidity surplus to about €320bn from the current level of
                                    €360bn. Such a scenario would be consistent with President Draghi’s comments at the
                                    ECB’s February press conference that “according to [ECB] estimates, even after the second
                                    repayment of the LTRO, the excess liquidity should remain well above €200 billion”. In such
                                    a scenario we would expect EONIA to remain approximately unchanged at about 8bp, with
                                    some volatility probably related to the particular microstructure of the EONIA market
                                    characterized by low (reported) volume, which would make the fixing very sensitive to any
                                    particular flows reported by panel banks.

                                    The light blue line corresponds to a scenario in which there is a gradual weekly average
                                    repayment of €4bn till the end of the year. Here, the “psychological limit” of €200bn should
                                    be breached by the end of October.

                                    Finally, the red line outlines a scenario of aggressive average weekly paybacks of about
                                    €8bn until year end: the “passive” tightening of the liquidity conditions would push the
                                    surplus below €200bn at the end of July. In such a scenario, we would expect a significant
                                    tightening of the spread EONIA vs refi as shown in the Figure 2, similarly to in the second
                                    part of 2010 when the surplus approached zero.

Risks of aggressive repayment are   With a total of about €730bn of 3y liquidity currently still to be reimbursed, the likelihood of
not negligible                      the third scenario is not negligible, in our view. With the repo market for Spanish banks
                                    working again (both domestically and via bilateral transactions with international banks),
                                    the gradual and moderate repayment by Spanish banks is likely to continue. French banks
                                    should behave in the same manner. Some of the Italian banks are likely to start a gradual
                                    exit from the 3y LTROs in the next few months also to smooth the effect of the €85bn of the
                                    government-guaranteed banks bonds that from March 1 2015 will no longer be eligible at
                                    the ECB’s operations. BTP redemptions in the next few months could be taken as an
                                    opportunity to unwind carry trades and start repaying ECB liquidity. An improvement of the
                                    political situation with the formation of a new government in the very near term might also
                                    support the decision to repay part of the liquidity.

                                    ECB’s options
Passive tightening could            At the April meeting, the ECB remarked on its commitment to maintain an accommodative
affect the ECB’s                    monetary policy stance as long as needed, with the fixed rate procedure with full allotment,
accommodative stance                and to be vigilant that liquidity conditions in the euro money markets remain consistent
                                    with its stance.

                                    The “passive” tightening of the liquidity conditions, which will develop over time if more
                                    LTROs are reimbursed as we discussed above, could represent a key issue, with the
                                    potential to limit the effect of the accommodative stance on money market rates.

                                    Notwithstanding this, we believe that the ECB still has a few options to counteract the
                                    possible tightening through measures that would affect the liquidity needs (lower reserve
                                    requirements) and the supply of liquidity (new LTROs). In addition, the ECB could cut the
                                    refi rate. In our view, the ECB will be more open to reiterate actions that have clearly worked
                                    in the past: rate cuts or LTROs. The room for large changes in collateral eligibility is limited
                                    in our view, given that already, there is a lot of flexibility on that side, and the ECB is likely
                                    unwilling to change haircuts much (although we would note that there is a review of the
                                    collateral framework during the summer).

18 April 2013                                                                                                                      37
Barclays | Global Rates Weekly

                                  Lower reserve requirement: not that likely
Reduce liquidity needs, but       Lowering the reserve ratio to (or close to) zero would cause an increase in the liquidity
risks that this could be offset   surplus, with the additional implication of freeing up eligible collateral. Here, the main risk
by lower MRO borrowing            would be that such a measure may not be enough to counteract the passive tightening, also
                                  because the reduced liquidity needs might be partially offset by a lower MRO borrowing11.

                                  New LTROs: quite likely
New 3y LTROs with particular      On this point, the ECB could decide to conduct a new LTRO, in order to reinject liquidity.
features                          While it may be used to roll maturing 3y LTROs for a number of banks (thus not increasing
                                  the surplus, but keeping it stable, and with the same long duration), the ECB could design
                                  particular features (especially on the collateral side to take into account, for example, the
                                  differentiation introduced by the Basel3 LCR’s HQLA regulations)12 to make it attractive also
                                  for those banks that have reimbursed the 3y LTROs (or are more likely to do it), in order to
                                  increase net liquidity and push the surplus higher again.

                                  The most likely option is for the ECB to conduct 3-5y LTROs, unlimited in amount, on
                                  specific SME-type collateral, and possibly at fixed (rather than variable) rates. We would
                                  expect an announcement on LTROs in the summer.

                                  Refi rate cut: possible
Cut in the refi rate but not in   Finally, the ECB could decide to act on the policy rate side, by cutting the refi rate. While
the depo rate                     such a measure would have no meaningful effect on the real economy owing to the frictions
                                  in the monetary policy transmission, on the market side, it would reduce the level towards
                                  which short rates would gravitate in a context of lower liquidity. We do not expect a cut in
                                  the depo rate, even if it is theoretically an option.

                                  A policy rate cut scenario would imply tightening the monetary policy corridor and
                                  potentially hurting interbank liquidity. However, in our view, the impact of liquidity
                                  regulations is more important in that respect, as highlighted in the ECB’s article mentioned
                                  above. LCR regulations push banks to borrow (and redeposit) at the ECB, on essentially non
                                  LCR eligible collateral.

                                  Forward guidance: implicit or explicit?
Precise forward guidance          As President Draghi recently mentioned ”during crisis times, when short-term nominal rates
                                  are at zero or close to zero, they cannot be adjusted further down. The central bank may
                                  then engage in active communication reassuring markets that the future path of policy
                                  rates would not deviate from the current low level for a certain period or until certain
                                  observable conditions are verified” 13. The ECB has conducted its operations with the Fixed
                                  rate full allotment procedure since October 2008, rolling its commitment approximately on
                                  a quarterly or six-month basis. It will likely continue to do so, but could engage in more
                                  precise forward guidance, for example by conducting fixed rate LTROs – a move towards
                                  Fed-like guidance is much more unlikely.

                                  SME lending: ‘it’s complicated’
Measures to support SMEs          While the issue of access (and pricing) of credit to SMEs has been very much in focus, and
lending: no magic wand            there is a good understanding of what the problems are, there is no ‘magic wand’ as Coure

                                     Note that, as of the end of March, out of a total MRO borrowing of €125bn, Greek banks were the main borrowers
                                  with €75bn (they use the MRO as a flexible source of funding rather than for liquidity management). The remaining
                                  €50bn is spread over the other countries, whose banks use the weekly operations for their near-term liquidity
                                  management needs (like a reserve requirement)
                                     See the article “Liquidity Regulation and monetary policy implementation”) in the April monthly ECB bulletin
                                     Speech by Mario Draghi, President of the ECB, at the “Room for discussion” of the Study Association SEFA and the
                                  Faculty of Economics and Business, Amsterdam,15 April 2013

18 April 2013                                                                                                                                       38
Barclays | Global Rates Weekly

                                     stated in a recent speech14 and a solution that the ECB or other policymakers could put in
                                     place. We expect a number of small (but important) moves to improve the access to finance
                                     and lower its cost, but not a big announcement or scheme at this stage. In our view, a
                                     combination of EIB-type guarantees with attractive ECB liquidity (from a rate and collateral
                                     perspective) would be the quickest way to potentially improve the situation – assuming the
                                     economy does pick up.

                                     Market implications
Bull flattening trend                A bull flattening trend has characterized the price actions in the euro money markets over
                                     the last few weeks. Two aspects are worth highlighting - see below.

                                     1)   Since the ECB’s April meeting, when President Draghi left the door open for a refi rate
                                          cut, the front end of the money market rates have not changed significantly. The
                                          stability of the EONIA curve is probably related to the market having already priced out
                                          the possibility of a cut in the deposit facility. However, the lack of any significant
                                          reaction in white contracts on the Euribor future curve is probably mostly because after
                                          the sharp rally since the beginning of the year, the white contracts already incorporate
                                          some probability of a 25bp refi rate cut by June.

                                     2)   The increase in the 3y LTRO repayment has not affected the term premium on the
                                          curve. Unlike in January, when the expectations for aggressive repayment caused a
                                          significant steepening of the curve, at present, the curve has continued to bull flatten
                                          probably discounting some ECB’s actions to counteract the passive tightening.

Not easy to extract market           It is hard to extract precise market expectations on the ECB action from the current prices.
expectations on the ECB’s action     The EONIA forward for ECB’s June 2015 meeting is at about 25bp. This could be the result
on the policy rates                  of some term premium (or the likelihood of a depo rate hike) in a context of still abundant
                                     liquidity conditions after the maturity of the 3y LTROs, or a normalization of EONIA to a
                                      level of policy rates at 25bp (therefore two cuts from the current level) given a low
                                      liquidity surplus.

A continuation of the current bull   Having said that, in the very near term, we expect the recent trend of moderate bull
flattening trend is likely           flattening of the money markets curve to continue, accompanied by some re-tightening of
                                     the FRA/EONIA spread in the forward space. A possible rate cut in May could cause an
                                     adjustment of white contacts to a new level of the 3m Euribor (which we project at about
                                     15bp if the refi is cut 25bp, as a consequence of the tightening of the FRA/EONIA rather
                                     than of the reduction in the EONIA leg of the spread). This could lead to a moderate, but
                                     temporary, bull steepening of the curve. In this respect, next week the focus will be on the
                                     Flash Eurozone PMI data as a further decline (the third in a row) might reinforce
                                     expectations of a rate cut being delivered in May.

                                       Speech by Benoît Cœuré, Member of the Executive Board of the ECB, Eurofi High Level Seminar organized in
                                     association with the Irish Presidency of the Council of the EU, Contribution to plenary Session 11: Challenges and
                                     feasibility of diversifying the financing of EU corporates and SMEs, Dublin, 11 April 2013

18 April 2013                                                                                                                                             39
Barclays | Global Rates Weekly


                                             Decline and fall
Moyeen Islam                                 As realised volatility declines, increased interest in positive roll-and-carry structures is
+44 (0)20 7773 4675                          becoming a driver of investment, this favours the 10-15y sector of the gilt curve and                    consequentially, a re-steepening over Q2 13.

There was little news from the               The Minutes of the April MPC meeting offered very little fresh insight as to the future policy
April MPC Minutes and the                    direction. For the third month in a row, the vote on whether to undertake a further £25bn of
market remains listless                      asset purchases was split 6-3. Despite the much-discussed change in the BoE’s remit in the
                                             Budget, the Committee saw no reason yet to change its stance. Reflecting this sense of
                                             ennui, the market has seemed unable to start the quarter with any sense of conviction, with
                                             yields grinding lower. Figure 1 shows the evolution of the cumulative change in 10y yields
In previous years, 10y yields
                                             over the year to date and compares it with the previous three years. Typically, the market
have traded with a bullish bias
                                             has traded with a bullish bias in the early part of the year, with the bigger moves in the
in the second quarter of the
                                             second half. Clearly, there was greater scope to rally in 2010 and 2011, when the outright
                                             market yield was materially higher. So perhaps 2012 is more of a salutary guide to what the
                                             evolution of yield might be. Here, we can see that the trading range for yields was extremely
                                             limited. Thus with outright yields only c.25bp from the historical lows, the risk to the market
                                             is that yields grind lower during the year and look to revisit these lows.

With the market range bound,                 The corollary of a market trading in a limited range is a continuation of the secular decline in
realized volatility has been                 realised volatility. Realised volatility in 10y gilts is now as low as it has been in the last 5
secularly declining                          years – Figure 2. This move is further reflected in the interest rate swaption markets. Figure
                                             3 shows that here the decline in realised volatility has similarly led to a decrease in implied
                                             volatility in swaptions, where vol now sits at historical lows. The decline in realised volatility
                                             and low level of absolute rates combined with the steepness of the term structure means
                                             that we should see continued interest in positioning for positive –roll-and–carry in both cash
                                             and swaps. Figure 4 shows the current 3m –roll and carry for the gilt curve. The relative
                                             steepness of the curve means that the highest roll and carry is in 7-10y. However, equally,
                                             we note that the very short end of the curve, where gilt yields trade below cash rates, offers
                                             significant negative roll and carry, most likely indicative of the non-discretionary investment
                                             that is made here (ie, gilt and cash are not seen as substitutable asset classes).

FIGURE 1                                                                    FIGURE 2
Cumulative change in 10y nominal yields over 1 year (bp)                    Realised volatility has declined globally (abpv equiv)

     0                                                                       170

  -50                                                                        120

               change                                                         70
             since start
 -150        of the year
 -200                                                                           2008        2009        2010      2011       2012          2013
         1         45         89       133        177       221
                                                                                             10yr CM Gilt realised vol (abpv equivalent)
                            Business days since 1 Jan
                                                                                             10yr CM Bund realised vol (abpv equivalent)
                2013            2012            2011          2010
                                                                                             10yr CM UST realised vol (abpv equivalent)
Source: Barclays Research                                                   Source: Barclays Research

18 April 2013                                                                                                                                     40
Barclays | Global Rates Weekly

FIGURE 3                                                                   FIGURE 4
Selected benchmark implied vol (abpv equiv)                                Gilt 3m roll and carry curve (bp)

125                                                                             5


 50                                                                         -5

   Jan-08      Jan-09       Jan-10   Jan-11       Jan-12      Jan-13
                        GBP 3m 5y ATM Normalised Vol
                        GBP 3m 10y ATM Normalised Vol
                        GBP 3m 30 y ATM Normalised Vol                        2014 2019 2024 2029 2034 2039 2044 2049 2054 2059
Source: Barclays Research                                                  Source: Barclays Research

Roll and carry is likely to                 A prerequisite to the realisation of roll and carry is the decline in realised volatility; a more
become an increasingly                      instructive metric than roll and carry on its own is the carry: vol ratio. Most interesting are
important determinant of                    the areas of the curve with high carry:vol ratios (ie, those that have high roll and carry and
positioning                                 low realised volatility) as these suggest a greater probability that the roll and carry (which
                                            ultimately is a function of the forward curve) being realised. Again, this points towards a
                                            bias to positioning in the belly of the curve. Figures 5 and 6 show the current carry:vol ratios
                                            for the curve and the historic z-scores across the curve. These suggest that investors
                                            looking for long duration and to earn the roll and carry on the curve would be best served
                                            by positioning in 10-15y, where the z-scores on the ratios are higher compared with other
                                            bonds on the curve. This implies further steepening pressure on the gilt curve if the belly
                                            continues to richen. In addition, a weak Q1 13 GDP estimate next week may sway the
                                            market into believing further asset purchases are likely. This would also steepen Gilt 10/30s,
                                            as has historically been the case with previous rounds of QE.

FIGURE 5                                                                   FIGURE 6
Gilt carry:vol ratio curve                                                 Gilt carry:realised vol 1-year z-scores
0.70                                                                        2
                                             3m gilt carrry/realised vol

0.60                                                                        1

0.50                                                                        0

0.40                                                                       -1

0.30                                                                       -2

0.20                                                                       -3                                                    Z-score

0.10                                                                       -4
    2014        2022        2030     2038        2046       2054             2013 2018 2023 2028 2033 2038 2043 2048 2053 2058

Source: Barclays Research                                                  Source: Barclays Research

18 April 2013                                                                                                                              41
Barclays | Global Rates Weekly


                                 EFSF – to tap or not to tap
                                 This is an edited extract from The AAA Investor, 18 April 2013.

Fritz Engelhard                  Given the strong backing of EFSF debt by buy-and-hold investors, expected guarantee
+49 69 7161 1725                 changes for EFSF bond issuance could be the catalyst for spread tightening of     outstanding EFSF debt.

                                 The demand and size of last week’s EFSF 5y bond represented one of the largest bond
Michaela Seimen
                                 issuances of a supranational organisation. At EUR8bn in magnitude and given a strong
+44 (0)20 3134 0134
                                 performance in the secondary market, questions have arisen around the reasons for the
                                 particular market attention on this bond. We believe the reasons are manifold:
Jussi Harju, CFA                 • The EFSF has established itself since its first issuance in January 2011 as a frequent and
+49 69 7161 1781                    liquid issuer.
                                 • Confidence in the European sovereign support structures and in the eurozone seems to
                                    be holding up in spite of recent uncertainty regarding the Italian political situation and
                                    the support discussions on Cyprus.

                                 • Investors are attracted to European supranational issuers as they offer a diversified
                                    European risk with a strong guarantee participation of Germany, combined with
                                    interesting relative value options versus European sovereign debt.

                                 • Strong support from Asian investors for past issuance, as well as previous public
                                    statements by the Japanese government stressing its commitment to the eurozone, have
                                    furthered expectations that Japan, in light of the BOJ’s monetary easing policy, will focus
                                    strongly on investments in European bond markets.

                                 • The announcement by the EFSF that Cyprus applied to become a ‘stepping-out
                                    guarantor’ will change the guarantee structure of the issuer. Thus, from the point of
                                    change in the guarantee structure, the issuer will not be allowed to reopen bond
                                    issuance for existing bonds. Therefore, investors with short positions could be caught
                                    out by tighter liquidity in secondary market trading.

                                 In this week’s AAA Investor, we will assess more closely the potential effect of this latter
                                 point on outstanding bond performance.

                                 Supported by an increased and diversified investor base, we believe EFSF bonds could
                                 benefit from the guarantee change with further spread tightening versus agencies and
                                 European sovereigns. We see good value in the 3y to 5y segment, as this part of the curve is
                                 supported by a more diversified investor base, and particularly by institutional investors with
                                 a typically more long-term investment view.

                                 Upcoming guarantee change for the EFSF
                                 In line with its recent bond issuance, the EFSF announced on its webpage that on 8 April
                                 2013, given its outstanding request for sovereign support, the Republic of Cyprus submitted
                                 a request to become a so-called ‘stepping-out guarantor’ under the EFSF Framework
                                 Agreement. According to the EFSF, this request will be considered by the remaining
                                 guarantors during a meeting planned for 25 April 2013. However, the stepping-out will only
                                 become effective upon approval by the Euro Working Group.

18 April 2013                                                                                                                42
Barclays | Global Rates Weekly

                                 FIGURE 1
                                 EFSF current guarantee structure and expected change to contribution keys with Cyprus
                                 becoming a ‘stepping-out guarantor’
                                                    EFSF guarantee   Adjusted contribution keys
                                                     commitments     (to cover bond issuance, %)   Adjusted contribution keys
                                                      (as of 2011      with Greece, Ireland and    (to cover bond issuance, %)
                                                     agreements -     Portugal as ‘stepping-out      with Cyprus as additional
                                 Country               EUR mn)               guarantors’             ‘stepping-out guarantor’

                                 Austria                  21,639                2.99                         2.996
                                 Belgium                  27,032                3.72                         3.728
                                 Cyprus                   1,526                 0.21                           0
                                 Estonia                  1,995                 0.27                         0.271
                                 Finland                  13,974                1.92                         1.924
                                 France                  158,488               21.83                         21.876
                                 Germany                 211,046               29.07                         29.131
                                 Greece                   21,898                 0                             0
                                 Ireland                  12,378                 0                             0
                                 Italy                   139,268               19.18                         19.220
                                 Luxembourg               1,947                 0.27                         0.271
                                 Malta                     704                   0.1                         0.100
                                 Netherlands              44,446                6.12                         6.133
                                 Portugal                 19,507                 0                             0
                                 Slovakia                 7,728                 1.06                         1.062
                                 Slovenia                 3,664                 0.51                         0.511
                                 Spain                    92,544               12.75                         12.777
                                 Total                   779,784                100                           100
                                 Source: EFSF, Barclays Research

                                 We do not believe there should be any obstacles to the implementation of this request,
                                 given the established procedure with previous supported sovereigns and the fact that
                                 Cyprus held overall a very small position in the guarantee structures, namely 0.21% of
                                 existing bond issuance.

                                 However, we highlight that based on a changed guarantee structure, existing EFSF bonds
                                 will not be able to be re-opened. Since the establishment of the EFSF in 2010, this is the
                                 third change of the guarantee structure, with Ireland being the first and Portugal the second
                                 steeping-out guarantor, due to their respective support agreements. However, on top of
                                 changes to the guarantee structure, the downgrade of the EFSF in January 2012 resulted in
                                 an amendment to the deed of guarantee. As a consequence, previous bond issuance
                                 became excluded from the ability of being reopened. Figure 2 gives an overview of the
                                 outstanding bond volumes previously having been affected by these changes.

18 April 2013                                                                                                                    43
Barclays | Global Rates Weekly

Review of changes to the EFSF guarantee structure and affected outstanding debt amounts
                                                                                                             Total affected
                                                                                                  Bond tap- amount (EUR)
                                                                                                  able as of     as per
                              Announcement                                          Amount         17 April   outstanding
ID_ISIN              Ticker       date          Maturity    Coupon Currency       outstanding       2013?        bonds          Event date Event

EU000A1G0AA6          EFSF     25/01/2011     18/07/2016      2.75      EUR      5,000,000,000       No       5,000,000,000 17/05/2011 Portugal requested
                                                                                                                                       support & became
EU000A1G0AB4          EFSF     15/06/2011     05/07/2021 3.375          EUR      5,000,000,000       No
EU000A1G0AC2          EFSF     22/06/2011     05/12/2016      2.75      EUR      3,000,000,000       No
EU000A1G0AD0          EFSF     07/11/2011     04/02/2022       3.5      EUR      3,000,000,000       No
EU000A1G0AE8          EFSF     03/01/2012     04/02/2015 1.625          EUR      3,000,000,000       No      14,000,000,000 16/01/2012 Rating downgrade
                                                                                                                                       by S&P with
                                                                                                                                       amendment of the
                                                                                                                                       guaranteed deed
EU000A1G0AJ7          EFSF     19/03/2012     30/03/2032 3.875          EUR      2,500,000,000       Yes
EU000A1G0AK5          EFSF     20/03/2012     15/05/2017        2       EUR      4,960,000,000       Yes
EU000A1G0AR0          EFSF     23/04/2012     02/05/2019 2.625          EUR      5,500,000,000       Yes
EU000A1G0AS8          EFSF     23/05/2012     01/06/2015 1.125          EUR      4,483,600,000       Yes
EU000A1G0AT6          EFSF     12/06/2012     03/04/2037 3.375          EUR      3,500,000,000       Yes
EU000A1G0AU4          EFSF     10/07/2012     15/09/2017 1.625          EUR      6,000,000,000       Yes
EU000A1G0A16          EFSF     28/08/2012     05/09/2022      2.25      EUR      3,974,350,000       Yes
EU000A1G0A24          EFSF     15/10/2012     30/11/2017 1.125          EUR      5,900,000,000       Yes
EU000A1G0A81          EFSF     15/01/2013     22/01/2020       1.5      EUR      6,000,000,000       Yes
EU000A1G0A99          EFSF     29/01/2013     05/02/2018      1.25      EUR      5,000,000,000       Yes
EU000A1G0BA4          EFSF     25/02/2013     07/03/2016       0.5      EUR      4,000,000,000       Yes
EU000A1G0BB2          EFSF     09/04/2013     16/04/2018 0.875          EUR      8,000,000,000       Yes     59,817,950,000 25/04/2013* Cyprus will become
                                                                                                                                        a stepping-out
Total fixed coupon EFSF primary market issuance of EFSF                 EUR      78,817,950,000
Note: *Provisional affected amount to become non-tap-able at time of writing if Cyprus becomes a ‘stepping-out guarantor’. Source: Bloomberg, Barclays Research

                                              Given that previous changes to the guarantee structure of the EFSF happened in the early
                                              stages, the effect was more limited, affecting outstanding bond sizes of EUR5bn and
                                              EUR14bn as of May 2011 and January 2012, respectively. Therefore, existing investors could
                                              have expected, at those points in time, a high volume of future primary issuance to fill any
                                              short positions or investment interests in particular maturity brackets. However, since the
                                              last change in January 2012, the EFSF has issued about EUR59.8bn in additional primary
                                              market fixed coupon bonds, which are currently tap-able in the market. Once the new
                                              guarantee structure, with Cyprus being a ‘stepping-out guarantor’, is implemented, the
                                              liquidity in those bond issues could be affected.

18 April 2013                                                                                                                                                     44
Barclays | Global Rates Weekly

                                 FIGURE 3
                                 Review of EFSF tapping activities since establishment of the issuer

                                 EUR bn
























                                                                        New Issue       Tap
                                 Source: Bloomberg, Barclays Research

                                 Remaining funding needs of EFSF until 2014
                                 As per the issuance last week, the EFSF has funded about EUR25bn of its yearly EUR58bn
                                 issuance programme so far this year. Should Cyprus become a ‘stepping-out guarantor’
                                 before the next issuance, about EUR23bn of issuance this year and EUR34bn of issuance in
                                 2014 would fall under the new guarantee structure, providing a similar amount to the
                                 recently tap-able pool of bonds. With total expected supply volume of about EUR57bn for
                                 this year and next, there seems to be sufficient room for investors to fill their investment
                                 needs in various maturity brackets. However, this depends on potential further changes to
                                 the guarantee structure if any other sovereigns apply to become ‘stepping-out guarantors’.

                                 Also, investors need to keep in mind that due to the establishment of the permanent ESM
                                 structure, the EFSF will cease to enter new programmes from July 2013. However, the support
                                 facility will complete existing programmes for Ireland, Portugal and Greece and manage the
                                 rollover of existing debt. Following the conclusion of existing programmes, the EFSF will exist
                                 in an administrative capacity until all outstanding debt has been repaid (including refinancing
                                 operations). However, given that EFSF’s successor, the ESM, is now in place, we could very
                                 well envisage that EFSF debt could be transferred to ESM to avoid a more illiquid phase-out
                                 period for any remaining smaller volumes of bond issuance. All these factors will result in
                                 overall amounts and respective tap-able amounts of the EFSF staying rather limited. Investors
                                 therefore might need to focus more on supply in primary market issuance.

                                 As a side note, on 12 April 2013, the Eurogroup and Ecofin ministers discussed the
                                 adjustment programmes for Ireland and Portugal and agreed in principle to support the
                                 sovereigns by increasing the weighted average maturity limit of EFSM and EFSF loans by
                                 seven years provided that ‘the troika’ confirms a continued successful programme
                                 implementation in the upcoming reviews. The extension of the programmes would smooth
                                 the debt redemption profiles of both countries and therefore lower the refinancing needs in
                                 the post-programme periods. From an investor perspective, we regard these changes as
                                 supportive for the spread performance of EFSF bonds because the issuer shall roll bond
                                 facilities, and therefore provide some extended liquidity to the EFSF curve.

                                 Liquidity in bond issuance – a factor of several denominators
                                 There are different reasons issuers choose to re-open bond issuance, although the overall
                                 focus of issuers might be on supporting the liquidity of the bonds:

18 April 2013                                                                                                                45
Barclays | Global Rates Weekly

                                 • Tap issues are often based on reverse enquiries of investors and therefore typically
                                    suppress new issuance premium. In addition, taps allow an issuer to avoid certain
                                    transaction or legal costs, resulting in a cheaper funding option for issuers.

                                 • Issuers are committed to supporting liquidity in their bonds; re-opened bond issuance
                                    often re-attracts investors and supports a follow-on performance of respective bond
                                    spreads in secondary markets. A general assumption by market participants is that
                                    bonds with higher liquidity benefit from tighter spreads and, thus, reduce liquidity
                                    premiums for future primary market issuance.

                                 • With an increased size of single bond issuance, the liquidity in the single bonds is
                                    understood to increase, and recognition as a benchmark issuance compared with
                                    sovereign bond markets improves.

                                 Growth of outstanding EFSF bond volumes in the market since the first issuance in January
                                 2011 and diversification of the investor base, combined with a more benign market
                                 environment and more confidence of investors in the future of the eurozone, have lead to the
                                 EFSF becoming one of the more liquid bond choices for investors in the SSA environment.

                                 However, the EFSF faces a crux in this respect. As SSA debt in general often does, EFSF debt
                                 also benefits from a relatively supportive investor base, such as central banks and other
                                 committed longer-term investors. Although this helps reduce volatility in such bonds,
                                 liquidity, particularly in smaller bond issuance, is typically undermined. It is therefore not
                                 surprising that larger issuers in the SSA segment in particular try to focus on increasing the
                                 size of individual issuance to provide better liquidity for their bonds.

                                 Large liquid bonds versus ‘rare’ bond issuance
                                 That said, the argument for larger issuance and the ability to create liquidity in particular
                                 parts of the curve via reopened bond issuance is a very feasible way to achieve tighter
                                 spreads for bond issuance, in our opinion, because certain liquidity premiums do not apply
                                 for these issuances in primary markets. However, the SSA segment provides specific
                                 examples of smaller issuers that benefit from the ‘rare issuer’ status and are partly traded at
                                 tighter levels than is typical for larger issuers. Prominent examples in this respect are the EU
                                 and RENTEN, as discussed in The AAA Investor, 31 August 2012. We now assume in this
                                 respect that EFSF bonds could change from being very liquid because of the outstanding
                                 volume to being a ‘rarer’ issuer, as investors looking for particular bonds or maturity
                                 brackets are forced into new primary market issuance. Ultimately, this could become a
                                 positive development for existing investors and the issuers alike because EFSF bond
                                 issuance could experience tightening in parts of the EFSF curve.

                                 The most recent EFSF issuance already gave some indication of investors’ strong focus on
                                 the issuer. According to information by the EFSF, the bond received orders from close to
                                 200 investors worldwide with a total volume of about EUR14bn, enabling the issuer to
                                 supply a bond with a size of EUR8bn. However, part of the success in this recent bond
                                 issuance is also applicable to the price concession the issuer applied on marketing the bond.
                                 Initial price thoughts had been about 12bp, compared with a fair secondary market value at
                                 about 6bp; however, due to the strong demand, final pricing was set at 9bp, with a strong
                                 follow-up performance of the bond in the secondary market. Furthermore, the pricing was
                                 relatively attractive compared with European sovereigns, such as France, to which the new
                                 bond offered a pick-up of about 19bp. Investors are particularly attracted by this aspect
                                 because European supranational issuers offer a diversified European risk with a strong
                                 guarantee participation of Germany.

18 April 2013                                                                                                                 46
Barclays | Global Rates Weekly

FIGURE 4                                                                  FIGURE 5
EFSF credit term structure vs. selected SSAs                              EFSF credit term structure vs. selected European sovereigns
   PP swap                                                                   PP swap
  spread (bp)                                                              spread (bp)
  40                                                                         40
  30                                                                         30
  10                                                                                                                                          Years
    0                                                                       -10
 -20                                                                        -40
 -30                                                                        -50
 -40                                                                        -60
        0            3             6            9           12       15          0          2          4            6          8        10        12
                            EFSF       EU    KFW      EIB                                 EFSF      Germany         France      Netherlands
Note: Click chart to view dynamic data on Barclays Live.                  Note: Click chart to view dynamic data on Barclays Live.
Source: Source: Barclays Live - Chart                                     Source: Source: Barclays Live - Chart

18 April 2013                                                                                                                                         47
Barclays | Global Rates Weekly


                                                                                             Unchanged policy rates, but significantly
                                                                                             softer forward looking policy guidance
Mikael Nilsson Rosell                                                                       We continue to see value receiving SEK10y swaps versus EUR, despite recent
+44 (0)20 7773 6057                                                                         outperformance. The inflation outlook remains benign and we fear that leading                                                                 indicators will soften going into the summer.

                                                                                             As expected, the Riksbank (RB) left policy rates unchanged at 1.0% at its recent meeting,
                                                                                             but the forward looking policy guidance was significantly softer than expected. Indeed, the
                                                                                             RB's own policy rate path signals a 25-30% probability of a cut at the 3 July policy meeting,
                                                                                             well in line with our expectations going into the meeting (see Unchanged policy rates, but
                                                                                             inflation suggests room for cuts, 11 April). The RB also revised its path beyond the July
                                                                                             meeting significantly lower, with policy rates now expected to be 0.94% by year-end 2013
                                                                                             (previously 1.14%) and 1.43% by year-end 2014 (previously 1.89%). The chief driver of the
                                                                                             softer forward looking policy guidance was a downward revision of the RB inflation forecast,
                                                                                             see Figures 1-2.

Trade ideas                                                                                 Rates rallied across the curve following the softer than expected policy announcement, with
                                                                                            10y, 5y and 2y cross-market spreads versus EUR tightening between 8bp and 10bp. With
                                                                                            the RB having opened the door for the possibility of further rate cuts, we continue to see
                                                                                            value in holding longs in the very front end. However, rather than holding cross-market
                                                                                            tighteners versus EUR in Sep ’13 3m FRA, we see better value in outright longs from here.
                                                                                            We also continue to see value in receiving 10y swaps versus EUR, despite recent
                                                                                            outperformance. Besides Sweden’s unchallenged AAA status, the spread should continue to
                                                                                            benefit from near-term rate cut prospects and the benign inflation outlook. Indeed, we
                                                                                            expect CPI to remain well below euro area inflation well into 2014.

                                                                                             Going into the meeting we recommended entering tactical SGB2s5s steepeners. However,
                                                                                             the benign inflation outlook and the RB’s soft forward looking policy guidance will likely act
                                                                                             to nourish expectations that policy rates will remain ‘low for long’ over the coming weeks.
                                                                                             Hence we will rather look for opportunities to enter 5y SGB/DBR tighteners (currently c.
                                                                                             85bp) on the back of any post-RB SGB underperformance.

FIGURE 1                                                                                                                                                        FIGURE 2
Riksbank’s policy rate forecast                                                                                                                                 Riksbank’s CPIF forecast

%                                                                                                                                                               %
   5                                                                                                                                                             3.00
   4                                                                                                                                                             2.50
   3                                                                                                                                                             2.00
   2                                                                                                                                                             1.50
   1                                                                                                                                                             1.00
   0                                                                                                                                                             0.50















                                                                                                                                                                    Feb-09     May-10     Aug-11      Nov-12   Feb-14     May-15
                                                         Policy rate                                      April                          February                                  CPIF          April         February
Source: Riksbank, Barclays Research                                                                                                                             Source: Riksbank, Barclays Research

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Pronounced downward                 In the policy announcement press-release, the RB concludes that growth prospects are
revisions of the inflation          gradually brightening, but its new assessment nevertheless assumes that it will take longer
forecast, despite unchanged         for inflation to reach its target (2.0%). Indeed, while the RB left its 2013 CPIF forecast
growth prospects                    unchanged (1.0%) it lowered its 2014 CPIF forecast by 0.4 percentage points to 1.4% and
                                    kept its 2015 forecast unchanged (2.0%). This was a slightly more front-loaded revision
                                    than our expectation that the RB would lower its CPIF forecast by 0.2 percentage points in
                                    both 2013 and 2014.

We continue to see downside         While we continue to see downside risks to the RB inflation forecast (mainly 2015) they
risks, but they are less evident    seem less evident than the downside risks to the RB forecast going into the April meeting
than before, although data          after the revisions, even taking into account the recent benign 3-year wage deal and the still
looks likely to soften near term    relatively strong SEK. Similarly we don’t see any particular risks to the RB near-term growth
                                    forecast, although we expect forward looking sentiment data to temporarily soften slightly
                                    going into the summer.

RB majority remains concerned       In the press-release the RB also concludes that a cut today “would mean that inflation
with medium-term systemic           attained the target somewhat quicker, but at the same time it would further increase the
risks, but now seems willing to     risk of imbalances building up”. In our view, this again confirms that the majority of the
tolerate moderate gains in          Executive Board (Ingves, Wickman-Parak, Jansson and Jochnick) also remains concerned
house prices                        that a ‘too low policy rate for too long’ might nourish medium-term systemic risks.
                                    However, interestingly, in its Monetary Policy Update (MPU) the RB now assumes that
                                    house prices and debt levels will increase at a faster pace, with household debt as a
                                    percentage of disposable income now expected to increase from 174% to just over 177%
                                    by the beginning of 2016. In our view, this suggests that the majority of the Executive
                                    Board, despite its medium-term systemic concerns, is now more willing to accept a
                                    moderate upturn in house prices and debt levels given the benign inflation outlook. That
                                    said, we look forward to gaining significantly more colour on the how the different Board
                                    members view this issue in the forthcoming minutes (published 29 April).

We hold on to our base case of      All in all, we hold on to our base case scenario that policy rates will be left unchanged at the
unchanged policy rates for          July meeting. However, we believe the probability of a 25bp cut to 0.75% is a finely balanced
now, but believe that the           call. We do fear that high frequency survey data will weaken (align with recent moves
probability of a 25bp cut is just   among Sweden’s main training partners) going into the summer, but we still feel
shy of 50%                          unconvinced about the ultimate magnitude of the slowdown. We also continue to see
                                    downside risks to the RB inflation forecast, but we do not believe that the RB will follow up
                                    with another substantial downward revision in July. The key driver for our base case call will
                                    therefore likely be whether the forthcoming minutes validate our impression that the
                                    majority of the Board is now willing to tolerate moderate near-term gains in house prices
                                    and debt levels, despite concerns with medium-term systemic risks. In this context it will
                                    obviously also be highly interesting to see who will replace Deputy Governor Wickman-
                                    Parak (retires in May) and whether LEO Svensson’s mandate will be extended. In addition,
                                    we will obviously also continue to monitor SEK developments, especially on the back of an
                                    ECB rate cut.

18 April 2013                                                                                                                    49
Barclays | Global Rates Weekly


                                               Viva l’Italia… again!
Khrishnamoorthy Sooben                         The recent BTP Italia issuance does not seem to have prompted significant switches out
+44 (0)20 7773 7514                            of BTP€is, unlike the placement in October. We therefore expect 3-5y BTP€is to correct
khrishnamoorthy.sooben@                        some of their recent cheapening. That sector also appears attractive in breakeven.
                                               The placement of the latest BTP Italia (maturing April 2017) once again drew very
                                               impressive demand; at slightly above €17bn, the volume is only about €1bn less than the
                                               size of the October deal. The press release containing the details of the placement mentions
                                               a large participation by retail investors, with a significant role of retail portfolio managers
                                               and private banking. The high participation of retail investors is evidenced by the fact that
                                               more than 80% of the number of contracts amounted to €50k or less. However, the
                                               presence of institutional investors is also highlighted, with foreign ones accounting for
                                               about 12% of the total amount issued. While it is difficult to properly gauge the
                                               participation of institutional investors from the placement statistics, it again appears likely
                                               that the BTP Italia has attracted interest well beyond the primary investor base – the
                                               domestic retail one – that it supposedly targets.

                                               One similarity between the BTP Italia April 2017 and the previous issue is the apparent high
                                               participation of institutional investors. As well, both bonds were issued when a BTP was
                                               being redeemed, which suggests that both benefited from reinvestment flows, given that
                                               BTP holdings by Italian retail investors are non-negligible. One striking difference, however,
                                               is that, unlike at the October supply, the latest issue does not appear to have prompted
                                               significant switches out of BTP€is or BTPs (see Viva l’Italia, 18 October 2012). In October,
                                               there was a general consensus that the issue was being offered at a very cheap level (based
                                               on the minimum coupon) relative to the BTP€i16 or 4y sector BTPs. The performance of the
                                               BTP€i16 during the placement period in October indicated strongly that there were
                                               switches out of it. While it does not appear to have been the case for the recent BTP Italia,
                                               the BTP€i market seemed to have braced itself for that possibility before the opening of the
                                               issuance window, as evidenced by the cheapening in 3-5y BTP€is before the placement
                                               period. With no indication of significant switches ex-post, we expect a correction of this
                                               “pre-emptive” cheapening.

FIGURE 1                                                                         FIGURE 2
BTP€i issuance dwarfed by the BTP Italia                                         Some corrective cheapening in 5y sector ASW in 2013
 30                  Gross BTP€i issuance             BTP Italia issuance         800                BTP€i19 z-spread asw                     250
                                                                                                     BTP€i19 relative z-spread asw
                                                                                  500                                                         150
 15                                                                               400

                                                                                  300                                                         100
   5                                                                                                                                          50

   0                                                                                 0                                                        0
         03    04     05     06    07     08     09     10    11    12      13       Apr-10        Dec-10      Aug-11       Apr-12   Dec-12
Note:* 2013 data are year-to-date. Source: Italian Treasury, Barclays Research   Source: Barclays Research

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                                          The bulk of interest for BTP€is over the past year or so has been from domestic investors
                                          and mainly in asset swap. For instance, demand from Italian bank treasuries for their
                                          liquidity portfolios accounts for a notable share of activity. Interest is driven mainly by the
                                          extent to which BTP€is trade at a discount in asset swap versus BTPs. Such demand tends
                                          to materialise mainly in sub-10y issues, given the nature of the portfolios involved. With 3-
                                          5y BTP€is having cheapened in absolute and relative asset swap to some extent this year,
                                          we expect asset swap interest in that sector to continue.

                                          From a breakeven valuation perspective, the 3-5y BTP€is also appear very cheap. Based on
                                          our economists’ euro HICPx forecasts, their forward breakevens to mid-September (when
                                          there is no seasonality bias in valuations) are less than 1%. This may not appear strikingly
                                          cheap compared with the distressed levels reached in 2011 or early 2012, but as we explain
                                          in This time it should different, 28 February 2013, those distressed levels were caused by
                                          specific factors that are no longer at play. In the 10y area, BTP€is offer notably more value in
                                          real yield or asset swap (absolute and relative to nominals) and are therefore attractive for
                                          carry or yield-enhancement positions. However, as we highlighted above, long maturities do
                                          not suit the portfolio maturity profiles of the main asset swap buyers as much as shorter-
                                          dated issues.

                                          One obvious question that arises following two consecutive sizeable BTP Italia placements is
                                          whether the Tesoro will be driven to reduce BTP€i issuance. We note also that Reuters
                                          reported comments (in Italian) from the head of the Italian debt management office, Maria
                                          Cannata, that Italy is investigating potential issuance of an Italian linker indexed to Italian
                                          inflation and aimed at institutional investors but copying the format of BTP€is rather than
                                          the BTP Italia. When the first BTP Italia was launched last year, Tesoro officials indicated
                                          that the new programme provides scope to reduce BOT issuance, rather than BTP€is. In the
                                          2013 Guidelines for Public Debt Management, the commitment to the BTP€i market was
                                          reiterated, and this commitment to supply was evident even after the BTP Italia drew more
                                          than €18bn in demand last October. However, the Tesoro also stated that BTP€i issuance
                                          choices will have to consider overall exposure to inflation risk, with the BTP Italia taken into
                                          account. In our view, this does not necessarily indicate that BTP€i issuance will be cut.
                                          However, we believe the Tesoro may elect to reduce BTP€i issuance in the 4y sector if it
                                          feels this sector is being crowded by BTP Italia issuance, especially if the latter continues to
                                          capture significant institutional demand.

FIGURE 3                                                                FIGURE 4
BTP€i relative value most attractive in 10y sector                      3-5y BTP€is cheap in breakeven
 80                                BTP€i relative z-spread asw curve      1.8

 70                                                                       1.6

                                                                          0.8                         BTP€i spot breakeven curve

 30                                                                                                   Forwards to mid-Sep 13 implied by
                                                                                                      Barclays' Euro HICPx forecasts

 20                                                                       0.4
   2014         2019        2024      2029       2034       2039             2014       2019        2024     2029      2034        2039
Source: Barclays Research                                               Source: Barclays Research

18 April 2013                                                                                                                             51
Barclays | Global Rates Weekly


                                            Supply me to the moon
Henry Skeoch                                UK linker supply is unusually concentrated in the next three weeks. The 15y sector is
+44 (0)20 7773 7917                         cheap on the curve, but the IL27 offers more value than the auctioned IL29. We expect                   the IL62 mini-tender to draw good demand and favour IL22/62 breakeven steepeners.

                                            The UK linker market faces heavy supply over the next three weeks, which we estimate will
                                            supply roughly £9 mn/bp of risk. First up is a £1.3bn notional auction of the IL29 on Wednesday,
                                            April 24. In cash terms, this is worth £1.5bn and so is slightly lower than the £1.6bn average
                                            linker auction size implied by the FY13/14 gilt remit. We think the slightly lower-than-average
                                            auction size reflects the concentration of supply in the coming weeks, and also the weakness in
                                            linker breakevens since the start of April. The 5y sector in particular came under selling pressure
                                            in recent days, but once adjusting for carry it has outperformed the 10y sector this month. The
                                            IL29 has been one of the better performing sub-20y issues recently, showing little sign of specific
                                            pre-auction concession. The IL27 offers markedly better value on the real yield curve and we
                                            continue to recommend buying the issue versus the IL22+IL32 real yield barbell. We see risks of
                                            the IL29 reversing its recent outperformance into its auction, which we estimate will shorten all-
                                            linker and +5y indices by 0.01y and 0.02y respectively.

Long end of curve offers most               After Wednesday, focus shifts to the 30 April IL62 mini-tender then to the scheduled IL44
value on a relative basis                   auction on 8 May. The mini-tender was announced on 12 April and was likely no great surprise,
                                            given the lack of other ultra-long linker supply this quarter. The size of the tender will be
                                            announced on Friday, 19 April – we expect a £400-500mn size, consistent with the usual sizing
                                            of mini-tenders as half that of a regular auction. In risk terms this would be worth a modest £2.5-
                                            3.0mn/bp, and should be easily absorbed. We see value in both real yield flatteners and
                                            breakeven steepeners, given the shapes of both respective curves (Figure 2), with recent flows in
                                            shorter-dated linkers skewed towards selling recently. We think the underperformance of the
                                            10y sector represents mainly profit-taking on long positions. Also, the lack of major MPC remit
                                            changes may have led some to reconsider the risks of inflation persistence. In this vein, the latest
                                            MPC minutes noted that the majority of the committee are wary of rising medium-term inflation
                                            expectations. We think that 10y breakevens still offer structural value versus the MPC 2% CPI
                                            target as inflation is likely to remain uncomfortably sticky; but for now, we see much better value
                                            in the long end of the curve where the demand base is more structural, albeit recently dormant.

FIGURE 1                                                                    FIGURE 2
IL27 cheap on curve, IL29 less obvious value                                IL62 vs IL22 BEI steepeners, RY flatteners attractive
25                                                                           160                                                                   90
                    IL27 vs IL22+32 real yield barbell
                    IL29 vs new IL24+34 real yield barbell                   140                                                                   80
15                                                                           100
  5                                                                                                                                                20
                                                                                                 IL62 vs IL22 real yield slope
                                                                               20                                                                  10
                                                                                                 IL62 vs IL22 breakeven slope (rhs)
 0                                                                              0                                                                  0
 Apr-10         Dec-10        Aug-11        Apr-12       Dec-12                 Jan-12      Apr-12      Jul-12     Oct-12        Jan-13   Apr-13
Source: Barclays Research                                                   Source: Barclays Research

18 April 2013                                                                                                                                      52
Barclays | Global Rates Weekly


                                               Conditionally hedged
Piyush Goyal                                   Buy low-strike EUR 1y SL 30y CMS floor spread vs low-strike 1y*10y receiver spread (bull
+1 212 412 6793                                flattener) to hedge a eurozone risk flare. It takes advantage of relative cheapness of vol on                      30y tails, steepness of rate curve and high convexity adjustment for the current rate levels.

                                               Buy EUR 1y*30y versus sell EUR 1y*10y
Hitendra Rohra
+44 (0)20 7773 4817                            Implied vol on mid-expiry 30y tails has come off over the past few months and is now at its                    lowest levels since late 2008 (Figure 1). Lower concerns about a eurozone risk flare, weaker
                                               growth expectations and a more benign inflation outlook have all contributed to this sell-off in
                                               vol. While these factors still hold, the current low levels offer a great way to position for a
                                               hedge against medium-term risks to the eurozone through long vol trades on 30y tails.

                                               However, as Figure 2 shows, implied vol on 30y tails is at a premium to realised vol and
                                               could still fall somewhat in the near term if rates remain range-bound. Therefore, instead of
                                               taking outright positions, we prefer buying vol on 30y tails relative to 10y tails. Specifically,
                                               we like initiating EUR 10y-30y conditional bull flatteners (ie, buying 1y*30y receivers versus
                                               1y*10y receivers) as a hedge against a medium-term risk flare. The trade is attractive from
                                               both rate and vol perspectives.

EUR 1y*30y is currently cheap                  From a vol perspective, this is attractive for two reasons: 1) implied-to-realised vol is higher
compared with EUR 1y*10y on                    for 10y tails than for 30y tails (Figure 2); 2) even on an absolute basis, 1y*30y is trading
an implied-to-realised basis                   almost at parity to 1y*10y vol. In our view, EUR 1y*30y should trade at a premium to
                                               compensate for its tendency to spike more sharply during times of stress (Figure 1). While a
                                               part of the justification for higher vol on the 30y compared with the 10y is that the 30y rate
                                               has more room to decline in a risk flare, a lot of it is also due to the threat of CVA hedging.
                                               The latter, currently on the back-burner, can become an issue if there is a significant risk
                                               flare in the eurozone (see CVA Hedging: Here to stay?, 20 July 2012).

At current low rates, the curve                From a rates perspective, the curve is close to its historically steep levels (Figure 3), implying
would bull flatten in a sharp                  good entry levels for the bull flattener. As the figure shows, earlier when 10y rates were
rally in rates                                 high, the level of 10y rates and the 10y-30y curve were inversely related: a rate rally would
                                               accompany a curve steepening and vice versa. However, for the past year-and-a-half, 10y
                                               rates have been low enough that any violent move has been led by the long end (ie, 30y
                                               rates), implying flattening in rate rallies. This is exactly what happened during the risk flare

FIGURE 1                                                                      FIGURE 2
EUR 1y*30y is at its lowest since late 2008                                   EUR 1y*10y is extremely rich compared with realised vol
 170                                                                   1.3       Imp Vol           2 Yr            5 Yr           10 Yr   30 Yr
                                                                                    3m              39              50             56      62
                                                                       1.2          6m              40              52             59      64
 130                                                                                1y              44              58             65      67
                                                                               20d rlzd vol        2 Yr            5 Yr           10 Yr   30 Yr
 110                                                                   1.1
                                                                                    3m              39              39             39      50
   90                                                                               6m              40              39             40      51
                                                                       1            1y              40              43             43      53
   70                                                                            Imp/rlzd          2 Yr            5 Yr           10 Yr   30 Yr

   50                                                                 0.9           3m             0.98            1.30           1.41    1.24
    Apr-08       Apr-09       Apr-10       Apr-11      Apr-12    Apr-13             6m             1.02            1.33           1.47    1.26
              EUR 1y*30y (bp/y)              EUR 1y*30y/1y*10y (RHS)                1y             1.10            1.35           1.52    1.26
Note: As of 17 April 2013. Source: Barclays Research                          Note: As 17 April 2013. Source: Barclays Research

18 April 2013                                                                                                                                     53
Barclays | Global Rates Weekly

                                               of mid-2012, when the 10-30y curve flattened sharply as the rates rally was led by the long-
                                               end. Consequently, we expect the bull flattener to benefit in a significant move lower in
                                               rates and expire without a pay-off if rates move higher.

Initiate a low-strike EUR 1y SL                Admittedly, the curve is already flatter in forward space, worsening the carry characteristics
30y CMS floor spread vs EUR                    of the trade. For example, the spot 10-30y is c.69bp, while the 6m forward and 1y forward
1y*10y receiver spread                         are 60bp and 52bp, respectively. To improve the carry characteristics, we propose striking
                                               the two option legs at lower rate levels and replacing the EUR 1y*30y receiver with a EUR 1y
                                               SL 30y CMS floor. Specifically, as:

                                               • Buy €935mn 1y SL 30y CMS floor spread struck at 2.10 versus 1.60%
                                               • Sell €100mn 1y*10y receiver spread struck 1.55% (ATM – 27bp) versus 1.05%
                                               As of 18 April 2013, the trade at initiation requires no premium outlay (mid-levels). Net, the
                                               trade can be struck at 55bp, which is actually steeper than the forward curve (by 3bp).

The trade is carry-neutral                     In this fashion, the trade is carry-neutral. Therefore, if the level of rate and curve remain
                                               unchanged in the next one year, the P&L on the trade is negligible. In contrast, an ATM version
                                               of the trade would incur a negative carry of -20cts in three months and -95cts in one year.

                                               At the same time, the lower strikes do not hamper the potential gains on the trade. This is
                                               because in a risk flare, when the curve actually bull flattens, the 10y and 30y rates will likely
                                               rally much below the current spot levels anyway.

Using CMS floors instead of                    It is also important to note how the convexity adjustment in CMS floors improves the trade.
receivers on 30y tails improves                Essentially, the EUR 1yf 30y CMS rate is higher than the vanilla swap rate by about 6bp due
the strike on the trade                        to convexity adjustment. This means that for a given premium outlay, higher-strike 1y SL
                                               30y CMS floors can be purchased compared with 1y*30y vanilla receiver swaptions. As a
                                               result, a premium-neutral 1y expiry 10y-30y bull flattener structure can be struck at a
                                               steeper curve level using CMS floors instead of receivers on 30y tails. In the above structure,
                                               a trade via vanilla swaptions would be struck at 50bp, which is 5bp worse than the current
                                               strike. Therefore, the spot 10-30y curve needs to flatten by a lesser extent to start making
                                               profits than would have been required if the trade were done via vanilla swaptions.

                                               The chief risk to the trade comes from a sharp bull steepening of the curve. However, as
                                               shown in Figure 3, over the past year, the 10-30y curve has steepened to its all-time highs,
                                               while the EUR 10y rate has rallied sharply. In other words, the curve has been bull steepening
                                               for a while now, and there is limited scope for this dynamic to continue. Besides, the trade
                                               being limited-loss should not incur runaway losses even if the curve bull steepens sharply.

FIGURE 3                                                                      FIGURE 4
EUR 10-30y curve has steepened considerably                                   Receiver skew (100bp wide) is richer for EUR 1y*30y
                                                                      70        20

   3                                                                              5
                                                                      -10        -5
                             Risk Flare in mid 2012

   1                                                                  -30      -10
   Apr-08       Apr-09       Apr-10       Apr-11       Apr-12    Apr-13          Apr-08        Apr-09      Apr-10       Apr-11       Apr-12       Apr-13
                 EUR 10y (%)               EUR 10y-30y (RHS, bp)                                            1y*10y            1y*30y
Note: As of 17 April 2013. Source: Barclays Research                          Note: Shows the difference between implied vol 50bp low-strike receiver vs 50bp
                                                                              high-strike payer for EUR 1y*10y and EUR 1y*30y. As of 17 April 2013.
                                                                              Source: Barclays Research

18 April 2013                                                                                                                                            54
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                                    How the BoJ can achieve a ¥175trn current
                                    account balance
Chotaro Morita                      The BoJ plans to increase its current account balance to ¥175trn by end-2014. Domestic
+81 3 4530 1717                     banks will have to cut their ¥160trn in JGB holdings to around ¥70trn. For this to be         accomplished smoothly, yields might have to decline somewhat further.

                                    Last week we considered whether life insurers would drastically alter their asset allocation in
Reiko Tokukatsu, CFA
                                    the wake of the BoJ’s latest easing measures. We concluded that although their activity
+81 3 4530 1532
                                    might be affected in some way by the added absorption of over ¥8trn in super-long JGBs on
                                    the BoJ’s balance sheet, this would not lead necessarily to a commensurate shift to foreign
                                    bonds. We argued that they would respond to the decline in JGB yields not through
Noriatsu Tanji
                                    allocations but by refraining from portfolio duration extension.
+81 3 4530 1346         Now we turn to the banks. Banks, unlike life insurers, will be directly affected by the increase
                                    in the BoJ’s monetary base (ie, the increase in its current account), the main policy target of
                                    this month’s easing. The bank decided on 4 April to raise its current account to ¥175trn by
Unlike life insurers, banks will    end-2014. That would represent an increase of ¥128trn in two years from end-December
be directly affected by the BoJ’s   2012. Domestic banks account for nearly 40% of the BoJ’s current account deposits, foreign
decision to increase its current    banks around 15%, and other reserve deposit holders around 40%. Assuming the increase
account                             in the current account centers on the major domestic banks, the figure for the domestic
                                    banking sector would grow by ¥90trn, suggesting a change in the sector’s main asset
                                    categories as in Figure 1. We assume the current level of growth continues for deposits,
                                    lending and non-JGB securities.

                                    Under this assumption, domestic banks would sell ¥90trn in domestic bonds, meeting
                                    precisely the current account increase, by end-2014. Domestic banks currently hold
                                    ¥160trn in JGBs including TBs, so the calculations imply an average cutback of ¥4trn per
                                    month. There may be some question over whether it is appropriate to assume that
                                    domestic banks alone will represent ¥90trn of the ¥128trn current account increase. At the
                                    same time, we feel it is unrealistic to assume a ¥128trn rise across all formats at the same
                                    proportion of present ownership, since it is not clear that foreign banks and other reserve
                                    deposit holders have the financial leeway to boost their reserves.

                                    FIGURE 1
                                    Projected change in assets at domestic banks
                                     JPY trn                                                                                  JPY trn
                                    180                                                                                          520
                                    160                                                                                          500
                                    140                                                                                          480
                                    120                                                                                          460
                                    100                                                                                          440
                                      80                                                                                         420
                                      60                                                                                         400
                                      40                                                                                         380
                                      20                                                                                         360
                                       0                                                                                         340
                                           05       06        07     08       09      10   11       12       13       14
                                                  JGBs (LHS)                                    Non-JGB securities (LHS)
                                                  Reserves and other deposits (LHS)             Loans (RHS)
                                    Source: BoJ, Barclays Research

18 April 2013                                                                                                                       55
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If the yield curve does not fall          What impact would a ¥90trn cut in JGB holdings have on domestic banks? Assuming a
further, the BoJ would be                 portfolio yield of 0.5%, income gains would drop by ¥360bn annually if the bonds are
unable to achieve its current             transferred to the BoJ current account, which pays 0.1%. The banks would also earn capital
account goal                              gains on bond sales, of course. Supposing a premium of 0.1% from the BoJ’s expanded JGB
                                          purchasing and a duration of around 3y on the bonds sold, the additional capital gains
                                          would come to some ¥270bn. Capital gains at that level would hardly be an incentive to sell
                                          in order to make up for a constant drop of income gains. If the yield curve does not fall
                                          further, the BoJ would be unable to achieve its current account goal.

                                          Bank balance sheets should experience a clear change as the BoJ’s operations proceed.
                                          However, we believe that this change will require a corresponding drop in yields. At yield
                                          levels (10y 0.7%) prior to March, when the markets began pricing in a monetary easing in
                                          earnest, we suspect that yields ultimately will have to drop below 0.5%.

                                          JGB 10s20s flatteners not reliant on today’s strong auction
                                          Today’s strong 20y JGB auction looks to have stopped the rebound steepening of the JGB
                                          10s20s curve after its dive to 65bp following the BoJ’s April MPM. We see more room for the
                                          JGB 10s20s curve to flatten. At the same time, we do not think that flattening of 10s20s
                                          necessarily needs strong momentum in the 20y segment, as partly provided by today’s
                                          auction. We discuss below the reasons why we think a 10s20s flattener position is still
                                          attractive to enter around the 90bp level.

                                          1) Fundamentals: Yield curve fundamentals argue that lower front-end rates mean a
                                          steeper curve. Indeed, we saw an extreme steepening of the JGB 10s20s early this year, as
                                          the 2y JGB yield fell to 4bp (Figure 2) and the front end of the JGB curve inverted as the
                                          market started to price in the possibility of a deposit rate cut in addition to tight supply-
                                          demand conditions. As the interest on excess reserves (IOER) rate was not changed in the
                                          April MPM, the short end of the JGB curve returned to a more normal shape with a positive
                                          slope, similar to its profile about a year ago (Figure 3). Based on the current shape of the
                                          curve, we think 10s20s can flatten to around 80bp.

                                          This view is also related to our thinking that the 10y belly is likely to cheapen, as a
                                          retracement takes place from 2012 curve dynamics, when the BoJ’s JGB purchases were
                                          concentrated below 3y and the yield curve steepened with the belly richening.

                                          2) OTR premium in 10y: Currently, the JGB 10y is rich largely, which is thought due to the
                                          fact that the BoJ’s new rinban operation will allocate its largest share of purchases to the 5-

FIGURE 2                                                                FIGURE 3
Recent JGB 10s20s and JGB 2y                                            Short end of JGB curve (%)
 105                                                            0.03    0.35
                                                                                           04/17/13 (10s20s=93bp)
                                                                0.05    0.30               04/10/12 (10s20s=79bp)
  95                                                                                       02/06/13 (10s20s=100bp)
  90                                                            0.07
  85                                                                    0.20
  80                                                                    0.15
  75                                                            0.11
  65                                                                    0.05

  60                                                            0.15    0.00
   3-Sep 3-Oct 3-Nov 3-Dec 3-Jan 3-Feb 3-Mar 3-Apr                             0.25          1        2           3        4          5
                   JGB 10s20s (bp, LHS)       JGB 2Y (%, RHS)                                        Maturity (years)
Source: Barclays Research                                               Source: Barclays Research

18 April 2013                                                                                                                         56
Barclays | Global Rates Weekly

FIGURE 4                                                                                    FIGURE 5
Current(OTR) premium JGB 10y relative to 5s10s curve (bp)                                   10s20s box (bp)
 4.0                                                                            80           18

 3.5                                                                            70           16
 3.0                                                                            60
 2.5                                                                            50
 2.0                                                                            40             8

 1.5                                                                            30             6

                 3m spread for current vs. ex current                                          4
 1.0                                                                            20
                 when new maturity JB is issued (bp, LHS)                                      2
 0.5             JGB 5s10s (bp, RHS)                                            10
 0.0                                                                            0             13-Dec           13-Jan            13-Feb      13-Mar      13-Apr
  May-11       Sep-11       Jan-12     May-12      Sep-12       Jan-13                                                            10s20s box (bp)
Source: Barclays Research                                                                   Source: Barclays Research

                                                10y sector. But richness in the 10y sector appears mainly driven by an increase in the
                                                current premium, not by overall richness of the 5-10y sector, in our view. Figure 4 shows
                                                that the 3m spread between the on-the-run (OTR) JGB 10y versus the last-on-the-run issue
                                                has tightened to 0.5bp. This looks tight, even after considering that JGB 5s10s has also
                                                flattened over this time. In terms of the swap spread, the OTR JB328 is 1.6bp richer than the
                                                ex-OTR JB327. We admit that the repo is tight for JB328. However, if the repo rate is tighter
                                                by 50bp for one month, it can explain the richness in the swap spread by 0.5bp
                                                (0.5%/12/0.098 = 0.5bp, 0.098 is the dv01 for 10y JGB). Therefore, we think that if the
                                                current premium returns to a more normal level, then the 10y richness is likely to decrease.

Trade recommendation updates (bp)
                                                             Year             Current
                                                             end/      Level   (incl    Weekly                 Risk        Target
                                                   Entry     Entry    at last carry)      P&L                 (DV01,     (includin
                                                   date      level    report or closed (JPY mn)              JPY mn)      g carry)   Stop    Horizon    Action
 JGB           10s20s flattener                   18-Apr      90.0       n/a         90.5          -2.5        5.0        80.0       100.0    1-3m       New
               1y OIS pay                         13-Jul       6.0       5.5          5.5           0.8    100bn face      8.0        5.0      1y        Hold
 Swap          5s10s steepener                    11-Apr      35.0       34.0        37.0          10.0        5.0        50.0       30.0      3m        Hold
               5x5-10x10 flattener                10-Apr     120.0     116.0         128.0         -40.0       5.0        100.0      130.0     3m        Hold
 Swap          20s30s fly (JL142/JX38)            13-Mar     10.50       10.0        10.0           0.0         6          11.0      30.0     1-3m     Remaining
 spread                                                                                                                                                20s30s leg
               Short 1mx20y (atm+20bp) vs         28-Mar      -9.0       50.0        22.0          -28.0    10bn face       0         -15      1m        Hold
               long 1mx10y (atm+11bp)                                                                        (for 10y)
               Pay 1yx1y                          10-Nov      -44.0    -40.0         -40.0          0.0         10        -30.0      -80.0   medium-     Hold
 Xccy basis Pay 1yx1y                             11-Apr      -46.0    -47.0         -46.0          5.0         5         -30.0      -80.0     long      Hold
               Pay 4y                             7-Mar       -51.0    -56.0         -54.0         16.0         5         -40.0      -70.0   medium-     Hold
Weekly P&L =-38.7; total P&L since 2013: 344.3; balance sheet=5.9
Note: Current levels based on the absolute maturity to capture rolldown correctly; therefore, it is different from the constant-maturity spread.
Source: Barclays Research

18 April 2013                                                                                                                                                     57
Barclays | Global Rates Weekly


                                 Trade portfolio update
Piyush Goyal                     Since the previous publication (April 11, 2013), the portfolio has lost $0.2mn. It has
+1 212 412 6793                  increased $10.8mn year-to-date and $59mn since inception.15
                                 FIGURE 1
Vivek Shukla                     Mark-to-market performance of the portfolio – cumulative P&L, $mn
+1 212 412 2532                          mn       70






                                      Jan-09      Jul-09    Jan-10     Jul-10      Jan-11      Jul-11      Jan-12      Jul-12      Jan-13

                                 Note: As of April 18, 2013. Portfolio stop loss = $10mn. Given this total loss allowed, we allocate $500k as the stop-
                                 loss for high-conviction trades and less for low-conviction trades. Source: Barclays Research

                                 Total equity = $100mn, stop-loss = $10mn
                                 We estimate an initial and variation margin for each derivative trade and a haircut for cash
                                 trades. The total of all such margins and haircuts is less than $100mn. In other words, the
                                 portfolio is assumed to have $100mn of equity. Thus, all returns are computed on a base of
                                 $100mn. Any unused equity is invested in fed funds and assumed to earn the daily funds rate.

                                      Since January 2009.

18 April 2013                                                                                                                                             58
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New Trades
   Inception                                                       Weights/Notional   Levels @    Current   Net Change (Gain Total Stop              Initial     Variation     Total
                         Theme                     Trade                                                                                  Horizon
     Date                                                              Amount         Inception    Level      (+) /Loss (-)) Loss (bp)               Margin       Margin      Margin
                                           Long 5y5y breakeven
4/18/2013             Dovish Fed                                      $25k dv01        266bp      264bp        ($50,000)     ($500,000)     1m      $350,000     $50,000     $400,000
                                          (Apr 17-Jul22) fwd BE
 US Treasury
                    Curve looks too
                      steep given
4/18/2013                                  7s30s curve flattener      $50k dv01        172.2      172.3         ($5,000)     ($500,000)     1m      $500,000      $5,000     $505,000
               End of extreme
                low short end
4/18/2013                                  JGB 10s20s flattener       $40k dv01          90        90.5        ($20,000)     ($300,000)     3m      $832,000     $20,000     $852,000
                means flatter
 US Swaps / Futures
                       Cross mkt           Sell 10y France vs eq
4/18/2013                                                             $50k dv01         64.8       64.3        ($25,000)     ($300,000)     3m      $1,500,000   $25,000     $1,525,000
                     relative value         wgt US and Japan
 US Options
                                           Long 6/14/13-30y
                                        receiver 2.725% vs short
4/18/2013            Bull-flattener                              +20mn: (500 each)       0        -15000       ($20,000)     ($500,000)   Expiry    $1,000,000   $20,000     $1,020,000
                                         3EM3C 99 and 34EMC
Note: All prices as of April 18, 2013. Source: Barclays Research

18 April 2013                                                                                                                                                                          59
Barclays | Global Rates Weekly

Trades Outstanding
 Inception                                                                Weights/Notional      Levels @                      Net Gain (+)                                              Variation     Balance Sheet
                 Theme                          Trade                                                         Current Level                Stop Loss (bp)   Horizon   Initial Margin
   Date                                                                       Amount            Inception                      /Loss (-)                                                 Margin           Used
US TIPS                                                                                                                                                                                                $6,570,000
              Front-end Asset
 1/12/2012                            Long Jan '14 TIPS ASW                   $500mn           Libor - 13bp    Libor -7bp     $1,300,000    ($250,000)        1y       $2,500,000      ($1,300,000)
              Swap Tightener
                 Long Core    Sell 1% 2y CPI Floors vs. Long CL4 Puts
 8/3/2012                                                                  ($100mn): +50       ($376,500)      ($176,500)      $200,000     ($200,000)        1y        $800,000       ($200,000)
                  Inflation                      65
 10/5/2012          Carry      Long Jan '15 ASW relative to nominals          $100mn              14bp            9bp          $120,000     ($300,000)        1y       $1,000,000      ($120,000)
10/18/2012 Supply unwind             Long Feb 40 Relative ASW                  $10mn              22bp            31bp        ($130,000)    ($400,000)        1y        $400,000        $130,000
                                 Apr16-Jan22 rel ASWs flattener (20K
 3/8/2013         Supply                                                     20k DV01             11bp            11bp         ($10,000)    ($200,000)        3m       $1,250,000        $10,000
          Low realized CPI
3/27/2013                       Sell 3y y/y CPI strangle, energy hedged   $100mn 1%-3.5%       ($1,400,000)   ($1,500,000)    ($100,000)    ($500,000)        3m       $2,000,000       $100,000
2/14/2013   Curve trade              Long OBL€i18 vs OAT€i40 BE              $50k dv01            95bp            81bp        ($100,000)    ($500,000)        4m        $39,000         $100,000
US Treasury                                                                                                                                                                                            $1,545,000
            Improvement in
 3/14/2013                              Long OTR3y versus OIS               $100k DV01             8.9            8.94         $26,000      ($500,000)        3m       $1,000,000       ($26,000)
4/11/2013    Low front end        5s10s Flattener (65% dv01 on 10s)          $50k dv01            43.5            39.9         $179,000     ($500,000)      Unwound     $750,000       ($179,000)
             risk premium
Eurozone Sovereign debt                                                                                                                                                                                 $555,000
 10/5/2012 UFR positioning          Receive 5y5y/5y10y/5y15y fwd             $15k dv01            102bp           99bp         $45,000      ($375,000)       3-6m       $600,000        ($45,000)
US Swaps / Futures                                                                                                                                                                                     $1,420,000
                                 1y1y Libor-OIS tightener against 1y1y
3/8/2013            RV                                                      $100k DV01            13.6            12.8         $80,000      ($500,000)        1m       $1,500,000       ($80,000)
                                             3s1s widener
JPY Swaps                                                                                                                                                                                              $5,402,000
 7/13/2012 Short front-end                    Pay 1y OIS                     $160k dv01            6bp           6.55bp        $88,000      ($350,000)        1y       $1,600,000       ($88,000)
            Swap spread
3/13/2013 term structure is          Swap spread 10s20s30s long             usd 60 k dv01          23              24          ($60,000)    ($450,000)        1y       $1,500,000        $60,000
           Volatility is high
                                 Short 1mx20y (ATM+20bp) payers vs.
3/28/2013 for 20y tail vs.                                                     100mn                -5             20          $250,000     ($200,000)        6m       $1,200,000      ($250,000)
                                   long 1mx10y (ATM+15bp) payers
                10y tail
4/11/2013    Swap 5s10s                  Swap 5s10s steepner                 $60k dv01             35              37          $120,000     ($450,000)        3m       $1,500,000      ($120,000)
US Options                                                                                                                                                                                            $10,165,000
 7/19/2012       Short vol              Short 1y*10y straddles                ($20mn)          ($1,220,000)    ($470,000)      $750,000                       6m        $880,000       ($750,000)
 9/7/2012        Short vol              Short 1y*10y straddles                ($20mn)          ($1,242,000)    ($617,000)      $625,000                       6m        $880,000       ($625,000)
 9/27/2012       Short vol              Short 1y*10y straddles                ($10mn)          ($596,000)      ($336,000)      $260,000     ($1,000,000)      6m        $880,000       ($260,000)
 10/5/2012       Short vol              Short 1y*10y straddles                ($10mn)          ($597,000)      ($367,000)      $230,000                       6m        $880,000       ($230,000)
11/15/2012       Short vol                Short 1y*10y straddles               ($10mn)         ($570,000)      ($390,000)      $180,000                      Expiry     $880,000       ($180,000)
                                  Long 1x11 cap -flr straddles 2% vs
 6/14/2012    Relative Value                                                $20mn: ($20mn)     $1,964,000      $3,104,000     $1,140,000    ($500,000)        1y        $880,000       ($1,140,000)
                                           1y*10y straddles 2%
                Long risk-       Long 1y*30y 100bp wide risk-reversal
 8/3/2012                                                                      $100mn          ($450,000)      $1,430,000     $1,880,000    ($500,000)        6m        $725,000       ($1,880,000)
                 reversal               (long recr), delta hedged
                                Long 3y*1y 25bp low-strike recr vs 45bp
 8/9/2012        Tactical                                                  $200mn:($200mn)          0           $540,000       $540,000     ($500,000)        1y        $800,000       ($540,000)
                                             high-strike payer
                                Short belly of 2y5y - 2y10y - 2y30y payer +$94mn : ($100mn):
 8/16/2012    Relative Value                                                                   ($300,000)      ($20,000)       $280,000     ($500,000)        1y       $2,200,000      ($280,000)
                                                    fly                        +$22mn
 1/4/2013        Short vol           sell 2y*10y straddles @ 2.65%             ($50mn)         ($4,105,000)   ($4,015,000)     $90,000      ($500,000)        6m       $2,200,000       ($90,000)
 1/17/2013      Sell skew         Sell 3y*5y 2.5% payer, delta hedged     ($100mn):($40mn)     ($2,115,000)   ($2,220,000)     ($35,000)    ($500,000)        1y       $1,200,000        $35,000
 1/24/2013                  long 2ez3 p 99 vs short 4ez3 p 97.75
              cheap flattener                                               +2000: (2000)      ($650,000)      ($575,000)      $75,000      ($500,000)       Expiry     $500,000        ($75,000)
                             short TYM3P 128 vs matched expiry
 2/1/2013    put-payer                                                     (1000): $129mn      ($200,000)      ($20,000)       $180,000     ($250,000)       Expiry     $500,000       ($180,000)
2/14/2013 Calendar spread     long 5y30y p 3.6 vs 1y30y p 3.15            +$50mn: ($50mn)      $3,320,000      $3,700,000      $380,000     ($500,000)        1y       $1,000,000      ($380,000)
                          Long 1y30y recr, Short 1y30y payer, Pay         $100mn: $100mn:
2/28/2013   Fade skew                                                                          ($430,000)      ($440,000)      ($10,000)    ($500,000)        6m        $725,000         $10,000
                                         fix 1y30y                             $50mn
4/11/2013   Steeper Vol       Long 3x13 cfs vs 3y10y swaption              +$50mn: -$50mn      $4,650,000      $4,590,000                   ($500,000)        1y       $1,600,000
                                                                                                                                  $0                                                       $0
              Surface                     straddle

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Barclays | Global Rates Weekly

Trades Outstanding (continued)
  Inception                                                                Weights/Notional      Levels @                      Net Gain (+)                                             Variation    Balance Sheet
                    Theme                           Trade                                                      Current Level                Stop Loss (bp)   Horizon   Initial Margin
    Date                                                                       Amount            Inception                      /Loss (-)                                                Margin          Used
 EUR Options                                                                                                                                                                                          $4,191,000
  6/1/2012         Short vol          EUR 1x2 1y5y 1.25 vs 1 recr ladder    EUR 20mn: (40mn)         0           $50,000        $50,000      ($250,000)        6m        $744,000       ($50,000)
                                                                               EUR 100mn:
  9/7/2012         Short vol          EUR 1x2 1y5y 1.15 vs 0.9 recr ladder                           0           $250,000       $250,000     ($250,000)        6m       $1,692,000      ($250,000)
                                     Long EUR 1y*10y 1x2 payer spread (2.2   (EUR 50mn): EUR
 10/5/2012         Long vol                                                                          0          ($90,000)       ($90,000)    ($500,000)        6m        $550,000        $90,000
                                                     vs 2.6)                      100mn
                                                                               EUR 100mn:
  2/1/2013       Low for long          6m5y 1x2x1 1.3 - 0.95 - 0.7 recr fly                      $650,000       $1,065,000      $415,000     ($250,000)      Expiry      $500,000       ($415,000)
                                                                             (200mn): 100mn
                                    Short 3m*4y GBP straddles vs 30bp high- +GBP 100mn: gbp
3/8/2013              RV                                                                        ($1,040,000)   ($1,170,000)    ($130,000)    ($500,000)      Expiry     $1,200,000      $130,000
                                              strike 3m*4y payer                  100mn
 Cross-currency                                                                                                                                                                                        $980,000
10/11/2012            Carry                  Pay 1yx1y Xccy basis             $40k dv01            -53.5           -40          $540,000     ($400,000)        1y        $400,000       ($540,000)
                Paying demand
3/8/2013        is larger in 4-5y             pay 4y Xccy basis              usd 40 k dv01          -51            -54         ($120,000)    ($400,000)      3m-6m      $1,000,000      $120,000
 US BMA                                                                                                                                                                                               $2,130,000
                                       Long 3m1y BMA ratio vs short 3y1y
                 Sell Front-end
 1/12/2012                          ratio; 3m1y matured on 4/12 at 1y ratio $200mn : ($200mn)      54, 84         50, 69        $150,000     ($250,000)        1y        $800,000       ($150,000)
                                            = 50, implying p&l -$42k
                 Sell Front-end
 5/10/2012                                      Short 3y ratio                 $200mn             65.375            60          $80,000      ($250,000)        1y        $800,000       ($80,000)
                 Sell Front-end
  6/7/2012                                      Short 3y ratio                 $200mn              66.75            62          $40,000      ($250,000)        1y        $800,000       ($40,000)
 Cash                                                                                           4/11/2013       4/18/2013
        Cash Used as Collateral/ Haircut                                                        $34,225,000    $37,399,000
           Fed Funds (residual cash)                                                            $84,764,185    $81,430,657
                                             Return on Fed Funds                                 $104,369        $106,841
                                               Return on trades                                                $18,722,816
                     Total                                                                                     $118,829,657

Note: All prices as of April 18, 2013. Source: Barclays Research

18 April 2013                                                                                                                                                                                                     61
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Trades Unwound
  Inception      Unwound                                                                                            Weights/Notional       Levels @      Levels @      Net Change (Gain   Total Stop
    Date           Date                  Theme                                      Trade                               Amount             Inception      Unwind         (+) /Loss (-))   Loss (bp)      Horizon
 9/29/2011      1/12/2012    Front-end Asset Swap Tightener                Long Jan '12 TIPS ASW                         $500mn              Libor -    Libor - 34bp      $170,000        ($250,000)     Unwound
  1/6/2012      1/19/2012             Supply Trade                      Sell Apr '16 - Jul '21 - Apr '28                $25k dv01             20bp         21bp            $25,000        ($500,000)     Unwound
 10/20/2011     2/23/2012            Relative Value                     10y-30y breakeven steepener                     $20k dv01           21.5bp          5bp           ($260,000)      ($250,000)     Stop-out
  3/9/2012      3/28/2012            Relative Value                   Long Apr '14 - Apr '15 breakeven                  $30k dv01            165bp         185bp          $500,000         $200,000      Unwound
 1/27/2012      4/6/2012               Dovish Fed                           Long 5y5y breakevens                        $20k dv01            232bp         251bp          $250,000         $300,000      Unwound
 6/16/2011      4/19/2012         Eurozone contagion            Long the belly Jan '16 - Apr '16 - July '16 real        $20k dv01            5.5bp          7bp           ($20,000)        ($75,000)     Unwound
                                                                                   yield fly
  8/5/2011      5/24/2012              Long TIPS                Long July'12 TIPS energy hedged; bought 20          12k dv01, Short 40      -60.5bp,    -253bp, 288       $865,000            $0         Unwound
                                                                       XBM2 on 4/6/12 for 327.66                      XBH2 (XBM2)            267.76
 3/29/2012      6/1/2012             Relative Value                Long TII Jan 22 Relative Asset Swap                  45k dv01              33bp         31bp            $10,000        ($500,000)     Unwound
 4/19/2012      7/6/2012          Eurozone contagion                       Long Apr '17 vs Jan '17                      $50k dv01             6bp          -5bp           $550,000        ($500,000)     Unwound
  6/1/2012      7/19/2012        Inflation risk premium                   Long 10y10y vs 5y5y BE                        $15k dv01            -19bp         -8bp            $80,000        ($150,000)     Unwound
 6/28/2012      7/19/2012                Supply                  Short belly of Jan '18 - Jan '21 - Jan 26 real         $20k dv01            -12bp         -9bp            $90,000        ($250,000)     Unwound
                                                                                    yield fly
 7/19/2012      8/30/2012               Flattener               Jan '14 - Apr '17 breakeven flattener ; energy        $15k dv01; (30      67bp, 94.44   52bp, 96.35       ($100,000)      ($250,000)     Unwound
                                                                                     hedged                             contracts)
 8/16/2012      10/18/2012            Supply Trade                   Apr '17 - Feb '42 breakeven flattener              $15k dv01            39bp          35bp            $12,000        ($250,000)     Unwound
 11/2/2011      10/25/2012           Normalization              Long Apr' 13 TIPS vs. sell 2% CPI cap and sell        $30k dv01; 45         -103bp, -  -107bp, 4bp,      $1,100,000        $700,000      Unwound
                                                                                    XBH3                                contracts         36bp, 249.83     275

 9/20/2012      11/8/2012              Dovish Fed               Receive 2y forward 2y break-even (Jan '14 vs            $20k dv01            228bp         215bp          ($250,000)      ($500,000)     Unwound
                                                                                  Jan '16)
 8/17/2012      11/15/2012         Sell Deflation Floor                   Long Jan' 17 vs. Apr '17                      $50k dv01             0bp          -1bp           ($50,000)       ($100,000)     Unwound
  9/7/2012      11/29/2012             Carry trade              Buying German I/L Apr 2016, asset swapped                $100mn             32.3bp         16bp           $690,000        ($500,000)     Unwound
                                                                                 into USD
 11/8/2012      1/4/2013               Fiscal Cliff                       Short Jul17 Breakeven                        25k/$56mn             215bp         228bp          ($292,344)      ($500,000)     Unwound
 11/29/2012     1/4/2013             Supply Fly: 5s               Sell the belly of Jan15-Jan17-Jan19 RY Fly           $15K DV01              -21           -18            $60,000        ($200,000)     Unwound
 11/29/2012     1/4/2013             Risk Premium                 10s30s BE steepener ahead of Dec. FOMC                15K DV01              2bp          6.2bp           $70,000        ($250,000)     Unwound
  1/4/2013      2/7/2013          Concession unwind                    Long Jan15-Apr17-Jan19 RY Fly                    $15k dv01             -10            0            ($175,000)      ($150,000)     Stop-out
 2/21/2013      1/10/2013        Front-end Underpriced          Long $250mn TIIJan14s hedged with sell 100               $250mn             -134bp,     -226bp, 93.5     $1,003,000       ($600,000)     Unwound
                                                                                  CLZ4                                                       91.74
 1/17/2013      3/14/2013    Long the belly and fade the roll         Jan19-Jul22-Jan25 real yield fly                  $20k dv01            32bp          37bp           ($10,000)       ($160,000)     Unwound
 UK Inflation

  6/1/2012      6/14/2012                Macro                    Long IL20 vs. pay match-maturity swap                 GBP 7mn              280bp         262bp          ($515,000)      ($500,000)     Stop-out
 6/22/2012      7/6/2012                 Macro                      Buy IL29 Breakeven (vs. UKT 4.75%)                GBP 13mn: (GBP         262bp         263bp           $35,700        ($500,000)     Unwound
                                                                                                                   13.3mn)/ $35.7k dv01
 6/29/2012      7/26/2012       Real Yield curve flattener                    Long IL32 vs IL17                         $45k dv01            126bp         145bp          ($720,000)      ($500,000)     Stop-out
 7/13/2012      9/28/2012            Relative Value                  Sell IL17 vs IL16, IL22 real yield fly            $37.5k dv01           -24bp         -24bp          $150,000        ($300,000)     Unwound
 9/14/2012      10/18/2012      Cheap forward real rates         Receive 20y20y forward RPI real rate swap             $17.2k dv01           36bp          42bp           ($103,000)      ($500,000)     Unwound
 9/28/2012      11/29/2012         Real yield flattener                 IL22 - IL42 real yield flattener                $25k dv01            97bp          100bp          ($175,000)      ($500,000)     Unwound
 11/16/2012     1/10/2013             UK Linker RV                     Sell IL22 vs IL17+32 RY barbell                 62.5k DV01             0bp           1bp           $125,000        ($500,000)     Unwound
 12/12/2012     1/10/2013        10y UK breakevens rich                      Sell IL22 Breakeven                       $25k DV01              250           293          ($1,075,000)     ($1,000,000)   Stop-out
 1/17/2013      2/7/2013       UK 5y5y fwd real yield rich            Sell IL22 into IL17 cash for cash                $30k DV01              -20           -15           $150,000        ($500,000)       3m
 2/21/2013      2/1/2013              UK Linker RV                   IL24 vs IL17+IL34 real yield barbell              $125k dv01             32            37            ($500,000)      ($500,000)     Stop-out
 2/14/2013      3/8/2013               Real Yield                       IL32-IL55 real yield flatteners                 $50k dv01            26bp          33bp           ($500,000)      ($500,000)     Stop-out
Source: Barclays Research

18 April 2013                                                                                                                                                                                                       62
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Trades Unwound (continued)
  Inception      Unwound                                                                                 Weights/Notional      Levels @    Levels @    Net Change (Gain   Total Stop
    Date           Date                  Theme                                 Trade                         Amount            Inception    Unwind       (+) /Loss (-))   Loss (bp)    Horizon
 EUR Inflation
  6/1/2012       6/22/2012               Macro                     Receive 5y Euro HICPx Inflation           EUR 25mn           1.35%       1.48%         $390,000        $390,000     Stop-out
  6/29/2012      7/26/2012            Relative Value             Sell Bund i23 vs. OBL i18 breakeven        $27.2k dv01          47bp        50bp         ($106,000)      ($300,000)   Unwound
  8/10/2012      9/7/2012            Short inflation                Sell 10y FRCPIx ZC Inflation             $37k dv01          2.32%        2.4%          $50,000        $100,000     Stop-out
  9/14/2012      9/28/2012            Relative Value               Sell 10y FRCPIx vs. Euro HICPx           $39.5k dv01          27bp        37bp         ($388,000)      ($400,000)   Unwound
 11/29/2012 12/14/2012                  Real Yield                 Short BTPi16/19 fwd real yield           $5.4k DV01          346bp       360bp          $75,000        ($250,000)   Stop-out
  1/17/2013      2/28/2013                Curve                     Buy BTP€i41 versus BTP€i21          EUR 10mn 21s vs EUR      77bp        36bp         $411,000         $75,000     Unwound
                                                                                                           4.5mn 41s ($11k
  1/4/2013       3/14/2013                                                                                EUR21.3mn 23s vs                                                             Unwound
                                      Relative value                 Buy OATi23 versus OATi22                                   3.5bp        1bp          $105,000        ($75,000)
                                                                                                        25mn 22s ($35k dv01)
 US Treasury
  1/12/2012      1/26/2012             Fed-on-hold                   Long 2y-5y-10y treasury fly             $50kdv01          -49.5bp     -66.5bp        $850,000        ($500,000)   Unwound
  1/19/2012      1/26/2012             Dovish Fed                    10y-30y tsy curve steepener             $50k dv01         106.25 bp   117.25 bp      $550,000        ($500,000)   Unwound
  2/9/2012       2/23/2012    Unwind of auction concession            7y-30y tsy curve flattener             $50k dv01         177.75bp    174.75bp       $150,000        ($500,000)   Unwound
  3/1/2012       3/9/2012        Bond auction concession             10y-30y tsy curve steepener             $50k dv01         111.5bp     116.25bp       $237,500        ($500,000)   Unwound
  3/29/2012      4/6/2012        Bond auction concession             10y-30y tsy curve steepener             $50k dv01         111.5bp     117.5bp        $305,000        ($500,000)   Unwound
  3/1/2012       4/19/2012       Increase in odds of QE3                Long 5y-10y-30y fly                  $50k dv01          1.75bp      -1.7bp        $172,500        ($500,000)   Unwound
  3/1/2012       4/19/2012             Fading 7yr                       Short 5yr - 7yr - 10yr               $50k dv01          -4.5bp     -11.8bp        ($365,000)      ($500,000)   Unwound
  3/16/2012      4/19/2012             Dovish Fed                             Long ct2                       75k dv01           36.9bp      26.7bp        $865,000        ($500,000)   Unwound
  4/20/2012      5/17/2012    Low front-end term premium           Vol weighted 2y - 3y steepener         $80k dv01: ($50k       -2bp       -7.5bp        ($270,000)      ($500,000)   Unwound
  4/26/2012      5/17/2012       Bond auction concession             10y-30y tsy curve steepener             $50k dv01         117.2bp     112.2bp        ($250,000)      ($500,000)   Unwound
  5/10/2012      6/1/2012              Fading 7yr                       Short 5yr - 7yr - 10yr               $50k dv01         -12.2bp     -18.2bp        ($325,000)      ($300,000)   Stop-out
  5/10/2012      6/14/2012            Relative Value            Short HC Nov '15 Ps vs. HC Feb '15 Ps        $50k dv01          6.25bp       8bp           $87,500        ($300,000)   Unwound
  6/7/2012       7/6/2012        Fading Operation Twist               Long 3% Sep '16 vs. OIS                $50k dv01          16.1bp      13.5bp        $130,000        ($250,000)   Unwound
  6/28/2012      7/19/2012     Dovish Fed/ Relative Value               Long 9.25% Feb '16s                  $40k dv01         0.525%       0.40%         $500,000        ($400,000)   Unwound
  6/14/2012      7/26/2012               Macro                           Long 10y treasury                   $25k dv01         1.635%      1.425%         $570,000        ($300,000)   Unwound
  7/12/2012      7/26/2012              Flattener                    10y-30y tsy curve flattener             $50k dv01         108.4bp      106bp         $115,000        ($300,000)   Unwound
  7/26/2012      8/9/2012                Macro                               Long 7y tsy                     $50k dv01          0.94bp     1.045bp        ($525,000)      ($500,000)   Stop-out
  9/7/2012       9/13/2012              Steepener                         7y-30y steepener                   $50k dv01         171.5bp      184bp         $625,000        ($500,000)   Unwound
  8/10/2012      9/20/2012             Fed on hold                            Long 5y                        $25k dv01         0.694%       0.68%          $50,000        ($500,000)   Unwound
 10/11/2012 11/29/2012                  Flattener                         7y-30y flattener                   $50k dv01          177bp       178bp         ($45,000)       ($500,000)   Unwound
  9/20/2012      1/10/2013          Low funding rates                         Long 3y                        $50k dv01          35.5bp      33.2bp        $219,000        ($500,000)   Unwound
 11/15/2012      1/10/2013         Liquidity Premium                  Long OTR 10s vs Old 10s               $100K DV01          3.8bp        4.7p         ($89,000)       ($500,000)   Unwound
 12/13/2012      1/10/2013       Long end Fed purchases               7s30s Tsy curve flattener              25k dv01           175.8       175.7          $5,000         ($500,000)   Unwound
  2/14/2013      1/24/2013      bond refunding steepener                       10s30s                        $50k dv01          119.7       120.3          $28,000        ($500,000)   Unwound
  1/10/2013      2/28/2013           Long front end                           Long 4y                       $50k DV01           59.4bp      53.3bp        $378,000        ($500,000)   Unwound
  1/17/2013      2/28/2013   Lower growth, higher fiscal risk            Long 5s10s30s fly                  $50k DV01           -9.6bp     -12.5bp        $194,370        ($500,000)   Unwound
  2/1/2013       2/28/2013   Easy Fed, Fading richness of 7s           Long 2s5s7s gross fly                $50k DV01           8.6bp       3.6bp         $243,700        ($500,000)   Unwound
  2/14/2013      3/14/2013   Not enough liq premium in OTR            Long Feb23s vs Nov22s                 $100k dv01          2.95bp       2.76          $53,000        ($500,000)   Unwound
  9/20/2012      3/27/2013           QE underpriced                           Long 10y                       $25k dv01          1.78%       1.76%         $260,000        ($500,000)   Unwound
  2/14/2013      3/27/2013   sequester/post auction dynamics           10s30s curve flattener                $50k dv01          116.65      124.2         ($414,000)      ($500,000)   Unwound
  2/28/2013      4/5/2013        Fade the curve steepness                  7s10s flattener                  $100k DV01           62.8       61.39         $175,000        ($500,000)   Unwound
  3/27/2013      4/5/2013             Risk aversion                        7s30s flattener                  $50k DV01            186        175.9         $530,000        ($500,000)   Unwound
Source: Barclays Research

18 April 2013                                                                                                                                                                                     63
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Trades Unwound (continued)

  Inception      Unwound                                                                                       Weights/Notional      Levels @       Levels @     Net Change (Gain   Total Stop
    Date           Date                  Theme                                    Trade                            Amount            Inception       Unwind        (+) /Loss (-))   Loss (bp)    Horizon

  6/8/2012      6/21/2012    Fading monetary policy easing                   5y-10y flattener                     $125k dv01            66bp         61.8bp         $525,000        ($250,000)   Unwound
  6/8/2012      6/21/2012             relative value                        10y-20y flattener                     $125k dv01            81bp         84.4bp         ($425,000)      ($375,000)   Stop-out
 10/17/2012 10/25/2012                Bear flattener                    JGB 10y-20y bear flattener                 $50k dv01          90.5bp          91.5          ($50,000)       ($150,000)   Unwound
  11/8/2012     12/13/2012     Auction Concession Unwind                   JGB 30s40s flattener                    60k DV01              19           16.4          $156,000        ($150,000)   Unwound
                1/29/2013                Tactical                          JGB 10s12s flattener                    $60k dv01            30.2          29.8           $24,000        ($150,000)   Unwound
  2/21/2013      3/7/2013         JGB 20s30s steepener                    JGB 20s30s steepener                       $120K              17.5           14           ($400,000)      ($400,000)   Stop-out
                3/28/2013      Still flattening room for JGB
  3/21/2013                                                                JGB 10s20s flattener                       60                 95            91           $240,000        ($150,000)   Unwound
 Eurozone Sovereign debt
  4/19/2012     5/17/2012          Eurozone contagion          Short FRTR Apr '20 vs. 50% RFGB Apr '20 and         $35k dv01           -42bp        -58.5bp         $542,500        ($250,000)   Unwound
                                                                             50% RAGB Jul '20
  4/27/2012     5/25/2012             Italy vs. Spain           Short BTPS 3.75% Mar 21 vs SPGB 5.5% Apr          $12.5k dv01          -37bp         -70bp          ($425,000)      ($350,000)   Stop-out
  9/7/2012      11/21/2012   Front end periphery convergence    Long SPGB 4.75% Jul 14 vs BTP 4.25% Jul 14         $10k dv01            60bp         102bp          ($420,000)      ($350,000)   Stop-out
  6/15/2012     2/28/2013             Relative Value           Short Bobl ASW vs. EONIA long Schatz ASW            $15k dv01           -48bp         -24bp          ($360,000)      ($350,000)   Stop-out
                                                                                vs. libor
  1/10/2013      3/8/2013       Fundamental cheapness                   Long 5y5y fwd EUR ASW                      $30k dv01             -4            15           $570,000        ($450,000)   Unwound
 US Swaps / Futures
  1/19/2012     2/23/2012             Calendar roll                   USH2 invoice spread widener                 $100k dv01          0.45bp         -2.4bp         ($285,000)      ($500,000)   Unwound
  1/6/2012      3/15/2012         Eurozone Contagion                     Short EDU2 Long EDU4                    2000 contracts       47.75bp       54.75bp         ($525,000)      ($500,000)   Stop-out
  3/16/2012      4/6/2012            Spread widener                     FV invoice spread widener                  $50k dv01          17.75bp       28.25bp         $525,000        ($500,000)   Unwound
  4/19/2012     5/24/2012             Relative Value           Sell TYM2 Invoice spread vs. 1/3rd dv01 1y1y       $50k DV01           12.15bp        19.7bp         ($377,500)      ($500,000)   Unwound
  5/18/2012     5/30/2012             Calendar Roll                      Long TUU2 Short TUM2                     2000:(2000)       2.875 (ticks) 1.75 (ticks)       $70,313        ($250,000)   Unwound
  5/18/2012     5/30/2012             Calendar Roll                      Long TYU2 Short TYM2                     2000:(2000)       31.75 (ticks)   30 (ticks)      $109,375        ($250,000)   Unwound
  1/6/2012      6/21/2012                Issuance                            Sell 30y spreads                      $50k dv01           -31bp         -24bp          ($350,000)      ($250,000)   Stop-out
  4/6/2012      7/12/2012        Front-end spd widener            March '14 FRA-ois (USFOSC8) widener              $50k dv01          38.5bp         33.5bp         ($250,000)      ($250,000)   Stop-out
  7/19/2012      8/3/2012               Flattener                         4y1y vs 1y1y flattener                   $50k dv01          109.5bp        120bp          ($525,000)      ($500,000)   Stop-out
  6/7/2012      8/30/2012             Relative Value                    Short 5y - US - 30y spread                 $50k dv01          13.15bp        8.4bp          $237,500        ($250,000)   Unwound
 10/11/2012 10/18/2012                Long duration                           Receive 3y1y                         $50k dv01         103.25bp       116.9bp         ($500,000)      ($500,000)   Stop-out
  9/13/2012     11/23/2012            Relative Value            Long 11/23/12 -> Aug '19 vs short TYZ2 C        "$130mn: (1000)          0          $684,000        $684,000        ($500,000)   Expired
  9/7/2012       1/4/2013        Spread Curve Flattener               5y - 10y spread curve flattener             $100k dv01           -7.2bp        263bp          ($130,000)      ($500,000)   Unwound
  9/13/2012      1/4/2013                 Macro                            30y Spread widener                      $50k dv01          -22.5bp       -20.5bp         $100,000        ($500,000)   Unwound
 10/11/2012      1/4/2013               Flattener                           Pay 3y1y Rec 5y9y                      $50k dv01           237bp         263bp          ($500,000)      ($500,000)   Stop-out
  2/14/2013      2/1/2013     7y auction concession unwind        Long dv01 weighted OTR7y TYH3 basis         $100mn/820 TYH3 cts      -260.1        -260.5          ($9,000)       ($500,000)   Unwound

  2/14/2013      4/5/2013           UK v US steepener           UK 10s-30s steepener against US flattener         100K DV01             6bp           16bp         $1,000,000       ($500,000)   Unwound
Source: Barclays Research

18 April 2013                                                                                                                                                                                               64
Barclays | Global Rates Weekly

Trades Unwound (continued)

  Inception      Unwound                                                                                        Weights/Notional   Levels @    Levels @   Net Change (Gain   Total Stop
    Date           Date                   Theme                                     Trade                           Amount         Inception    Unwind      (+) /Loss (-))   Loss (bp)    Horizon

 JPY Swaps
  2/14/2013     1/24/2013     Pause in one-way steepening in       Long 1yx10y straddle vs. 1yx20y straddle         $120mn           -60         -43         $204,000        ($250,000)   Unwound
                                          long end
  2/5/2013                   Volatility and rates are both high          Short 1yx8y ATM+10bp payers               USD60mn           -92         -90          $12,000        ($150,000)   Unwound
  5/18/2012     5/25/2012      Fade excessive bull-flattening                 6x2-8x2 steepener                   $120k dv01       48.75bp      50.5bp       $210,000        ($450,000)   Unwound
  5/24/2012      6/7/2012              Calendar Roll                  Short calendar spread (JBM2-JBU2)           100 contracts    20 ticks    18 ticks       $26,000        ($12,500)    Unwound
  5/18/2012     6/21/2012 Good carry trade with stable front                      6mx1y pay                        $60k dv01        -53bp       -44bp        $540,000        ($420,000)   Unwound
  6/14/2012     6/21/2012              Tactical                              5y5y-10y10y flattener                 $60k dv01        99.5bp      104bp        ($270,000)      ($120,000)   Stop-out
  6/7/2012       7/6/2012              Long spreads                         Long 30y swap spread                   $30k dv01         19bp       18.8bp        ($6,000)       ($120,000)   Unwound
  5/22/2012     7/20/2012              Long spreads                         Long 20Y swap spread                   $60kdv01          11.4        12.3        ($54,000)       ($400,000)   Unwound
  7/13/2012     7/20/2012              Long spreads                      Reestablish 30Y swap spread               $30k dv01        21.2bp      20bp          $36,000        ($54,000)    Unwound
  7/19/2012     7/25/2012              Long spreads                 Short 20y swap spread vs 10y10y (1:3 )         $60kdv01         84.4bp      86.9bp       $150,000        ($200,000)   Unwound
  6/14/2012     7/26/2012                 Tactical                       Short 7Y (future) swap spread             $60k dv01        -9.1bp      -8.5bp        $36,000        ($144,000)   Unwound
  7/6/2012      7/26/2012                  Carry                             Long 6Y swap spread                   $120kdv01       -16.1bp     -12.7bp       ($408,000)      ($300,000)   Stop-out
  8/3/2012      8/16/2012                 Tactical                              pay 1y1y swap                      $75k dv01       -26.1bp      -29bp        $218,000        ($300,000)   Unwound
  8/9/2012      8/16/2012             Relative Value              long 30y swap spread and receive 20yx10y at     $100k dv01        123.13       123          $13,000        ($300,000)   Unwound
  7/20/2012     9/14/2012                  Carry                   Receive USD/JPY Xccy basis 6yx2y vs. 4yx1y      $60kdv01           7         -11.7       $1,120,000       ($360,000)   Unwound
  8/3/2012      9/28/2012                 Tactical                           long 8y swap spread                  $120k dv01       -5.75bp      -5.2bp       ($62,000)       ($300,000)   Unwound
  8/31/2012     10/5/2012             Relative Value                         short swap 7s10s20s                  $100k dv01       -42.125      -44.5        ($238,000)      ($300,000)   Unwound
  9/14/2012     10/5/2012                 Tactical                           pay 3yx5y Xccy basis                  $40k dv01         -83         -57        $1,040,000       ($400,000)   Unwound
  9/21/2012     10/11/2012          Limited rally in 10s                  Sell 1mx10y receiver spread                $40mn          -28cts      -32cts       ($16,000)       ($100,000)   Unwound
  10/5/2012     11/8/2012                 Tactical                        10y10y - 20y10y steepener                $60k dv01        -26bp       -18bp         $48,000        ($50,000)    Unwound
  11/7/2012     11/15/2012            Relative Value                        Swaps 5s10s flattener                  120k DV01        44.75         42          $33,000        ($250,000)   Unwound
  8/31/2012     11/29/2012                Macro                              long 30y swap spread                  $60k dv01          21         15.3        $342,000        ($200,000)   Unwound
  11/7/2012     12/21/2012          Rate Directionality                       Pay 5y vs 3m Libor                   60k DV01          21.5        21           ($3,000)       ($150,000)   Unwound
  9/28/2012     12/28/2012       hedge to overall portfolio       Long receiver fly 3mx10y (0.72-0.77-0.82%)         $40mn           8cts       17cts         $36,000        ($50,000)    Expired
  11/1/2012      1/7/2013               Carry Trade                         Sell 1y1y ATM receiver                 USD40mn            -6          -8          ($8,000)       ($100,000)   Unwound
  12/7/2012      1/7/2013          Hedge to short 1y1y                       long 30y swap spread                  $60k dv01         14.3         -1         $918,000        ($200,000)   Unwound
  1/7/2013      1/17/2013        5s swap spread too rich                       5s7s box spread                    $120k dv01         7.5         6.9         ($60,000)       ($400,000)   Unwound
  1/23/2013     2/28/2013       Pause in easing speculaion               Swap 20s30s box (20y long)                $80k dv01          -7         -4.6        $232,000        ($500,000)   Unwound
  1/17/2013      3/8/2013                  Carry                      short 5x5, long 10x10, short 20x10           $60k dv01         -149        -140        $360,000        ($250,000)   Unwound
  2/5/2013       3/8/2013                Volatility                      Short 1yx8y ATM+10bp payers                 $60mn           -92         -62         $180,000        ($150,000)   Unwound
 10/18/2012     3/21/2013                Widener                             2y Tibor 6v1 widener                 $120k dv01          19         19.2         $24,000        ($400,000)   Unwound
  2/7/2013      3/28/2013          Volatility and Rates             Short 1yx8y ATM straddle with 5x2 long           $30mn           -235        -202         $99,000        ($150,000)   Unwound
Source: Barclays Research

18 April 2013                                                                                                                                                                                        65
Barclays | Global Rates Weekly

Trades Unwound (continued)
  Inception    Unwound                                                                               Weights/Notional     Levels @     Levels @      Net Change (Gain   Total Stop
    Date         Date              Theme                               Trade                             Amount           Inception     Unwind         (+) /Loss (-))   Loss (bp)    Horizon
 US Options
 10/7/2011    1/9/2012         Sell GBP Gamma                   Sell 3m5y straddles                     GBP 25mn         ($650,000)   ($491,000)        $159,000        ($500,000)   Expired
 10/7/2011    1/9/2012         Sell EUR Gamma                 Sell EUR 3m2y straddles                   EUR 25mn         ($225,000)   ($175,000)         $50,000        ($100,000)   Expired
 10/20/2011   1/20/2012        Sell US Gamma                   Sell 3m*10y straddles                     $10mn           ($420,000)   ($285,000)        $135,000        ($125,000)   Expired
 1/19/2012    1/26/2012           Steepener          Long 4m30y payer spread (1.8 vs 2.1) and        $100mn: (2400)      ($100,000)    $700,000         $800,000        ($500,000)   Unwound
                                                            short TYM2 puts @ 128.5
 11/18/2010   2/3/2012           Fed on hold                     long 1y1y collar                   $300mm:($300mm)      $1,546,000   $2,069,000        $523,000        ($500,000)   Unwound
 3/10/2011    2/3/2012           Fed on hold                      1y5y covered call                      $10mn           ($150,000)    $108,000         $258,000        ($250,000)   Unwound
 5/19/2011    2/3/2012       Hedge to Fed on hold   Long 1y*2y payer spread (atm vs 100bp high-     $240mn: ($100mn)          0        $100,000         $100,000        ($250,000)   Unwound
                                                       strike) and sell high-strike 1y*5y payer;
                                                      unwound the long 1y2y payer on 9/2/11
  7/8/2011    2/3/2012           GBP options        1y1y vs 1y5y bear flat; unwound the long 1y1y    470mn: (100mn)      ($125,000)    $517,000         $642,000        ($250,000)   Unwound
                                                                 payer on Sep 22 '11
 11/4/2011    2/6/2012         Sell US Gamma                    Sell 3m*10y straddles                    $10mn           ($431,000)   ($233,000)        $198,000        ($250,000)   Expired
  2/4/2011    2/9/2012           Fed on hold            Rec 1y1y and sell 25bp low 1y*1y recr            $100mn          ($225,000)    $249,000         $474,000        ($250,000)   Expired
 11/17/2011   2/17/2012        Sell US Gamma                   Sell 3m*10y straddles                     $10mn           ($440,000)   ($134,000)        $306,000        ($250,000)   Expired
 12/15/2011   2/24/2012        Sell US Gamma                     Sell TYH2 straddles                       100           ($284,375)    ($64,375)        $220,000        ($100,000)   Expired
 12/2/2011    3/2/2012         Sell US Gamma                   Sell 3m*10y straddles                     $10mn           ($393,000)   ($259,000)        $134,000        ($250,000)   Expired
 11/10/2011   3/9/2012        Eurozone contagion           6m 10y-30y CMS Bull Flattener                $50k dv01         $225,000    ($350,000)        ($575,000)      ($500,000)   Stop-out
  2/3/2012    3/22/2012           Steepener                5y*2y vs 5y*30y bear steepener            ($200mn):$20mn       ($90,000)   ($630,000)        ($540,000)      ($500,000)   Stop-out
 2/16/2012    3/22/2012           Steepener               2y*10y vs 2y*30y bear steepener           ($ $50mn    ($20,000)   ($560,000)        ($540,000)      ($500,000)   Stop-out
  2/9/2012    3/23/2012        Sell US Gamma                     Sell TYJ2 straddles                       100           ($201,000)   ($150,000)         $51,000        ($100,000)   Expired
 2/23/2012    4/20/2012        Sell US Gamma                     Sell TYK2 straddles                       100           ($232,813)    ($67,813)        $165,000        ($100,000)   Expired
  3/1/2012    4/20/2012        Sell US Gamma                     Sell TYK2 straddles                       100           ($212,500)   ($117,500)         $95,000        ($100,000)   Expired
 11/4/2011    5/4/2012        Eurozone contagion    Long 6m1y payer spread vs. short 6m5y payer     $485mn: ($100mn)          0            0               $0           ($250,000)   Expired
  2/9/2012    5/9/2012        Eurozone contagion    Long 3m1y payer spread vs. short 3m7y payer     $490mn: ($100mn)     ($110,000)    $270,000         $380,000        ($500,000)   Expired
 11/17/2011   5/11/2012      Eurozone Contagion        Buy 6m2y payr spd vs 6m10y payr spd             EUR 225mn:             0            0               $0           ($500,000)   Unwound
 2/23/2012    5/11/2012          Higher rates           Buy 3m*10y payer 2.25% KO 2.75%                  $100mn           $570,000      $40,000         ($530,000)      ($500,000)   Unwound
  3/9/2012    5/17/2012        Sell US Gamma                    Sell TYM2 straddles                        100           ($245,313)   ($320,313)        ($75,000)       ($100,000)   Unwound
 3/22/2012    5/17/2012       Rangebound rates      Long 1y30y @ 3.1% vs short 3m30y @ 3.1%          $20mn:($20mn)       $1,540,000   $1,035,000        ($505,000)      ($500,000)   Stop-out
 3/29/2012    5/17/2012        Sell US Gamma                    Sell TYM2 straddles                        200           ($440,625)   ($750,625)        ($310,000)      ($100,000)   Unwound
  4/6/2012    5/17/2012        Sell US Gamma                    Sell TYM2 straddles                        100           ($190,625)   ($280,625)        ($90,000)       ($100,000)   Unwound
 4/12/2012    5/17/2012        Sell US Gamma                    Sell TYM2 straddles                        100           ($193,750)   ($273,750)        ($80,000)       ($100,000)   Unwound
 4/19/2012    5/17/2012        Sell US Gamma                     Sell TYN2 straddles                       100           ($221,875)   ($266,875)        ($45,000)       ($100,000)   Unwound
 4/26/2012    5/17/2012        Sell US Gamma                     Sell TYN2 straddles                       100           ($192,188)   ($192,188)        ($30,000)       ($100,000)   Unwound
 1/26/2012    5/25/2012         Cross -currency         Long EUR 4m*7y vs TYM2 straddles             EUR 10mn: (100)      ($20,000)    $160,000         $180,000        ($500,000)   Expired
 4/13/2012    6/1/2012           Higher rates          Buy EUR 3m*5y payer 1.55% KO 2.05%              EUR 100mn          $560,000      $50,000         ($510,000)      ($500,000)   Stop-out
  1/6/2012    6/21/2012      Eurozone Contagion     Long 6m1y payer spread vs. short 6m7y payer     $490mn: ($100mn)     ($340,000)        0            $340,000        ($500,000)   Unwound
 2/17/2011    7/12/2012         Relative Value       Buy 3y*10y payer @ 5% Sell 3y SL 10y CMS        $50mn: ($350mn)     ($100,000)        0            $100,000        ($500,000)   Unwound
                                                                     Cap @ 5%
 8/18/2011    7/12/2012       Eurozone contagion    Long 1y2y payer spread vs 1y10y payer spread      $90mn: $20mn       ($130,000)     $10,000         $140,000        ($500,000)   Unwound

  2/3/2012    7/12/2012       Eurozone contagion     Long 1y1y payer spread (0.55% vs 1.05%)             $100mn           $105,000      $55,000         ($50,000)       ($50,000)    Unwound
 6/15/2012    7/12/2012       Eurozone contagion          1m*10y vs 1m*30y bull flattener           ($116.5mn):$50mn          0       ($510,000)        ($510,000)      ($500,000)   Stop-out
 4/20/2012    7/26/2012     Long EUR vs. US gamma        Long EUR 4m*7y std vs. TYU2 std             EUR 50mn: (750)     ($945,000)   ($1,495,000)      ($550,000)      ($500,000)   Stop-out
 4/26/2012    7/26/2012         Relative Value      Long 1y5y straddles vs 3EM2 straddles; sold       $100mn:(2000)      ($250,000)    ($10,000)        $240,000        ($500,000)   Unwound
                                                           3EU2 straddles for $1.75mn
 6/28/2012    7/26/2012            Short vol                  Short 1y*10y straddles                     ($20mn)         ($1,260,000) ($1,560,000)      ($300,000)      ($250,000)   Stop-out
 5/18/2012    8/3/2012        Eurozone contagion      Buy 1y*30y flr 2.25% vs 3m*30y flr 2.25%      $200mn: ($200mn)      $350,000    $1,090,000        $740,000        ($250,000)   Unwound

Source: Barclays Research

18 April 2013                                                                                                                                                                                   66
Barclays | Global Rates Weekly

Trades Unwound (continued)
  Inception       Unwound                                                                                       Weights/Notional     Levels @     Levels @      Net Change (Gain   Total Stop
    Date            Date                Theme                                    Trade                              Amount           Inception     Unwind         (+) /Loss (-))    Loss (bp)     Horizon
 7/12/2012        8/3/2012        Eurozone contagion            Long USU2 156-157 Call spread (digital floor)    3000 contracts      $515,625     $195,625         ($320,000)      ($250,000)     Stop-out

  8/9/2012     9/13/2012                 Tactical                     3m*10y vs 3m*30y bull steepener           $117mn: ($50mn)          0        $725,000         $725,000        ($500,000)     Unwound
  9/7/2012     9/20/2012                Steepener                      1y*7y vs 1y*30y bull steepener            $63mn: ($20mn)          0         $90,000          $90,000        ($500,000)     Unwound
 9/20/2012     11/23/2012            Relative Value                Short TYZ2 straddles vs 11/23-12 -> 7y         +$100mn: (820     ($250,000)    ($70,000)        $180,000        ($500,000)     Expired
                                                                            swaption straddles                      contracts)
 10/23/2012 11/23/2012                   Election                     Long FVZ2 straddles: strike 124             1000 contracts      671,875      781,875         $110,000        ($200,000)     Expired
 5/24/2012     11/29/2012               Short vol                Short 1y*10y straddles vs. long 1y1y payer     ($20mn): $200mn     ($1,160,000) ($1,015,000)      $145,000                       Unwound
                                                                              spread 1- 1.25
  6/7/2012     11/29/2012               Short vol                         Short 1y*10y straddles                    ($50mn)         ($3,250,000) ($2,350,000)      $900,000                       Unwound
 11/15/2012 12/11/2012              unwind fvz2 std               Short FVZ2 to hedge the long FVZ2 124               1000            124-25       124-25+            $0                          Unwound
 1/15/2009     12/13/2012       Longer Rates could Rise         Buy 5y*10yr Payr Spd (ATM vs 100 bp high),      $100mm: - $100mm    ($1,924,000) ($1,910,000)       $14,000        ($250,000)     Unwound
                                                                added the short CMS cap @ 5% on 7/2/10 ;
                                                                 sell 6w*10y payer @ 2.75% on Nov 10 '11
  2/9/2012     12/13/2012          Hike expectations                Long 1y*1y - 1y*3y - 1y*5y payer fly        ($300mn): $200mn:    ($30,000)     ($3,000)         $27,000        ($500,000)     Unwound
 5/25/2012     12/13/2012               Short vol                          Short 2y*10y straddles                    ($20mn)        ($1,830,000) ($1,465,000)      $365,000                       Unwound
 6/21/2012     12/13/2012               Short vol                          Short 2y*10y straddles                   ($20mn)         ($1,800,000) ($1,445,000)      $355,000        ($1,000,000)   Unwound
 8/16/2012     12/13/2012               Short vol                          Short 2y*10y straddles                   ($10mn)         ($935,000)   ($805,000)        $130,000                       Unwound
 10/23/2012       1/4/2013          Election volatility           Long 220mn 2m*5y ATM payer vs. 50mn             220mn:(50mn)      ($580,000)   ($725,000)        ($145,000)      ($200,000)     Expired
                                                                           2m*30y ATM payer
  1/4/2013        4/5/2013               Tactical                     3m*7y vs 3m*30y bear flattener             +$75mn:($25mn)     ($110,000)        $0           $110,000        ($500,000)     Expired
                                                                                                                                      -491bp:      -330bp:         $300,000
 3/27/2013     4/11/2013         Front end looks cheap                   Long Jul13s energy hedged               $200mn:65 XBM3                                                    ($500,000)     Unwound
                                                                                                                                       308.12       284.39
 EUR Options
  3/9/2012     12/13/2012           Capped steepener            2y5y vs 2y30y bear steepener, short 2y SL 5y-    (EUR 90mn): EUR    ($1,597,000) ($2,127,000)      ($530,000)      ($500,000)     Stop-out
                                                                           30y curve cap @ 75bp                 20mn: (EUR 400mn)
 JPY Options
 5/30/2012     6/29/2012              Higher rates                      Sell 1m*20y receiver spread                  $27mn             41cts        20cts          $110,700        ($225,000)     Unwound
 6/28/2012     7/20/2012                 Tactical                    1m*10y risk reversal (long payers)          $80mn notional        0 cts       -38 cts         ($304,000)      ($160,000)     Stop-out
  7/6/2012     10/5/2012             Relative Value                       Long 6mx10y 1x2 payers                 $80mn notional        -26cts       1.8cts         $222,000        ($200,000)     Unwound
 10/25/2012 11/15/2012                   Tactical                       Conditional 10s20s flattener                  80mn               -8           0             $64,000        ($200,000)     Unwound
 7/13/2012     12/7/2012                Long vol                 Long JPY 5y5y OTM recr , delta hedged with      $80mn notional        80cts        121cts         $328,000        ($160,000)     Unwound
                                                                                  10y swap
 11/29/2012    1/17/2013              Bear flattener              ATM+10bp 6mx5y payer long vs. 6mx10y               $100mn             -10           -7            $30,000        ($200,000)     Unwound
                                                                                 payer short
 1/10/2013     1/24/2013                 Low vol                    sell 1mx10y receiver (0.8% at 20 sen)            $80mn              -20          -43           ($24,000)       ($200,000)     Stop-out
 1/10/2013     1/24/2013                 Low vol                   sell 3mx20y receiver (1.65% at 74 sen)            $50mn              -74          120           ($15,000)       ($200,000)     Stop-out
 11/28/2012    3/28/2013          Volsurface is too flat          Long 10yx10y straddle vs. 5yx5y straddle          $120mm              88           96             $96,000        ($250,000)     Unwound
  5/4/2012     6/28/2012                 Tactical                Long EUR 6m*2y payer vs GBP 6m*2y payer           EUR 100mn             0        $135,000         $135,000        ($250,000)     Unwound
 8/17/2012     10/25/2012                Tactical                   Receive USD/JPY Xccy basis 20yx10y              $30k dv01          53bp         29bp           $720,000        ($200,000)     Unwound
 9/21/2012     11/23/2012          US vs EUR gamma                      Long RXZ2 std vs. TYZ2 std                 +500: (860)       $300,000     $663,000         $363,000        ($500,000)     Expired
 10/15/2009 12/13/2012               Cross -currency            Short 5x10 US caps @ 8% vs Long 5x10 EUR ($75mm): EUR 50mm          ($200,000)     $65,000         $265,000        ($500,000)     Unwound
                                                                                caps @ 5%
  2/3/2012     12/13/2012            Cross -currency             Long EUR 3y10y P @ 4% vs USD 3y10y P @     EUR 10mn: (13mn)         ($90,000)    ($80,000)         $10,000        ($500,000)     Unwound
 11/29/2012    2/28/2013               EUR vs US                Long RXH3 std 144.5 vs short TYH3 std 133.5    +400: (740)           $100,000    ($720,000)        ($820,000)      ($1,000,000)   Stop-out

 12/21/2012       3/7/2012    USD funding supplied via MoF                   Pay 8y Xccy basis                      $40k dv01          -66.5         -55           $460,000        ($400,000)     Unwound
 2/28/2013        3/7/2013   JPY long end is too rich vs. USD   short 10yx10y JPY swap vs. USD (beta = 0.4)       usd 40 k dv01         107          97            ($400,000)      ($400,000)     Stop-out

Source: Barclays Research

18 April 2013                                                                                                                                                                                                67
Barclays | Global Rates Weekly

                      Country                                   Bond                 Coupon   Maturity     Size - bn

     Euro Area
     24-Apr-13                 Italy                     BTPei Linker Auction                                1.00
     24-Apr-13              Germany                       30y Bund Auction           2.50%     04-Jul-44     2.00
     29-Apr-13                 Italy                        5yr BTP Auction          3.50%    01-Jun-18      3.00
     29-Apr-13                 Italy                       10yr BTP Auction          4.50%    01-May-23      3.00
     29-Apr-13              Belgium                         5y BGB Auction           1.00%    04-Mar-18      1.00
     29-Apr-13              Belgium                        10y BGB Auction                    28-Sep-23      1.25
     29-Apr-13              Belgium                        15y BGB Auction           5.50%    28-Mar-28      1.00
      May-13                Belgium                             New 30y                                      4.00
     02-May-13               France                            10y OAT               2.25%    25-Oct-22      4.00
     02-May-13               France                            15y OAT               2.75%    25-Oct-27      2.00
     02-May-13               France                            30y OAT                        01-May-44      1.50
     03-May-13                Spain                     Bond Announcement
     07-May-13               Austria                            5y RAGB                       15-Apr-18      0.83
     07-May-13               Austria                           10y RAGB              3.40%    22-Nov-22      0.83
     08-May-13              Germany                     New 5y OBL Auction                     Apr-18        5.00
     08-May-13                 Italy              Nominal Bond & Size Announcement
     09-May-13                Spain                             2y SPGB              2.75%    31-Mar-15      1.50
     09-May-13                Spain                             3y SPGB                       31-Mar-16      1.50
     09-May-13                Spain                            15y SPGB              5.90%     30-Jul-26     1.00
     13-May-13                 Italy                       3yr BTP Auction                    01-May-16      3.00
     13-May-13                 Italy                       5yr CCT Auction            FRN     15-Jun-17      1.00
     13-May-13                 Italy                            15y BTP              4.75%    01-Sep-28      2.00
     14-May-13               Holland                   5y DSL Tap (1.5-2.5bn)                 15-Jan-18      2.50
     14-May-13               Ireland                            5y IRISH             5.50%    18-Oct-17      0.25
     14-May-13               Ireland                           10y IRISH             4.25%    20-Mar-23      0.25
     15-May-13              Germany                    New 2y Schatz Auction                    Jun-15       5.00
     16-May-13               France                            5yr BTAN              1.00%    25-May-18      3.50
     16-May-13               France                            2yr BTAN              0.25%    01-Nov-15      3.00
     16-May-13               France                            2yr BTAN              1.00%    25-Oct-16      1.50
     16-May-13               France                        OATi/ei Auctions                                  1.50
     17-May-13                Spain                     Bond Announcement
     21-May-13              Belgium                     Bond Announcement
     22-May-13              Germany                       10y Bund Auction                     May-23        5.00
     23-May-13                Spain                             5y SPGB              4.50%    31-Jan-18
     23-May-13                Spain                            10y SPGB              5.40%    31-Jan-23      2.00
     23-May-13                Spain                            20y SPGB              5.75%    30-Jul-32
     23-Apr-13               Japan                  Liquidity Enhancement Auction                            300
     25-Apr-13               Japan                           2y JGB Auction                                2700.00
     01-May-13               Japan                          10y JGB Auction                                2500.00
     08-May-13               Japan                  Liquidity Enhancement Auction                          300.00
     14-May-13               Japan                          30y JGB Auction                                700.00
     16-May-13               Japan                           5y JGB Auction                                 2600
     21-May-13               Japan                          40y JGB Auction                                  400
     23-May-13               Japan                  Liquidity Enhancement Auction                            300
     24-Apr-13                  UK                          UKT linker 2029          0.125%   22-Mar-29       1.5
     08-May-13                  UK                          UKT linker 2044          0.125%   22-Mar-44       1.2
     14-May-13                  UK                            UKT 2018               1.250%    22-Jul-18      4.5
     16-May-13                  UK                            UKT 2044               3.250%   22-Jan-44       2.5
     23-Apr-13                US                             2y Note Auction                                  35
     24-Apr-13                US                             5y Note Auction                                  35
     25-Apr-13                US                             7y Note Auction                                  29
     07-May-13                US                             3y Note Auction                                  32
     08-May-13                US                            10y Note Auction                                  24
     09-May-13                US                            30y Bond Auction                                  16
     23-May-13                US                            10y TIPs Auction                                  13
                      Unconfirmed Barclays Capital Estimate
Source: Barclays Research

18 April 2013                                                                                                          68
Barclays | Global Rates Weekly

                                           US Treasuries                                       US swap spreads

              Fed funds       3m Libor      2y        5y     10y    30y    10y RY             2y      5y      10y    30y
   Q2 13       0.00-0.25        0.25        0.20     0.75    1.80   3.00   -0.75    Q2 13     15      15      10     -15
   Q3 13       0.00-0.25        0.25        0.20     0.75    1.80   3.00   -0.80    Q3 13     15      15      10     -10
   Q4 13       0.00-0.25        0.20        0.25     0.80    2.00   3.15   -0.65    Q4 13     15      15      10     -5
   Q1 14       0.00-0.25        0.20        0.30     0.90    2.00   3.15   -0.75    Q1 14     15      15      10     -5

                                 Euro government (Germany)                                  Euro area swap spreads

                Refi rate        3m          2y        5y     10y    30y   10y RY             2y      5y     10y     30y
   Q2 13          0.75          0.23        0.10      0.55   1.60   2.35    -0.15   Q2 13     40      40      30      5
   Q3 13          0.75          0.25        0.15      0.65   1.75   2.45    -0.10   Q3 13     40      40      30      5
   Q4 13          0.75          0.25        0.20      0.70   1.80   2.50    -0.10   Q4 13     40      40      30      5
   Q1 14          0.75          0.25        0.30      0.85   1.95   2.60     0      Q1 14     40      40      30      5

                                          UK government                                       UK swap spreads

               Bank rate         3m          2y        5y     10y    30y   10y RY             2y      5y     10y     30y
   Q2 13          0.50          0.50        0.30      1.00   2.00   3.15    -1.35   Q2 13     40      15     10      -15
   Q3 13          0.50          0.50        0.35      1.10   2.10   3.20    -1.30   Q3 13     40      15     10      -15
   Q4 13          0.50          0.50        0.40      1.20   2.20   3.30    -1.25   Q4 13     35      10      5      -10
   Q1 14          0.50          0.50        0.45      1.30   2.30   3.35    -1.15   Q4 14     35      10      0      -10

                                         Japan government                                    Japan swap spreads

              Official rate      3m         2y        5y      10y    30y   10y RY             2y      5y     10y     30y
   Q2 13          0.10          0. 20       0.09     0.18    0.50   1.25    0.00    Q2 13     15      12      1      -4
   Q3 13          0.10          0. 20       0.09     0.18    0.50   1.25    0.00    Q3 13     15      13      2      -10
   Q4 13          0.10          0.20        0.09     0.18    0.45   1.15    0.10    Q4 13     15      13      3      -10
   Q1 14          0.10          0.20        0.09     0.18    0.45   1.15    0.10    Q1 14     15      13      3      -10

Source: Barclays Research

18 April 2013                                                                                                              69
Barclays | Global Rates Weekly

Ajay Rajadhyaksha
Head of Rates and Securitised
Products Strategy
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18 April 2013                                                                                                                       70
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