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Barclays Capital - Regime shift

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Regime shift

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									                                                                                                               Interest Rates Research
                                                                                                                               30 May 2013


Global Rates Weekly
Regime shift
• Broad-based losses in carry trades across asset classes over the past month
     suggest a perceived regime shift in policy.                                             Views on a Page                               5
                                                                                             Trade Portfolio Update                        43
• The market continues to re-price to a hawkish shift in the Fed’s tone, as
     evidenced by a further rise in long-term real rates and a tightening of                 Global Supply Calendar                        56
     breakevens. Given the uncertain market perception of the Fed's reaction                 Global Bond Yield Forecasts                   57
     function, we remain neutral on duration and maintain our long gamma view.

• We maintain our US 7s30s/10s30s curve flattener view, as the curve looks steep,            United States
     given modest inflation expectations. We also recommend bear flatteners to               TIPS: 10s30s breakeven flatteners now
     position for a further sell-off and bull spread tighteners for a reversal.              attractive                                    14
                                                                                             Money Markets: Heading east                   17
Global
Regime shift                                                                           2     Europe
We are neutral on duration in developed rates and long US gamma, given our belief that       Sovereign Spreads: Taper talk – in core EGB
markets are likely to remain volatile and sensitive to US labor metrics over the summer.     markets                                     23
We maintain our US 7s30s curve flattener view, given the drop in inflation expectations.     Money Markets: ECB – no rush on policy
                                                                                             rates                                         26
United States                                                                                SSA: European support structures – familiar
                                                                                             territory                                     34
Tread with caution                                                                       6
The market continues to re-price to a hawkish shift in the Fed’s tone, as evidenced by a     Scandinavia: Prospect of Riksbank rate cut
                                                                                             despite headline GDP surprise              35
further rise in long-term real rates and a tightening of breakevens. At current levels,
curve flatteners continue to offer better risk-reward than outright duration views, given    UK Inflation-Linked: Watch out for the
                                                                                             overhang                                      37
the high uncertainty about the Fed’s reaction function. In options, we recommend bear
flatteners to position for a further sell-off and bull spread tighteners for a reversal.     Special Topic: EGBs – Back to trading like a
                                                                                             rate product                                 38
Euro Area
                                                                                             www.barclays.com
Sharp sell-off in euro rates – do not fade it                                   20
European rates have not been immune to the recent volatility in global markets. We
were expecting rates to gradually move higher: even though our end-Q2 targets have
been reached, we maintain our neutral-to-negative view on rates.

UK
Steeper and cheaper                                                             30
The DMO plans to launch a new “super long” 50-60y maturity nominal gilt next month.
There is some natural demand for a super long issue: the ultra long end needs to
cheapen and steepen for supply to be absorbed. We favour 2052/2060 steepeners.

Japan
Tug of war in JPY/USD cross-currency basis                                          41
10y USD/JPY Xccy basis is now as negative as it was in May 2012. Given the gradual
tightening of loan spreads, spreads on new loans are likely to be much tighter and may
eventually become a disincentive for banks to bear more basis cost.




PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER PAGE 58
Barclays | Global Rates Weekly


GLOBAL THEMES

                                              Regime shift
Rajiv Setia                                   We are neutral on duration in developed rates and long US gamma, given our belief that
+1 212 412 5507                               markets are likely to remain volatile and sensitive to US labor metrics over the summer.
rajiv.setia@barclays.com                      We maintain our US 7s30s curve flattener view, given the drop in inflation expectations.

                                              Global rates endured another week of high volatility. 10y Treasuries sold off 9bp through
Laurent Fransolet
                                              Thursday, but this masks the intraday volatility that characterized much of the week, on
+44 (0)20 7773 8385
                                              little fundamental news. It remains clear that the market believes that US monetary policy
laurent.fransolet@barclays.com
                                              has taken a hawkish turn, while the increase in volatility in the bond and stock markets in
                                              Japan has market participants questioning the efficacy of the BoJ’s monetary expansion.
Amrut Nashikkar
                                              Meanwhile, inflation expectations in the US have continued to decline through the rate sell-
+1 212 412 1848
                                              off, and real rates have to risen to levels not reached since early 2012, even as the incoming
amrut.nashikkar@barclays.com
                                              data have remained decidedly mixed (Figure 1).

                                              It is not just the level of real rates that suggests that there has been a policy change in the
                                              market’s mind; a look at carry trades in several other markets corroborates such a belief. By
                                              definition, an investor in a carry trade looks to earn a risk premium with a view that markets
                                              will remain range-bound; ie, forward prices are not realized, but roll to spot prices instead.
                                              The fact that carry-trades across asset classes performed poorly over the past month
                                              suggests that the market perceives such a regime shift.

Carry trades across asset                     In Figure 2, we have chosen a few carry trades that were popular at the end of April. Some
classes were likely stopped out               of these are rates trades, such as receiving 3y1y rates, long the belly of the curve, 7s30s
in May, suggesting that a                     steepeners, short 1y10y straddles and long 10y JGBs. Others are non-rates trades such as
reversal may be slow in                       long AUD and long agency mortgage REITs. With the exception of the 7s-30s steepener and
coming.                                       selling rates vol, the other trades have given up more than a year’s worth of carry. Clearly,
                                              the past month has been brutal for carry trades; we did not see such broad-based losses in
                                              carry trades across asset classes in the January rate sell-off. Faced with large losses,
                                              leveraged money will likely be hesitant to position for a reversal anytime soon.




FIGURE 1                                                                    FIGURE 2
Sell-off in rates continues to be real yield driven, while                  With the exception of 7s30s curve steepeners, popular carry
inflation expectations are falling                                          trades have severely underperformed over the past month

120
                                                                                                 1y expected     Carry/     Months of carry
100                                                                          Trade              carry , 30-Apr    vol        lost in May

  80                                                                         Receive 3y1y               50 bp     1.05            14
                                                                             Receive 7s                 38 bp     0.91            13
  60
                                                                             7s30s steepener            26 bp     0.64            1.5
  40
                                                                             Short 1y10y
                                                                                                        270        -               5
                                                                             straddle (cnts)
  20
                                                                             Long AUD (cnts)             2.6      0.27            32
   0
                                                                             Long agency
                                                                                                        1.73      0.75            12
 -20                                                                         REIT ETFs ($)
       Oct-Dec 10       Oct 11       Mar 12    July-Aug 12   May 13          Buy 10y JGB                15 bp     0.23            25
              Change in real yields, bp   Change in breakevens, bp
Source: Barclays Research                                                   Source: Barclays Research


30 May 2013                                                                                                                               2
Barclays | Global Rates Weekly


                                        Adding fuel to the fire, there are emerging signs of instability in Japanese markets, potentially
                                        signalling the constraints of unconventional monetary policy at the zero lower bound. Despite
                                        the BoJ’s stated intention to lower long-term interest rates, 10y JGBs now trade nearly 35bp
                                        higher than they did before the BoJ’s QQE announcement. The Nikkei has been extremely
                                        volatile, already having lost over 2,000 points after rising to a local peak of 15,627. This rise in
                                        volatility, along with the increase in rates, means that financial conditions in Japan have
                                        tightened over the past few days, quite the opposite of the BoJ’s intention.

Volatility in Japanese equity          As our Japanese economists have argued, it will be extremely difficult for the BoJ to meet its
and rates markets means that           stated inflation target of 2% (see Long and winding road to inflation, April 25, 2013). This is
it may be difficult for investors      compounded by the fact that wealth effects, if any, from the rise in the stock market are
to position for a rally                likely to be small, given the low levels of stock ownership in Japan (only 7% in Japan, vs 33%
                                       in the US, Figure 3). Further, Japanese depository institutions hold over JPY300trn of
                                       government bonds, which means that any large rises in interest rates could also lead to
                                       losses on their holdings; capital losses could crimp credit creation, implying an indirect
                                       tightening of policy.

                                        Our Japanese strategists believe that 0.8% on 10y JGBs is an attractive level for the long
                                        term. But it is unclear how the BoJ, which has already announced a massive bond purchase
                                        program, could push rates lower in the face of rising volatility. This leads us to take a
                                        cautious stance on outright duration in Japan.

                                        Volatility is likely to remain elevated
In the US, we are neutral on           We are neutral on duration in developed markets. Over the past few years, we have
duration, but maintain our long        consistently viewed every inordinate rate sell-off in the US as an opportunity to “buy the
gamma and curve flattener              dip.” We are no longer in that camp. Our base view has always been that rates would start
views.                                 to rise on a sustainable basis, as growth accelerated to above trend, most likely in 2014.
                                       While we still expect this to be the case, our change of stance on duration to neutral last
                                       week (see Unusually uncertain, May 23, 2013) was not driven by a fundamental shift in our
                                       economic outlook. Rather, it was driven purely by our view that the market’s perception of
                                       the Fed’s reaction function has shifted dramatically following mixed messages from Fed
                                       leadership. Specifically, unless Fed speakers clarify what metrics they are looking at to
                                       gauge the appropriate timing of the withdrawal of stimulus, volatility is likely to remain
                                       elevated in the months ahead. In the US Rates Strategy section of this publication, we argue
                                       that while the Fed has typically tended to overestimate growth, it has underestimated the

FIGURE 3                                                                FIGURE 4
Equity ownership by households in Japan is much lower than              The Fed has typically turned dovish whenever the
in the US or even Europe                                                unemployment rate has stalled
 100%                                                                     0.4
                                                                                                                  Dovish
  80%                                                                     0.2

                                                                          0.0
  60%
                                                                         -0.2
  40%
                                                                         -0.4
  20%
                                                                         -0.6
    0%
                                                                         -0.8
                  Japan         United States        Euro Area
                                                                                                                               Hawkish
     Currency & Deposits             Bonds                               -1.0
     Investment Trusts               Shares and equities                    Jan-10    Jul-10    Jan-11   Jul-11   Jan-12   Jul-12   Jan-13
     Insurance andPension Reserves   Others                                                 Change in Unemployment Rate, 6 months
Source: Bank of Japan                                                   Source: Barclays Research


30 May 2013                                                                                                                                  3
Barclays | Global Rates Weekly


                                 drop in the unemployment rate. With the market already pricing in the first hike in mid-
                                 2015, there is probably some more room for expectations to be pulled forward to early
                                 2015 if the unemployment rate continues to drop because of modest job growth and a fall
                                 in the participation rate. Such a scenario would imply 10s trading at 2.25% in the near term.

                                 On the other hand, if the decline in the unemployment rate stalls (Figure 4), the Fed could
                                 turn increasingly dovish. This leads us to be neutral on duration unless the Fed clarifies
                                 otherwise. We are also maintaining our long gamma and 7s30s flattener views going into
                                 payrolls. For a list of trade ideas to implement our views or to position for either a
                                 continuation of the sell-off or for a reversal, please refer to the US Rates Strategy section.

                                 Our European rates strategists believe that rates in core European countries are likely to be
                                 driven largely by US rate moves over the near term. Given the recent stabilization in
                                 European data, in the Euro Rates Strategy section of this publication we suggest that the
                                 recent sell-off in core European rates should not be faded.




30 May 2013                                                                                                                 4
Barclays | Global Rates Weekly


VIEWS ON A PAGE
              US                                                                        EUROPE                                                              JAPAN
 Direction    • Economic data in the US remain modest, with the fiscal deal and         • Developments in the US are likely to continue to drive euro       • Investors appear to have grown cautious about buying on
                   the sequester likely to exert significant drags.                         rates next week. Therefore the focus is on the NFP report,          weakness in the face of the rising volatility in the markets this
              • The market has overreacted to concerns about tapering, but                  which should affect market expectations on the possibility          month. We believe this situation will continue for now given the
                   uncertainty about the Fed’s reaction function has also increased.        of Fed tapering QE. In the Eurozone all eyes will be on the         low likelihood of any rapid retreat in yields. Nevertheless, we see
                                                                                            ECB, which is expected to remain on hold at its June                10y and 5y JGB yields of 0.8% and 0.3%, respectively, as attractive
              • We maintain our neutral view on duration.
                                                                                            meeting. With the liquidity surplus well below €300bn,              from a long-term viewpoint in light of the negative economic
                                                                                            markets will pay a lot of attention on the 3y LTROs payback         factors worldwide, such as Chinese economic trends. A Fed exit
                                                                                            announcement.                                                       strategy stands as the one real upside risk for JGB yields, but at
                                                                                                                                                                present levels we would recommend maintaining a long position.
 Curve/       • We maintain 10s30s flatteners, as the curve looks too steep, given • Hold on to receive EUR 5y5y/5y10y/5y15y fwds.                          • 1s3s5s short vs 3s5s7s long.
 curvature      inflation expectations.                                            • Hold onto pay EUR 5y10y/5y15y/5y20y fwds.
              • We maintain our long front-end Tsy vs. OIS view, given improving • UK: Longer-dated nominal gilt yields remain rich,
                   financing conditions. The 2y sector looks cheap.                         underpinned by low real rates. Reset Gilt 5/30s or Gilt
              • We maintain a short view on a weighted 5s10s20s fly to position             10/30s steepeners into Q2 13 supply. Declining realised
                   for a decline in the term premium.                                       volatility supports carry-and-roll structures – carry: vol
              • Shorten on the Cs STRIPS curve into the 10-12y area; switch out             ratios are at their cheapest in the 10-15y part of the curve.
                of rich 20y Tsy P STRIPS to 20y REFCO P STRIPS.                    • Into super long supply in June , hold 2052/2060 steepeners
 Swap         • Neutral on 30y spread wideners, considering risks from risky asset • EUR: Take profit on short Bobl ASW on Ger 5s/30s ASW       • 20s30s box (20y long).
 spreads        underperformance.                                                    box.
                                                                                                                                                • Short 10y and 5y.
              • 1y1y Libor-OIS tightener hedged with 1y1y 3s1s widener.            • GBP: While short-dated asset swaps can remain well
              • 10s30s spread curve flattener to benefit from possible convexity     supported between now and end-June, we see 30y ASW
                   paying.                                                                  vulnerable both outright and on the ASW curve into May
                                                                                            and June’s supply.
 Other        • We continue to favor long-end agency-Treasury spread tighteners • SEK: Hold SEK/EUR 10y tighteners in swaps and longs in                    • Pay USD/JPY 1yx1y basis.
 spread            but find the most upside potential only in the super-long end. 7s        SEK Sep ‘13 3m FRA.
 sectors                                                                                                                                                    • Pay USD/JPY 4y basis.
                   have underperformed along the curve and now offer more than          •   Hold Spain and Italy 2s/5s/10s.
                   20bp of spread pick-up to Treasuries; shorten duration to 10s with
                                                                                        •   Hold Spain 5s/10s/30s.
                   no spread give-up.
                                                                                        •   Hold onto short Spain 10s/15s/30s.
              • We remain constructive on Canadian covered bonds, given their
                   relative isolation from Europe and continued significant spread      •   Long 5-8y Netherlands and Finland versus France.
                   pick-up to agencies. Pockets of value persist in USD SSA space.      •   Long FRTR Oct ‘19/Oct ‘22/Apr ‘26 fly.
 Inflation    • 10s30s breakeven flatteners given already steep levels and the          •   Short 10y euro HICPx swap versus long in OAT€i18                • Breakevens have started to rise even with negative carry intact, and
                   upcoming 30y reopening supply.                                           breakeven.                                                          we expect this trend to continue for now. Over the short term,
              • Neutral on real rates. Long TIIJan17 versus TIIJan18 on ASW.            • UKTI Mar ’24 no longer cheap in relative value, risks of              there is probably an opportunity for capital gains. However, it is
              • The short end may remain under tactical pressure in the                     overhang post upcoming reopening.                                   difficult to determine where levels will settle over the medium to
                   upcoming switch from positive to negative carry.                                                                                             long term. In establishing long positions over such a horizon, we
                                                                                                                                                                recommend paying attention to levels.
 Volatility   • Buy 1m*7y straddles, as uncertainty about the Fed’s policy action • Buy EUR1y*30y 100bp wide risk reversal (long receivers) to
                   could persist for the next few weeks.                                    hedge a risk flare in the eurozone.
              • Initiate 1m*5y vs 1m*15 bear flattener to position for strong           • Buy 1y*5y receivers funded with 1y SL 5-30y curve cap to
                   payroll/Fed taper in the near term. Long 3x13 Libor cap-floor vs         benefit from EUR rates staying low for long.
                   3y10y swaption straddle to position for steepening of the vol        • Buy EUR 6y*5y versus 1y*(5y5y) to position for steepening
                   surface.                                                                 of the vol surface and monetise the range in rates.
Source: Barclays Research




30 May 2013                                                                                                                                                                                                                      5
Barclays | Global Rates Weekly


UNITED STATES: RATES STRATEGY

                                               Tread with caution
Rajiv Setia                                   The market continues to re-price to a hawkish shift in the Fed’s tone, as evidenced by a
+1 212 412 5507                               further rise in long-term real rates and a tightening of breakevens. At current levels,
rajiv.setia@barclays.com                      curve flatteners continue to offer better risk-reward than outright duration views, given
                                              the high uncertainty about the Fed’s reaction function. In options, we recommend bear
Anshul Pradhan                                flatteners to position for a further sell-off and bull spread tighteners for a reversal.
+1 212 412 3681
                                              Over the past few years, we have consistently viewed every inordinate rate sell-off as an
anshul.pradhan@barclays.com
                                              opportunity to “buy the dip.” We are no longer in that camp. Our base view has always been
                                              that rates would start to rise on a sustainable basis, as growth accelerated to above trend,
Amrut Nashikkar
                                              most likely in 2014. While we still expect this to be the case, our change of stance on
+1 212 412 1848
                                              duration to neutral last week (see Unusually uncertain, May 23, 2013) was not driven by a
amrut.nashikkar@barclays.com
                                              fundamental shift in our economic outlook. Rather, it was driven purely by our view that the
                                              market’s perception of the Fed’s reaction function has shifted quite dramatically following
Piyush Goyal
                                              mixed messages from Fed leadership. Specifically, unless Fed speakers clarify what metrics
+1 212 412 6793
                                              they are looking at to gauge the appropriate timing of the withdrawal of stimulus, volatility
piyush.goyal@barclays.com
                                              is likely to remain elevated in the months ahead.
Vivek Shukla                                  Over the past week, the violent sell-off has caused carry trades of all flavors to be punished
+1 212 412 2532                               (see Global Themes elsewhere in this publication). Given current rate levels, we are getting
vivek.s.shukla@barclays.com                   close to where it might be worth outright longs on a tactical basis. From our vantage point,
                                              longer-term forwards already reflect any likely taper. The only question is how much more
                                              the hiking cycle can be pulled forward. With the market still pricing in the first Fed hike in
                                              mid-2015, the market can “reasonably” price to early 2015 (after all, the unemployment
                                              rate could be at 6.5% by late 2014 if recent trends continue). This could push 10y rates to
                                              ~2.25% in the near term. We therefore maintain our neutral duration view for now. On the
                                              other hand, if consumption data surprise to the downside and payrolls disappoint, 10y rates
                                              could rally to 1.8-1.9% as hike expectations are pushed out and the term premium declines.

                                               Given the possibility of large moves in either direction, we continue to recommend being long
                                               gamma on mid-tails. We also maintain our 7s30s/10s30s curve flattener view. While the
                                               10s30s curve has flattened since mid-May, when concerns about tapering were picking up,

FIGURE 1                                                                         FIGURE 2
Unlike in the past sell-off, breakevens have actually                            The Fed has consistently overestimated growth but
tightened, suggesting the sell-off was driven by hawkish Fed                     underestimated the drop in the unemployment rate

120
                                                                                                                    2010       2011      2012      2013*
100
                                                                                 Real GDP, 1y ahead Fed
  80                                                                             forecast, %                          3.0       3.3       2.7       2.55
                                                                                 Realized Real GDP, Q4/Q4, %          2.4       2.0       1.7         --
  60

  40                                                                             Unemp Rate , 1y ahead Fed
                                                                                 forecast, %                          9.5       9.0       8.6        7.4
  20
                                                                                 Realized Unemp Rate, Avg
   0                                                                             Q4, %                                9.5       8.7       7.8         --

 -20
       Oct-Dec 10       Oct 11       Mar 12      July-Aug 12     May 13
              Change in real yields, bp      Change in breakevens, bp
Note: We use Fed CMT data for all the episodes, with the exception of the most   Note:*The latest, not from a year ago. Source: Federal Reserve, Barclays Research
recent one, where we use OTRs. Source: Federal Reserve, Barclays Research

30 May 2013                                                                                                                                                     6
Barclays | Global Rates Weekly


                                 we believe curve flatteners still offer attractive risk-reward. In our view, the curve continues to
                                 look too steep, given modest inflation and inflation expectations. We also recommend
                                 conditional bear flatteners to position for a further sell-off and conditional bull spread
                                 tighteners to position for a reversal. With the market re-pricing expectations higher even for
                                 2014, we recommend going long front-end EDs (please see the trade section at the end of the
                                 article for details).

                                 What has changed?
                                 Not the economic outlook
The rate sell-off has not been   Has the sell-off been driven by expectations of a better economic outlook? We do not think
driven by an improvement in      so. While consumer confidence has been higher than expected, manufacturing surveys and
economic outlook                 industrial production have surprised to the downside. Our economists’ tracking estimate of
                                 Q2 real GDP growth has actually fallen from 1.7% in mid-May to 1.4%. Similarly, consensus
                                 and Barclays forecasts for H2 real GDP growth have barely budged at 2.4% and 2%,
                                 respectively. Inflation data have also surprised to the downside, and market expectations of
                                 CPI inflation 1y and 2y ahead are at the lower end of the range.

                                 Hence, it does not seem that expectations for the economy have suddenly shifted to justify
                                 the rate move. In past sell-offs, which have resulted from improving fundamentals, real
                                 yields and breakevens have participated. In the recent move, only real yields have moved
                                 higher (Figure 1); breakevens have actually tightened. This is another sign that the move is
                                 not a reflection of a better economic outlook, but rather a hawkish Fed.

                                 Mainly the perception of the Fed’s reaction function
Market’s perception of the       So what changed? In our view, it was the market’s perception of the Fed’s reaction function,
Fed’s reaction function has      given mixed messages from key Fed officials. New York Fed President Dudley noted that he
changed                          would wait for 3-4 months to decide whether to taper; St. Louis Fed President Bullard noted
                                 that he wanted to wait for inflation to rise before tapering; and the May FOMC minutes
                                 showed that “views differed about what evidence would be necessary” to gauge substantial
                                 progress and, hence, to commence tapering. At the same time, Chairman Bernanke said the
                                 Fed may begin to taper at the next few meetings and also did not rule out the possibility
                                 before Labor Day, ie, at the June or July meeting.

                                 The exact timing of the taper should not have much of an effect on the term premium at
                                 the long end of the curve, especially if the taper is gradual and halting, as the stock of Fed
                                 purchases may not end up being different than what the market was expecting prior to the
                                 recent Fedspeak. However, the conditions under which the Fed will begin to taper convey
                                 what metrics it is looking at to judge the appropriateness of monetary policy and, therefore,
                                 its reaction function. This should have significant implications for the hiking cycle.

Were the Fed to convey it is     Until a few weeks ago, we assumed that the Fed would look at not only the partial progress
focused on the unemployment      made in the labor market since the launch of QE3, but also the modest growth and inflation
rate, then the hiking cycle      backdrop. This is where there has been a change in market perception. For instance, were the
could be pulled forward to       Fed to begin tapering at one of the next few meetings despite data that only match consensus
early 2015                       (eg, modest growth in Q2/Q3, a slowdown in payroll growth vs. the past six months, below-
                                 target inflation), that could convey that the Fed is focused on the unemployment rate. This is
                                 relevant because the forward guidance is explicitly linked to the unemployment rate, which
                                 has been steadily falling faster than Fed’s forecast despite growth being consistently lower
                                 than its forecast (Figure 2). Were the unemployment rate to keep dropping at the current pace
                                 (driven by modest job gains/a continued decline in LFPR), it could get to 6.5% by the end of
                                 2014, and investors would price in a high chance of a Fed hike in early 2015.




30 May 2013                                                                                                                       7
Barclays | Global Rates Weekly


                                              While the Fed has stressed that 6.5% is a threshold, not a trigger, it has also been non-
                                              committal on how it views declines in the unemployment rate to the extent they are driven
                                              by a drop in the LFPR. At the March FOMC press conference, Chairman Bernanke noted that
                                              the drop was mostly structural, but at the latest testimony, he characterized that as a sign of
                                              a weak labor market.

                                              Hence, there is now considerable confusion on how investors are supposed to judge the
                                              progress in the economy in the context of the outlook for monetary policy.

                                              Could the Fed reverse course?
Fedspeak has shifted from                     Since the sell-off has been driven primarily by shifting perceptions of the Fed’s reaction
being hawkish to dovish in the                function, there is the potential for a large rally if Fedspeak suddenly turns more dovish. This
past                                          is certainly something that has happened in the past. For instance, in March 2012, the
                                              FOMC statement mentioned that the unemployment rate had dropped notably and the
                                              minutes from that meeting showed that only a couple of members thought that additional
                                              stimulus would be necessary even if the economy lost momentum. This was perceived as
                                              very hawkish, and 10y yields rose from 2% to 2.4% in a matter of days. Fast forward to June
                                              2012, and the Fed extended the maturity extension program to the end of 2012 and said
                                              that it was prepared to take more action (ie, launch QE3).

                                              What prompted the turnaround in 2012 were the data. Similarly, the Fed’s tone could reverse
                                              if the unemployment rate stalls, or medium-term inflation forecasts/longer term breakevens
                                              fall, or financial conditions continue to tighten. However, with the unemployment rate closer
                                              to the 6.5% threshold, the bar to force a reversal may be higher this time.

Stalling of the unemployment                  To highlight the evolution of Fedspeak, in Figure 3, we plot the 6m change in the
rate may cause a reversal in                  unemployment rate. The Fed has typically sounded hawkish after sharp drops in the
the recent hawkish tone                       unemployment rate and dovish after the unemployment rate stalls. For instance, heading into
                                              Q3 10 and Q3 11, the unemployment rate had stalled and the Fed launched QE2 and
                                              Operation Twist, respectively. However, by the March 2012 FOMC meeting, the rate had
                                              dropped 0.8%, leading to Fed to shift its tone. But by the middle of the year, it stalled again
                                              and the Fed extended Operation Twist. With the unemployment rate now much closer to the
                                              desired level than it was in 2010 or 2011, the Fed’s tolerance for an unchanged rate may be
                                              higher. In addition, over the past few years, tail risks have diminished greatly; household and
                                              bank balance sheets are in better shape, and euro area stability concerns have subsided.


FIGURE 3                                                                    FIGURE 4
A stalling of the unemployment rate may cause the Fed to                    … or a decline in longer-term inflation expectations could
reverse its recent stance…                                                  force a dovish shift
  0.4                                                                        4.0
                                             Dovish
  0.2
                                                                             3.0
  0.0
                                                                             2.0
 -0.2

 -0.4                                                                        1.0

 -0.6
                                                                             0.0
 -0.8                                                                         May-08        May-09       May-10          May-11   May-12   May-13
                                                          Hawkish                            Fed's medium term core PCE inflation forecast
 -1.0                                                                                        yoy core PCE, %
    Jan-10     Jul-10   Jan-11     Jul-11    Jan-12   Jul-12   Jan-13                        5y5y OTR cash breakevens
                    Change in Unemployment Rate, 6 months                                    5y5y cpi swaps
Source: Haver Analytics, Barclays Research                                  Source: Haver Analytics, Barclays Research


30 May 2013                                                                                                                                         8
Barclays | Global Rates Weekly


                                 Separately, while the Fed has overlooked the recent decline in inflation, Figure 4 shows it is
                                 mainly because its own medium-term inflation forecasts remain close to their target. Also,
                                 market expectations of longer-term inflation (5y5y cash breakevens or CPI swaps) are still
                                 “well anchored”. When the Fed was worried about low inflation in mid-2010, both of these
                                 metrics were well below current levels.

                                 Hence, it seems that for a reversal in Fedspeak, either the unemployment rate has to stall or
                                 long-term breakevens (and the Fed’s medium-term inflation forecasts) need to fall further.
                                 Obviously, a sharp tightening in financial conditions could force a reversal as well, ie, a large
                                 decline in equity indices, or a continued rise in mortgage and corporate rates, or a
                                 strengthening of the USD. As Figure 5 shows, with the exception of the equity market, the
                                 other metrics show that financial conditions have tightened over the past month.

                                 Convexity hedging
Convexity hedging flows are      With the sharp rise in mortgage rates, we have received multiple queries on whether the
unlikely to exacerbate the       sell-off could be exacerbated by mortgage convexity hedging flows. As we have discussed
sell-off                         (Refi Wave: Only a “wavelet” in rates, October 5, 2011), the fraction of the mortgage
                                 universe held by hedgers is much lower than it was in prior convexity episodes. In addition,
                                 mortgage investors are likely better hedged than they have been. In summary, we do not
                                 believe mortgage hedging flows are likely to worsen the sell-off.

                                 We do not believe that there is a specific level at which mortgage convexity hedging flows are
                                 triggered. In addition, flows from mortgage “hedgers” are not necessarily convexity related.
                                 Thus, some of the duration shedding from mortgage accounts over the past few days may be
                                 driven by the fact that they were only partially hedging duration; other accounts may simply
                                 have been lightening up on MBS if they view the carry trade in MBS to be nearing its end.

                                 For context, we have had a nearly 70bp increase in the current coupon rate since the lows
                                 at the beginning of May. The duration of the mortgage index has extended nearly a year,
                                 which translates to roughly $510bn in 10y equivalents for the entire universe (4,600
                                 *1/9=510). However, in our view, only 10-15% of the mortgage market is hedged (vs ~40%
                                 a decade ago). Based on 15% of the index being hedged, this means that roughly $80bn in
                                 mortgage-related hedging needs should theoretically have been triggered since early May.
                                 The actual hedging-related flows will likely have been far smaller, as many hedgers were
                                 likely pre-hedged for convexity. Consider the main sources of potential mortgage hedging:
                                 GSES, REITs, servicers, and pipeline hedgers.

.
                                 FIGURE 5
                                 Have financial conditions tightened enough?
                                   3.5                                                                                                           130
                                   3.3                                                                                                           125
                                   3.1
                                                                                                                                                 120
                                   2.9
                                   2.7                                                                                                           115
                                   2.5                                                                                                           110
                                   2.3                                                                                                           105
                                   2.1
                                                                                                                                                 100
                                   1.9
                                   1.7                                                                                                           95
                                   1.5                                                                                                       90
                                    May-12            Jul-12          Sep-12           Nov-12           Jan-13          Mar-13          May-13

                                             Mtg CC yield            IG Index Yield           DXY Index, rhs            S&P 500, rhs

                                 Note: S&P and DXY has been scaled to 100 at the beginning of the period. Source: Bloomberg, Barclays Research

30 May 2013                                                                                                                                           9
Barclays | Global Rates Weekly


                                    • The GSEs have been mandated to shrink their portfolios by 15% per annum. As a result,
                                        they have been systematically unwinding their derivatives books. This means that they
                                        do not need to actively hedge convexity as much as they did in the past. Also, unlike a
                                        decade ago, the duration gap is always kept close to zero. Given this backdrop, the
                                        chances of a GSE being caught offside is very low.

                                    • Second, based on public information, some agency REITs have also partially pre-hedged
                                        their convexity, so their need to rebalance duration hedges may be lower. Many Fed
                                        speakers, including Chairman Bernanke and Jeremy Stein, have pointed to the growth in
                                        the mortgage REIT universe as a potential source of financial instability (eg, agency REITS
                                        are currently ~$350bn vs. less than ~$90bn in 2007). However, from the point of view of
                                        the rates market, any forced MBS selling that occurs because of leverage constraints on
                                        REITS may not be a duration event in itself, since the associated hedge will also need to be
                                        unwound at the same time.

                                    • Pipeline hedging should also not be as big a risk as it was in 2003. Mortgage issuance
                                        has been smaller than in prior episodes, and originators are not coming off a particularly
                                        aggressive lending phase.

                                    • As far as servicers are concerned, the question is how much of the convexity was pre-
                                        hedged and how tightly various servicers are hedging their books. Our mortgage
                                        strategy team believes that the large servicers were fairly well hedged for convexity.

                                    Based on our models, an upper bound on servicer hedging should be $50bn in 10y
                                    equivalents in a further 50bp sell-off, if they had not pre-hedged for convexity at all. An
                                    upper bound on hedging from all other hedgers (GSEs, REITs etc.) should be another $50bn
                                    in 10s for a 50bp sell-off. So paying needs of $100bn in 10y equivalents is an upper bound
                                    for a further 50bp sell-off under very conservative assumptions.


                                    Market implications
                                    Duration: Remain neutral
10y rates can still move            What is the near-term outlook for rates? We believe volatility is likely to remain high over the
significantly in either direction   coming weeks. Since it established forward guidance, the Fed has been able to suppress the
                                    transmission of economic uncertainty into interest rate volatility. However, with its reaction
                                    function becoming uncertain, interest rate volatility should remain elevated, and there could
                                    be large moves in either direction. Hence, we remain neutral on duration.

                                    The market still expects the first hike around mid-2015. If the Fed intends to focus on the
                                    unemployment rate, then the hiking can still be pulled forward. A re-pricing to Q1 15 could
                                    result in another 10-15bp rise in 10y rates. This would mainly affect the intermediate sector,
                                    as longer-term forward rates have also risen enough to compensate for the smaller-than-
                                    expected Fed balance sheet; 10y10y swap rates are already at 4.1%.

                                    On the other hand, if labor market data weaken materially or the Fed re-emphasizes the
                                    modest growth and inflation backdrop, hikes should be pushed out and the term premium
                                    should decline. For instance, Vice Chair Yellen has argued that to compensate for the zero
                                    lower bound, the Fed should keep rates on hold until mid-2016, after unemployment has
                                    dropped to about 6%. Even if the market were to push out the Fed hikes to, say, Q3 15, 10y
                                    rates could decline to early May levels.

                                    Curve: Maintain flatteners
We maintain our 10s30s curve        We maintain our 7s30s/10s30s curve flattener view. While the 10s30s curve has flattened
flatteners                          since mid-May, when concerns about tapering were picking up, we believe curve flatteners
                                    still offer attractive risk-reward. Further repricing of the hiking cycle should result in the

30 May 2013                                                                                                                      10
Barclays | Global Rates Weekly


                                 underperformance of the belly in a sell-off, as falling long-term inflation expectations and
                                 the negative reaction of risk assets should support the long end. On the other hand, dovish
                                 Fedspeak or weak data should result in a decline in the term premium as well, and the long
                                 end may not underperform in a rally. In our view, the curve continues to look too steep,
                                 given modest inflation and inflation expectations.

                                 Swap Spreads: Maintain spread curve flattener
We maintain our long 7s30s       We maintain our long 7s30s or 10s30s spread curve flatteners recommendation. As we
or10s30s spread curve            suggested last week, given the potential for duration shedding by leveraged holders of
flatteners recommendation        mortgages, we believe that the possibility of a taper should bias swap spreads in the belly of
                                 the curve wider, while any potential equity market selloff should bias 30y spreads tighter
                                 because of insurance hedging flows. An attractive risk-reward implementation of long end
                                 tightening view is selling USU3 invoice spreads have not kept pace with the cheapening in
                                 15y sector in treasuries from potential Fed tapering.

                                 Volatility: Maintain long gamma
We maintain our long gamma       Given that the uncertainty about the Fed’s reaction function is likely to amplify any
position                         economic data surprises, particularly in the upcoming payroll report, we expect volatility to
                                 remain high. We had recommended long gamma on mid-tails when 1m7y was trading at
                                 73bpv. Since then, it has richened to 87bpv, which implies 5.5bp in daily delivered vol or a
                                 20bp drift in 7y rate over next one month. With the payroll report likely to be the key driver
                                 of both when tapering, we believe gamma should stay elevated next week.


                                 Trade Ideas
                                 Outright Trades
                                 Long front EDs (EDZ3 to EDU4) and FFZ4
                                 In this selloff, market expectations of short rates have changed even for 2014, with which
                                 we disagree. For instance, EDZ3 is pricing in 3m Libor to rise from the current 27.5bp to
                                 36bp by the end of the year. We believe this increase is unlikely to materialize, especially
                                 given reduced USD funding needs from European banks.

                                 In addition, the market is now pricing in a significant chance of the first hike in 2014. FFZ4 is
                                 implying an effective fed funds rate of 32.5bp; in other words, a 30% chance of a hike to 50bp
                                 is priced in (assuming either 25bp or 50bp; allowing for effective to remain below 25bp would
                                 lead to even a higher probability of 50bp). We believe that is excessive. Even if the
                                 unemployment rate were to decline to 6.5% by late 2014, the Fed will likely refrain from hiking
                                 that much sooner than the earlier mid-2015 guidance. We recommend going long FFZ4 and
                                 EDU4 as well.

                                 Sell USU3 invoice spread
                                 We also continue to recommend USU3 invoice spread narrowers (sell USU3 and receive
                                 equivalent DV01 in Sep 2013 forward starting swap maturing in Nov 2028):

                                 • The Nov 28s (CTD of USU3) swap spread is still close to the wides reached in April; it
                                    has also widened over the past few days from swap paying flows in lower tenors.

                                 • However, the market is pricing in a tapering of Fed purchases, resulting in a cheapening
                                    of the 15y sector in Treasuries. This can be seen from the 10s-Nov28s-30s yield fly.

                                 • Tapering also means a greater illiquidity discount when the CTD rolls off, which should
                                    start to get reflected in the invoice spread. Typically, the spread to the swap curve of
                                    Nov 28s (CTD for USU3) moves with the 10s-US-30s yield fly, but the relationship has
                                    broken down recently.


30 May 2013                                                                                                                    11
Barclays | Global Rates Weekly


                                               • Favorable risk reward: If the Fedspeak reverses, the invoice spread should be biased
                                                     tighter because mortgage underperformance should reverse. On the other hand, if the
                                                     Fed tapers, as futures expiry in September approaches, the invoice spread should
                                                     tighten because the CTD cheapens.

                                               The primary risk to the trade is a mortgage convexity event that would push the invoice
                                               spread wider. We target a tightening of 5bp in the USU3 invoice spread, with a stop at 17bp.

                                               Conditional Trade for a continuation of the sell-off
                                               1m*5y vs. 1m*15y bear flattener
                                               We continue to like bear flattener to position for further selloff. However, the yield curve and
                                               gamma has already re-priced to some extent; for example, the 7-30y swap curve has
                                               flattened 12bp and gamma on mid-tails has richened relative to long tails since concerns
                                               about tapering picked up, so one needs to pick points on the yield curve carefully.

                                               We evaluated a variety of premium neutral bear flatteners for curve entry levels in the recent
                                               past, as well as the last three-year history. Our conclusion: 1m*5y vs. 1m*15y is optimal. This
                                               part of the yield curve has steepened in the recent sell-off, so gamma on 5y tails is still cheaper
                                               to 15y tails. Due to the lower vol on 5y tails, a premium neutral bear flattener can be initiated
                                               at better than spot and forward levels. A material sell-off, as shown in Figure 6, would likely
                                               flatten the curve, or at least move the curve in parallel. As a result, a slightly out-of-the-money
                                               bear flattener, such as the following, is appropriate:

                                               • Long $260mn 1m*5y 20bp high-strike payer (=1.42%)

                                               • Short $100mn 1m*15y 22bp high-strike payer (=3.04%)

                                               • Premium neutral, as of May 30, 2013

                                               This is effectively a 5-15y flattener at 162bp when spot is 161bp and the forward is 160bp.
                                               As shown in Figure 6, the curve has been 135-175bp range at about 25bp higher rates,
                                               implying an attractive risk-reward for the trade.




FIGURE 6                                                                      FIGURE 7
5-15y curve will likely start to flatten in a further rate sell-off           Swaptions are cheaper to TY options even though swaps are
                                                                              delivering more volatility

   5-15y                                                                       1.4
 curve, bp
                                                                               1.3
  195
                               current,                                        1.2
 175                          2.02 , 162
                                                                               1.1
                                                                                                                                               1.02
 155
                                                                               1.0                                                             0.96
 135                                                                           0.9
 115                                                                           0.8

   95                                                                          0.7
                                                                                 Jul-04         Jul-06       Jul-08       Jul-10      Jul-12
   75
                                                                                                          swaption/ TY implied vol ratio
        1.0         1.5           2.0          2.5              3.0   3.5
                                                                                                          20d del vol ratio
                                  avg (5y,15y)
Note: Last data point as of May 29. Source: Barclays Research                 Source: Barclays Research


30 May 2013                                                                                                                                     12
Barclays | Global Rates Weekly


                                 Conditional Trade for a reversal of the sell-off
                                 Buying swaption vs TY options
                                 We recommend buying swaptions vs TY options. Short-dated Treasury future options are
                                 trading at a premium to OTC swaptions, even though swaps in the belly are delivering more
                                 vol. For example, as of May 30, TYN3 straddles are pricing 93bp/y, while matched-expiry
                                 swaptions on 7y tails are priced for about 89bp/y, implying the latter is at about a 4%
                                 premium to swaption vol.

                                 Swaptions trading at a discount to exchange options is not unusual for the past few years
                                 (Figure 7). However, as the recent price action has indicated – where 7y swaps have moved
                                 more than the 7y Treasury or 7y spreads have widened in the rate sell-off – swaptions could
                                 deliver more vol in a rate reversal as well.

                                 As a result, we recommend two trades, as follows:

                                 • Short 1000 TYN3 call 130 (underlying TYU3 = 129.64)

                                 • Long $122mn 6/21 -> 7y receiver 1.69% (forward = 1.74%)

                                 This is a premium neutral bull spread tightener, initiated at a better spread level than
                                 forwards due to lower vol for swaptions.

                                 The second trade combines the bull spread tightener with a bearish spread widener, as
                                 follows:

                                 • Short 1000 TYN3 strangles 129.5/ 130

                                 • Long $122mn 6/21 ->7y strangles 1.71/1.76%

                                 This structure requires no premium outlay and would benefit if rates rally significantly,
                                 leading to tighter spreads in the belly.




30 May 2013                                                                                                              13
Barclays | Global Rates Weekly


INFLATION-LINKED MARKETS: UNITED STATES

                                  10s30s breakeven flatteners now attractive
Michael Pond                      We find the 10s30s breakeven curve has steepened more than justified by a fair value
+1 212 412 5051                   model. The recent steepening is reflective of very low near-term inflation expectations
michael.pond@barclays.com         and market pricing in tapering, in our view. We recommend 10s30s breakeven flatteners
                                  ahead of 30y TIPS supply.
Chirag Mirani
+1 212 412 6819
                                  Relative value trades more favourable given the recent volatility
chirag.mirani@barclays.com        Given the increased uncertainty regarding the Fed’s reaction function over the past few
                                  weeks, the rates market has become volatile to say the least. This means the economic data
                                  uncertainty is likely to translate into more interest rate volatility; as such, we turned neutral
                                  on outright duration views last week. Until there is more clarity on economic data and
                                  further confirmation on the Fed’s reaction function, we think tactical relative value trades in
                                  the TIPS market make more sense. In particular, the recent 10s30s breakeven curve
                                  steepening is overdone versus our 10s30s breakeven fair-value model (adjusted for the Fed
                                  purchase dummy variable), which, in our view, presents an attractive opportunity to
                                  position for a reversal in this move.

                                  10s30s breakeven flattener is particularly attractive
Given the increased volatility,   We believe the recent 10s30s BE steepening has been a function of falling near-term
we find tactical trades such as   inflation expectations (now sharply lower versus our forecasts) and the market aggressively
10s30s breakeven flattener        pricing in Fed purchase tapering following Chairman Ben Bernanke’s comments that the Fed
more attractive to outright       may begin to taper at the next few meetings if the data improve significantly. The former
breakeven/real rate trades        has lead the entire the 2s10s breakeven curve to steepen extensively, which justifies at least
                                  some steepening in the 10s30s breakeven curve (Figure 1), in our view. On the latter,
                                  judging from our 10s30s breakeven fair-value model (without Fed purchase dummy
                                  variable), the TIPS market is pricing in a significant reduction in long-end purchases, which
                                  seems aggressive. This is consistent with our findings in Trading the taper, May 16, 2013.
                                  We recommend fading the steepening in 10s30s breakeven curve, which has a favourable
                                  supply outlook given the 30y reopening TIPS supply in June. Considering the volatility in
                                  rates and weaker-than-expected TIPS auctions recently, investors are likely to price in



                                  FIGURE 1
                                  10s30s breakeven more than 4bp steeper than justified by a fair value model; we
                                  recommend fading this move

                                   80
                                   70
                                   60
                                   50
                                   40
                                   30
                                   20
                                   10
                                    0
                                  -10
                                    Mar 09       Sep 09       Mar 10   Sep 10   Mar 11    Sep 11    Mar 12     Sep 12   Mar 13
                                                                                10s30s Estimated (w/o Twist Dummy)
                                                                                10s30s BE
                                                                                10s30s Estimated (with Dummy Twist)

                                  Source: Barclays Research


30 May 2013                                                                                                                      14
Barclays | Global Rates Weekly


                                   higher concession for the 30y, which should put further flattening pressure on the 10s30s
                                   breakeven curve. Next we discuss the details of 10s30s breakeven fair-value models (with
                                   and without Fed purchase dummy variables).

                                   The 10s30s breakeven curve has over-steepened by 4bp
10s30s breakeven steepening        In Be forward looking, look at forwards, May 9 2013 (on page 3), we discussed steepening
is coinciding with increased       in the 10s30s breakeven curve. Then, we anticipated further steepening in 10s30s
chatter about tapering, which      breakeven curve based on our fair-value models and upcoming 10y TIPS reopening supply.
suggests the Fed purchase          Prior to Operation Twist, our 10s30s breakeven fair-value model used the 5y CPI swaps rate,
activity likely played a role in   2s10s CPI swap curve and 3m L-OIS as independent variables for the 10s30s BE fair-value
flattening 10s30s breakeven        estimate. After the Operation Twist announcement, this 10s30s BE fair-value model
curve                              deviated sharply from 10s30s BE market levels. In our view, this was due to the Fed
                                   purchasing more long-end nominals (versus nominal 30y issuance) than long-end TIPS
                                   (versus TIPS 30y issuance) in both Operation Twist and QE3.

                                   Because of this, we adjusted our model with a Fed purchase dummy variable; we now see
                                   fair value of the 10s30s breakeven curve at 12bp (figure 1), while the 10s30s breakeven
                                   curve is trading at 15.7bp (as of Thursday, May 30). On a residual basis, the 10s30s
                                   breakeven curve is about 4bp too steep, similar to pre-Operation Twist levels. In fact, since
                                   March 19, the 10s30s BE curve has steepened about +17bp, from the low of -2bp, while
                                   both fair-value 10s30s breakeven models (with and without the Fed purchase dummy
                                   variable) have steepened only +8bp. The difference between the 10s30s BE steepening
                                   (market) versus the fair-value-model-anticipated steepening suggests that the market is
                                   reverting to pre-Operation Twist levels and therefore is anticipating Fed purchase tapering.

                                   Pre-Operation Twist 10s30s BE model fair value at 25bp
The 10s30s BE curve is steeper     The 10s30s breakeven curve fair value (not including the Fed purchase dummy variable) is
than fair value estimates,         at 25bp (Figure 1), reflecting a residual of only about 9bp versus the market. As noted, just a
implying a significant amount      few months ago (on March 19), the residual was close to 18bp (now at 9bp), the recent
of Fed tapering, which should      compression in residual versus the original 10s30s breakeven model suggests that the
be faded, given low realized       market is now pricing in significant reduction in Fed purchases. Also, uncertainty remains
inflation and mixed economic       about whether the stock of Fed holdings or the flow of Fed purchases matters for this curve.
data                               If the former (which favors the nominal long end relative versus the TIPS long end), the
                                   10s30s BE curve should continue to trade below the 10s30s BE model (without Fed
                                   purchase dummy) fair value of 25bp. Additionally, economic data uncertainty remains, and
                                   in the context of falling realized inflation, the Fed is likely to start tapering very gradually. In
                                   light of these factors, this amount of 10s30s BE steepening seems too much; we
                                   recommend 10s30s breakeven flatteners (Entry: 16bp, stop-loss:20bp, Target: 8bp).
                                   Outside of the Fed factors, the 2s10s CPI swap curve has likely steepened too much as
                                   front-end breakevens are now significantly cheap versus our CPI forecast. Thus, on
                                   improving global economic data, the CPI swap curve is likely to flatten.

                                   30y reopening supply should help 10s30s breakeven flattener
                                   We think the upcoming 30y reopening supply (our expectations: $7bn; tentative
                                   announcement date: Thursday, June 13; tentative auction date: Thursday, June 20) is
                                   supportive of the 10s30s breakeven flattener trade for a number of reasons. One reason is
                                   that the past few TIPS auctions have been weaker than expected. Second, real rates have
                                   been quite volatile over the past month, which should lead market participants to price in a
                                   higher-than-normal concession given the very large duration for the 30y. Also, after the 10y
                                   TIPS reopening supply in May, TIIJan23s remain fairly cheap on relative ASWs curve, which
                                   is supportive of the trade.




30 May 2013                                                                                                                         15
Barclays | Global Rates Weekly


                                 Negatives for the trade
                                 The key risk to the trade is a better-than-expected May payroll report next week. The
                                 market may price in even more tapering, which could help the 10s30s breakeven curve
                                 steepen further. Separately, a decline in energy/commodity prices may further steepen the
                                 breakeven curve in general. The trade carries slightly negatively (-0.4bp) until July 1.




30 May 2013                                                                                                            16
Barclays | Global Rates Weekly


UNITED STATES: MONEY MARKETS

                                              Heading east
Joseph Abate                                 Persistently low interest rates and a diminishing supply of higher yielding bank paper
+1 212 412 7459                              are encouraging a few money funds to look for alternatives in regions previously
joseph.abate@barclays.com                    ignored. One of these is non-Japan Asia. 1

                                              • Money funds have always maintained large non-US asset allocations. But the
                                                     composition of these holdings appears to be shifting away from core Europe.

                                              • Holdings of obligations from non-Japan Asia – while still small as a share of overall
                                                     money fund assets – have grown four-fold in the past 18 months.

                                              • All of this exposure is unsecured, mostly in CP. And relative to other money fund assets,
                                                     these holdings have fairly lengthy WAMs (at 63d).

                                              • As demand for this paper increases, it is getting more expensive. The volume-weighted
                                                     average yield has fallen 20bp since January 2012.

                                              We expect allocations to continue to grow as money funds seek to balance the diminishing
                                              supply of bank paper under 3m with their need for more attractive yields.


                                              Migration from US holdings
                                              The past few weeks have been difficult ones for money market funds. Overnight Treasury
                                              collateral rates dipped into the low single digits as net bill supply contracted sharply. As
                                              money fund managers have termed out and changed their asset allocations, spill-over
                                              effects have pulled some (non-Libor) unsecured funding rates sharply lower. In fact, some
                                              institutions have been able to raise 6m financing at rates below 25bp. And although the
                                              sample of issuing AA-financial institutions is small, their 3m funding rates have recently
                                              drifted below 15bp. The Treasury’s stronger-than-expected tax collections, together with
                                              additional (and longer) net bill supply reductions, suggest that all short-term interest rates
                                              will hover at these levels or lower at least through July.


FIGURE 1                                                                               FIGURE 2
Non-government taxable fund allocations (% total assets)                               Singapore and China exposures ($bn)
 1,800                                                                                   18
 1,600                                                                                   16
 1,400                                                                                   14
 1,200
                                                                                         12
 1,000
                                                                                         10
   800
                                                                                             8
   600
                                                                                             6
   400
   200                                                                                       4

      0                                                                                      2
      Jan-12      Apr-12       Jul-12       Oct-12         Jan-13      Apr-13
                                                                                             0
       US bank     Europe     UK    Japan    Scandi       Australia    Other                     Jan-12 Mar-12May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13
Note: All taxable money fund balances excluding holdings of Treasuries and             Source: imoney.net
Agencies. Other includes US non-US primary dealers, Canada, Switzerland, and
multinationals. Source: imoney.net

                                              1
                                                  We exclude Australia from this analysis.

30 May 2013                                                                                                                                               17
Barclays | Global Rates Weekly


                                     A European focus
Money funds have historically        Taxable money market fund holdings have always had a fairly sizeable non-US asset
had large non-US asset               allocation (Figure 1). Before the sovereign debt crisis triggered sizeable prime fund
allocations                          redemptions, money market funds held a significant portion of their assets in the liabilities
                                     of banks in core Europe. As investor nervousness increased, money funds reduced their
                                     exposures to France, Germany, Belgium and the Netherlands and increased their holdings of
                                     paper from Japan, Canada, and Australia. During the crisis (between May 2011 and May
                                     2012), Japanese, Canadian, and Australian exposures increased 110%, 48%, and 18%,
                                     respectively. And even though there has been a retour de France and a pickup in core
                                     European exposures more generally, money fund exposures to Japan, Canada, and Australia
                                     remain higher today than they were a year ago.


                                     Going east
                                     In addition to these “most favored nations,” money funds have also sharply increased their
                                     holdings of obligations from institutions located in China, India, Singapore, and South Korea.
                                     Since January 2012, taxable money funds have increased their holdings of paper from these
                                     four countries four-fold. However, nearly all of the increase has come from money fund
                                     holdings of unsecured obligations from Singaporean and Chinese institutions, which have
                                     risen three- and six-fold, respectively (Figure 2). Holdings from Indian and Korean
                                     companies are somewhat different. Indian bank exposure is limited to direct pay letters of
                                     credit from a US bank, and the Korean holdings are from quasi-government institutions.
                                     Issuers from Singapore and China include a mixture of large industrial companies and banks
                                     with increasingly global reach.

Holdings from Singapore              Although money market paper from China and Singapore accounts for just under $20bn (or
and China have                       0.7% of total taxable money fund assets), its rapid growth is impressive, especially relative
increased dramatically               to the holdings of Japanese obligations, which have risen 33% over the period. And unlike
                                     their Japanese exposures, none of the Singaporean or Chinese money fund holdings is
                                     secured or in repo. Instead, all of the exposure is in either commercial paper or bank
                                     deposits. More significantly, the tenors of these borrowings are at an average WAM of 63d
                                     since January 2012, which is a bit longer than Japanese exposures, which is about 40d
                                     (Figure 3).




FIGURE 3                                                             FIGURE 4
Money fund WAMs by country (d)                                       Unsecured financing rates (bp)
 100                                                                  50
   90                                                                 45
   80                                                                 40
   70                                                                 35
   60                                                                 30
   50                                                                 25
   40                                                                 20
   30                                                                 15
   20                                                                 10
   10                                                                   5
    0                                                                   0
    Jan-12      Apr-12   Jul-12    Oct-12      Jan-13       Apr-13      Jan-12       Apr-12       Jul-12       Oct-12       Jan-13      Apr-13
             Singapore     China       Japan            Australia                               Fin CP, all         Non-Japan
Source: imoney.net                                                   Note: The CP rate is for 2m maturities to match the WAM of the non-Japan
                                                                     exposures more closely. Source: Federal Reserve and imoney.net


30 May 2013                                                                                                                                     18
Barclays | Global Rates Weekly


                                 As demand for Asian paper has risen, it has become progressively more expensive, in both
                                 absolute and relative terms. Between January 2012 and April 2013, the volume-weighted
                                 average yield has declined from 45bp to 25bp (Figure 4). Over the same period, the rate on
                                 similar maturity AA financial CP has traded under 15bp, so that the spread to AA bank
                                 paper has also narrowed 20bp. With little let-up in sight to the super-low money market
                                 yields, we expect demand for paper from Singaporean and Chinese institutions to increase,
                                 especially as fund familiarity with the issuing institutions grows. In turn, these yields should
                                 continue to converge on 2m financial rates.




30 May 2013                                                                                                                   19
Barclays | Global Rates Weekly


EURO AREA: RATES STRATEGY

                                           Sharp sell-off in euro rates – do not fade it
Laurent Fransolet                          European rates have not been immune to the recent volatility in global markets. We
+44 (0)20 7773 8385                        were expecting rates to gradually move higher: even though our end-Q2 targets have
laurent.fransolet@barclays.com             been reached, we maintain our neutral-to-negative view on rates.

                                           Markets have become more volatile in the past few weeks, digesting the implications of a
                                           potential shift away from ultra accommodative monetary policies, especially in the US.
                                           European rates have not been immune, especially since some European-specific factors
                                           have also contributed to push rates higher. In our view, the recent moves have been very
                                           much in line with the developments in the economic outlook and the moves in US rates, as
                                           we outline below.

                                           One of the biggest sell-offs in the past few years, but euro rates are still low
                                           Since their lows at the beginning of May, reached on the day of the ECB rate cut, euro rates
                                           have broadly sold off, by about 10-15bp at the short end, and 30bp in 10y. Still, this sell-off
                                           has just unwound the rally that was triggered by the weaker economic data (hard data and
                                           more importantly, surveys like the PMIs) from the beginning of March. In absolute terms,
                                           euro area rates have moved back to within the broader range that they have been stuck into
                                           since the middle of 2012. This is in contrast to US rates, which are now firmly above the top
                                           end of the range they had been in over the past year.

                                           Our valuation models suggest that 5y5y fwd rates (and hence 10y rates as well) remain on
                                           the expensive side, despite the recent sell-off and the structural decline in medium-term
                                           nominal potential growth in the euro area. We remain cautious about over-interpreting
                                           these valuation models, and part of the valuation gap can be attributed to a ‘safe-haven’
                                           premium. Still, they indicate a richness for 10y euro yields in the order of 30bp (down from
                                           50bp a few weeks ago). Importantly, we suspect the gradual but continuous decline in
                                           medium-term nominal growth expectations has probably come to an end, if only because
                                           there is a certain ‘cyclical’ element to it, i.e. it is correlated to near-term growth
                                           expectations, which have been bottoming out since mid 2012. Similarly, the safe-haven
                                           premium is more likely to decrease from here than increase, as supply and demand factors,
                                           as well as the reduced likelihood of a large crisis, are less supportive of safe-havens.



FIGURE 1                                                                   FIGURE 2
The economy will remain a key driver for bonds                             Euro 5y5y fwd model vs actual (%)

                                       Draghi's speech                      7
-1.6                                                               -12.5
                                                                   -11.0
                                                         Barclays -9.5      6
-1.1
                                                         Forecasts
                                                                   -8.0
                                                                            5
                                                                   -6.5
-0.6
                                                                   -5.0
                                                                            4
                                                                   -3.5
-0.1                                                               -2.0
                                                                            3
                                                                   -0.5
                                                                                                 2.75% FV for
 0.4                                                               1.0
                                                                            2                      2.90% LT
                                                                   2.5                              nominal
 0.9                                                               4.0
                                                                   5.5      1
                     6mth chg in Bund 10y (%)                                   99      01       03    05       07     09      11     13
 1.4                                                               7.0
                     6mth chg PMIs (RHS, units)
       10            11            12           13                                      EUR 5yr5yr          Model for OIS 5y5y (1999- Apr12)
Source: Bloomberg, Barclays Research                                       Source: Barclays Research

30 May 2013                                                                                                                                    20
Barclays | Global Rates Weekly


                                 Hence, both factors are more likely to lead to a gradual and modest increase (say 30-50bp)
                                 in the fair value of medium-term yields in coming quarters, rather than a decrease, other
                                 things being equal.

                                 The European outlook has improved, albeit from low levels
                                 In the Euro Area Rates Strategy section of Global Rates Weekly, 16 May, we highlighted that
                                 we were expecting hard data and survey data to improve in the near term, from a very
                                 depressed level. This has occurred in the past few weeks. In particular, the PMIs have been
                                 moving back up towards the January levels (the recent ‘highs’ are still below 50 though).
                                 Overall, the recent data releases seem to indicate that the renewed weakness in March,
                                 which led to the latest leg of the rally in the Bund, is being unwound. In fact, based on the
                                 relationship we identified between 6-month changes in PMIs and 6-month changes in the
                                 Bund, the latest data suggest 10y Bunds should have moved by around 30bp, much in line
                                 with the actual moves. On its own, even without looking at US moves, the back-up in 10y
                                 euro rates thus can be justified by the improved data vs March/April.

                                 From here, our leading indicators still suggest improvements in the hard data in the next
                                 few months, before a stabilisation in the summer. Our economists’ growth outlook is
                                 unchanged: they expect a gradual improvement in the survey data as well. This
                                 improvement, against very low expectations for the euro area, should reduce the likelihood
                                 of further moves by the ECB and should also continue to push longer-end rates higher, in
                                 our view. Note that in any case the prospects of negative deposit rates have declined given
                                 the recent comments by a number of ECB officials, and additional easing is no longer priced
                                 in at the short end of the euro curve. If anything, the spectre of passive tightening due to a
                                 decline in the liquidity surplus, currently at €260bn, to below €200bn is resurfacing and this
                                 may put, other things being equal, renewed pressure on short rates if the ECB does not
                                 counteract it (with a further refi cut, or new LTROs).

                                 The US rate outlook remains key for euro rates: we think this time might
                                 be different
                                 Euro rates are and will remain broadly correlated to US rates. Over any significant period of
                                 times, rates in both regions move in tandem, and this is especially the case when there are
                                 large moves, as we have had. The typical beta in 10y rates is around 0.75: a 10bp move in
                                 10y US rates translates into a 7.5bp move in 10y euro rates. As such, the recent moves in
                                 euro area commensurate with the moves in the US. If anything, they are a bit lower than
                                 what could have been expected (50bp in the US vs 30bp in euro area), and this is also
                                 reflected in the widening of the 5y5y fwd nominal spread (in swaps) to above 90bp – this
                                 looks fairly high given that the spreads in 2y rates are still close to zero. We are reluctant at
                                 this stage to position for an outright re-tightening of the 5y5y fwd spread (or the nominal
                                 USTs vs Bund spread), since the focus is almost entirely on US rates, but it does suggest
                                 that over time, there is more room for the Bund to sell-off in absolute terms.

                                 As outlined in the US rates strategy section, we believe the recent sell-off in US rates is
                                 different this time than what we have experienced in the past few quarters – we are
                                 refraining from tactical long duration positions at this stage, since the sell-off has been
                                 driven by a change in the market perception of the Fed reaction function, and the data
                                 could trigger large two-way volatility in the coming weeks and months.

                                 These potentially further volatile moves in US rates are likely to be reflected as well in the
                                 euro area rates outlook. Coupled with the underlying expected small improvement in the
                                 economic data, it suggests further potential modest upwards pressure on euro area rates.
                                 We are thus comfortable with our view still of a gradual move up in 10y euro area rates,
                                 towards 1.70% in 10y Bunds by year-end.



30 May 2013                                                                                                                    21
Barclays | Global Rates Weekly


                                 The wider implications of Fed tapering: likely a muted impact on
                                 peripheral debt
                                 Moving away from the pure rate level, recent rate markets gyrations have also been
                                 reflected in other financial variables – this is well documented in for example the Global
                                 asset allocator ‘Who is vulnerable to Fed Tapering?’ May 24.

                                 The general tightening trends seen in core and peripheral markets have come to a
                                 (temporary) end in the past few weeks, with even some modest re-widening seen vs
                                 Germany. Market participants are arguably nervous about a general change in risk appetite
                                 and the impact it could have on peripheral markets at large.

                                 As we had highlighted in recent comments, our view was that the bulk of the tightening in
                                 Spanish and Italian spreads was behind us – a new period of more gradual (and volatile)
                                 tightening was likely to emerge, as valuations were less attractive and positions by non
                                 domestic investors were less underweight than before. We are thus not surprised by the
                                 recent stabilization in spreads and we do not see it as the precursor of a large renewed sell-
                                 off in peripheral spreads. In our view, a number of factors will remain supportive, even if the
                                 central bank-induced ‘risk-on’ environment is less favourable. In particular, we would note
                                 that following very heavy government bond supply YTD, the remainder of the year will likely
                                 register a run rate of gross and net supply of around 30-40% lower in both Spain and Italy,
                                 even accounting for the traditional low issuance in the summer. This, and the slow gradual
                                 stabilization seen in these economies, along with the lack of big potential headline news,
                                 suggest that large sell-offs are unlikely.

                                 Over time, we continue to believe the path of least resistance will be towards further
                                 tightening in Spain and Italy, across the curve, as a broader set of investors gradually come
                                 back to these markets (eg Asian investors less keen on taking outright duration risks in
                                 safe-haven countries). The tightening in spreads is more likely to be driven by core rates
                                 moving higher than by a large decline in the absolute level of peripheral rates, though. We
                                 stay long outright in 3-5y yields and long the belly of the curves vs 2 and 10s in both Spain
                                 and Italy (we do not have a strong strategic view on one country vs the other).




30 May 2013                                                                                                                  22
Barclays | Global Rates Weekly


EUROPE: SOVEREIGN SPREADS

                                  Taper talk – in core EGB markets
Huw Worthington                   Selected short positions in France vs. highly rated core issuers offer a low-risk limited
+44 (0)20 7773 1307               downside way of positioning against any short-term re-widening, which could occur on
huw.worthington@barclays.com      the back of “taper talk”-type news flow.

                                  Since Ben Bernanke’s comments stating that “tapering” bond purchases could be
Cagdas Aksu
                                  considered at the Fed’s September meeting, outright bond yields have sold off by 8-11bp in
+44 (0)20 7773 5788
                                  2-10y bunds. Notably, this has also been accompanied by a re-widening in EGB spreads,
cagdas.aksu@barclays.com
                                  which had been more resilient in the earlier yield sell-off in the first part of May.

                                  Unsurprisingly the moves have been greatest in the larger peripheral markets, with Italy
                                  underperforming the German sell-off by an additional 16bp in the front and in 10y, while
                                  Spain widened 17bp and 10bp in the same basis (the 5bp differential being accounted for
                                  by BTP supply, we think). Elsewhere, Portugal proved resilient broadly mirroring the moves
                                  in Spain and Italy, while Ireland is little changed on the week in 10y and managed a further
                                  7bp of outperformance in the front-end.

France has been the strongest     Underperformance was notable in core issuers as spreads moved off their post-2011tights.
core performer since end          The strongest performer post the catalyst of the BoJ announcement at end-March had been
March                             France, with tightening, since then up until last week’s comments, of 25bp in 5y and of
                                  35bp in 10y bonds. This compares with outperformance on the same basis of 19bp and
                                  16bp in the Netherlands 17bp and 21bp in Austria and 14bp and 15bp in Finland.

France still trade close to YTD   Given this performance it would not have been surprising to see France give some of this up
tights vs. peers, however         in the recent re-widening. However the underperformance of France vs. core has been small
                                  with widening of 8bp in the 5-10y area compared to 6bp in the Netherlands and 4-8bp in
                                  Austria and 3-6bp in Finland, leaving France still trading close to YTD tights vs. peers.

France looks rich in 6y vs NL,    The moves have not been consistent across curves amongst all core issuers. The richness of
Finland and in 9y vs Austria      France in 5y compared with the cheapness of this sector in Finland and the Netherlands
                                  leaves spreads particularly tight here. In contrast, while the cheapness of Austria in 9-10y,
                                  as illustrated in Figure 1, offers the best value, in our view.


                                  FIGURE 1
                                  Selected Core Issuer ASW Structures
                                   25
                                                              France   Netherlands    Austria     Finland
                                   15


                                    5


                                   -5


                                  -15


                                  -25


                                  -35
                                    Jan 15         Apr 16         Jul 17     Sep 18      Dec 19       Mar 21   Jun 22   Aug 23
                                  Source: Barclays Research




30 May 2013                                                                                                                      23
Barclays | Global Rates Weekly


                                   Fundamentally, we still believe France has a weaker credit profile/near-term outlook compared
                                   with other core issuers. To a large extent this is already reflected in both credit ratings and,
                                   importantly, short market positioning. Indeed the latter seems likely to have been a factor in
                                   France’s resilience of late and should remain supportive going forward. However, the recent
                                   lowering of French growth expectations alongside the 2y extension given to France to meet
                                   deficit targets may be a catalyst for a re-assessment by rating agencies, and in particular by Fitch,
                                   which still rates France AAA (with negative outlook), given that it stated in December that
                                   “France's fiscal space to absorb further adverse shocks without undermining its 'AAA' status is
                                   largely exhausted”.

Short France vs. highly rated      As we have been highlighting for some time, given the pace of gains thus far since mid
core issuers seems a relatively    2012, a consolidation phase now seems likely in EGB spreads. Nonetheless selected
attractive low risk way of         short positions in France at current very tight levels vs. highly rated core issuers seem a
positioning given current levels   relatively attractive low-risk way of positioning against any short-term re-widening,
                                   which could occur on the back of “taper talk”-type news flow. We expect that any
                                   underperformance from France would be modest and limited to moves of 5-10bp, with
                                   French core spreads moving closer to Feb/Mar 13 levels as opposed to what was seen
                                   earlier in the crisis, while avoiding the greater volatility seen in peripheral spreads (on
                                   which we remain constructive for the medium term).


                                   FIGURE 2
                                   Finland and Netherlands vs 6y France and 8y Austria vs France
                                       0
                                                       9y Austria vs France         6y Finland vs France          6y NL vs France
                                      -5

                                    -10

                                    -15

                                    -20

                                    -25

                                    -30

                                    -35

                                    -40
                                      Jan-13     Jan-13    Jan-13 Feb-13 Mar-13 Mar-13 Apr-13 Apr-13 May-13 May-13
                                   Source: Barclays Research



                                   Next week’s cash flows
                                   Austria auctions 4y and 10y bonds on Tuesday for up to €1.43bn, while Germany on
                                   Wednesday will tap the 5y OBL for €4bn. Most interest, however, will be focused on
                                   Thursday, when both France and Spain come to the market. Support will come from Italy,
                                   which will redeem €17.2bn of bonds and will pay out €1.07bn in coupons.




30 May 2013                                                                                                                          24
Barclays | Global Rates Weekly


FIGURE 3
Barclays cash flow expectations for week beginning 3 June 2013
                   Beginning                          Auction Date   Issuance   Redemptions   Coupons   Net Cash Flow
                               20-May        2.74      Germany         4.00        0.00        0.00         4.00
Weekly                         27-May       13.49        France        8.00        0.00        0.00         8.00
Net                            03-Jun       -0.43         Italy        0.00        17.17       1.07        -18.23
Cash flow                       10-Jun      -3.78        Spain         4.50        0.00        0.00         4.50
                                17-Jun      13.90       Belgium        0.00        0.11        0.02         -0.13
                                                         Greece        0.00        0.00        0.00         0.00
 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        1.43        0.00        0.01         1.42
Total issuance                               17.93      Portugal       0.00        0.00        0.00         0.00
Total redemptions                            17.27       Total        17.93        17.27       1.092        -0.43
Total coupons                                 1.09
Net cash flow                                 -0.43
Source: Barclays Research




30 May 2013                                                                                                         25
Barclays | Global Rates Weekly


EUROPE: MONEY MARKETS

                                          ECB: no rush on policy rates
Giuseppe Maraffino                        We do not expect any major announcement at the June ECB press conference. Short
+44 (0)20 3134 9938                       rates have sold off recently reflecting global factors, but any rally back is likely to be
giuseppe.maraffino@barclays.com           limited by the ongoing passive tightening of liquidity conditions.

                                          Since the ECB’s May meeting, data in the Eurozone have continued to stabilise somewhat
Laurent Fransolet
                                          after the worsening economic activity in Q1. The Eurozone “flash” PMIs for May overall
+44 (0)20 7773 8385
                                          showed healthy gains after the stabilization posted in April, though they are still below 50.
laurent.fransolet@barclays.com
                                          May inflation releases for some Eurozone countries suggest a likely increase in “flash” May
                                          HICP to 1.4% y/y from 1.2% y/y. Therefore, the prospects of imminent action by the ECB
                                          appear minor, although the ECB is likely to remain on alert as growth and inflation data
                                          probably remain weak (and the ECB will likely adjust its forecasts on both).

Data show economic stabilization,         Indeed, we expect the ECB to remain on hold at next week’s meeting and to continue to signal
we expect the ECB to remain               the possibility of further policy rates cuts if the worsening of the growth/inflation outlook
on hold                                   warrants it. Noteworthy, since the May 2 meeting, the rhetoric has continued to focus on the
                                          possibility of a negative depo rate, but it has turned more prudent over the last few days as
                                          several ECB members, including the Vice President Constancio, highlighted the risks and the
                                          negative implications (in terms of an increase in lending rates) that could stem from a negative
                                          depo rate. Judging from their latest comments, we would classify, Asmussen, Noyer, Mersch,
                                          Nowotny (together with Constancio) in the “less open” camp while Praet, Draghi, Visco have
                                          shown more openness. This suggests that there is no clear consensus within the ECB on the
                                          benefits of a negative depo rate yet, which makes the chance of imminent action low.

The liquidity surplus is gradually        Owing to the 3y LTROs repayments and the increase in autonomous factors, the liquidity surplus
approaching the €200bn threshold          has declined €45bn to €268bn, since the beginning of May. Even if the liquidity is still large, the
                                          risk of a passive tightening in liquidity conditions is not negligible, especially if one considers that
                                          as ate end-April banks in the core countries still had €145bn of 3y liquidity and banks in the
                                          peripheral countries about €570bn. With the former likely to continue to reimburse, we would
                                          not rule out the possibility that also peripheral banks, and, in particular the Italian ones that as at
                                          end-April repaid only €3.5bn out of €255bn that could have been repaid Government bonds
                                          redemptions in the coming weeks (the next is €17.6bn of BTPs on June 1) could allow banks to
                                          unwind carry trade positions which are not so attractive anymore, and to repay the ECB.


FIGURE 1                                                                   FIGURE 2
3y LTROs repayment: cumulative and weekly payback                          Risks of passive tightening (€bn)
 350                                                               160                         Liquidity Surplus
                        Cumulative repayment, eur bn, lhs                  1,000               €4bn weekly payback till year-end
 300                    Weekly repayment, eur bn, rhs              140                         €4bn weekly payback till June
                                                                                               €8bn weekly payback till year end
                                                                   120       800
 250
                                                                   100
 200
                                                                             600
                                                                   80
 150
                                                                   60
                                                                             400
 100
                                                                   40
  50                                                               20        200
    0                                                             0
          1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18                          0
                        Number of repayments                                    Jun-09    Mar-10      Jan-11   Oct-11   Aug-12     May-13
Source: ECB, Barclays Research                                             Source: ECB, Barclays Research


30 May 2013                                                                                                                                    26
Barclays | Global Rates Weekly


The ECB should counteract the             We do not expect any suggestion of another very long-term operation at the upcoming ECB
passive tightening via policy rate        meeting. Our impression is that the ECB is willing to counteract any possible passive
and not via another LTRO                  tightening of liquidity conditions (in the wake of banks’ repayment of the 3y LTROs) via
                                          policy rates rather than an injection of liquidity to the system. We think that another long-
                                          term liquidity operation would be designed to be more effective in supporting the real
                                          economy (and not banks’ funding) via banks, maybe using SME loans (or on SME-backed
                                          ABS) as collateral, with attractive features for banks, such as long maturities (3 years+) and
                                          possibly, at the prevailing refinancing rate when the LTROs commence, instead of averaging
                                          MRO rates over the LTROs’ duration. However, such an announcement is unlikely in June.

The recent increase in short rates,       In our opinion, the recent increase in euro short rates should not be a source of concern for
is not a concern for the ECB              the ECB. Indeed the sell-off, not as abrupt as in January (see Figure 4) has mirrored the
                                          upward movement of US rates on rising expectations of Fed tapering its QE. In short, it was
                                          not the result of endogenous euro area factors like in January, but of global factors – and
                                          indeed the impact on exchange rates has been limited. More prudent comments on the
                                          negative depo rate and market positioning have probably contributed to exacerbate the
                                          upwards move in rates. Furthermore, the EONIA fixing has remained in the 6.5-8.5bp range,
                                          despite an increase in daily volatility resulting from the low EONIA volume. The 3m Euribor
                                          has stabilized at 20bp, and the 12m euribor has remained broadly unchanged at 48bp.
                                          Basically, the pressure has affected the long part of the money market curve (bear
                                          steepening), as is usual when global factors are at play.

Any correction in short rates             The 1y and the 1y1y forward rates moved up, to 8bp and 26bp respectively. At such levels,
movement likely to be limited by          rates are at the upper bound of our expected trading range given the current monetary
the risk of passive tightening            policy stance. While a further increase depends on the evolution of US rates (likely
                                          dependent on the next data releases like the May NFP, the day after the ECB meeting), the
                                          ongoing reduction in the liquidity surplus in the Eurosystem is likely to limit any rally back
                                          from the current levels. We are thus not yet scaling back into tactical longs.

Negative depo rate: no longer             It seems that currently the EONIA forward curve is no longer pricing in a cut in the depo
priced in the Eonia forward curve         rate. Indeed, the forward on Eonia sees the fixing in the 6-8bp range until the beginning of
                                          next year and then gradually moving up to about 28bp by the end of 2014 and at 36bp by
                                          March 2015, when the second 3y LTRO expires. Such level would be consistent, in our
                                          opinion, with a further decline in the liquidity surplus in the coming months somewhat
                                          counteracted by an ECB refi rate cut (no change in the deposit facility).


FIGURE 3                                                                FIGURE 4
EONIA forwards: No cut in depo rate is priced anymore (%)               Global factors behind the euro short rates sell-off (%)

 0.30                                                                    0.6               USD -1y1y fwd Eonia
                     41424
                     30 -May-13                                                            EUR - 1y1y fwd Eonia
 0.25                41417
                     23 -May-13
                                                                         0.5               USD - 1y EONIA
                     02 -May-13
                     41396
 0.20                                                                                      EUR - 1y Eonia
                                                                         0.4
 0.15
                                                                         0.3
 0.10

 0.05                                                                    0.2

 0.00                                                                    0.1

-0.05
                                                                         0.0
    May-13      Sep-13      Jan-14    Jun-14   Oct-14    Feb-15
                                                                          May-12               Sep-12             Jan-13    May-13
Source: Barclays Research                                               Source: Barclays Research




30 May 2013                                                                                                                          27
Barclays | Global Rates Weekly


                                    Banks’ exit from the EONIA/Euribor panel
                                    An important issue that has surfaced recently is the implication of banks’ exit from the
                                    EONIA/Euribor panel on monetary policy implementation.

Banks’ exodus from the panel        Indeed, two more German banks (LBBW and Helaba) have announced their exit from the
continues…                          panel after May 31. The Euribor panel is currently composed of 36 banks, and those that
                                    contribute to it are the same banks that contribute to the EONIA panel. Noteworthy, since
                                    last summer 8 banks have left the panel: LandesBank Berlin (1 May 2013), UBS (28 March
                                    2013) Svenska Handelsbanken (20 March 2013), RBI (15 January 2013), Rabobank (3
                                    January 2013), BayernLB (1 January 2013), Deka Bank (30 November 2012) and Citibank
                                    (21 September 2012).

…with risks of reducing the         A side-effect of banks’ exodus from the panel is the reduced credibility of EONIA and Euribor
credibility of EONIA and Euribors   as indicators of euro area liquidity conditions (in terms of prices and volumes) for the ECB’s
as reference rates                  monetary policy implementation. So far, several ECB members have raised concerns on this
                                    important issue. In particular, in his speech at the 17th Global Securities Financing Summit,
                                    Luxembourg, 16 January 2013, the ECB executive board member Benoit Coeure’ highlighted
                                    the importance of EONIA as the first link in the chain of monetary policy transmission. He
                                    pointed out also that “in light of the fundamental importance of money market reference
                                    rates, we are closely following the developments taking place as regards the shrinking number
                                    of panel members for establishing EURIBOR and EONIA rates. Given the authorities’
                                    commitment to addressing the shortcomings revealed in the rate-setting process, it is in the
                                    interest of markets that banks remain in the panel while the regulatory framework is being
                                    amended and behave as responsible market participants, thus preventing potential disruption
                                    in the functioning of an important financial market segment.” Also, the ECB’s May 2013
                                    Financial Stability Review (published on May 29) highlights in BOX 2 the importance of
                                    reference interest rates “as a key orientation or benchmark of the prevailing price of liquidity
                                    for financial market participants and help in standardising financial contracts for both
                                    wholesale and retail clients (e.g. loans for house purchase)".

Different impact on Eonia and       In terms of potential effect on the EONIA and Euribor, we believe that the impact from a
Euribor due to variance in          banks’ exit differs, as both rates have a different calculation method, as we discussed in the
calculation methodologies           focus section, “Banks’ panel exodus: Eonia has been affected, not Euribor” in the Euro
                                    Money Markets Weekly: The final Countdown, 22 January 2013.

                                    Marginal Impact on the Euribor fixing
                                    The Euribor is a simple average of the rates provided (which are not market rates). Also, in
                                    the calculation of the Euribor fixing, the highest and lowest 15% of all quotes collected on a
                                    given day are taken out to eliminate the effect of any outlier contribution. The fixing is
                                    calculated as an average on the remaining contributions rounded to three decimal places.

                                    The contributions from LBBW and Helaba have been about 20bp since the ECB’s May meeting
                                    (more precisely, Helaba increased its contribution from 20bp to 21bp yesterday, 29 May, and
                                    LBBW has kept its contribution at 20bp). Hence, both contributions are considered in the
                                    fixing calculation. As both of these are broadly in line with the current Euribor fixing (20bp),
                                    we would not expect a significant impact on the fixing, which is likely to remain unchanged or,
                                    at the margin, to move down slightly (all other contributions being equal).

                                    Impact on Eonia: decline in volume and probably in the fixing, with higher daily volatility
                                    Eonia (Euro OverNight Index Average) is calculated as a “weighted average of all overnight
                                    unsecured lending transactions in the interbank market, initiated within the euro area by the
                                    Panel Banks (the same as for Euribor)”. Each panel bank “shall report to the ECB the total
                                    volume of unsecured lending transactions that day and the weighted average lending rate
                                    for these transactions”.


30 May 2013                                                                                                                      28
Barclays | Global Rates Weekly


                                 The impact is likely to be higher on EONIA because apparently German banks are quite
                                 important for the calculation of EONIA in terms of reported volumes and fixing, as
                                 suggested by the drop in volumes and the increase in volatility in the fixing when German
                                 markets close for public holidays (meaning there are no contributions by the German banks
                                 in the panel). This is probably because some German banks currently in the EONIA panel are
                                 very active in the overnight unsecured liquidity market, with many transactions, especially
                                 with small banks, closed at rates higher than the market average.

                                 Due to the lack of detailed data, it is difficult to understand the contributions of Helaba and
                                 LBBW within the group of German banks. We would guess that their exit is likely to bring
                                 the reported volume into the €10-15bn range from €15-20bn currently, with the EONIA
                                 fixing likely to creep down (because of the reduction in reported transactions closed at high
                                 rates). Importantly, the daily volatility for EONIA is likely to remain high, as in a context of
                                 small EONIA (reported) volume, the fixing becomes more sensitive to any particular
                                 transactions reported by panel banks at higher/lower rates.




30 May 2013                                                                                                                   29
Barclays | Global Rates Weekly


UNITED KINGDOM: RATES STRATEGY

                                 Steeper and cheaper
Moyeen Islam                     The DMO plans to launch a new “super long” 50-60y maturity nominal gilt next month.
+44 (0)20 7773 4675              There is some natural demand for a super long issue: the ultra long end needs to
moyeen.islam@barclays.com        cheapen and steepen for supply to be absorbed. We favour 2052/2060 steepeners.

The DMO plans to issue a new     With the market being led by the sell-off in USTs, the ongoing discussion about tapering Fed
conventional gilt of 50-60y      purchases and the volatility in Japanese assets, the ultra-long end of the UK curve seems
maturity in June                 very far removed for the broader macro themes that we see in the fixed income universe.
                                 Nonetheless, there will be a significant event next month: the DMO will announce further
                                 details of its planned super-long gilt issuance at the end of June. This will be for a maturity
                                 in the 50-60y area of the nominal curve, thus extending it beyond its traditional 50y
                                 maximum maturity point. The decision to do so was arrived at ahead of the Budget and
                                 some discussion of how the government could take advantage of record-low gilt yields.
                                 While the market response to the initial idea of a 100y maturity was lukewarm, there was
                                 enough interest and perceived demand for hedging of the longest-dated liabilities to
                                 suggest that an opportunity now exists for the DMO to open up a new part of the curve.

There is some natural demand     How much demand would there be for a new super long? Figure 1 shows the liability profile
from DB schemes looking to       for a typical defined benefit (DB) pension scheme. The significant drop in liabilities after
hedge their tail liabilities     2060 is largely a function of the dwindling number of open DB schemes that are actively
                                 adding to their liability stocks. The most recent National Statistics survey of pension
                                 schemes estimated there were only 1 million workers in open DB schemes and only 2.4
                                 million workers in private sector DB schemes in total. So while there is some demand from
                                 liability hedgers, it is by no means significant. Our Pension and Insurance Solutions group
                                 estimates there are no more than 5% of total liabilities in the ultra-long maturities. With
                                 overall pension liabilities about £1.3trn, this would mean there is, in theory, £60-65bn of
                                 liability hedging demand. However, some of this will have already been hedged in the past
                                 decade when there was issuance to fund utility buyouts by the private equity industry.




                                 FIGURE 1
                                 Projected liability structure of a typical UK DB scheme (£mn)
                                   50
                                                                                                         Pensioner Liabilities

                                                                                                         Active Liabilities
                                   40
                                                                                                         Deferred Liabilities

                                   30


                                   20


                                   10


                                    0
                                        2012    2022      2032      2042       2052       2062   2072   2082     2092         2102
                                 Source: Barclays Pension and Insurance Solutions Group


30 May 2013                                                                                                                          30
Barclays | Global Rates Weekly


                                      FIGURE 2
                                      The longest end of the gilt curve trades structurally rich
                                        3.40
                                                       2044 and 2052 gilts are cheap

                                        3.35



                                        3.30



                                        3.25



                                        3.20
                                               29           32           35             38          41            44            47         50
                                                                                       years to maturity
                                     Source: Barclays Research



Bucketing of cash flows in LDI        The structure of liability hedging through LDI structures has focused on the cash flow
strategies means that the             profiles of liabilities and looks to immunise liabilities via matching cash flows. The lack of
longest liabilities are partially     hedging instruments at the longest maturities has meant the longest-dated liabilities are
hedged with the longest               aggregated together and the longest available duration instruments are used to hedge
available instrument                  them. This results in the longest-dated gilts trading structurally rich to the curve (Figure 2).
                                      We expect any new super long issue to pick up a similar “hedging premium” and trade rich.
                                      By extension, this means the 2055 and 2060 issues will lose some of their lustre and should
                                      underperform in RV versus other post 30y maturities.

The curve has been steady but         The longer end of the curve remains relatively directional to the market. Figure 3 shows that
is directional to the level of the    the 2022/2042 spread versus 2022s yield has been as consistent as the relationship between
market; we would expect a             the 2042/2060 and 2022/2042 spread (Figure 4). The latter has been steepening steadily
further back-up in forward            since the middle of last year, so it has rarely been positive, supporting our view that the longer
rates into supply, with the 20y       end of the curve has traded structurally rich. Gilt forward rates remain at the cheaper end of
sector underperforming as QE          their recent range, with Gilt 10y10y fwd and Gilt 15y15y fwd comfortably higher above 4.25%,
expectations fade                     having backed up some 20-30bp since the beginning of May. While forward rates have been



FIGURE 3                                                                 FIGURE 4
2022/2042 spread vs 2022 yield                                           2022/2042 spread vs 2042/2060 spread

180                                                                       160                                                               0

160                                                                       150                                                               -1

140                                         y = -43.104x + 210.72         140                                                               -2
                                                  R² = 0.7648
120                                                                       130                                                               -3

100                                                                       120                                                               -4

 80                                                                       110                                                               -5

 60                                                                       100                                                               -6
                                                                            Jan-12      Apr-12       Jul-12   Oct-12   Jan-13     Apr-13
 40
                                                                                                     U42022/4H2042 spread (lhs)
   1.25          1.75       2.25     2.75           3.25         3.75
                                                                                                     4H2042/U42060 spread (rhs)
Source: Barclays Research                                                Source: Barclays Research


30 May 2013                                                                                                                                 31
Barclays | Global Rates Weekly


                                              higher, we expect more of a concession to develop over the next month so expect the 20y
                                              sector to underperform since the “natural” support of QE that it had enjoyed will likely be
                                              diminished, as further asset purchases seem unlikely in the next few months.

We assume a 2068 maturity                     To model a new issue in asset swap space, we assume that the new issue is a 3.25% coupon
with a 3.25% coupon, a                        January 2068. In the DMO’s quarterly consultation meeting, the discussion with end investors
compromise between the end-                   and market markers saw the former looking for a longer extension but the latter favouring a
users looking for a longest                   more modest extension into the 55-year sector. While we have no more insight into maturity
possible maturity and the                     choice, in our opinion, a 2068 is a something of a “compromise” between the desires of the
market-makers seeing no                       two groups: it extends the curve by eight years, while extending duration by about 2.5 years
material need to extend the                   from the Jan 2060s. Figure 5 shows the relationship in the ultra long end between duration
curve aggressively                            and yield. An extension of duration by 2.5 years would be consistent with a yield pick-up of
                                              about 15bp, given the relationship between yield and duration. However, Figure 6 suggests the
                                              convexity/duration relationship, which has been very tight, would say that duration of about
                                              25 years implies a convexity pick-up of about 1.6, so the current estimated increase in
                                              convexity of about 2.02 is too high – consistent with our view that the ultra/super long end of
                                              the curve is too flat. We see fair value for a 2068 issue at about 2060s +5bp.

Pricing the convexity of an                   One of the most common questions regarding ultra long-dated instruments is how to value
ultra-long issue is not                       the convexity of an issue. More convex securities are prized by investors as they will
straightforward and somewhat                  outperform in both bull and bear scenarios, and low coupon, long maturity issues tend to
theoretical as it not easy to                 have higher convexity than their peers. All of this tells us that the 2068s should see some
monetize fully                                support from convexity buyers, but how much is that convexity worth? Translating the
                                              value of convexity into the yield curve is not straightforward. Mathematically, the basis point
                                               value of convexity is a function of the instrument’s convexity and its normalised implied
                                               volatility. If we make the assumption of ignoring transaction costs, to monetise this gain,
                                               one would have to assume that any two instruments (convexity is a relative measure after
                                              all) would both be held to the maturity By constantly holding one versus the other, the
While convexity is understood,                convexity gain could be treated as an annuity. If this was summed over the life of the
other factors will underpin the               instruments being compared, the difference in the annuity values of convexity should
curve shape more such as flow                 translate into the yield difference between the instruments and the curve being flatter at the
and positioning                               longer maturities, so counteracting the term premium in the curve – but by how much?




FIGURE 5                                                                    FIGURE 6
Yield vs duration for long gilts (2042-2055)                                Duration vs convexity for long gilts
                                                                              Convexity
 Duration
                                                                              8.00
 22                                                                                                     y = 0.6981x - 8.1841
                                                                               7.50                          R² = 0.9902
 21                                                                            7.00
               y = 25.784x - 65.954
                    R² = 0.8568                                                6.50
 20                                                                            6.00
                                                                               5.50
 19                                                                            5.00
                                                                               4.50
 18
                                                                               4.00
                                                                               3.50
 17
                                                                                   16.00   17.00    18.00   19.00   20.00   21.00   22.00   23.00
      3.20           3.25             3.30           3.35          3.40
                                      yield                                                                    duration
Source: Barclays Research                                                   Source: Barclays Research



30 May 2013                                                                                                                                     32
Barclays | Global Rates Weekly


In CMS space, the convexity                  The CMS swap market gives some idea as to where this adjustment would be done in
adjustment is worth about                    forward space. The CMS GBP 10y20y fwd versus 30y20y fwd spread is about -25bp – in
25bp, ie, the curve should be                vanilla swaps, the same spread is about -20bp. This suggests that the swaps market does
25bp flatter in ultra-longs                  price convexity in some form. Though bonds and swaps differ, the historical realised
versus 30y                                   volatility of the 2060 gilt and 50y swap have tended to be closely linked (Figure 7),
                                             suggesting the implied volatility would likely be similar. However, to expect the new issue to
                                             come 20bp through the 2060 seems highly unlikely. More importantly, the convexity, while
                                             understood by the market, is not the only factor to consider in pricing. For example, in linear
                                             GBP swaps, GBP 40/50s are about a basis point flatter than GBP 50/60s. This is largely a
                                             function of the relative richness of the 50y point on the curve (GBP 10y40y fwd is notably
                                             rich in swap RV), which itself is a function of residual positioning and supply and demand.
                                             So while the convexity is an important concept and is an attractive feature of the new issue,
                                             whether its “mispricing” can be monetised is a moot point, in our view.

We need to see asset swaps                   In the ultra-long end, the gilts curve is more inverted than the swap curve, leaving asset
cheapen to attract outright                  swap valuations interesting (Figure 8). On a matched-maturity basis (vs 6mL), the new
buyers                                       issue would be slightly cheap. However, on a par/par measure, its lower coupon leaves it
                                             rich relative to surrounding issues, while on the z-spread measure, a new 2068 would be
We need to see a bear                        slightly cheap to the 2060s. All told, we would expect some cheapening in asset swap back
steepening in 2052/2060s                     towards L+30bp before there is outright asset swap demand for the issue but there may be
ahead of supply                              some interest in switches out of expensive bonds.

All told, the outright level                 There should be some demand from the issue from index-sensitive accounts. We estimate
needs to cheapen and the                     that the +15y Index extends by +0.013yrs per £1bn of the issue and the All Stock Index by
ultra-long end bear steepen                  +0.02yrs per £1bn of the issue. All told, we expect the current level of ultra long yields to be
into June’s supply                           too rich for outright buyers, while the ultra long end is too flat ahead of supply. This
                                             suggests that most of the demand for the issue will come from extension trades in the
                                             2055/2060 part of the curve, meaning the curve should come under steepening pressure
                                             into supply. Thus, we favour being long the cheaper 2052 issue relative to longer parts of
                                             the curve as a structural trade into supply.




FIGURE 7                                                                   FIGURE 8
Gilt 2060 vs 50y swap historical volatility                                Long gilt asset swap measures (bp)
2.00                    Historical volatility in 50yr swap                  bp                 vs 6mL        par/par          z-spread
1.80                    Historical volatility of 2060 gilt                  30
1.60                                                                        28
                                                                            26
1.40
                                                                            24
1.20
                                                                            22
1.00                                                                        20
0.80                                                                        18
0.60                                                                        16
                                                                            14
0.40
                                                                            12
0.20
                                                                            10
0.00                                                                             Dec Dec    Jan Dec Dec    Jul Dec   Jan Jan-68
   May-10 Nov-10 May-11 Nov-11 May-12 Nov-12                                     2040 2042 2044 2046 2049 2052 2055 2060
Source: Barclays Research                                                  Source: Barclays Research


30 May 2013                                                                                                                               33
Barclays | Global Rates Weekly


SUPRANATIONAL, SUB-SOVEREIGN & AGENCIES

                                 European support structures – familiar
                                 territory
                                 (This is an edited extract from The AAA Investor, published 30 May 2013)

Fritz Engelhard                  In this week’s The AAA Investor publication we review the events since 2009 leading up
+49 69 7161 1725                 to the sovereign crisis and also assess the current situation for European support
fritz.engelhard@barclays.com     structures and the respective relative value from a capital markets perspective.

                                 May 2013 marked the third anniversary of the implementation of the first sovereign
Michaela Seimen
                                 support programme for Greece and the creation of the European Financial Stability Facility.
+44 (0)20 3134 0134
                                 In line with the evolution of the European sovereign crisis, European support structures
michaela.seimen@barclays.com
                                 have been adjusted according to changing requirements. Furthermore, the overall situation
                                 has been a learning process for politicians and market participants alike as a crisis with this
Jussi Harju, CFA
                                 global scale and impact has been rarely experienced. In line with the more recent track
+49 69 7161 1781
                                 record of the eurozone as a union, weaknesses of the system have been exposed and
jussi.harju@barclays.com
                                 needed to be addressed. In this week’s publication we review the events since 2009 leading
                                 up to the sovereign crisis and also assess the current situation for European support
                                 structures and the respective relative value from a capital market perspective.

                                 FIGURE 1
                                 Timeline of events for the establishment of sovereign financial backstop facilities EFSF
                                 and ESM
                                 Year        Date            Key events for the establishment of EFSF and ESM financial backstops

                                             7 June          European Financial Stability Facility (EFSF) was created
                                 2010
                                             28 November     Agreement of financial assistance programme for Ireland (€85bn)
                                             17 May          Agreement of financial assistance programme for Portugal (€78bn)
                                                             Agreement by eurozone and EU finance ministers to increase EFSF's
                                             20 June         effective lending capacity, widen scope of mandate and finalise terms of
                                                             permanent stability mechanism, the European Stability Mechanism (ESM)
                                 2011
                                                             Eurozone summit, second support package for Greece and increased scope
                                             21 July
                                                             for EFSF / ESM
                                                             EU summit - ESM brought forward, EFSF will continue as scheduled until
                                             9 December
                                                             end June 2013
                                             2 February      ESM Treaty signed
                                             14 March        Second Greek programme formally approved by Euro Working Group
                                 2012        30 March        Eurogroup decides EFSF / ESM to run in parallel
                                             20 July         Eurogroup grants financial assistance to Spain's banking sector
                                             8 October       ESM inauguration
                                 2013        8 January       ESM launches its short-term programme with its first bill auction
                                 Source: Barclays Research




30 May 2013                                                                                                                             34
Barclays | Global Rates Weekly


SCANDINAVIA: RATES STRATEGY

                                              Prospect of Riksbank rate cut despite headline
                                              GDP surprise
Mikael Nilsson Rosell                         Sweden’s headline Q1 GDP number surprised to the upside but the weak composition
+44 (0)20 7773 6057                           does not bode well for the coming quarters. Therefore, we retain our longs in the very
mikael.nilsson@barclays.com                   front-end and receive 10y swaps versus EUR, given the very benign inflation outlook.

                                              Swedish swap rates underperformed EUR by c.4.5bp across the curve after the surprisingly
                                              strong GDP report. However, the weak composition of growth does not bode well for the
                                              coming quarters and the very benign inflation outlook still suggests room for rate cuts, in
                                              our view. Hence, we continue to see value in holding longs in the very front-end (Sept ’13
                                              3m FRAs) and cross-market tighteners versus EUR in 10y swap rates.

                                              Swedish GDP increased by 0.6% q/q (1.7% y/y) in Q1, significantly stronger than our
                                              estimate (0.1% q/q 1.1% y/y) and, more importantly, the Riksbank’s latest forecast (0.3%
                                              q/q; 1.5% y/y). However, the composition of GDP growth was not particularly convincing,
                                              in our view, with inventories leaving a significant positive contribution to GDP compared to
                                              Q1 last year (0.7 percentage points). This will likely reverse and weigh negatively on growth
                                              in the coming quarters. In addition, it is notable that net exports left a significant positive
                                              contribution (0.6% percentage points), despite surprisingly weak exports (-2.9% y/y).
                                              Hence, the positive contribution was instead driven by even weaker imports (-4.7%).

                                              Furthermore, while consumption growth was slightly stronger than expected at 1.5% y/y
                                              and left a positive contribution to growth (0.7 percentage points), it is, in our view, more
                                              notable that fixed investments plunged (-7.2% y/y) and left a surprisingly large negative
                                              contribution than anticipated (-1.3 percentage points). On a more detailed, and perhaps
                                              slightly abstract, level it is also notable, in our view, that Statistic Sweden’s internal
                                              calibration shows an unusually large discrepancy between GDP estimates based on
                                              demand-side data (1.4% y/y) and production data (-0.3% y/y).

                                              All in all, we leave our 2014 GDP forecast unchanged (1.4%) given that the Q1 GDP
                                              surprise, in our view, was mainly driven by temporary factors which will reverse in the
                                              coming quarters (for a more detailed account, see Slightly better days ahead, 10 April


FIGURE 1                                                                    FIGURE 2
GDP surprises to the upside but growth composition is weak                  Downside risk to the Riksbank’s CPIF forecast

%                                                                            4.0        y/y
 2.5
                                                                             3.5
 2.0
 1.5                                                                         3.0
 1.0
                                                                             2.5
 0.5
 0.0                                                                         2.0
-0.5                                                                         1.5
-1.0
                                                                             1.0
                                                                                                                                                   Forecast




-1.5
-2.0                                                                         0.5
       Jun-12              Sep-12              Dec-12          Mar-13
                                                                             0.0
             Household consumption               Public consumption
                                                                                   06         07   08          09   10   11   12         13   14
             Fixed investments                   Inventories                                            CPIF                  CPIF, RB
             Net exports                         GDP (y/y)
Source: Statistic Sweden, Barclays Research                                 Source: Riksbank, Barclays Research


30 May 2013                                                                                                                                                   35
Barclays | Global Rates Weekly


                                              2013). More importantly, we don’t believe the Q1 GDP numbers will trigger any significant
                                              revision of the Riksbank’s forecast going into the 3 July meeting. Indeed, the weak
                                              composition of growth and recent downside surprises in leading indicators will probably, if
                                              anything, raise concerns about the underlying growth momentum (Sweden Economic
                                              Tendency Indicator: Clearly surprises to the downside in May, 24 May 2013).

                                              More importantly, the benign inflation outlook and modest resource utilisation clearly
                                              suggest room for further policy rate cuts, in our view. We continue to see substantial
                                              downside risk to the Riksbank’s inflation forecast (Figure 2). Indeed, according to statistics
                                              released earlier this week the producer price index (PPI) posted its largest y/y decline on
                                              record, underscoring the very benign near-term inflation outlook (Figure 3). While, the part
                                              of PPI that covers consumer goods hasn’t posted as dramatic a decline as the headline PPI it
                                              nevertheless suggests some near-term downside risk to our already benign CPI forecast.

                                              While the Riksbank does not have a single preferred resource utilisation measure, notably, in
                                              our view, one of its preferred measures, the RU-indicator (summarising information in
                                              survey and labour market data), reached its lowest level since mid-2009 in Q1 13 (Figure 4),
                                              providing a fairly dramatic contrast to the headline numbers in the Q1 GDP release. Hence,
                                              both the inflation outlook and resource utilisation continue to suggest room for further rate
                                              cuts, in our view.

                                              That said, in retrospect we are also a bit surprised that the Riksbank’s pronounced
                                              downward revisions to its inflation forecast in April did not trigger an immediate rate cut,
                                              possibly suggesting that the Riksbank’s reaction function has changed more materially than
                                              even we had anticipated due to concerns (from the majority) that a “too low policy rate for
                                              too long” might nourish potential medium-term systemic risks. However, while the
                                              Riksbank continued to stress potential structural weakness in its recently released financial
                                              stability report (Swedish bank are financially strong, but the Riksbank continues to stress
                                              potential structural weaknesses, 27 May 2013), we believe that the FSA decision to
                                              introduce a 15% minimum risk weight floor on mortgages earlier this week might have
                                              alleviated some of these concerns.

                                              With the short-end discounting a 40% probability of a 25bp cut at the forthcoming meeting
                                              we continue to see vale in holding longs in the very front end (Sep ’13 3m FRAs). Given the
                                              prospects for further cuts and the benign inflation outlook we also continue to see value in
                                              receiving 10y swaps versus EUR.


FIGURE 3                                                                    FIGURE 4
PPI posts its largest decline (-5.3% y/y) on record in April                Resource utilization (RU-indicator) close to mid-2009 levels

%                                                                            %
 12                                                                           2.50
 10                                                                           2.00
  8                                                                           1.50
  6                                                                           1.00
  4                                                                           0.50
  2                                                                           0.00
  0                                                                          -0.50
 -2                                                                          -1.00
 -4                                                                          -1.50
 -6                                                                          -2.00
 -8                                                                          -2.50
  Jan 91 Jul 93 Jan 96 Jul 98 Jan 01 Jul 03 Jan 06 Jul 08 Jan 11                 Mar 96 Nov 98        Jul 01      Mar 04 Nov 06    Jul 09    Mar 12
                                           PPI (y/y)                                                               Riksbank's RU-indicator
Source: Reuter EcoWin, Barclays Research                                    Source: Riksbank, Barclays Research


30 May 2013                                                                                                                                           36
Barclays | Global Rates Weekly


INFLATION-LINKED MARKETS: UNITED KINGDOM

                                           Watch out for the overhang
Henry Skeoch                               The IL Mar ‘24 offers value only in breakeven before its impending auction. The bond is
+44 (0)20 7773 7917                        no longer cheap on the curve or versus the IL22. The auction itself should be fairly
henry.skeoch@barclays.com                  routine assuming further concession, but we see risks of a post auction overhang.

                                           The DMO will auction the new IL24 for £1.6bn notional on Tuesday, 4 June, equivalent to a
                                           £1.8bn cash size and £2mn/bp of risk. The bond was last auctioned for the same notional
                                           amount on 11 April, which drew a fairly strong reception with the bond performing well
                                           after the auction. We think a repetition of this is unlikely on this occasion. Although the new
                                           IL24 is now 15bp cheaper in breakeven relative to the last auction date, it has corrected
                                           much of its cheapness both on the real yield curve and relative to the IL22. One positive for
                                           the supply is the marked cheapening in real yields since the start of April, with the new IL24
                                           cheapening almost 40bp. This cheapening initially was driven by concerns about a potential
                                           disinflationary environment and latterly by the global nominal sell-off, which has been
                                           driven in large part by expectations of the Fed tapering its asset purchase programme. We
                                           still think that 5-10y breakevens offer attractive value relative to the BoE inflation target, but
                                           breakeven demand alone is rarely sufficient to absorb UK linker supply. 10y linkers are also
                                           now not notably cheap versus nominal asset swaps. While this likely reflects diminished
                                           expectations of further QE nominal purchases, it may also limit ASW interest for the auction.

New IL24 has unwound its                   The new IL24 has exhibited significant volatility in relative value since it was launched last
hitherto attractive cheapness              October. The launch of the bond drew very strong demand, as did its £1.1bn notional 13
in relative value                          December reopening with the issue performing well after both auctions. However, it notably
                                           lagged the IL22 following the National Statistician’s recommendation not to alter the RPI
                                           aggregation formulae on 10 January. The two subsequent reopenings of the new IL24 on 5
                                           February and 11 April saw a marked underperformance of the bond on the real yield curve
                                           ahead of the two auctions (Figure 2), with the bond extending its underperformance after
                                           the February reopening. Even after Tuesday’s auction, the new IL24 will still be markedly
                                           smaller than neighbouring bonds, suggesting it is likely to be frequently reopened in the
                                           coming quarters. Therefore, we see little compelling value in the bond at current levels,
                                           except versus 10y nominals given the structural value offered by breakevens. The supply
                                           has a shortening effect of 0.03y and 0.05y on all-linkers and over-5y indices, respectively.


FIGURE 1                                                                  FIGURE 2
10y breakevens value outright, no longer cheap vs RPI swaps               New IL24 now only marginally cheap on curve
3.4                                                                10     55
                                                                                                New IL24 vs IL17+IL29 real yield barbell
                                                                   12
3.3                                                                       50                    New IL24 vs IL22 real yield spread
                                                                   14
                                                                   16
3.2                                                                       45
                                                                   18
3.1                                                                20     40
                                                                   22
3.0                                                                       35
                                                                   24
                                                                   26
2.9               New IL24 breakeven (%)                                  30
                  New IL24 relative z-spd asw (RHS inv, bp)        28
2.8                                                                30     25
  Jan-13        Feb-13      Mar-13      Apr-13      May-13                 Oct-12            Dec-12            Feb-13          Apr-13
Source: Barclays Research                                                 Source: Barclays Research
                                                                          Note: Vertical lines denote reopening auction date

30 May 2013                                                                                                                                37
Barclays | Global Rates Weekly


EUROPE: SPECIAL TOPIC

                                           EGBs: Back to trading like a rate product
Cagdas Aksu                                ECB and other developed market central banks’ notable monetary expansions and
+44 (0)20 7773 5788                        institutional changes in the eurozone have helped most EGBs trade more like a rate
cagdas.aksu@barclays.com                   product once again. While core countries are pretty advanced in this process, Italian and
                                           Spanish bonds are still in transition from trading like a credit to rate product in our view.

                                           During the credit and eurozone debt crisis that we have been living through since 2007,
                                           sovereign spreads in the euro area have widened substantially in peripheral as well as core
                                           European government bonds (EGBs). As a result, correlation behaviour within the EGB market
                                           and also versus swaps has been changing notably. As peripheral/core bonds have started
                                           pricing in more credit and liquidity risks, they have traded more like credit products than rate
                                           products. Indeed, this has ended up being a problem not just for the sovereigns but also for
                                           the ECB, due to high financial market fragmentation making it difficult for the central bank to
                                           have a relatively even transmission of monetary policy in rates across the eurozone.

                                           Indeed, it has been this substantial credit/liquidity premium in peripheral bonds and financial
Peripheral and core bonds
                                           market fragmentation that has pushed the ECB into taking bolder action in the past two years
traded more like credit than
                                           (eg, LTROs and OMT program announcement). Thanks to these actions from the ECB, other
rate products during the crisis
                                           developed market central banks’ significant monetary policy expansions and the institutional
                                           changes in the eurozone, core EGBs are once again pretty much all behaving like a pure rates
                                           market. While Italian and Spanish bonds have not yet fully become like rate products, we find
                                           that they are currently in transition.

                                           In order to illustrate this, we looked at rolling correlations of daily yield changes in 5y core and
                                           peripheral countries versus 5y German bond yield changes. As Figure 1 shows, before 2007
                                           the correlations on yield changes in Belgium, France and the Netherlands were all very close to
                                           one versus Germany. These correlations fell to zero (in France and Belgium, less so in the
                                           Netherlands) at the end of 2011/early 2012 as contagion spilled over from periphery to core
                                           countries. Since then, a number of factors, including global monetary expansion, have led to
                                           yield grab and as a result core spreads across the board, including France, are not far from
                                           pre-crisis levels. As such, the correlations of yield changes are now back to around one and all
                                           of these curves are trading similar to Germany like a rate product: ie these core bonds are
                                           moving more on the back of macro rate moves than credit and liquidity risk premiums.

FIGURE 1                                                                   FIGURE 2
3m rolling correlation of daily yield changes in 5y core and               3m rolling correlation of daily yield changes in 5y core
German bonds                                                               periphery and German bonds
 1.5                                                                        1.5


                                                                            1.0
 1.0

                                                                            0.5
 0.5
                                                                            0.0
 0.0
                                                                           -0.5
                                                                                                   Italy
                            France
-0.5                        Belgium                                                                Spain
                                                                           -1.0
                            Holland

-1.0                                                                       -1.5
   Jan-07          Jul-08         Jan-10      Jul-11       Jan-13             Jan-07              Jan-09         Jan-11            Jan-13
Source: Barclays Research                                                  Source: Barclays Research


30 May 2013                                                                                                                                 38
Barclays | Global Rates Weekly


FIGURE 3                                                                    FIGURE 4
1m rolling correlation of daily yield changes in 5y periphery               Swaps have been a good hedge for Germany with
and German bonds                                                            correlations only dropping notably during times of large
                                                                            structural ASW moves
 1.0                                                                         1.5                                                            0


                                                                                                                                            -20
                             Italy                                           1.0
 0.5
                             Spain
                                                                                                                                            -40
                                                                             0.5
 0.0                                                                                                                                        -60
                                                                             0.0
                                                                                                                                            -80
-0.5
                                                                            -0.5             6m rolling correlation with 5y Ger and swaps   -100
                                                                                             5y Ger ASW
-1.0                                                                        -1.0                                                            -120
   Jan-12     Apr-12        Jul-12   Oct-12    Jan-13   Apr-13                 Jan-04       Jan-06         Jan-08   Jan-10     Jan-12
Source: Barclays Research                                                   Source: Barclays Research


Core countries are pretty                     When we look at the same correlations in 5y Italian and Spanish daily yield changes versus
advanced in trading like a rate               Germany, it is still early to say whether these bond markets are trading like rate products.
product once again; peripheral                During the crisis, correlations fell very quickly into negative territory and stayed there for
bonds are still catching up                   quite a long time. However, it is worth nothing that these correlations are gradually edging
                                              up in the positive territory. We can see this more clearly when we look at correlations over a
                                              shorter time period (Figure 3).

                                              Apart from the correlation of yield changes within the EGBs, it is also interesting to look at
                                              the correlation of all EGBs, including Germany, against swaps to see how much of a good
                                              hedge swaps have been to EGBs before and after the crisis. As Figure 4 shows, German yield
                                              levels demonstrate very good correlation with swaps in general, with the correlation having
                                              fallen notably only during times of large structural tightening/widening moves in ASWs.
                                              While swaps would be a good hedge also for core issuers such as Belgium, France and the
                                              Netherlands before the crisis, this changed during the crisis. However, as highlighted above


FIGURE 5                                                                    FIGURE 6
Swaps have become a good hedge once again for core EGBs                     … however, swaps would still not be an effective hedge for
(all in 5y maturities)…                                                     Italy and Spain (all in 5y maturities)
 1.5                                                                         1.5


                                                                             1.0
 1.0
                                                                             0.5
                                                                                                   Italy
                                                                                                   Spain
 0.5                      Ger                                                0.0
                          France
                          Belgium
                          Holland                                           -0.5
 0.0
                                                                            -1.0


-0.5                                                                        -1.5
   Jan-04        Jan-06          Jan-08       Jan-10    Jan-12                 Jan-04        Jan-06        Jan-08    Jan-10      Jan-12
Source: Barclays Research                                                   Source: Barclays Research


30 May 2013                                                                                                                                     39
Barclays | Global Rates Weekly


                                  with these core issuers trading like rate products now, swaps have once more become a
                                  good hedge/benchmark in their trading. As Figure 6 shows, given the volatility of change in
                                  the sign of correlations, swaps would still not be an effective hedge for Italy and Spain.

Swaps are also becoming an        Overall, our analysis shows that most EGB bonds are once again trading more like rate
effective hedge for most of the   products. While core countries like Belgium, France and the Netherlands are pretty
EGB market                        advanced in this process, Italian and Spanish bonds are still in transition from trading like a
                                  credit to rate product. As such, swaps once again are becoming an effective hedge for most
                                  of the EGB market. We expect this process to continue to evolve in this direction, also
                                  helping liquidity in the EGB and swaps market.




30 May 2013                                                                                                                   40
Barclays | Global Rates Weekly


JAPAN: RATES STRATEGY

                                       Tug of war in JPY/USD cross-currency basis
Reiko Tokukatsu, CFA                   10y USD/JPY Xccy basis is now as negative as it was in May 2012. Given the gradual
+81 3 4530 1532                        tightening of loan spreads, spreads on new loans are likely to be much tighter and may
reiko.tokukatsu@barclays.com           eventually become a disincentive for banks to bear more basis cost.

                                       The demand for USD funding is still pressuring JPY/USD Xccy basis in a negative direction,
Chotaro Morita
                                       especially in the above-5y sector. As a result, the 10y basis is close to the historical low
+81 3 4530 1717
                                       recorded in 2012 (-74bp), and 5s10s flattened to a historical low of about -12bp. Strong
chotaro.morita@barclays.com
                                       demand for USD funding is backed by the consistent increase in Japanese banks’ overseas
                                       loans, where the outstanding amount exceeds the pre-Lehman level but funding via
Noriatsu Tanji
                                       deposits is not catching up (Figure 2). We examine the following factors to see whether
+81 3 4530 1346
                                       there is room for USD/JPY Xccy basis to become more negative.
noriatsu.tanji@barclays.com
                                       1. For an immediate move for positive direction, we need institutions that could take
                                          advantage of the negative Xccy basis – typically a Japanese borrower issuing debt in
                                          USD and converting the proceeds into JPY. However, for Japanese borrowers, the benefit
                                          of negative Xccy basis is often reduced by the wider credit spread they have to pay
                                          outside Japan. As credit spread is wider at longer maturities, it is difficult to find a
                                          Japanese issuer for 10y USD debt. Although there are issuers of 5y paper, a recent
                                          USD500mn 5y note from a Japanese local authority did not appear to achieve cheaper
                                          funding compared with its 5y USD issue in May 2012 (JPY Libor-15bp, or JGB flat) or its
                                          funding in JPY. Therefore, we think it is unlikely that other issuers will follow soon.

                                       2. On the other hand, samurai issuers appear to have some advantage currently, though
                                          marginal. A couple of European companies issued samurai bonds in May. While credit
                                          spreads recently stopped tightening in Europe, samurai spreads have not (Figure 3).

                                       3. More negative 10y basis than 5y can be explained that 5y because longer-maturity loans
                                          tend to be for project finance and generally offer wider spreads. Therefore, banks can
                                          afford to pay more basis cost. According to the BoJ October 2012 system report, project
                                          finance spreads typically are about 80bp wider, on average, than spreads on loans for
                                          capital investment. In addition, increased usage of subsidized funding via the Japan Bank
                                          for International Cooperation at USD 6m Libor flat (effectively 3m Libor+14bp for now),
                                          may actually allow banks to bear more basis cost.

FIGURE 1                                                             FIGURE 2
5y and 10y USD/JPY Xccy basis spread and spread (bp)                 Overseas loans and amount funded by deposit
  -40                                                          15     45                                                          130%
                                                                                                                                  120%
  -50                                                          10     40
                                                                                                                                  110%
                                                                      35
  -60                                                          5                                                                  100%
                                                                      30                                                          90%
  -70                                                          0
                                                                      25                                                          80%
  -80                                                          -5                                                                 70%
                                                                      20
                                                                                                                                  60%
  -90                                                          -10    15
                                                                                                                                  50%
 -100                                                          -15    10                                                          40%
    10-May         10-Aug     10-Nov      10-Feb     10-May            Jan-05          Jan-07     Jan-09    Jan-11       Jan-13
                      5Y        10Y          5s10s (bp, RHS)                     Loan (Mega bank, JPY tn)      Deposit as % of loan
Source: Barclays Research                                            Source: Barclays Research

30 May 2013                                                                                                                           41
Barclays | Global Rates Weekly


FIGURE 3                                                                                    FIGURE 4
European spread and samurai spread (bp)                                                     Average spread for IG syndicated loan (5y)
 130                                                                            80           300
 125                                                                            75           280
 120                                                                                         260
                                                                                70
 115                                                                                         240
 110                                                                            65
                                                                                             220
 105                                                                            60
                                                                                             200
 100                                                                            55           180
  95
                                                                                50           160
  90
  85                                                                            45           140

  80                                                                            40           120
   21-Nov                  21-Jan             21-Mar                  21-May                 100
                        Itrx Europe (bp, LHS)                                                  19-Jul       19-Sep      19-Nov        19-Jan       19-Mar      19-May
                        Samurai average swap spread (bp, RHS)                                                             Syndicated loan spread(bp)
Source: Barclays Research                                                                   Source: Bloomberg, Barclays Research


                                                At the same time, we also note that, overall, loan spreads are likely to tighten gradually.
                                                Although we have limited data, Figure 4 shows an average spread for syndicated 5y loans
                                                based on Markit prices (data for 10y loans are not available). If the spread on loan tightens
                                                to 150bp from 200bp but funding costs stay the same, banks have to accept much less
                                                profit. Assuming the spread for overseas loans is about 100bp wider, on average, than
                                                domestic loans, the advantage decreases significantly. Of course, the decision to continue
                                                to increase overseas loans does not depend only on the spread, but also on loan demand, so
                                                domestic banks may still choose to pay the basis cost.

                                                It is difficult to determine the breakeven basis cost for banks to continue accumulate
                                                overseas asset, but we can say, at least, that banks can now only acquire less yielding assets
                                                because they have to pay the same 10y basis spread as in May 2012. In this sense, we think
                                                it is reasonable to start paying 10y Xccy basis at around the current level.

FIGURE 5
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
               1y OIS pay                         13-Jul       6.0       5.5          5.5          0.0     100bn face      8.0       5.0         1y         Close as O/N
                                                                                                                                                              has fallen
 Swap          1s3s5s short vs. 3s5s7s long      25-May       -9.0      -9.5         -10.0         -10.0      10.0        -3.0      -12.0        1m          remaining
               (1:3:5:7=1:-3:3:-1)                                                                                                                          1s3s5s short
               10-15-20 short                     17-May       9.8      13.0         13.9          4.5        10.0        16.0       5.0         1m             Hold
               7s10s box (JB310/JB327)       25-May           -5.50     -6.0          -6.0         0.0          5          -2.0      -8.0       1-3m           New
 Swap          Short 10y swap spread         19-Apr           -15.0     -17.4        -16.4         5.0          5         -10.0     -20.0       1-3m           Hold
 spread        (JB327)
               Short 5 y swap spread (JS109) 19-Apr           -15.0     -13.4        -13.2         1.0          5         -10.0     -20.0       1-3m           Hold
               Pay 1yx1y                          10-Nov      -44.0     -31.0        -31.0         0.0         10        -30.0      -80.0      medium-         Hold
                                                                                                                                                long
 Xccy basis Pay 1yx1y                             11-Apr      -46.0     -41.0        -41.0         0.0          5        -30.0      -80.0       long           Hold
            Pay 4y                                7-Mar       -51.0     -52.0        -52.0         0.0          5        -40.0      -70.0      medium-         Hold
                                                                                                                                                long
 JGB           sell JBM3JBU3 calendar             7-Mar       24.0      n/a          24.0          0.0        300         18.0      30.0        2wks           New
 futures       spread                                                                                       contract
Weekly P&L =0.5; total P&L since 2013: 585.4; balance sheet=27.4.
Note: Current levels based on the absolute maturity to capture rolldown correctly; therefore, it is different from the constant-maturity spread.
Source: Barclays Research




30 May 2013                                                                                                                                                             42
Barclays | Global Rates Weekly


TRADE PORTFOLIO UPDATE

                                 Trade portfolio update
Piyush Goyal                     Since the previous publication (May 23, 2013), the portfolio has lost $1.3mn. It has
+1 212 412 6793                  increased $8.0mn year-to-date and $56.2mn since inception. 2
piyush.goyal@barclays.com
                                 FIGURE 1
Vivek Shukla                     Mark-to-market performance of the portfolio – cumulative P&L, $mn
+1 212 412 2532                           mn
vivek.s.shukla@barclays.com          70

                                     60

                                     50                                                                                                          $56.2

                                     40

                                     30

                                     20

                                     10

                                      0
                                      Jan-09      Jul-09    Jan-10      Jul-10      Jan-11      Jul-11      Jan-12      Jul-12      Jan-13

                                 Note: As of May 30, 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.




                                 2
                                     Since January 2009.

30 May 2013                                                                                                                                           43
Barclays | Global Rates Weekly


TRADE PORTFOLIO
New Trades
   Inception                                                                                  Levels @    Current   Net Change (Gain Total Stop              Initial     Variation     Total
                       Theme                     Trade           Weights/Notional Amount                                                          Horizon
     Date                                                                                     Inception    Level      (+) /Loss (-)) Loss (bp)               Margin       Margin      Margin
 US TIPS
               10s30s breakeven
  5/30/2013                                  Jan-23-Feb43               $25k dv01                15         16         ($25,000)     ($200,000)     1m      $1,000,000   $25,000     $1,025,000
                 curve flattener
 US Swaps / Futures
                 For reversal of sell-
  5/30/2013                            Long front Eds (EDU4)            $50k dv01              53.8bp      54bp        ($10,000)     ($250,000)     1m      $200,000     $10,000     $210,000
                         off
                                         Sell USU3 invoice
  5/29/2013              RV                                             $50k dv01              13.2bp     13.5bp       ($10,000)     ($250,000)     1m      $500,000     $10,000     $510,000
                                              spreads
 JPY Swaps
                  CTD spread is too
                                        Sell JBM3JBU3 calendar
  5/30/2013        wide relative to                                       300                    24         24            $0         ($150,000)     2w      $600,000        $0       $600,000
                                                spread
                       7s10s
 US Options
  5/30/2013        Delta-hedge to      Receive $50mn 6/17/13-            $50mn                 1.74%
                   1m7y straddle               7y swap
                                                               Long $260mn 1m*5y 20bp
                 For continuation of 1m*5y vs. 1m*15y bear
  5/30/2013                                                 OTM:Short $100mn 1m*15y 22bp       10000         0         ($10,000)     ($250,000)     1m      $500,000     $10,000     $510,000
                       sell-off              flattener
                                                                     high strike payer
                                       Buy swaptions vs TY    Sell 1000 TYN3 130 call: Long
                 For reversal of sell-
  5/30/2013                            options (bull-spread $122mn 6/21 7y reciever @ 1.69%    10000         0         ($10,000)     ($250,000)     1m      $500,000     $10,000     $510,000
                         off
                                            tightener)
Note: All prices as of May 30, 2013. Source: Barclays Research




30 May 2013                                                                                                                                                                                    44
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                                                                                                                                                                                                 $8,232,000
           Front-end Asset
 1/12/2012                         Long Jan '14 TIPS ASW                        $500mn         Libor - 13bp    Libor -8bp     $1,400,000    ($250,000)        1y        $2,500,000      ($1,400,000)
           Swap Tightener
              Long Core    Sell 1% 2y CPI Floors vs. Long CL4 Puts
  8/3/2012                                                                   ($100mn): +50     ($376,500)      ($238,500)      $138,000     ($200,000)        1y         $800,000       ($138,000)
               Inflation                      65
 10/5/2012       Carry      Long Jan '15 ASW relative to nominals               $100mn            14bp            9bp          $91,000      ($300,000)        1y        $1,000,000       ($91,000)
10/18/2012 Supply unwind              Long Feb 40 Relative ASW                   $10mn            22bp            32bp        ($122,000)    ($400,000)        1y         $400,000        $122,000
                                  Apr16-Jan22 rel ASWs flattener (20K
 3/8/2013         Supply                                                       20k DV01           11bp            11bp            $0        ($200,000)        3m        $1,250,000          $0
                                                DV01)
              Low realized CPI
3/27/2013                        Sell 3y y/y CPI strangle, energy hedged    $100mn 1%-3.5%     ($1,400,000)   ($1,400,000)        $0        ($500,000)        3m        $2,000,000          $0
                    vol
                                 Sell the belly of Apr17-Jul20-Jan23 real
4/25/2013      Relative Value                                                  $50k DV01         -15.5bp         -9.4bp        $383,000     ($500,000)      Unwound     $1,000,000      ($383,000)
                                                   yield fly
 5/8/2013       Dovish Fed                     Long 5y5y BE                    $25k dv01          269bp          260bp        ($225,000)    ($250,000)      Stop out     $500,000        $225,000
 5/9/2013     Cheap front end            Long Jul13 breakeven                   $200mn            -60bp          +49bp         $53,000      ($500,000)        3m         $500,000        ($53,000)
US Treasury                                                                                                                                                                                             $3,173,000
           Improvement in
 3/14/2013      funding                 Long OTR3y versus OIS                 $100k DV01           8.9             8.2         $122,000     ($500,000)        3m        $1,000,000      ($122,000)
             environment
           Decline in term                                                     $50k DV01          -30.4           -31.7        ($30,000)    ($500,000)        1m         $750,000         $30,000
4/25/2013                              Short 5s10s20s (0.4:1.4:1)
               premium
 5/9/2013   Overweight 3s                Long 2s3s5s (2:2:0.5)                 $50k dv01          -11.6           -10.3        ($65,000)    ($500,000)      Unwound      $750,000         $65,000
5/23/2013    Low inflation                                                     $50k dv01          117.4          116.4         $50,000      ($500,000)        1m         $750,000        ($50,000)
                                            10s30s flatteners
                worries
Eurozone Sovereign debt                                                                                                                                                                                  $450,000
 10/5/2012 UFR positioning          Receive 5y5y/5y10y/5y15y fwd               $15k dv01          102bp           92bp         $150,000     ($375,000)       3-6m        $600,000       ($150,000)
US Swaps / Futures                                                                                                                                                                                      $1,910,000
                                 1y1y Libor-OIS tightener against 1y1y
3/8/2013            RV                                                        $100k DV01          13.6            11.8         $180,000     ($500,000)        1m        $1,500,000      ($180,000)
                                             3s1s widener
 5/23/2013          RV               10s30s spread curve flattener            $100kDV01            -22            -24.1        $210,000     ($500,000)        1m         $800,000       ($210,000)
JPY Swaps                                                                                                                                                                                               $3,957,000
 7/13/2012  Short front-end                    Pay 1y OIS                     $160k dv01           6bp           6.55bp        $88,000      ($350,000)      Unwound     $1,600,000       ($88,000)
             Swap spread
 3/13/2013 term structure is         Swap spread 10s20s30s long               usd 60 k dv01        23              12          $540,000     ($450,000)      Unwound     $1,500,000      ($540,000)
               distorted
              5y belly too
5/16/2013                             1s3s5s short vs. 3s5s7s long             $30k DV01            -8             -5          $15,000      ($250,000)      Unwound     $1,500,000       ($15,000)
                 cheap
 US Options                                                                                                                                                                                            $18,685,000
 7/19/2012       Short vol               Short 1y*10y straddles                 ($20mn)        ($1,220,000)    ($835,000)      $385,000                       6m         $880,000       ($385,000)
 9/7/2012        Short vol               Short 1y*10y straddles                 ($20mn)        ($1,242,000)    ($872,000)      $370,000                       6m         $880,000       ($370,000)
 9/27/2012       Short vol               Short 1y*10y straddles                 ($10mn)        ($596,000)      ($466,000)      $130,000     ($1,000,000)      6m         $880,000       ($130,000)
 10/5/2012       Short vol               Short 1y*10y straddles                 ($10mn)        ($597,000)      ($407,000)      $190,000                       6m         $880,000       ($190,000)
11/15/2012       Short vol              Short 1y*10y straddles                  ($10mn)        ($570,000)      ($570,000)         $0                         Expiry      $880,000           $0
                                  Long 1x11 cap -flr straddles 2% vs
 6/14/2012     Relative Value                                               $20mn: ($20mn)     $1,964,000      $3,019,000     $1,055,000    ($500,000)        1y         $880,000       ($1,055,000)
                                         1y*10y straddles 2%
                 Long risk-      Long 1y*30y 100bp wide risk-reversal
 8/3/2012                                                                       $100mn         ($450,000)       $600,000      $1,050,000    ($500,000)        6m         $725,000       ($1,050,000)
                  reversal             (long recr), delta hedged


30 May 2013                                                                                                                                                                                                         45
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
US Options                                                                                                                                                                                          $18,685,000
                                  Long 3y*1y 25bp low-strike recr vs 45bp
 8/9/2012         Tactical                                                   $200mn:($200mn)         0             $0             $0        ($500,000)        1y        $800,000          $0
                                               high-strike payer
                                  Short belly of 2y5y - 2y10y - 2y30y payer +$94mn : ($100mn):
 8/16/2012    Relative Value                                                                    ($300,000)     ($160,000)      $140,000     ($500,000)        1y       $2,200,000      ($140,000)
                                                      fly                        +$22mn
 1/4/2013        Short vol             sell 2y*10y straddles @ 2.65%             ($50mn)       ($4,105,000)   ($4,025,000)     $80,000      ($500,000)        6m       $2,200,000      ($80,000)
 1/17/2013       Sell skew          Sell 3y*5y 2.5% payer, delta hedged   ($100mn):($40mn)    ($2,115,000)    ($2,365,000)    ($250,000)    ($500,000)        1y       $1,200,000      $250,000
 1/24/2013    cheap flattenerlong 2ez3 p 99 vs short 4ez3 p 97.75           +2000: (2000)      ($650,000)     ($1,125,000)    ($475,000)    ($500,000)       Expiry     $500,000       $475,000
                              short TYM3P 128 vs matched expiry
  2/1/2013    put-payer                                                    (1000): $129mn      ($200,000)          $0          $200,000     ($250,000)      Expired     $500,000       ($200,000)
                                            payer
 2/14/2013 Calendar spread     long 5y30y p 3.6 vs 1y30y p 3.15           +$50mn: ($50mn)      $3,320,000      $3,170,000     ($150,000)    ($500,000)        1y       $1,000,000      $150,000
                           Long 1y30y recr, Short 1y30y payer, Pay        $100mn: $100mn:
 2/28/2013   Fade skew                                                                         ($430,000)      ($110,000)      $320,000     ($500,000)        6m        $725,000       ($320,000)
                                          fix 1y30y                            $50mn
 4/11/2013   Steeper Vol       Long 3x13 cfs vs 3y10y swaption             +$50mn: -$50mn      $4,650,000                                   ($500,000)        1y       $1,600,000
                                                                                                               $4,210,000     ($440,000)                                               $440,000
               Surface                     straddle
                            Long 6/14/13-30y receiver 2.725% vs
4/18/2013   Bull-flattener                                                +20mn: (500 each)         0          ($25,000)       ($25,000)    ($500,000)       Expiry    $1,000,000       $25,000
                              short 3EM3C 99 and 34EMC 98.375
                           Buy 1x1x1 4EH4 98.125 – 98.375 – 98.5
5/3/2013      Short Vol                                                     3000 contracts          0           $70,000        $70,000       $500,000        Expiry    $1,500,000      ($70,000)
                                       CALL LADDER
5/16/2013   Fed Tapering      Long 3en3p 98.625 vs 5en3p 97.25               +2000-2000         ($25,000)       $150,000       $175,000     ($500,000)       Expiry    $1,000,000      ($175,000)
 5/23/2013    Long Gamma                  Logn 1m*7y straddles                 $100mn           $995,000       $1,215,000      $220,000     ($250,000)       Expiry    $1,500,000      ($220,000)
EUR Options                                                                                                                                                                                          $4,752,000
                                                                            EUR 100mn:
 9/7/2012        Short vol           EUR 1x2 1y5y 1.15 vs 0.9 recr ladder                           0           $430,000       $430,000     ($250,000)        6m       $1,692,000      ($430,000)
                                                                              (200mn)
                                   Long EUR 1y*10y 1x2 payer spread (2.2  (EUR 50mn): EUR
 10/5/2012       Long vol                                                                           0          ($160,000)     ($160,000)    ($500,000)        6m        $550,000       $160,000
                                                   vs 2.6)                     100mn
                                  Short 3m*4y GBP straddles vs 30bp high- +GBP 100mn: gbp
3/8/2013            RV                                                                        ($1,040,000)     ($340,000)      $700,000     ($500,000)      Unwound    $1,200,000      ($700,000)
                                            strike 3m*4y payer                 100mn
              Rangebound            Long gbp 50mn 1x11 cfs vs gbp 50mn
4/25/2013                                                                   50mn:50mn          $5,420,000      $4,940,000     ($480,000)    ($500,000)        1y       $1,800,000      $480,000
               GBP rates                      1y10y straddles
Cross-currency                                                                                                                                                                                        $580,000
10/11/2012          Carry                  Pay 1yx1y Xccy basis               $40k dv01           -53.5           -33          $820,000     ($400,000)        1y        $400,000       ($820,000)
              Paying demand
3/8/2013      is larger in 4-5y             pay 4y Xccy basis               usd 40 k dv01          -51            -51             $0        ($400,000)      3m-6m      $1,000,000         $0
                    basis
US BMA                                                                                                                                                                                               $2,040,000
                                     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        $190,000     ($250,000)        1y        $800,000       ($190,000)
                  Ratios
                                          = 50, implying p&l -$42k
              Sell Front-end
 5/10/2012                                    Short 3y ratio                   $200mn            65.375            60          $110,000     ($250,000)        1y        $800,000       ($110,000)
                  Ratios
              Sell Front-end
 6/7/2012                                     Short 3y ratio                   $200mn             66.75            62          $60,000      ($250,000)        1y        $800,000       ($60,000)
                  Ratios




30 May 2013                                                                                                                                                                                                      46
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
 Cash                                                                               5/23/2013      5/30/2013
        Cash Used as Collateral/ Haircut                                            $43,354,800   $47,144,000
           Fed Funds (residual cash)                                                $73,407,354   $68,300,422
                                           Return on Fed Funds                       $115,638       $117,106
                                             Return on trades                                     $15,327,316
                     Total                                                                        $115,444,422
Note: All prices as of May 30, 2013. Source: Barclays Research




30 May 2013                                                                                                                                                                                       47
Barclays | Global Rates Weekly

Trades Unwound

  Inception    Unwound                                                                                           Weights/Notional      Levels @      Levels @      Net Change (Gain   Total Stop
    Date         Date                  Theme                                      Trade                              Amount            Inception      Unwind         (+) /Loss (-))   Loss (bp)    Horizon
 US TIPS
 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
                                                                                                                                        15.75bp
  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
4/18/2013     4/25/2013              Dovish Fed                Long 5y5y breakeven (Apr 17-Jul22) fwd BE            $25k dv01            266bp         278bp          $255,000        ($500,000)   Unwound




30 May 2013                                                                                                                                                                                                   48
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
 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

 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
                                                                                                                 dv01)
  1/4/2013       3/14/2013                                                                                                                                                                 Unwound
                                                                                                            EUR21.3mn 23s vs
                                     Relative value                  Buy OATi23 versus OATi22                                     3.5bp        1bp          $105,000         ($75,000)
                                                                                                          25mn 22s ($35k dv01)

 2/14/2013       3/28/2013            Curve trade                  Long OBL€i18 vs OAT€i40 BE                  $50k dv01           95bp        81bp         ($100,000)      ($500,000)     Unwound
 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
                                                                                                                 dv01)




30 May 2013                                                                                                                                                                                           49
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 Treasury
 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
                                       premium
  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
 4/11/2013     4/18/2013      Low front end risk premium        5s10s Flattener (65% dv01 on 10s)         $50k dv01         43.5        39.9        $179,000        ($500,000)   Unwound
 4/18/2013     5/16/2013      Curve too steep given inf exp            7s30s curve flattener              $50k DV01        172.2       182.9        ($500,000)      ($500,000)   Stop out
  5/3/2013     5/23/2013             Long duration                           Long 10y                     $50k DV01         1.79        1.9         ($530,000)       $500,000    Stop-out
 JGB
  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
                                          10s20s
                             End of extreme low short end
4/18/2013      5/3/2013                                                JGB 10s20s flattener               $40k dv01          90         90.5        ($20,000)       ($300,000)   Unwound
                                    means flatter curve




30 May 2013                                                                                                                                                                                 50
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
 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
                                                                                     21
  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
                                                                                  libor-OIS
 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
                                                                                     133
  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
4/18/2013      5/3/2013        Cross mkt relative value            Sell 10y France vs eq wgt US and Japan           $50k dv01            64.8          54.8          ($300,000)      ($300,000)   Stop out
 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
                                       end.
 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




30 May 2013                                                                                                                                                                                                  51
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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
 JPY Swaps
 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
                                                                                    2:1
 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
                           Volatility is high for 20y tail vs.    Short 1mx20y (ATM+20bp) payers vs. long
 3/28/2013    4/25/2013                                                                                            100mn              -5           0            $50,000        ($200,000)   Expired
                                         10y tail                        1mx10y (ATM+15bp) payers
 4/11/2013    4/25/2013         Swap 5s10s steepner                         Swap 5s10s steepner                   $60k dv01          35           37           $120,000        ($450,000)   Unwound
 4/24/2013    5/16/2013       Dip buying under slowed                           2s5s flattener                    $60k dv01          11.5         25           ($450,000)      ($450,000)   Stop out
                              economic fundamentals
 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




30 May 2013                                                                                                                                                                                            52
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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
 US Options
 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           ($112.5.mn): $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
                                                                      spread
  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
                                                                      spread
 11/17/2011   5/11/2012      Eurozone Contagion        Buy 6m2y payr spd vs 6m10y payr spd             EUR 225mn:            0             0               $0           ($500,000)   Unwound
                                                                                                       (EUR50mn)
 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
                                                                       spread
 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


30 May 2013                                                                                                                                                                                     53
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
 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
 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
                                                                        straddles
 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
                                                                                                             ($60mn)
 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)
  6/1/2012     5/3/2013              Short vol              EUR 1x2 1y5y 1.25 vs 1 recr ladder          EUR 20mn: (40mn)         0           $0               $0           ($250,000)     Unwound
                                                                                                       EUR 100mn: (200mn):
  2/1/2013     5/3/2013            Low for long             6m5y 1x2x1 1.3 - 0.95 - 0.7 recr fly                             $650,000    $1,090,000        $440,000        ($250,000)     Unwound
                                                                                                             100mn
 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




30 May 2013                                                                                                                                                                                          54
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 Options
 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
 Cross-currency
  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
                                                                                                                :(GBP82mn)
  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
                                                                                    4%
 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
                                        program
  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




30 May 2013                                                                                                                                                                                             55
Barclays | Global Rates Weekly


GLOBAL SUPPLY CALENDAR
                      Country                                   Bond                Coupon   Maturity     Size - bn

     Euro Area
      Jun-13                  Spain                            New 15y                                     4.00
      Jun-13                Belgium                            New 30y                                     4.00
     04-Jun-13               Austria                           4y RAGB              4.30%    15-Sep-17     0.72
     04-Jun-13               Austria                          10y RAGB              1.95%    20-Oct-23     0.72
     05-Jun-13              Germany                        5y OBL Auction           0.25%    13-Apr-18     4.000
     06-Jun-13                Spain                            2y SPGB              2.75%    31-Mar-15     1.50
     06-Jun-13                Spain                            3y SPGB              3.30%     30-Jul-16    1.50
     06-Jun-13                Spain                           30y SPGB              4.70%    30-Apr-41     1.00
     06-Jun-13               France                           10y OAT               1.75%    25-May-23     4.00
     06-Jun-13               France                           15y OAT               2.75%    25-Oct-27     2.00
     06-Jun-13               France                           30y OAT               3.25%    25-May-45     1.00
     11-Jun-13               Holland                 3y DSL Tap (range 2.5-3.5bn)            15-Apr-16     3.50
     12-Jun-13              Germany                       2y Schatz Auction                  12-Jun-15     5.00
     13-Jun-13                 Italy                       3yr BTP Auction          2.25%    15-May-16     3.00
     13-Jun-13                 Italy                      5yr CCT Auction            FRN     01-Nov-18     1.00
     13-Jun-13                 Italy                           30y BTP                                     1.50
     18-Jun-13               Ireland                           5y IRISH             5.50%    18-Oct-17     0.25
     18-Jun-13               Ireland                          10y IRISH             3.90%    20-Mar-23     0.25
     19-Jun-13              Germany                       10y Bund Auction                   15-May-23     5.00
     20-Jun-13                Spain                            5y SPGB              4.50%    31-Jan-18     1.25
     20-Jun-13                Spain                           10y SPGB              5.40%    31-Jan-23     2.00
     20-Jun-13                Spain                           15y SPGB                                     1.00
     20-Jun-13               France                           5yr BTAN              1.00%    25-May-18     3.50
     20-Jun-13               France                           2yr BTAN              0.25%    01-Nov-15     3.00
     20-Jun-13               France                           2yr BTAN              1.00%    25-Oct-16     1.50
     20-Jun-13               France                       OATi/ei auctions          0.25%     25-Jul-27    0.60
     24-Jun-13              Belgium                         BGB Auctions?
     27-Jun-13                 Italy                     BTPei Linker Auction                               1.00
     27-Jun-13                 Italy                       5yr BTP Auction          3.50%    01-Jun-18      3.00
     27-Jun-13                 Italy                      10yr BTP Auction          4.50%    01-May-23      3.00
       Japan
     04-Jun-13               Japan                          10y JGB Auction                                2400
     06-Jun-13               Japan                          30y JGB Auction                                500
     12-Jun-13               Japan                  Liquidity Enhancement Auction                          300
     14-Jun-13               Japan                           5y JGB Auction                                2700
     18-Jun-13               Japan                          20y JGB Auction                                1200
     25-Jun-13               Japan                  Liquidity Enhancement Auction                          300
     27-Jun-13               Japan                           2y JGB Auction                                2900
         UK
     04-Jun-13                  UK                       2024 Linker Auction                                1.50
     11-Jun-13                  UK                          New 2023 Gilt                                   3.50
     13-Jun-13                  UK                        2032 Gilt Auction                                 2.50
      Jun-13                    UK                    New 50-60y Syndicated Gilt                            4.00
     20-Jun-13                  UK                        2018 Gilt Auction                                 4.50
         US
     11-Jun-13                US                             3y Note Auction                                 32
     12-Jun-13                US                            10y Note Auction                                 21
     13-Jun-13                US                            30y Bond Auction                                 13
     20-Jun-13                US                            30y TIPs Auction                                 7
     25-Jun-13                US                             2y Note Auction                                 35
     26-Jun-13                US                             5y Note Auction                                 35
     27-Jun-13                US                             7y Note Auction                                 29
                      Unconfirmed Barclays Capital Estimate
                      Rich
                      Cheap
Source: Barclays Research




30 May 2013                                                                                                           56
Barclays | Global Rates Weekly


GLOBAL BOND YIELD FORECASTS
                                           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          0.50          0.15        0.00      0.40   1.40   2.20    -0.15   Q2 13     32      35      25      7
   Q3 13          0.50          0.15        0.05      0.55   1.60   2.35    -0.10   Q3 13     32      35      25      7
   Q4 13          0.50          0.15        0.10      0.60   1.70   2.40    -0.10   Q4 13     32      35      25      7
   Q1 14          0.50          0.15        0.20      0.75   1.85   2.50     0      Q1 14     32      35      25      7


                                          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. 23       0.12     0.30    0.80   1.75    0.00    Q2 13     15      12      1      -4
   Q3 13          0.10          0. 23       0.12     0.35    0.85   1.80    0.00    Q3 13     15      13      2      -10
   Q4 13          0.10          0.23        0.11     0.25    0.70   1.70    0.10    Q4 13     15      13      3      -10
   Q1 14          0.10          0.23        0.11     0.20    0.55   1.60    0.10    Q1 14     15      13      3      -10

Source: Barclays Research




30 May 2013                                                                                                                57
Barclays | Global Rates Weekly


GLOBAL RATES RESEARCH
Global
Ajay Rajadhyaksha
Co-Head of FICC Research
+1 212 412 7669
ajay.rajadhyaksha@barclays.com

US
Joseph Abate                       Piyush Goyal                      James Ma                          Chirag Mirani
Fixed Income Strategy              Fixed Income Strategy             Fixed Income Strategy             Fixed Income Strategy
+1 212 412 6810                    +1 212 412 6793                   +1 212 412 2563                   +1 212 412 6819
joseph.abate@barclays.com          piyush.goyal@barclays.com         james.ma@barclays.com             chirag.mirani@barclays.com
Amrut Nashikkar                    Michael Pond                      Anshul Pradhan                    Rajiv Setia
Fixed Income Strategy              Head of Global Inflation-Linked   Treasury Strategy                 Head of US Rates Research
+1 212 412 1848                    Research                          +1 212 412 3681                   +1 212 412 5507
amrut.nashikkar@barclays.com       +1 212 412 5051                   anshul.pradhan@barclays.com       rajiv.setia@barclays.com
                                   michael.pond@barclays.com
Vivek Shukla
Fixed Income Strategy
+1 212 412 2532
vivek.s.shukla@barclays.com

Europe
Laurent Fransolet                  Cagdas Aksu                       Fritz Engelhard                   Jussi Harju
Head of European FICC Research     European Strategy                 German Head of Strategy           European Strategy
and European Rates Strategy        +44 (0)20 7773 5788               +49 69-7161 1725                  +49 69 7161 1781
+44 (0)20 7773 8385                cagdas.aksu@barclays.com          fritz.engelhard@barclays.com      jussi.harju@barclays.com
laurent.fransolet@barclays.com
Moyeen Islam                       Sreekala Kochugovindan            Giuseppe Maraffino                Mikael Nilsson
Fixed Income Strategy              Asset Allocation Strategy         Fixed Income Strategy             Fixed Income Strategy
+44 (0)20 777 34675                +44 (0)20 7773 2234               +44 (0)20 313 49938               +44 (0)20 7773 6057
moyeen.islam@barclays.com          sreekala.kochugovindan@           giuseppe.maraffino@barclays.com   mikael.nilsson@barclays.com
                                   barclays.com
Hitendra Rohra                     Michaela Seimen                   Henry Skeoch                      Khrishnamoorthy Sooben
Fixed Income Strategy              SSA & Covered Bond Strategy       Inflation-Linked Strategy         Inflation-Linked Strategy
+44 (0)20 7773 4817                +44 (0) 20 3134 0134              +44 (0)20 777 37917               +44 (0)20 7773 7514
hitendra.rohra@barclays.com        michaela.seimen@barclays.com      henry.skeoch@barclays.com         khrishnamoorthy.sooben@
                                                                                                       barclays.com
Huw Worthington
European Strategy
+44 (0)20 7773 1307
huw.worthington@barclays.com

Asia Pacific
Igor Arsenin                       Chotaro Morita                    Reiko Tokukatsu
Head of Fixed Income Strategy      Head of Fixed Income Strategy     Senior Fixed Income Strategist,
Research, Emerging Asia            Research, Japan                   Japan
+65 6308 2801                      +81 3 4530 1717                   +81 3 4530 1532
igor.arsenin@barclays.com          chotaro.morita@barclays.com       reiko.tokukatsu@barclays.com

For any questions about Barclays Live for Rates, please contact:
Jason Howell                       Amy Mignosi
+1 212 412 6706                    +44 (0)20 3134 9774
jason.howell@barclays.com          amy.mignosi@barclays.com




30 May 2013                                                                                                                          58
Analyst Certification
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