EFTA01097815

Deutsche Bank Markets Research r4 United States Economics Date Rates 4 September 2015 Credit Dominic Konstam Research Analyst US Fixed Income Weekly Aieksandar Kocic Research Analyst a Markets are fixated on the potential for Fed normalization to start earlier than currently priced and whether China's recent FX adjustment is the Joseph LaVorgna beginning or the end. Economist ▪ At a superficial level there appears to be conflicting influences on rates.. The Fed and China may undermine risk asset performance but the consensus is that if risk assets find support, fewer FX reserves are likely to pressure rates higher. Alex Li ▪ On the contrary, we think the most important thing is that both the Fed and China's FX (ongoing?) unwind represent a tightening of global liquidity that clearly is negative for risk assets and clearly, at least for the last decade, has been positive for real rates and the curve. 5y5y is well Stuart Sparks correlated with changes in global liquidity and based on recent trends Research Analyst should be closer to 2 percent. ▪ This reinforces our view that the Fed is in danger of committing policy error. Not because one and done is a non issue but because the market Daniel Send will initially struggle to price "done" after "one". And the Fed's communication skills hardly lend themselves to over achievement. More Reeteereh Aretrat likely in our view, is that one in September will lead to a December pricing and additional hikes in 2016, suggesting 2s could easily trade to 1 1/4 percent. This may well be an overshoot but it could imply another leg Steven Zeng. CFA lower for risk assets and a sharp reflattening of the yield curve. Decline in liquidity implies a lower 5y5y 30 7.0 Maya Bhave Fed plus fx reserves oy 5y5y rhs 25 6.0 Economist 20 5.0 15 4.0 10 3.0 ITable of Content 5 US Overview Page 06 2.0 US Credit Strategy Page 23 0 Chart Pack Page 28 -5 10 10 0.0 20001 20061 20121 sower Fed anCIDeurSea bale Deutsche Bank Securities Inc. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI IP) 124/04/2015. EFTA01097815 2015 Outlook Recommendations co NJ Trade Detail Rationale Risks Opened Entry Current P/L Option Buy 1x1, 1y1y receiver spreads The post-Fed sell-off has left the spot/forward Maximum total loss is 12/19/14 29c with strikes ATMF and ATMS spread near multi-year post-crisis highs. the premium outlay This curve segment might be expected to steepen if, for example, higher inflation produces Swaps RV Pay 3y1y versus 2y1y greater pricing power, or if the long-absent Curve flattens 12/19/14 +40 bp cyclical increase in productivity finally materializes. Sell 1X2 payer spreads at the Vulnerable to rally below The repricing of Fed hikes could begin in Q2 with Option short end: Sell $100mn 6M3Y the breakevens, with the short end rebounding sharply after initial 12/19/14 ATMF vs. buy $200mn 34.5bp potentially unlimited rally. OTM payers at zero net cost downside. Sell $100mn 6M10Y straddles With expectations of Fed hikes, volatility should Option Unilateral spike in vs. buy $300mn 6M3Y straddles move to the front end of the curve, while the 12/19/14 backend vol. for a net premium of 175K back end movements remains Quiet flatteners: sell $1bn 6M Option 5s/10s 9.5bp OTM curve cap vs. Potential for considerable bear flattening should Curve steepens. 12/19/14 buy$1bn 6M 5s/1Os atmf/9.5 the market reprice the Fed hikes. curve floor spread at zero cost Quiet bulls: Sell $100mn 1Y10Y This captures the risk of bullish flattening of the Option 50bp OTM payers vs. buy curve where growth is unable to take off either Sell-off beyond 3.10%. 12/19/14 $100mn 1Y10Y ATMF/33 due to fundamental weakness or in response to a receiver spreads costless policy mistake of premature hikes. Option Buy $100mn 1Y30Y receivers, Loss equal to the 12/19/14 Bull/flatteners at the back end. struck at spot, at 1270c options premium This is a leveraged expression of a policy-mistake Option 6M dual digital: 2sa F+10bp & Loss equal to the trade where premature hikes cause a rally at the 12/19/14 10s < F-10bp offer 11.5% options premium back end. SONO. Dootiao Salk Deutsche Bank Securities Inc EFTA01097816 Deutsche Bank Securities Inc. 2015 Outlook Recommendations Trade Detail Rationale Risks Opened Entry Current P/L Treasury Further outperformance +5 bp Sell rich bond futures against The classic bond futures look rich in the long end of the 6.25s of 5/2030 12/19/14 +21 bp (Closed on +1,249k RV cheap off-the-run bonds in the long end 2125) Inflation Further decline in The 2yr2yr inflation appears attractive on a long- Buy 2yr2yr forward breakevens medium-term inflation 12/19/14 1.95% 1.60% -1,367k Swaps term history expectations The long and inflation market looks undervalued on Inflation Buy long end inflation Inflation markets further a long-term perspective, with the 30-year TIPS 12/19/14 1.92% 1.71% -3,400k underperform. breakevens trading below 2.00%. Inflation Buy 5yr5yr forward breakevens The 5yr5yr forward breakevens have dropped to Decline in energy prices 12/19/14 2.18% 1.97% -848k as a hedge to high rates their multi-year lows. and a stronger dollar With the Fed moving closer to its first rate hike in a Buy 3nc1y and 5nc6m Higher implied vol Agencies low-inflation, moderate-growth environment, there callables vs. matched-maturity cheapens callables 12/19/14 are few themes as sure as the flattening of the bullets relative to bullets curve, likely going beyond the forwards. On the bullet agency curve, spreads are relatively tight to the level of rates volatility, and they risk Increased GSE risk Agencies 2-year vs. 5-year agency widening 5.10bp from current levels on our model widens intermediate 12/19/14 spread curve flattener incorporating forward vols and the projected level spreads of outstanding debt. Widening of credit With CCC energy bonds trading at 60 cents on the spreads beyond the dollar, and oil just S10 away from matching the breakeven point as well US Credit US High Yield: Sell covered most severe percentage drop in oil prices over as a rally in credit 12/19/14 puts on HY CDX 1997-8, our sense is that we may be reaching the beyond the breakeven, latter stages of a pronounced move lower in a with potentially commodities-driven decline in HY credit valuations unlimited downside in either scenario Sane: Oeussono hat EFTA01097817 1 0 'Other Current Recommendations o (D a Trade Detail Rationale Risks Opened Entry Current P/L Treasury 10s look rich on the curve against 5s Short 10s versus 5s and 30s 10s richen further 5/8115 +9 bp +8 bp -6k RV and 30s Treasury Sell the rich classic bond futures Sell rich bond futures against cheap Classic bond futures off-the-run bonds in the 2026 11/26/14 +21 bp +20 by -106k RV off-the-run bonds versus richen to 2028 sector 30yr underperforrns Inflation 10s/30s breakeven curve steepener Long end TIPS offer good value relative to 10yr 6/26/2015 0.13% 0.30% +1,042k Front end TIPS look cheap to our Inflation Long front end TIPS breakevens inflation forecast Energy prices drop 4/10/2015 1.23% -1.45% -1,563k Possibly delayed first Fed rate hike is Inflation Real yield curve steepeners, either likely to help intermediate sector Long end outperforms 1/20/2015 5s/30*-00.65% 6s/30s@0.97% 10s-30s or 5s-30s. outperform in real yields, steepening 10&30s@1.60% 105/30s@1.48% +3,484k the real yield curve. The spread between 10yr inflation Inflation Long 10yr inflation swaps versus TIPS outperform swaps and TIPS breakevens is too 1/20/2015 +21 bp +17 bp -248k 10yr TIPS breakevens inflation swaps tight Inflation Long 1/2029 breakevens vs 10yr 10yr TIPS to 1/2029 breakeven curve 1/2029 breakeven 10/3/14 +2 bp +6 bp +502k breakevens is too flat cheapen further The long end inflation market looks Long term inflation Inflation Long 30yr TIPS breakevens undervalued; 30yr TIPS breakevens expectations decline 12/12/14 1.91% 131% -2,107k near multi-year lows Inflation We like lyrlyr forward inflation Inflation expectations Long 1yr1yr inflation swaps swaps. Front end breakevens look 3/3/15 1.84% 1.22% 4362k Swaps decline attractive. We like being long 2yr2yr or 2yr3yr Inflation forward breakevens to take advantage Medium term inflation swaps Long 2yr2yr inflation swaps 12/12/14 1.77°S 1.68% -868k of cheap 5s, while avoiding negative expectations decline carry in front end TIPS Reform bill stalls in Buy long-dated GSE debt: Legislative momentum of Johnson- Congress or language 3/14/14 Agencies Buy 3100mm FNMA 6.625 11/30s Crapo on GSE reform is credit bullish +48 bp +62 bp -953k on government vs. T 5.325 2/31s for long-dated GSE debt. modified. Receive $100m 3y3y SIFMA ratio at Further ratio curve Muni 78.2%. (Sorid) Attractive roll down profile steepening 4/25/13 78.2% 72.0% +941k Rally below the Deutsche Bank Securities Inc 1X2 1Y 5Y5Y ATMF/41 receiver Long-end rallies on premature or fast Option spreads costless rate hikes (policy mistake) breakevens; unlimited 9/26/14 0c -18.4c 411k downside EFTA01097818 Deutsche Bank Secunties Inc. Other Current Recommendations Trade Detail Rationale Risks Opened Entry Current P/L Buy $100mn 2Y2Y ATMF receivers vs. sell $22.7mn Trend growth and law inflation Recessionary mode with Option 1013!13 -6 bp -99 bp -925k 2Y10Y ATMF receivers for the net takenut of $55K limit the rise of long rates bull flattening of forwards Payer wreeds: Sell $500mn 2Y2Y 92bp OTM payers Vol differential is favorable for Option vs. buy $50mn 2Y30Y 25bp OTM payers at zero net initiating a positive carry baar The curve baar gatten 1/2114 +2 bp .0 bp -25k cost steepening trade Swaps Receive $1,023.4mm 2y1y rata versus pay Positive carry look at repricing Rv $1,002.7mm tyty rata Fed The curve baar steepens 5/20/14 +95 bp +95 bp +2,305k Swaps Receive $1,023.4mm 2y1y rata versus pay $431.2mm Funher rally via Fed delay 2y1y undemerformance 5/20/14 -10 bp +405k Rv tyty rata and $597mm 3y1y rata benefits 2yly rata -17 bp 5y rata, 10y forward is Swaps Forward fly: Pay fixed on $298.6 mm 10y5y versus hestorically rich versus 5y rata, Funher 10y5y 4/29/14 +22 bp -416k Rv receive fixed on $72.9 mm 5y5y and 5257.6 mm 15y5y 5y forward and 5y rats, outperformance +21 bp 15yloward Risk-on retightening of Bank credit underperforms; +25 bp +30 bp Cross Buy $10m each of SPNTAB 2.95%3/16; SPABOL covered bonds in stable rates Eurozone credit crunch; 7/25/13 +37 bp +25 bp -930k Market 5/16; DNBNOR 2.90% 3/16 on ASW. (Sond) regime Widening in a rata sell-off +31 bp +31 bp Cross US-Europe spread tightener: Receive fixed in $244 mm USD 5y5y rata vs. pay fixed on E165.8mm EUR 5y5y US recovery disappoints Spread witlens 1/24/14 +127 bp +136 bp -10k Market rare PIL as of 09/03/2015 prices. We sond &Dobnp dra performance otaw bacie recommendatrons on Jane r$ 20,0 P, s tabre shows out amant open recommendatem a rabh of our closed pos:jeans d in die bock atlas pubkaten Bod, rabies wik bes regular feature im the Weatdy. Ftrdomance~bers are based on bader end-obday marka end do not ;obiad° lad/offer spreads w transaction casts. We tonda Nie relevant benchmant lor our tredes to benzen‚ positie& gaven rhe hieraged or geneally market neutra, aspecrs of these tat Historica! performance is nora guaraniee afhouw performance Spotte 0—ara EFTA01097819 4 September 2015 US Fixed Income Weekly United States Rates Dominic Konstam Gov. Bonds & Swaps Research Analyst Rates Volatility Aleksander Kocic US Overview Research Analyst • Markets are fixated on the potential for Fed normalization to start earlier Alex Li than currently priced and whether China's recent FX adjustment is the !MEP beginning or the end. • At a superficial level there appears to be conflicting influences on rates. The Fed and China may undermine risk asset performance but the consensus is that if risk assets find support, fewer FX reserves are likely to Stuart Sparks pressure rates higher. Research Analyst • On the contrary, we think the most important thing is that both the Fed and China's FX (ongoing?) unwind represent a tightening of global liquidity that clearly is negative for risk assets and clearly, at least for the last Daniel Send decade, has been positive for real rates and the curve. 5y5y is well • Research Anal correlated with changes in global liquidity and based on recent trends should be closer to 2 percent. • This reinforces our view that the Fed is in danger of committing policy error. Not because one and done is a non issue but because the market Steven Zeng. CFA will initially struggle to price "done" after "one". And the Fed's Research Analyst communication skills hardly lend themselves to over achievement. More likely in our view, is that one in September will lead to a December pricing and additional hikes in 2016, suggesting 2s could easily trade to 1 Yi percent. This may well be an overshoot but it could imply another leg Aditya Bhave lower for risk assets and a sharp reflattening of the yield curve. • We think risk/reward has shifted toward paying spreads in the front end. Financing is challenging with term GC trading high relative to LIBOR, but we think rolling the position ovemight should allow investors to average in financing better than LIBOR, providing some backstop against tightening if significant additional intervention-related selling does not materialize. • We like being long front end breakevens in forwards, e.g., one-year breakevens implied by short maturity TIPS, such as the 7/2016s and the 7/2017s. One can also hedge out energy prices in that trade to create a synthetic exposure to core CPI. A simpler version of the implied front end forward breakevens is to be long front end breakevens outright. They have lagged oil prices. • 5-year inflation basis has recovered, while 30-year inflation basis has done less well, and remains in the low end of the long term trading range. Investors should consider inflation basis steepeners by being long 30-year inflation basis against 5-year inflation basis. The case for more liquidity Investors are rightly concerned about the impact of both a possible early start to Fed normalization and the probably yet-to-be-resolved Chinese FX adjustment. There is a reasonable consensus that both encourage further downside to risk assets. There is more uncertainty around bond yields. Potential FX intervention might imply selling of Treasuries, especially the front end where most reserves are held. But if higher short rates from either those sales or Fed tightening, undermine equities, bond yields might actually fall. Page 6 Deutsche Bank Securities Inc. EFTA01097820 4 September 2015 US Fixed Income Weekly The right framework to view potential Fed tightening as well as China's FX adjustment is in the context of global liquidity and that relationship with financial assets. Liquidity in the broadest sense tends to support growth momentum, particularly when it is in excess of current nominal growth. Positive changes in liquidity should therefore be equity bullish and bond price negative. Central bank liquidity is a large part of broad liquidity and, subject to bank multipliers, the same holds true. Both Fed tightening and China's FX adjustment imply a tightening of liquidity conditions that, all else equal, implies a loss in output momentum. Typically this should be associated with lower yields. This runs counter to a common perception that forex intervention that leads to Treasury sales pushes up yields. To the extent that it does, we suspect this is a short lived temporary affair and will easily be dominated by the more sinister implications of dwindling global liquidity. We note that the recent weakness in global nominal growth that we highlighted last week is highly consistent with weaker global liquidity and that the weakening in liquidity is not new news but has been ongoing since late last year. Not only has it been driven by falling FX reserves but also by the slowing of the Fed's balance sheet. To the extent that other central banks have tried to expand liquidity, in terms of historic relationships to financial assets, FX reserves and the Fed's balance sheet are more important. We think this reflects the role of the dollar as the reserve currency in the global financial system. Let's start from some basics. Global liquidity can be thought of as the sum of all central banks' balance sheets (liabilities side) expressed in dollar terms. We then have the case of completely flexible exchange rates versus one of fixed exchange rates. In the event that one central bank, say the Fed, is expanding its balance sheet, they will add to global liquidity directly. If exchange rates are flexible this will also mean the dollar tends to weaken so that the value of other central banks' liabilities in the global system goes up in dollar terms. Dollar weakness thus might contribute to a higher dollar price for dollar denominated global commodities, as an example. If exchange rates are pegged then to achieve that peg other central banks will need to expand their own balance sheets and take on dollar FX reserves on the asset side. Global liquidity is therefore increased initially by the Fed but, secondly, by further liability expansion, by the other central banks. Depending on the sensitivity of exchange rates to relative balance sheet adjustments, it is not an a priori case that the same balance sheet expansion by the Fed leads to greater or less global liquidity expansion under either exchange rate regime. Hence the mere existence of a massive build up in FX reserves shouldn't be viewed as a massive expansion of global liquidity per se - although as we shall show later, the empirical observation is that this is a more powerful force for the "impact" of changes in global liquidity on financial assets. The chart below shows the RMB vs. the ratio of PBOC to Fed balance sheets, using prevailing exchange rates at the time as the conversion factor. The initial post crisis period sees the Fed balance sheet expand relatively while the exchange rate is unchanged. There is then a phase of RMB appreciation and relative stability in the balance sheet ratio and then the PBOC balance sheet expands with continued RMB appreciation. Deutsche Bank Securities Inc. Page 7 EFTA01097821 4 September 2015 US Fixed Income Weekly IRMB vs. ratio of Fed to PBOC balance sheet 1.7 6.9 1.6 - 6.8 6.7 1.5 6.6 1.4 6.5 1.3 64 ratIn of P 6.3 1.2 sheets 6.2 1.1 -rr— .(fogisrpis 6.1 1 6.0 20084 20114 20144 Sane. Mbnbogron Daman avn. The table below highlights these three periods in terms of the actual notional impact on global liquidity via the combined effects of revaluing the PBOC balance sheet as well as the changes in the underlying domestic liquidity. Under a relatively stable currency the PBOC expanded its balance sheet aggressively in the first phase, presumably in part being obliged to accelerated FX reserve accumulation; the Fed was more or less in between expanding their balance sheet. The second phase saw the more dramatic currency appreciation with a strong Fed expansion but also strong PBOC liquidity expansion. The third phase saw even stronger Fed balance sheet expansion but weaker PBOC expansion and more modest RMB appreciation. The last two phases combined saw global central bank liquidity expand by notionally similar amounts i.e. $1500 billion. More than double the first phase when the currency was more stable and the Fed was quieter. However note that as expected, the reserve accumulation was almost the same in each period, around 500-600+ billion. So even though the Fed wasn't expanding the balance sheet much, the hangover of the previous expansion and capital flows in general required a more aggressive intervention by PBOC to acquire reserves and maintain the a stable currency. So a notionally less aggressive expansion in global central bank liquidity under a stable exchange rate regime was disproportionately more skewed to reserve accumulation. IChanges in central bank balance sheet liquidity ...Wu as dig ChM PAIS &meg WI On %68• 88416060 dunte 14214 knew, chi Ste bit Wait MUM, bit bit 201022-200824 41% 93 173% 3586 684 682 23% 532 622 508 201.241.201040 252% MI 142% 3534 6)7 631 7.2616 827 1.41:6 657 201981-82120 393% 1126 7.734 2274 624 609 251% 492 1618 510 Sayre. eMaya, a Daman &Mk The next issue is given changes to liquidity how does it impact asset prices. We can think of the three components of liquidity: the Fed's balance sheet, the accumulation of FX reserves by other central banks; and the residual of other central banks' liquidity expansion after the accumulation of FX reserves. As the chart below shows in terms of growth the explosion of the Fed stands out during the crisis but there have been strong expansions in other central banks' liquidity excluding reserve increases. FX reserve accumulation has been quite weak since 2012 and is now negative. In absolute terms liquidity is strongest in FX reserves and other central banks ex reserves by a factor of three times for the Fed's balance sheet. Page 8 Deutsche Bank Securities Inc. EFTA01097822 4 September 2015 US Fixed Income Weekly Sources of central bank liquidity - change yoy Sources of central bank liquidity - $ billion 180 16000 160 —FX reserves 14000 140 —Fed 120 12000 r B s ex Reserves 100 10000 80 8000 60 6000 ao ry 4000 20 2000 20 0 20031 20081 20131 20031 20081 20131 Saar ObowboRgtealDeutsch,Dint Sown INoombep ow Detachsrank Let's start with risk assets, proxied by global equity prices. It would appear at first glance that the correlation is negative in that when central bank liquidity is expanding, equities are falling and vice versa. Of course this likely suggests a policy response in that central banks are typically "late" so that they react once equities are falling and then equities tend to recover. If we shift liquidity forward 6 quarters we can see that the market "leads" anticipated" additional liquidity by something similar. This is very worrying now in that it suggests that equity price appreciation could decelerate easily to -20 or even 40 percent based on near zero central bank liquidity, assuming similar multipliers to the post crisis period. From q2 levels that implies an MSCI level of around 1350 for 2015q4 (reference q2 @ 1735), the end August level was 1645 i.e. still another 10-15 percent decline. World equities yoy vs. central bank liquidity yoy World equities yoy vs. components of liquidity yoy 50 40 WORLD EQUITIES YOY 40 50 30 Fed plus fx reserve lu then c (ex fx) yoy rhs 35 20 30 10 25 10 0 20 10 j \ s/ 15 10 20 FX e es 10 30 30 -40 5 Othe ks ex Reserves —world quitiesyoy 50 0 50 20041 20101 20031 20081 20131 Sages Bbornbug andDarse-no &ht. Source Beonnboop oneWound* Mat Interestingly, the components of liquidity themselves behave a little differently with FX reserves and Fed balance sheet being more in line recently than other central bank liquidity. This reflects the ECB and BoJ tardier reactions to balance sheet expansion in the post crisis period. If we only consider the FX and Fed components of liquidity there appears to be a tighter and more contemporaneous relationship with equity prices. The suggestion is at one Deutsche Bank Securities Inc. Page 9 EFTA01097823 4 September 2015 US Fixed Income Weekly level still the same, absent Fed and FX reserve expansion, equity prices look more likely to decelerate and quite sharply. The tie out, presumably with the "leading" indicator of other central bank action is that other central banks have been instrumental in supporting equities in the past. The largest of course being the ECB and BoJ. If the Fed isn't going doing its job, it is good to know someone is willing to do the job for them, albeit there is a "lag" before they appreciate the extent of someone else's policy "failure". And just to ram home the point — this differential relationship is entirely consistent with the idea that FX reserves are accumulate don the back of Fed balance sheet expansion and so if the Fed's balance sheet is not expanding then it is a double whammy that FX reserves are also not expanding and as we shall see below are contracting! World equities yoy lead by 6 qtrs vs. central bank World equities yoy vs. Fed plus FX reserves change yoy liquidity yoy 50 40 50 . .WORLD EQU ES TOY 30 40 WORLD EQUITIES YO 35 40 Fed plus fx reserves other ohs (ex fx) yoy rhs Fed pl re rves yoy - 25 30 30 30 20 20 A i- 20 10 25 10 - 15 0 20 0 ‘ 10 10 1 /14\ fsv 15 10 20 20 - 5 10 30 30 40 5 -0 -40 50 0 -50 -5 20041 20101 20001 20061 20121 San! ObornantmlOwitrehr Am* swore: tilonOrgeetietacne Bore So now let's be a little more specific on the Fed balance sheet and FX reserves now. The next chart shows both are decelerating sharply. The Fed's balance sheet is almost flat on the year and reserves are down around 5 percent and counting. The two as we have demonstrated are clearly connected. In the reverse scenario (as opposed to the above, when we demonstrated the connection when the Fed was expanding its balance sheet), tighter Fed policy forces other central banks to spend reserves to defend their currency peg and in principle shrink their balance sheets. This is the example recently with the adjustment in China's FX regime to accommodate more market based fixings. The ensuing unwind of the China carry trade has solicited what appears to have been significant FX intervention, judging by the move in front end swap spreads and dealer inventory of shorter dated Treasuries. The main point however is that it is not a change in FX regime per se that drives the loss of liquidity but that that change emanates from a tighter Fed balance sheet. Hence in the event that the Fed raises rates and we start to worry about balance sheet unwind this becomes a much more significant issue going forward. The Fed's balance sheet for example could easily be negative 5 percent this time next year, depending on how they manage the SOMA portfolio and would be associated with further FX reserve loss unless countries, including China allowed for a much weaker currency. This would be a great concern for global (central bank liquidity) So one counter is that FX reserve loss can be offset by other central banks' liquidity injection. At one level this is tempting but flawed; at another level it is more plausible. The first level is that FX reserve loss typically is "sterilized". The shock to a country's financial system from the sudden loss of liquidity Page 10 Deutsche Bank Securities Inc. EFTA01097824 4 September 2015 US Fixed Income Weekly needs to be offset and recently in the case of China the PBOC has acted to reinstate domestic liquidity and also has cut reserve requirements. However as we demonstrated above this component of liquidity seems to have a lagged impact on say (equity) financial assets relative to either the Fed or FX reserves themselves This is actually quite intuitive. The liquidation of FX reserve holdings reflects forced redemptions of domestic currency holdings. Simply forcing currency back into the system to satisfy those redemptions shouldn't be associated with restoring asset prices to where they were before. Ultimately in a fiat money system asset prices reflect "outside" i.e. central bank money and the extent to which it multiplied through the banking system. The loss of reserves represents not just a direct loss of outside money but also a reduction in the multiplier. There should be no expectation that the multiplier is quickly restored through offsetting central bank operations. IPBOC injection of funds vs. CNY 600 —10 day total of net injection of funds by PBoC (8n Yuan) 6.45 —USOCNY (rhs) 6.40 400 6.35 200 6.30 6.25 6.20 -200 • 6.15 6.10 -400 6.05 -600 6.00 Jan-14 Jul-14 Jan-15 Jul-15 Sane! Obowbent Anwar [PondDamon. Bent 1 We now move on to interest rates. If equities have a negative correlation with liquidity, it is not surprising to find that interest rates have a positive correlation at least since the crisis. Again in line with the above analysis regarding equities, the correlation in contemporaneous time is better if we focus on Fed and FX reserves. However even then we notice the correlation is a little loose at times. This raises an obvious issue in terms of how one thinks about nominal yields in terms of additional central bank liquidity and FX reserve accumulation. On the one hand the more Fed may help lower real yields but raise inflation expectations; more FX reserve accumulation may be just lower nominal yields and if anything real yields to the extent that by accommodating Fed monetary policy expansion the US "exports" inflation risk. Running across everything is the problem that equities are generally stronger (weaker) of liquidity is expanding (falling). Deutsche Bank Securities Inc. Page 11 EFTA01097825 4 September 2015 US Fixed Income Weekly 10 yr yield vs. FX/Fed defined liquidity 10 yr yield vs. broader defined liquidity 30 7.0 40 7.0 25 35 6.0 - 6.0 30 20 5.0 25 - 5.0 15 20 4.0 - 4.0 10 15 3.0 10 - 3.0 5 2.0 5 —red plus hc reserves plus other k 4 2.0 0 Fed plus tx reserves yoy 1 rhs 0 yey -5 10 —10y rhs 1.0 -5 10 0.0 10 0.0 20001 20061 20121 20001 20061 20121 Son Obornbagt ham.LPercl °mute S, Swear fel andDavtich:0 Sent Breaking down the breakeven and real yield components verifies that central bank liquidity has been more associated with real yields then breakevens, however the relationship is perverse! Real yields have tended to fall when balance sheet expansion is slowing while breakevens have generally been more sticky. This suggests that risk assets drive (real) yields and that breakevens anticipate a (delayed) liquidity injection. This is corroborated by also considering the curve. Like real yields 5s10s is well correlated (positively) with real yields. Note that prior to the crisis the relationship looked more "normal" in that expanding liquidity drive yields lower and vice versa. So something has changed since the crisis —this we think is very important and again, will revisit below. Liquidity vs. 10 yr real yields Liquidity vs. 10 yr breakevens 50 3.3 50 2.8 - 2.8 - 2.6 ao 40 - 2.3 - 2A 30 30 22 1.8 - 2.0 20 1.3 20 - 1.8 0.8 1 10 10 1.6 —FX + Fed balance sheet yo —FX+ Fed balance In et yoy 0.3 - 1.4 0 .—Q.17yr real rhs 0 . ..i.0 yr bel rhs -0.3 1.2 -10 0.8 10 1.0 20001 20061 20121 20001 20061 20121 Son abomtarpHano• Wend Dautzleba Bank Saud:Fad M Mean* The relationship between 5s10s and 10s in real terms screams 5y5y! And indeed we overlay 5y5y to liquidity there is a very tight, almost scary, relationship. The relationship even predates the crisis. Tighter liquidity essentially forces the 5y5y nominal rate lower reflecting some combination of a flatter curve and higher yields with a steeper curve and lower yields. Fundamentally we think this ultimately speaks to a lower terminal policy rate so that it doesn't really matter whether the term structure is trying to shift higher or lower but the curve will more than compensate so that if the trend is towards less central bank liquidity, the terminal rate is falling. Page 12 Deutsche Bank Securities Inc. EFTA01097826 4 September 2015 US Fixed Income Weekly Right now the decline is central bank liquidity suggest 5y5y should be closer to 2 percent or below not 3 percent to above. And this is before the Fed has tightened and China has potentially "finished" its adjustment. Liquidity vs. 5s10s Liquidity vs. 5y5y 30 1.6 30 7.0 • Fed plus fx reserves oy 5s10s rhs 1.4 Fed plus fx reserves oy , .5y5y rhs 25 25 6.0 1.2 20 20 1.0 5.0 15 0.8 15 4.0 10 0.6 10 3.0 5 D.4 5 0.2 2.0 0 0 0.0 5 -5 1.0 .0.2 10 -0.4 10 0.0 20001 20061 20121 20001 20061 20121 Saves amity faun (Pend Deuiseba Rant Swat Fig mar...se* Boni And of course the breakdown in 5y5y between real and inflation reinforces the story that it is the real rate not inflation expectations that drive this result. And this is again consistent with the risk asset concern that it is the lack of liquidity that undermines risk assets that in turn drives real yields lower, despite keeping breakevens relatively inflated. One conclusion is that if investors believe that liquidity is likely to continue to fall one should not sell real yields but buy them and be more worried about risk assets than anything else. This flies in the face of recent concerns that China's potential liquidation of Treasuries for FX intervention is a Treasury negative and should drive real yields higher. It is possible that if risk assets do very well then maybe the correlation with interest rates is broken. But like all these relationships for us, it is easier to work with the correlations that currently persist rather than to predict random breaks. And the potential breaks should be more cheaply hedged rather than making for a core portfolio allocation. I.e. cheap SPX calls based on rates lower. More generally the simple point is that falling reserves should be the least of worries for rates - as they have so far proven to be since late 2014 and instead, rates need to focus more on risk assets. Liquidity vs. 5y5y real Liquidity vs. 5y5y BEI 30 3.5 30 3.0 2S 3.0 25 - 2.5 20 2.S 20 2.0 15 2.0 15 10 1.5 10 1.5 S 1.0 5 1.0 0 0.5 0 —fed plus fx reserves yoy —Fed plus fx reserves yoy 0.5 5 —spy real Ms 0.0 5 —sysy bee rhs 10 -OS 10 0.0 20001 20061 20121 20001 20061 20121 Smear bomb"' raawa tPrd On,ssche Bank I Soutar fed andDonn. Sent Deutsche Bank Securities Inc. Page 13 EFTA01097827 4 September 2015 US Fixed Income Weekly Even without considering the empirical relationships, it is also clear that FX intervention is very much a short term affair. As the chart below shows the recent jump in dealer positions in less than three years is consistent with the Treasury data for 2014 that shows the preponderance of foreign official Treasury holdings is held in the sub 3 year sector. Very little is held in longer dated maturities so any FX intervention is anyway more likely to flatten the yield curve than steepen it. l About 56% foreign official holdings of Treasuries are under three years in maturity I Dealer positions in Treasuries maturing in 3 years or less 60% Distribution of Maturities in Treasuries Held —Dealer Net Outright Position: by Foreign Investors 30,000 Govt Coupon Securities,Due 3- 50% Yr or Less(EOP,MilS) • Official Institutions 0 Ore.-ate investors 20.00:: 40% 30% S 10,000 I E 20% 0 t 10% -10,000 1 0% a -20,000 0.3y 3-5y 5-10/ 10y. Jan-14 Jul-14 Sant. rneanywq Otwexere BW Spumy fee andAxon.emit The relationship between central bank liquidity and the byproduct of FX reserve accumulation is clearly central to risk asset performance and therefore interest rates. The simplistic error is to assume that all assets are treated equally. They are not - or at least have not been especially since the crisis. If liquidity weakens and risk assets trade badly, rates are most likely to rally not sell off. It doesn't matter how many Treasury bills are redeemed or USD cash is liquidated from foreign central bank assets, US rates are more likely to fall than rise especially further out the curve. In some ways this really shouldn't be that hard to appreciate. After all central bank liquidity drives broader measures of liquidity that also drives, with a lag, economic activity. The indicators of excess liquidity (see below) are but derivatives of central bank liquidity and the bank or "inside" money multipliers. If liquidity is tightening relatively to nominal growth, real growth will tend to slowdown later. Right now the message is not good for the OECD, excess liquidity indicators point to real growth losing momentum. The IMF seems to get the picture. China is probably getting the picture but faces the conundrum of how to manage the carry trade unwind with minimal disruption. The grass is definitely though greener if the currency is weaker and they hang onto most of their reserves. Ironically the excess liquidity indicator has recently improved for China although this is as much to do with decelerating nominal growth. Page 14 Deutsche Bank Securities Inc. EFTA01097828 4 September 2015 US Fixed Income Weekly 'Excess liquidity indicator vs. output: OECD 'Excess liquidity indicator vs. output: Chin.:: 30% 1 40% —Global excess liquidity yoy + m lead OECD — China excess liquidity yoy +12m lead China 20% —OECD output momentum 30% — China output momentum 10% • 20% 0% 10% -10% 0% -20% -10% -30% -20% 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 San. geowbvg amakrisraro &,* SorremOrcentimewW0erinawarrerr The more sinister undercurrent is that as the relationship between negative rates has tightened with weaker liquidity since the crisis, there is a sense that policy is being priced to "fail" rather than succeed. Real rates fall when central banks back away from stimulus presumably because they "think" they have done enough and the (global) economy is on a healing trajectory. This could be viewed as a damning indictment of policy and is not unrelated to other structural factors that make policy less effective than it would be otherwise -- including the self evident break in bank multipliers due to new regulations and capital requirements. Of course our definition of "failure" may also be a little zealous. After all why should equities always rise in value? Why should debt holders be expected to afford their debt burden? There are plenty of altemative viable equilibria with SPX half its value, longevity liabilities in default and debt deflation in abundance. In those equilibria traditional QE ceases to work and the only road back to what we think is the current desired equilibrium is via true helicopter money via fiscal stimulus where there are no independent central banks. One step at a time... 6mly-2y2y as a carry-efficient flattener We recommend a 6mly-2y2y flattener as an optimal carry proxy for USD 2s5s. The 6mly-2y2y can be thought of a leveraged version of the 2s5s spot: it has a 98% correlation and a beta of 1.74 with the latter over the last 12 months. Because of the 1.74x leverage, the beta-adjusted 3m carry is -2.Obp instead of -2.9bp for 2s5s, a 31% improvement. This flattener takes advantage of a recent 2.3 standard deviation decline in the (negative) roll for the 6mly paying leg, which compares to a 1.7 standard deviation decline in the 2y spot. The positive roll for receiving the 2y2y is also more attractive; it had just a 0.5 standard deviation reduction compared to a 0.7 standard deviation reduction in the 5y spot. Historically, 2s5s flatteners have performed well going into a tightening cycle, with nearly 70 percent of trades put on within three months of the liftoff beating their ex-ante forwards and thus being profitable. The market clearly thinks Friday's mixed jobs report was not enough to take a September liftoff completely off the table. DEC15 Fed funds future sold off 1.5bp after payrolls, and the implied probability of hiking in September rose slightly from Thursday to 34% at the time of writing. The 2s5s slope also flattened 2.5bp to 71.5bp, but still remains 7bp+ above its 2015 lows. A policy error by the Fed (i.e. hiking more than once this year in spite of declining global liquidity and falling inflation) can easily flatten 2s5s to 50bp or below. The risk to this trade is if the Fed relents in September but we think they will more likely than not do a Deutsche Bank Securities Inc. Page 15 EFTA01097829 4 September 2015 US Fixed Income Weekly "dirty" relent, which is to keep October and December FOMC dates in play. In this case 2s5s could steepen slightly but such a move would be short lived and limited in magnitude, if not for a hyped expectation of an October liftoff it would be because China's FX intervention flows continue to exert a flattening pressure on the curve, which we discussed earlier in this note. I6m1y-2y2y as a leveraged proxy for 2s5s spot 'Flattening carry is 31% better in 6m1y-2y2y than in 2s5s —finsly-2y2y (left se) —2s5s spot (right axis) Beta- Level Dv01 i 3M carry adjusted Improve (N Ratio (bp) Beta carry (bp) ment 2y spol 0.83 1.983 (8.3) 5y spot 1.54 4.838 5.3 2y-5y spot 0.71 2.44x (2.9) 1.00 (2.9; 6m1y 0.82 0.992 (15.1) Correlation 98.4% Bela- 1.74 2y2y 1.87 1.927 11.6 SS 6mly-2y2y 1.05 1.94x (3.5) 1.74 (2.0) 31% Sep Oct Nov Dec Ian Feb Mar Apr May kin Jul Aug Sep S000t goonsche gag Santa OeunctelLvg Risk/reward shifting towards paying front end spreads Front end spread tightening has been considerable given concems about possible intervention-related selling, and has reached levels we think offer value. At the time of writing the most recent Chinese reserves data have not been released, and markets will naturally be looking for concrete evidence that intervention-related sales have indeed been material. While this may introduce event risk into paid positions in spreads, we think risk reward should be biased toward spread re-widening from current levels. There are three primary supporting arguments. The first is that China will be increasingly defensive of its reserves, and is more likely to devalue in a larger increment to discourage new speculation against the RMB and trap speculative capital. A large enough increment should significantly reduce further speculation on the margin and hence reduce the need to liquidate Treasury positions to sell dollars and buy domestic currency. The second is that there remains some possibility that if the Fed does indeed raise rates (which we think would increase the probability of further devaluation in a lumpy increment) that IOER will have to be set higher than the top of the desired band for overnight effective funds in order to create adequate incentive for banks to do the "arb" whereby they absorb cash balances in the overnight market and then deposit them at the Fed. Third, both a devaluation and the likely risk-off market environment that would accompany it should bias spreads wider. If, as remains our central expectation, the Fed does not raise rates, then we would expect speculative pressure against the RMB to decrease somewhat, slowing reserve loss and Treasury liquidation. So even though diminished financial stress might work against spreads in this scenario, intervention- related selling could well decline. Financing is obviously critical with front end spreads, and this trade is complicated somewhat by high term repo rates relative to LIBOR. The September 2y note, given current levels, is likely to a reopening of the Page 16 Deutsche Bank Securities Inc. EFTA01097830 4 September 2015 US Fixed Income Weekly September 2017 5y note, which means the large issue is unlikely to trade tighter than GC. We note that as usual this September 2y should be the CTD issue into the December TU contract. In fact 3m GC has traded at levels above LIBOR as financing markets price defensively for the possibility of a September rate hike. This would effectively mean borrowing to fund the position at higher rates than offered by the Treasury asset itself. In this case investors are likely better served by rolling on open rather than locking in term financing. September month/quarter end could see elevated ovemight GC levels, which would argue for exiting the trade at or shortly following the RAC meeting. Naturally the trade is exposed to further spread tightening, and in theory potential losses are unlimited. However, more pragmatically, financing spreads offer some support against dramatic spread tightening. Dealer positions in Treasuries maturing in 2 years or less 30.0 25.0 —Primary dealer inventory <2 y 20.0 15.0 c 0 .-4 10.0 .0 5.0 0.0 -5.0 -10.0 :4" yb Nts St' 41' e, N ,tb S & +64 e; C4. ,keD. C 4:N, 4, . (< Of 9 Sans &obi.) Anew matrons &wok Did dealer positions tell much about intervention flows in the past? The concentration of foreign official holdings of Treasuries in the front end of yield curve suggests foreign reserve losses lead to yield curve flatteners to the extent that central banks sell their Treasury holdings. Treasury's TIC data shows that about 56% foreign official holdings of Treasuries mature within three years as of June 2014, up from about 48% as of June 2010. We note that primary dealer positions in short dated coupon Treasuries and TIPS have increased rapidly over the past few weeks. For example, dealer positions in Treasuries maturing in three years and less jumped to $18.6 billion on August 26; they were as low as -$11 billion in early July. Dealer positions in short dated TIPS set a record high on August 19. Deutsche Bank Securities Inc. Page 17 EFTA01097831 4 September 2015 US Fixed Income Weekly There has been an increased concentration in short Dealer positions in TIPS maturing in less than or equal to 1 dated Treasury holdings by foreign official institutions 2 years 60% - Percentage of Treasury Maturities Held by Foreign 7,000 —Rimary Dealer Positions: TIPS Official Institutions Due in Less than or Equal to 2 SO% 6,000 Years (EOP,MiLS) 02010 • 2014 5,000 40% - 4,000 30% 3,000 20% - E 69 2,000 • 10% 0% - 3.5y S.lOv 10y. -1,000 Jan-14 Jul-14 Save* Tv Mal .Sava. Fed awotvyur Binif How much did intervention-related flows affect dealer positions in the past? To answer that question, we analyzed Japan's foreign exchange operations in US dollars and dealer positions in short dated coupon Treasuries from 1991 to the present. The most recent operations occurred in 2010 and 2011, when Japan bought US dollars and sold yen. The operations that sold US dollars and bought yen were less frequent and have not occurred since 1998. It was evident that dollar buying foreign exchange operations coincided with a decline in dealer positions in short dated Treasuries, but the effects were not overwhelming. On a related note, there has been an uptick in PBoC's OMO net injections of funds recently, in the order of CNY215 billion in the second half of August, which came along with the CNY depreciation. Last time when the net injections in this order of magnitude occurred was late February. Opportunities abound in inflation markets Volatility in inflation markets has continued along with commodities and equities, creating opportunities for active traders. We like being long front end breakevens in forwards, e.g., one-year breakevens implied by short maturity TIPS, such as the 7/2016s and the 7/2017s, currently trades around 1.3%. One can also hedge out energy prices in that trade to create a synthetic exposure to core CPI. For example, one can use gasoline RBOB futures Dec16 and Dec17, which have higher open interest than neighboring contracts, taking advantage of the contango. The average core CPI over the past ten years is about 1.9%. Only briefly in 2010, did the year-over-year core CPI dipped below 1.0%. Page 18 Deutsche Bank Securities Inc. EFTA01097832 4 September 2015 US Fixed Income Weekly 'Long forward breakevens, either outright or hedged with energy futures 2.2 2.0 - 1y fwd implied 8E from 7/15/16 to 7/15/17 - lyfwd implied 8E from 1/15/17 to 1/15/18 1.0 2/1/15 3/1/15 4/1/15 5/1/15 6/1/15 7/1/15 8/1/15 9/1/15 Sane Sxmbrcr hunre [PondDesna Banc A simpler version of the implied front end forward breakevens is to be long front end breakevens outright. They have lagged oil prices. A regression of five-year TIPS breakevens against oil prices on past six months' data suggests breakevens are too low by 15bp to 20bp, given the current oil prices. Similarly, 5s/10s breakeven curve appears too steep and have room to flatten relative to oil prices. So the weakness in front end breakevens appears to be more than a function of energy prices. Dealer positions in TIPS maturing in less than or equal to 2 years are at a record high. 'Front end TIPS breakevens have lagged oil prices I5stl0s breakeven curve appears to have room to flatten 1.8 0.45 y= 0.0234 0.3417 1.7 • •Last limos data = 0.7756 0.40 • 1.6 •#* 410• * ,••• X9/4/2015 • * 0.35 40 '1 •t.a. p 1.5 • • • # • difr ciP• • C• 1.4 - *. ▪• 0.30 • a • • * ▪ 1.3 • • Last limos data to -I 0.25 - • • * • •*, •9/4/2015 ••• • • • 1.2 .• • • dt. 0.20 • y=.0.0073x 0.6339 * • • • ♦* ••• • * • 1.1 • = 0.5603 a •• 1.0 0.15 • s 38 40 42 44 46 48 50 52 54 56 58 60 62 36 38 40 42 44 46 48 50 52 54 56 58 60 62 Oil Prices Oil Prices Sane eeonamtiverOoman an Source: tornixeg one Oeuerest BIM I 5-year inflation basis has recovered, while 30-year inflation basis has done less well, and remains in the low end of the long term trading range. The 5-year inflation basis traded as low as +13bp in April and has bounced to about +25bp lately. The 30-year inflation basis currently trades about +25bp as well, having widened from about +18bp in late May. Over the past one year, the spread between the two basis spread has averaged around +6bp. Investors should consider inflation basis steepeners by being long 30-year inflation basis against 5-year inflation basis. Deutsche Bank Securities Inc. Page 19 EFTA01097833 4 September 2015 US Fixed Income Weekly 5-year inflation basis has recovered, ... ...while 30-year inflation basis has remained in the low end of the long term trading range 0.50 -5yr inflation swaps minus TIPS BEs 0.7 -30yr inflation swaps minus TIPS BEs 0.45 0.6 0A0 0.5 0.35 0.30 0.4 0.25 0.3 0.20 0.2 0.15 0.10 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Sawa Bbornbav andDane* a.s Sane. Biborthesp.intlDouracilo Bang US CPI-U NSA y/y, actual and forecast MoM CPI-U, actual and forecast (non-seasonally- adjusted) 6.0 0.7 CI liMoM NSA 0.6 - Projected 6.0 0.5 4.0 0.4 3.0 0.3 2.0 0.2 1.0 0.1 o.o 0.0 -1.0 -0.1 -0.2 lul - -2.0 -0.3 -3.0 Aug-04 Aug-06 Aug-06 Aug-10 Aug -12 Aug-I6 <4.4, v¢', i VY 00 4 CP:d r, 140 , Smear luau ollaborasevelos ., Dwane ant Sane fr anc Lire SlIonsros sad Deutsche Bart Auction Preview: 3s, 10s, and Bonds Treasury will sell a total of $58 billion notional securities worth roughly the same in ten-year cash equivalent through three- and ten-year notes and 30- year bond auction next week. The auction will settle on Tuesday, September 15, against an estimated $32 billion of coupon securities on the same day. The combined customer participation of this set of auction decreased for the third straight month to 63% from 64.2% in July, but remained above its one-year average of 62.2%. Direct bidders declined to a three-year record low of 7.7% from 11.9% in July (1yr avg. 12.3%). However, indirect bidders took down 55.3% of the supply up from July's 52.2%, and beat the average 49.9% for the seventh month in a row. 3-year note Indirect bidder participation increased to 52.8% from July's 47.7%, above the one-year average of 45.7% in every month since last December. However, Page 20 Deutsche Bank Securities Inc. EFTA01097834 4 September 2015 US Fixed Income Weekly direct bidders dropped to 8.2% from 13.9% in July (12.3% average). The combined customer participation of 61.0% was close to the 61.6% in July and remained above its one-year average 58% for the sixth straight month. Allotments share to investment funds rose to a record 45.3% from July's 38.9%, and compares with the one-year average of 35.4%. However, the allotments share to foreign and international investors dropped to 13.5% from July's 20.1%, and was soft as compared to the average 19.2% for the first time since April. The bid-to-cover ratio bounced back to 3.34 from 3.16 in July, above the average of 3.29. The auction stopped on the screws for the second straight month. Dealer positioning in two- to three-year Treasuries increased by $1.6 billion from the last auction to $1billion as of August 26. 13-year note auction statistics Size Primary Direct Indirect Cover Stop-out 1PM WI BP Tail ($bn) Dealers Bidders Bidders Ratio Yield Bid 1yr Avg $24.8 42.0% 12.3% 45.7% 3.29 -0.2 Aug-15 $24.0 39.0% 8.2% 52.8% 3.34 1.013 1.013 0.0 Jul-15 $24.0 38.4% 13.9% 47.7% 3.16 0.932 0.933 0.0 Jun-15 $24.0 39.6% 9.7% 50.7% 3.33 1.125 1.124 0.1 May-15 $24.0 35.7% 11.6% 52.7% 3.34 1.000 1.005 -0.5 Apr-15 $24.0 39.5% 11.1% 49.4% 3.25 0.865 0.866 -0.1 Mar-15 $24.0 40.5% 8.0% 51.4% 3.33 1.104 1.110 -0.6 Feb-15 $24.0 43.9% 7.2% 48.9% 3.34 1.050 1.056 -0.6 Jan-15 $24.0 39.4% 14S% 45.8% 3.33 0.926 0.933 -0.6 Dec-14 $25.0 47.7% 10.1% 42.2% 3.24 1.066 1.066 0.0 Nov-14 $26.0 47.1% 15.2% 37.7% 3.18 0.998 0.997 0.1 Oct-14 $27.0 47.0% 17.4% 35.5% 3.42 0.994 0.997 -0.3 Sep-14 $27.0 46.6% 20.3% 33.1% 3.17 1.066 1.064 0.2 &war US revenefitedDavao* Bent 10-year note Indirect bidder participation increased to 60.1% from July's 58.1%, beating its one-year average of 54.9% for the seventh straight month. Direct bidders took down 5.8% of the supply, their lowest of the last three years and compares with the average 11.1%. The combined customer participation declined to 66% from 70.2% in July, in line with the one-year average. The allotments share to investment funds decreased to 41.3% from 45.3% of the auction in July, but was still above its one-year average 40.1%. However, foreign and international investor share increased to 22.7% from July's 21.7%, a touch below the average 23.0%. The bid-to-cover ratio fell to 2.40 from July's 2.72, the lowest since March 2009, and well below the average of 2.65. The auction tailed by 0.8bp for the first time in the last seven months. Dealer net shorts in seven-to eleven-year Treasuries increased by $1.8 billion from around the last auction to $3.9 billion as of August 26. Deutsche Bank Securities Inc. Page 21 EFTA01097835 4 September 2015 US Fixed Income Weekly 110-year note auction statistics Size Primary Direct Indirect Cover Stop-out 1PM WI BP Tail ($bn) Dealers Bidders Bidders Ratio Yield Bid Tyr Avg $ 22.0 34.0% 11.1% 54.9% 265 -0.2 Aug-15 $ 24.0 34.0% 5.8% 60.1% 2.40 2.115 2.107 0.8 Jul-15 $ 21.0 29.8% 12.1% 58.1% 2.72 2.225 2.232 -0.7 Jun-15 $ 21.0 30.0% 12.1% 57.9% 2.74 2.461 2.473 -1.2 May-15 $ 24.0 18.9% 20.9% 60.2% 2.72 2.237 2.256 -1.9 Apr-15 $ 21.0 32.2% 9.3% 58.5% 2.62 1.925 t928 -0.3 Mar-15 $ 21.0 31.2% 10.2% 58.6% 2.65 2.139 2.147 -0.8 Feb-15 $ 24.0 27.8% 12.7% 59.5% 2.62 2.000 2.011 -1.1 Jan-15 $ 21.0 40.8% 9.2% 50.0% 2.61 1.930 1.917 1.3 Dec-14 $ 21.0 39.3% 6.9% 53.8% 2.97 2.214 2.217 -0.3 Nov-14 $ 24.0 42.0% 13.4% 44.7% 2.52 2.365 2.37 -0.5 Oct-14 $ 21.0 49.0% 6.6% 44.4% 2.52 2.381 2.366 1.5 Sep-14 $ 21.0 33.5% 13.5% 53.0% 2.71 2.535 2.532 0.3 sc.no! us Threw,end ovate hat 30-year bond Direct bidder participation increased to 9.9% of the supply from 8.1% in July, but still below the one-year average of 14.4%. Indirect bidders took down 51.9% in August, almost unchanged from July and beat their one-year average of 49.4% for the seventh straight month. The combined customer participation increased to 61.8% from 59.2% in July, but remained below its one-year average of 63.8% for the second straight month. Allotments share to investment funds declined to 48.1% from 49.1% in July, below the one-year average of 483% for the first time in the last four months. The allotments share to foreign and intemational investors increased to 11.4% from 7.7% of the auction in July, but remained below the average of 12.5%.The bid-to-cover ratio of 2.26 was almost the same as in July and compares with the average 2.36. The last auction tailed by 2.2bp, the most in the last five refunding auctions. Dealer net longs in more than eleven-year Treasuries increased by $1.1 billion to $12.6 billion over the week ended on August 26 130-year bond auction statistics Size Primary Direct Indirect Cover Stop-out 1PM WI BP Tail ($bn) Dealers Bidders Bidders Ratio Yield Bid Tyr Avg $14.0 36.2% 144% 49.4% 236 0.8 Aug-15 $ 16.0 38.2% 9.9% 51.9% 2.26 2.880 2.858 2.2 Jul-15 $ 13.0 40.8% 8.1% 51.1% 2.23 3.084 3.070 1.4 Jun-15 $ 13.0 33.6% 14.4% 52.0% 2.54 3.138 3.149 -1.1 May-15 $ 16.0 38.0% 11.1% 50.8% 2.20 3.044 3.023 2.1 Apr-15 $ 13.0 41.8% 7.0% 51.3% 2.18 2.597 2.567 3.0 Mar-15 $ 13.0 36.6% 11.6% 51.9% 2.18 2.681 2.662 1.9 Feb-15 $ 16.0 35.1% 15.5% 49.4% 2.26 2.560 2.555 0.5 Jan-15 $ 13.0 37.4% 13.7% 48.9% 2.32 2.430 2.411 1.9 Dec-14 $ 13.0 25.9% 24.3% 49.8% 2.76 2.848 2.872 -2.4 Nov-14 $ 16.0 42.5% 13.8% 43.8% 2.29 3.092 3.078 1.4 Oct-14 $ 13.0 32.2% 21.5% 46.2% 2.40 3.074 3.071 0.3 Sep-14 $ 13.0 32.8% 21.8% 45.5% 2.67 3.240 3.261 -2.1 Save* ut l alsuryaN AllAUMe Bank Page 22 Deutsche Bank Securities Inc. EFTA01097836 4 September 2015 US Fixed Income Weekly United States Credit Oleg Melentyev, CFA HY Strategy Strategist IG Strategy Daniel Sone US Credit Strategy Volatility This High Tends To Last Aftershocks lasting for weeks/months usually follow spikes like this As the dust from initial shake-up in global risk assets last week began to settle, markets turned to soul-searching. Was that a flash crash or not? How much did poor summer liquidity contribute? What part did new regulations play? Did Figure 1: VIX index 1997-2003 markets "overreact", or was the move supported by deteriorating macro so fundamentals? Will the Fed hike or do ClE4? Rarely did opinions appear to vary 4$ this greatly over such a wide set of important issues. 40 35 The extent of volatility was of course incredible. From a 7x sigma move in equities and all-time high change in vol of vol on Monday, to 700pts of total travel distance by S&P500 during the week, to four consecutive days of 6x- plus sigma moves in oil, recent trading sessions were nothing short of 15 extraordinary. One particular development that gained some attention but still 1997 995 1939 1300 NW 2003 lacks proper appreciation by the market, in our view, is a failure to price — vu1916.20,9 dozens of equity ETFs on last Monday opening, a development that could have long-lasting repercussions for this $2tr1n AUM industry. As it often happens, this surprise development exposed how far off the reality perceptions stood on VIX index 2006-2011 the topic of liquidity. Whereas so many pundits predicted the day when HY/IG 50 AI ETFs will fail to clear, plain-vanilla equity ETFs failed to do so, while no issues 45 were reported in credit space. 35 The VIX index has closed at above 30pts for three days in a row early last 30 week, and returned there this Tuesday. The significance of this level comes from historical experience shown in two graphs on the right. Here, for the sake of better readability, we have broken down its time series to 1997-2003 and 2007-2011, and highlighted the 30pt level with a red line (2004-2006 and 2012- 2015 are omitted as the index never reached 30pts in those years). The graphs LS iR4 2401 2034 2002 3010 — vtl 10091011 1011 seem to suggest that once volatility jumps to 30pts on the VIX scale, it tends to stay there for at least a few weeks or even months, with a total of seven Swim Numb. Ow* distinct periods confirming this observation. 1 The only exceptions that happened during the past 20 years have taken place in early 2000 and late 2007/early 2008. So technically speaking, even periods of quick reversal from a 30pt VIX levels have previously proven to be prescient indicators of more volatility to come down the road. We would thus caution our readers not to be too quick in dismissing what happened over the past two weeks as simple "overreaction". We explore the volatility angle of this developing story in greater detail on the following pages. In the credit world, spreads have naturally widened during this past week, albeit to a much lesser extent than what would have been expected given the volatility in equities. Our DM USD HY index has widened initially from 550bp earlier last week to 600 by Monday, and then retraced most of that range, closing at 566. In IG, the identical range was 157 - 165 - 163. Negative fund flows have reemerged in credit, with EPFR showing $5bn out of HY last week, the sevenths-largest reading on record. Combined HY outflows since June have claimed $18bn, compared to a $38bn withdrawal in 2H 2014. The takeaway here is that HY market's ability to offset outflows was poorer in this episode compared to 2H 2014, as evidenced by a similar degree of widening (+130bp last 3 mo vs +150bp in 2014) on half the size of outflows. Deutsche Bank Securities Inc. Page 23 EFTA01097837 4 September 2015 US Fixed Income Weekly Following the recent moves across asset classes, our relative value models are showing HY as being 50.75bp tight to IG, and 75-85bp tight to implied volatility in equities, FX, and rates. Additionally, we estimate that HY bonds are trading about 65bps wide relative to their equity valuations, as shown in Figure 2 below. In other words, equities still appear to be the most overpriced asset in our relative valuation framework. To arrive at our relative equity-vs-HY signal, we take all public HY issuers with a minimum of $1bn of debt outstanding and Total Debt/Enterprise Value ratio in the rage of 20% - 85%. The cutoff points here are used to exclude low- levered names with little meaningful spread sensitivity to equity values, and those deeply distressed names with D/EVs approaching 100%. Live equity valuations are reflected in this calculation as components of enterprise value. We then aggregate these values up to a market level and apply total debt weights capped at 2% to each issuer D/EV metric. On the bond side, we take 5yr benchmark-sized most recently issued senior unsecured bond spread levels, and aggregate them up using the same weighting methodology. The resulting combination provides a clean view of relative bond-vs-equity valuations adjusted for leverage and matched issuer-by-issuer. Each dot on the scatter plot represents a weekly observation going back to Jan 2010. Our sample includes only about 120 issuers, given the restrictions on bond liquidity/issuer size described above. At current levels, spreads in are about 65bps wide to respective debt/EV readings, or equity valuations adjusted for leverage. IFigure 2: US HY Issuer spreads vs Debt/Enterprise Ratio, combined for the market, total-debt weighted 700 150 650 • j •....• • 100 600 * aa 550 it • • 50 a S00 • at a 0 450 • 400 50 b 350 • a y • -1.1129x2 4 131.54x - 3326.5 300 100 R2 e 0.6121 2010 2011 2012 2013 2014 2015 250 1 43 48 53 58 63 . .11Y OAS Actual ex Estimated on Debt/EV Sane!Ammar Blot Other measures of relative value we have recently introduced, the proportion of distressed issuers in HY stood at 18.3% in US, versus 23.6% in EM following market repricing. Our argument here remains that this differential should be substantially wider (more EM names trading distressed vs US), given that EM HY market has twice as much weight in commodity names relative to US. Furthermore, our GDP-weighted basket of EM currencies devalued further in recent days, losing 2% since Aug 21, and bringing the cumulative devaluation in EM to 41% since a year ago. This factor is important in two respects: (a) it points to potential headwinds many EM corp issuers are facing in servicing their USD denominated debt and (2) currencies continued to devalue even over the past week on top of extreme weakness going into it. As we have Page 24 Deutsche Bank Securities Inc. EFTA01097838 4 September 2015 US Fixed Income Weekly shown in our last oat issuers in many important EM domiciles, such as Chile, Mexico, Brazil, Indonesia, Russia, and Turkey have more than half of their total debt denominated in external currencies, predominantly in USD. It is also important to keep in mind that China's corporates have the lowest external debt burden of all major EM countries, at less than 20%. The focus thus should not be just China, but a potential for spillovers to the rest of EM. Finally, we have suggested that some EM IG commodity names are still trading tight, in our opinion, given the prevailing macro environment. Following the market repricing last week, all these names are now trading meaningfully wider, including Pemex at 255bp (+25bp), Ecopetrol at 375 (+15), Vale at 310 (+20), Codelco at 235 (+20). While we view this move as one in the right direction, it still falls short of where it needs to be in this environment. In all cases, these EM names are trading roughly in line with US-domiciled issuers in the same industries with similar leverage, something that is unsustainable longer-term, in our opinion. We note that EM oil names have traded wider in the past week even in the face of a net 15% rebound in oil prices. Additionally, three largest Brazilian banks - Banco do Brasil, Bradesco, and ITAU - are all trading in the 450-500bp spread range, while all being technically rated as IG at this point'. We view these levels as incompatible with being IG in the longer run, particularly for a financial institution, relying heavily on its ability to access capital markets. Volatility risk premia Because the VIX has breached a level of 30 so rarely over the past decade, we looked to expand the number of recent historical parallels to last week's equity IFigure 3: High vol premium episodes Stan Length S&P Days market shock through an alternative measure of implied vol relative to the level Drop to S&P Low of volatility actually experienced in the market over the prior year. What we Jul '04 17 -3% 17 find is that such shocks tend to involve an extended period of market May '06 57 -5% 22 choppiness that runs its course over a period measured in weeks and months, Feb '07 6 -6% 6 not in days. Jun '07 83 -8% 50 Oct '07 110 -16% 95 The implied-vs-realized vol measure is considered to be a proxy for the volatility risk premium that rises and falls based upon investor risk version and Oct '08 45 -35% 44 expectations that volatility might break out from trend levels. In the years May '10 57 -15% 57 leading up to the financial crisis of 2008, for example, realized volatility was Aug '11 66 -17% 62 substantially lower than it is today, which created a lower threshold for implied Oct'14 10 -5% 5 volatilities to signal extreme levels of investor fear. Similarly, amid the Dec '14 50 -5% 5 choppiness of the equity markets during the period immediately after the 2008 Aug '15 12 -11% 4 financial crisis, implied volatilities remained high on an absolute basis but were Avg 50 -12% 36 actually lower than the trend at the time, suggesting an improvement of market conditions. ex '07-8 38 -8% 25 SOur00. Qruatlw Bank Looking most recently, implied volatility on three-month, at-the-money SPX options reached a level that was nearly double the level of realized volatility over the past 12 months, and has since settled into a 50% premium. The table shown here lists the ten prior episodes when the ratio of 3m ATM implied to 12m realized volatility exceeded 1.5x, as well as the number of days that implied vols remained above the equity market performance over the episode. (We measure equity performance beginning a week before the day when the vol risk premium rose above 1.5x against the low print on the S&P 500 over the episode.) One observation is that these episodes are associated with an average decline in the S&P index of 12%, or if the 2007-8 crisis episodes are I ITAU is a five-8 split-rated issuer. 2 See. for example, httplanww.bes.org/publiqtrpdfir_qt1409v.htm Deutsche Bank Securities Inc. Page 25 EFTA01097839 4 September 2015 US Fixed Income Weekly removed, 8%. This puts the current episode's maximum decline of 11% in good company with historical episodes. But other aspects of the historical record suggest that we may not out of the woods yet. For one, previous episodes of shocks to the volatility risk premium tend to last substantially longer than two weeks; they take an average of 50 days, or 38 days if the crisis-era episodes are excluded. (While there are some previous examples of "short" vol shocks in early 2007 and October 2014, these might be more appropriately viewed as early warning indicators for more extended periods of high volatility, and less as standalone examples.) Also, the equity markets have tended to hit rock bottom during these episodes an average of 30 days or so after implied volatility rises. The S&P 500 hit its low just four days after the vol shock, which seems out of line with historical pattems. Figure 4: Equity implied volatility relative to realized vol IFigure 5: S&P level during elevated volatility episodes 2.25 2,300 2,100 2.00 1,900 1.75 1,700 1,500 150 1,300 1,100 1.25 900 1.00 700 2004 2005 2006 2007 2009 2009 2010 2011 2012 2011 2014 2015 2004 2005 2006 2007 2009 2009 2010 2011 2012 2013 2014 2015 —3m Implied/12m Realised Vol Ratio, SPX —SPX —Implied/Reelired > 1.Sx Sane!Deuncia&tn. Source: Oruro* Seat The shock to the VIX index can be attributed to three inter-related measures of equity volatility: the general level of at-the-money volatility relative to the trend IFigure 6: Seasonality trends in HY/IG of realized volatility, the premium for options expiring in the near-term (1m) Average HY OAS monthly change 20 70 relative to somewhat longer-expiry (3m) options, as well as the premium for 15 10 out-of-the-money strikes over at-the-money strikes. An additional way to to 50 measure the magnitude of last week's equity market shock is to consider the 5 tl elevated level of volatility risk premium, measured here as the degree to which 0 - 30 option-implied volatility exceeds realized volatility. Finally, it's worth observing .5 - 20 .30 - that credit markets are also participating in these developments. The implied- .a - to-realized ratio on the CDX indices is also elevated, sitting in the 90thh 20 0 percentile over the last 3.5 years for lm options on IG CDX, while the equity Mn fa Mar hat Wig Ns hl tug 500 Oct Nov Oec el* keno, OW olPerszb risk premium is in the 99th percentile over the same period. Conclusions A rage 1G OAS monthly change 00 Overall, we find market moves over the past week were in line with our • • 70 expectations, directionally, although their speed, volatility, and reversals were 60 certainly as much a surprise to us as they were to most other investors. We 50 thought equities and other risk asset classes were much closer to what we perceive to be fair value at their bottom last Tuesday than they were following • T 1 20 20 a retracement. Developments in China could have significant repercussions for CO broader EM universe, and we don't find EM credit spreads to be properly 0 A.5 Sop 03 Nov On reflecting those consequences. We see main risks associated with EM credit Ma lob Ms e kW Am M assets being forced to re-price more substantially and having second-order •I60,NO3f{04 • •cto. , tootnifrothe effects on US credit markets. Additionally, historical evidence suggests that SocroavOeunone Bent periods of extreme volatility similar to those witnessed over the past few sessions tend to exhibit propensity for aftershocks, usually lasting for weeks if not months. Page 26 Deutsche Bank Securities Inc. EFTA01097840 4 September 2015 US Fixed Income Weekly In terms of relative value we find IG to be priced most attractively here, although this is unlikely to prevent it from widening in absolute terms, if broad market volatility persists. A +120bp repricing in HY over the past three months has moved valuations closer to reality, in our opinion, although it continues to trade 50.75bp tight to IG, and 75-85bp tight to implied volatility in equities, FX, and rates. At the same time HY is trading 65bp wide to a basket of issuer- matched equities adjusted for leverage (via debt/EV ratios), and this still suggests to us further vulnerability in broader equity space. Finally, September is the last month of the May-Sept seasonally-weak stretch in credit (Figure 3). Our targets in US credit thus remain 650bp all-in HY and 575bp ex-energy (+85bp and +70bp from here respectively), and 170bp in IG (+6bp). The Fed Last week's volatility naturally triggered a discussion whether the Fed is going to be able to proceed with its intentions to raise rates in the near future. Earlier voices and opinions on this matter seemed to side on with the view that it is unlikely to be able to do so, and interest rate derivatives have shown a substantially lower probability of the move in September. And yet Fed speakers who had a chance to react to recent events publicly recently have mostly sided with the narrative that while additional level of uncertainty has been introduced by recent volatility, the initial move in September, and even October, are still very much on the table. As a result, the forwards were still pricing in three full, and potentially four rate hikes before Dec 2016, and the 2yr Treasury yield was at 72bp, or 3bp away from its 2015 highs, at the time of this writing. This reaction is not surprising to us, as we have expressed our opinion that the bar is set very high for the Fed to pull the plug on its intentions to raise rates later this year. We continue to believe that it would take a lot more than S&P500 at 5% below its average level in 2015, where it stands today, for the Fed to seriously consider changing its plans. We would have to see more volatility and more negative (and sustained) reaction in US markets before the Fed is forced to step back. And while this view almost creates a breeding ground for more volatility, it also sets the stage for its eventual undoing as the risk of Fed weighing in against the market weakness will remain ever more present in coming weeks and months. The full list of our existing and past trade recommendations is available under » Legal » US Credit Strategy. Deutsche Bank Securities Inc. Page 27 EFTA01097841 4 September 2015 US Fixed Income Weekly Chart Pack IDB Treasury Yield Forecasts [ 2-3-5 butterfly, 50/50 weight, long bullet 2Y 5Y 10Y 30Y 20 —ButterfIy23.5 2015 03 0.75 1.60 2.25 2.95 0 NAmtievA 2015 04 1.15 1.90 2.45 3.10 2016 01 1.20 2.00 2.75 3.15 -20 2016 02 1.20 2.25 3.00 3.25 Source. Llognets sent -40 Ikact &sans,Mrs avaca6ArtiIor atimariviod. -60 -80 -100 03 04 05 06 07 08 09 10 11 12 13 14 15 Same:Davao* Oink I2-5-10 butterfly, 50/50 weight, long bullet 12-10-30 butterfly, 50/50 weight, long bullet 40 120 — Butterfly 2-5.10 -Butterfly 2-10-30 30 100 20 80 10 60 0 40 -10 20 -20 0 -30 .40 20 03 04 05 06 07 08 09 10 11 12 13 14 15 03 04 05 06 07 08 03 10 11 12 13 14 15 &vim 0*Ma* an SauterDavao* ftw* 5-10-30 butterfly, 50/50 weight, long bullet 15-7-10 butterfly, 50/50 weight, tong bullet 55 10 —Butterfly5.7-10 — Butterfly 5.1030 8 45 6 4 35 2 25 0 -2 15 5 -5 12 15 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 02 03 04 05 06 07 08 09 10 11 12 13 14 Savor: 0tkitla0 SW* Page 28 Deutsche Bank Securities Inc. EFTA01097842 4 September 2015 US Fixed Income Weekly 2-5-10 butterfly (PCA 65.88% and 34.12% risk on the 5-10-30 butterfly (PCA 34.92% and 65.08% risk on the wings) wings) 60 —Butterfly2-5-10 -15 — Butterfly5-10-30 54 48 -20 tk 42 36 25 - 30 24 18 -30 • Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Sep-13 Mar-14 Sep-14 Mat-15 Se[:- I 5 Seirce Oriorikiasie SavectOeuedreft•nt 2-10-30 butterfly (PCA 26.14% and 73.86% risk on the wings) 6 —Butterfly2-10,30 2 - -2 -6 - -10 - -14 - -18 - -22 - -26 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Deutsche Bank Securities Inc. Page 29 EFTA01097843 4 September 2015 US Fixed Income Weekly I30Y Treasury yield seasonals (Change since Jan-1) I10Y Treasury yield seasonals (Change since Jan-1) 70 —2005-2014 —1997-2014 —2015 . .2005-2014 —1997-2014 —2015 42 32 50 22 30 12 2 10 -8 -10 -18 -28 -38 -50 -48 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec J n Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec I5Y Treasury yield seasonals (Change since Jan -1) 2Y Treasury yield seasonals (Change since Jan-1) . 2005-2014 —1997-2014 —2015 -2005-2014 -19972014 -2015 25 25 15 15 5 -5 -15 -15 -25 -35 -25 -45 -35 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec J n Feb Mar Apt May Jun Jul Aug Sep Oct Nov Dec Same:°area* ant SweetDavao* ant I2Y/5Y slope seasonals (Change since Jan-1) I2Y/10Y slope seasonals (Change since Jan-1) 15 2005-2014 1997 2010 2015 40 —2005-2014 —1997-2014 —2015 10 30 5 20 0 10 -5 0 -10 -15 -10 -20 -20 25 -30 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Sante. Claututs Borg Page 30 Deutsche Bank Securities Inc. EFTA01097844 4 September 2015 US Fixed Income Weekly I2Y/30Y slope seasonals (Change since Jan-1) 15Y/10Y slope seasonals (Change since Jan-1) 62 2005-2014 . 1997-2014 2015 , 2005-2011 —1997-2014 . 2015 27 52 22 42 17 32 22 12 12 7 2 2 -8 -18 28 -8 J n Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec I5Y/30Y slope seasonals (Change since Jan-1) I10Y/30Y slope seasonals (Change since Jan-1) 50 — 20^5 2011 19972014 —2015 2W 2014 —19972014 . .2015 40 30 20 10 0 10 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Soon». Do~o ibnk Source. D~cellánk 130Y swap spread seasonals (Change since Jan-1) I10Y swap spread seasonals (Change since Jan-1) .i .2C05-2014 —1997 2014 2015 7 , .2005-2014 - 1997 2014 2015 5 3 1 -1 -3 -5 -7 -9 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Sweet. Do~oBánk Sane:~so» (Oak Deutsche Bank Securities Inc. Page 31 EFTA01097845 4 September 2015 US Fixed Income Weekly I5Y swap spread seasonals (Change since Jan-1) 12Y swap spread seasonals (Change since Jan-1) 8 2005-2014 -1997 2014 • .2015 2005-2014 1997-2014 2015 0 -2 -4 -6 -a -10 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec -12 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Semen: 0~ Hat &sum,:~ea,e Bank IS&P Index seasonals (Change since Dec-31) I3M10Y Implied vol seasonals (Change since Dec-31) 2005-2014 .--.1997 2011 2015 . 2095-2014 -1997-2014 -2015 8% 25 20 15 10 5 0 -6 -10 -8% -15 -10% J n Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec -20 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec BoonvrDemo»Bank Swear~be Bart I 5Y10Y Implied vol seasonals (Change since Dec-31) 7 .2005-2014 . .1997-2014 .2015 5 3 1 -1 -3 -5 -7 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Swore: &vase» St* Page 32 Deutsche Bank Securities Inc. EFTA01097846 4 September 2015 US Fixed Income Weekly I 30Y Treasury roll business days from auction 1OY Treasury roll business days from auction - 2 875%08/45 3.000% 05/45 — 2.000%08/25 - 2.125% 05)25 1.7 - 2.500%02/45 - 3.000% 11/44 2.5 - 2.000%02/25 -2.250%11/24 1.3 2.0 0.9 1.5 0.5 0.1 1.0 -0.3 0.5 -0.7 0.0 -1.1 -0.5 -1.5 -1.0 -1.9 -2.3 -1.5 2.0 0 20 40 60 80 100 120 0 20 40 60 80 100 120 Bus mess days tram the Melia. date Business days from the auction Ste I T( Treasury roll business days from auction I 5Y Treasury roll business days from auction - 875% 08/22 - 2 000%07/22 1.375% 08/20 - - 1.625%07)20 2.0 — 2.125% 06/22 —1.875%05/22 3.5 - 1.625%06/20 - 1.50D% 05/20 3.0 1.5 2.5 • 1.0 2.0 1.5 0.5 1.0 0.0 0.5 0.0 - -0.5 1.0 -1.0 0 10 20 30 40 50 60 O 10 20 30 40 50 60 Business days tram the b/Cticto date Bus mess days from the action date Soomnberroono Sank Swear Ocersafe Ant 1 311 Treasury roll business days from auction I 211Treasury roll business days from auction - 1.000%06118 - 0.875% 07/18 4.5 -1.125%06118 - 1.000% 05/18 — 0.625% 08/17 -0 .820% 07/17 4.7 4.1 - 0.625% 06/17 -0.625% 05/17 4.2 3.7 3.7 3.3 3.2 • 2.9 2.7 2.5 2.2 • 2.1 1.7 1.7 1.2 • 1.3 0.7 0.9 0.2 0.5 0 10 20 30 40 50 60 -0.3 Business days from the auction date O 10 20 30 40 50 60 Business days from the auction date Sant: *Qty.*. ZiteM SMAT070.0301.9Pnt Deutsche Bank Securities Inc. Page 33 EFTA01097847 4 September 2015 US Fixed Income Weekly Top 15 USD Flatteners Top 15 USD Steepeners fl.:-.k T,] , 1, Co. ry Iry Vo' Rot o Percentile lAin 25th Median 75th Max Rank Trade 1, Caoy i to Vol Rat J Percentile Min 25th Median 75th Max I lirairilrEMEMEEMM:MISEIIIIEENEXICEI ECNIMMEMEEMariffillirl I EME/MEMMIENEMOISEMEREIME111321 KM= MENEEEMEEMOCEIEBEEMIIIEZI F MENCEEIMMUMEEILEICEMEEICI MEIIIMMEMMEMEINOMEEIEBEIMECIIII 11M Y3Y d.7 29.2 -0.2 15 -1.3 0.1 0.5 0.9 4.0 4 3M5Y2ON* 30.9 375 OA 70 -1.0 0.2 0.5 CO 2.0 EiriMINEMEMENCEIMMEEICIKIMMEEI SIELITEMMEEMNIEMEINOISEICIEIMECIIII Z022MMEEME3MMISEICEIEENEEICEI KMEMIMIKINEEMMEINOISEIEMEEMECIM IIMICINTEMETIrMEEMIEENCEIFII 0 3Mre2ov WMrIE 05 69 EMTWENITIITI <`1'..faIMIEMMUMEXIOCIEBEIllallin El ELIMMIEMEMEEMEIMOISEICEICEMIIIEEI - EMI MEMMZENCI MiEMElEIIM CMI:3El EaEZ=MIEMESMEINOMEEICEICENIMIE3 CUMCM ra MI ilM ETUISEINTImm El rrarIMETIWIrrinwrimrn EMUIMEMMIEEMIZZIIMDMEEIIEEICEIIIEEIIEI marEMIKEMIliiamcnnEEIKENIIIIIII 1 ElliZiCM Win MIME= MEICI CM[EMI EFIEEEMIEMENIENEINflISEILKIEENIIIIM MITENTIMETIrMEEIIITIETNITIFII ERIEZETIMINIrrEEITOrarrICIFIETZ Inn 3M3Y5V -6.1 18.4 -0.4 29 -13 -0.5 0.0 DA 01 14 3M 5Y2ST 322 41.1 05 68 -13 0.2 0.5 0.9 2.0 ' LthaMEEMMEENCEIMMEICIEMIKIIEMEI KEIEEMMEEMIEMEINOISEICEICIENECIE3 &warDesire Ow* Sarre* OetraOrreitterk ITop 15 EUR Flatteners Top 15 EUR Steepeners r urrir irL i..1721122Erinr= Trade 1y Canyalmp-1/6 Ratio Percentile Min 25th Median 75th Max I 3/.12Y3Y 66 94 0.7 73 -2.0 03 0.3 07 3.7 1 3M ISY25Y 67 93 0.7 78 -0.1 0.3 0.5 0.7 1.6 2 6M2Y3Y 80 9.3 0.6 72 •1.7 6.3 0.2 0.7 2.4 2 I Y 15Y2DY 4.4 62 0.7 90 0.0 0.3 0.5 0.6 0.9 3 1Y 2Y3Y 5.2 9.5 0.5 74 -12 -02 0.2 DA 1.6 3 3M IST2ON 4.3 6.1 0.7 83 -0.1 0.3 0.5 0.7 1.4 4 36121T1 13.3 29.0 0.5 89 -1.8 -0.4 0.1 DA 3.0 4 3M ISY3ON 7.7 11.0 0.7 81 -0.1 0.2 0.4 0.6 1.4 5 6tA2YSY 12.2 26.0 0.5 70 -1.5 -0.3 0.1 DS 1.8 5 1Y 15N2ST 88 9.9 0.7 91 0.0 0.3 0.5 0.6 08 6 1Y 2Y5Y 10.3 24.4 0.4 75 -1.1 -0.3 0.1 DA 1.3 6 1Y 10N2ST 136 20.1 0.7 72 -0.1 0.3 0.5 0.7 1.0 7 61.13Y5Y 82 16.9 0.4 72 -12 -0.3 0.1 DA 1.2 7 3M2DY25N 2.4 3.5 0.7 85 -0.1 0.2 0.4 06 1.3 8 3612Y7Y 15.5 44.3 0.3 87 -1.8 -0.4 0.1 0.5 29 8 1Y 10N2DY 11.3 16.9 0.7 69 -0.1 0.3 0.5 0.7 1.1 9 6M 2Y7Y 14,0 40.5 0.3 70 -1.4 -0.3 0.1 DA 1.8 9 1Y 10Y3OT 14.5 218 0.7 77 -0.1 0.3 0.5 0.7 09 10 3M3Y5Y 86 19.3 0.3 89 -1.3 -0.3 0.1 DA 1.4 10 6M 10T3ON 143 216 0.7 77 -0.1 0.3 0.5 06 1.1 11 1Y 3Y5Y 5.1 15.5 0.3 78 -1.0 -0.3 0.1 0.3 1.0 11 6M10Y2SY 133 202 0.7 71 0.0 0.3 0.5 0.7 1.2 12 1Y 2Y7Y 11.3 37/ 0.3 76 -1.0 -0.3 0.1 0.3 1.1 12 6M 15Y20`1 4.3 6.6 0.7 93 0.0 0.3 0.5 0.6 1.1 13 6M 3Y7Y 7.9 31.6 0.3 78 -1.1 -0.4 0.0 02 1.0 13 6M 10Y2ON 10.9 18.7 0.7 69 0.0 0.3 0.5 0.7 1.2 14 3M 3Y7Y 88 386 02 70 -1.4 -0.4 0.0 0.3 1.4 14 6M 15Y251l 87 10.3 0.6 78 0.0 0.3 0.5 0.6 1.1 15 1Y 3Y7Y II 29.5 02 93 -0.9 -0.3 0.0 02 08 IS 3M IDY30`1 14.1 21.9 0.6 68 -0.1 0.3 0.5 0.7 1.4 &tom thmacts Sant Sago, Oman* ant ITop 15 JPY Flatteners ITop 15 JPY Steepeners Rank Trade 1y Carry Imp. Vol Ratio Pe rcent- TillnP2919 7511171111W Runk Trade 1y Carry lap. Vol ' alio Pits Nn Mil 1 1Y 2Y3Y 3.8 4.3 0.9 99 .1A 0.1 0.5 06 1.0 1 6/6 IST201 21 6.6 0.3 16 .1.3 0.4 0.7 0.9 IS 2 6M 2Y3Y 4.5 5.6 OA 88 -13 0.2 0.5 0.7 1.7 2 I Y 15Y2DY 24 8.6 0.3 6 -0.3 0.5 0.7 DS 1.6 3 1Y 255Y 7.9 11.4 03 83 -16 0.1 0.5 DA 1.2 3 35115Y2ON 1.8 72 0.3 14 -35 0.4 0.8 DS 24 4 3M 2Y3Y 5.4 82 03 72 -1.4 0.1 0.4 0.7 21 4 6/A 10Y2Ti 1.7 132 0.1 9 -0.8 0.3 0.8 0.8 1.9 5 6M 2Y5Y 9.0 15.2 0.8 63 -1.8 0.1 0.5 0.7 1.8 5 I le 10Y2DY 22 18.5 0.1 5 -0.3 0.3 0.8 0.8 1.5 13 1Y 1Y5Y 10.9 19.8 06 54 -1.8 0.3 0.5 0.7 1.4 6 3/A 10Y2ON 12 122 0.1 10 -12 0.3 0.5 0.8 2.7 7 3/A 21Te 10.0 18.3 0.5 43 -1.5 0.1 0.5 0.7 24 7 6M 15Y30,1 52 108.9 0.0 1 -0.5 0.1 0.3 0.7 1.7 8 61.11Y5Y 12.1 23.2 0.5 50 -2.0 0.3 0.5 0.7 1.9 8 1Y 15Y3OT 5.8 125.1 0.0 1 -0.3 0.1 0.2 0.8 1.2 9 IV 1V3V BS 13.4 0.5 57 -1.8 0.2 0.5 0.7 1.9 9 6M IDY30`i 4.9 109.4 0.0 4 -0.6 0.1 0.3 0.7 1.7 10 61.11Y3Y 7.5 14.9 0.5 53 -1.9 0.2 0.5 0.7 29 10 1Y 7Y2DY 1.1 24.3 0.0 7 -0.3 0.2 0.4 0.6 1.1 If 1Y 217Y 9.7 20.0 0.5 58 -16 0.1 0.4 DA 1.1 II IY 10Y3OT 5.4 133.7 0.0 4 -0.4 0.1 0.3 0.8 1.2 12 1Y 3Y5Y 4.0 8.4 0.5 55 -1.4 0.0 0.4 DA 1.2 12 3M15Yri 5.0 128.6 0.0 2 -1.3 0.1 0.2 06 2.4 13 31.42Y7Y 122 25.8 0.5 55 -1.8 0.1 0.4 DA 20 13 3M IDY3ON 4.4 130.9 0.0 4 -0.9 0.1 0.3 06 24 14 GM2Y7Y 11.1 23.2 0.5 54 -15 0.1 0.4 DA 1.6 14 6M20Y30Y 3.2 102.2 0.0 2 -0.5 0.1 0.1 DA 1.4 15 111MY 12.7 27.2 0.5 413 .1.8 0.3 0.5 DA 1.2 16 1Y MOY 4.3 137.3 0.0 6 -02 0.1 0.3 06 1.2 SaveorDeutsche SW Carry is calculated for neat 3 months and shown in annualized form. Volatility is calculated as Im realized for CAD and swatted from swaptions prices for other currencies. Percentile statistics are calculated from a W year history. Page 34 Deutsche Bank Securities Inc. EFTA01097848 4 September 2015 US Fixed Income Weekly I Top 15 CAD Flatteners Top 15 CAD Steepeners ea Ltrade I y Carry. Alzd Vol Ratio Percentile Alm 25Th Median In-th Max L Tiede 1y Carry. RDA Vol Ratio I Percentile Min 25th Median 7600148 IMEMM Errs Elm minn en Enrm ni MI I 3M 1Y2Y 23.1 10.0 22 91 -12.8 -1.5 -0.5 0.5 18.5 2 3M 2Y3Y CM. CM Mr III Eli EH M 2 31.410Y2ON 12.8 12.8 1.0 81 -21 0.3 0.8 0.9 2.3 EnliTEMI CM WIN KM =I= En MEIEr] Ea 3 051.110Y2ON 127 13.1 1.0 80 -10 0.3 0.8 0.9 1.7 =KUM Ella WM KM MI= En lin Mr EU 4 )IA 10Y251r 15.1 15.9 1.0 84 -1/ 0.3 0.8 OA 2.1 5 6M rev Ell•WIENTE 59 runnun 5 3/410Y151l 7.6 82 0.9 88 -17 02 03 0.8 3.1 MnISTIZIEZEMEEN Clan EMINM In® 6 inIA 10Y25N 15.0 182 09 84 -0.8 0.3 0.8 0.8 1.5 CI CM EMU WEI MEM EX. CM Min in EU 7 l YlOY20Y 13.5 15.1 0.9 80 -DS 0.3 0.8 0.8 1.5 rim raurrEnn ma FM WIWI CFI 8 8/A 10Y15N 7.7 86 09 ea -1.9 0.3 03 02 18 9 1Y 3Y5Y MENEM 0.5 97 in Cirri M 9 6M 7•420If 10.7 187 09 93 -0.5 02 0.5 0.8 1.8 MEE= Min MEEM:311 M:I= IEEI CM NM in En 10 IY ICY'S? 8.4 9.7 09 90 -IA 0.3 0.5 0.7 1.3 MINIMUM CM BIM WM =::::= lEti Crain En 11 IY7V20•0 IBA 19.0 09 81 -D2 02 0.5 0.8 1.7 12 wren 1 nom marl Inn In III 12 BM TY25V lel 20.1 08 79 -DA 02 03 0.8 1.5 KEICI ELM t2iN WES an MEM in En 13 6M10Y3ON 165 210 08 BB -D.7 0.3 0.5 0.7 12 in InIallil MEM REIM MI= En CM CM In El 14 3M10Y3ON 166 211 08 es -1.3 0.3 0.5 0.7 23 MCA ElmoryaNM =7=En En MINIM En 15 IY10Y2SY 15.8 19.3 08 81 -0.4 0.3 0.6 0.8 12 Sa.v.. Ow.aseno Rank Scioto. Dounone Mr* ITop 15 AUD Flatteners !Top 15 AUD Steepeners Rank Trade I y Carry Inc. Vol Ratio Peron* Min 25th Median 75th Max Rank 'Isaac le Cane I'm, Vol Rat o Percent Min 251h Median 75th Max I 3M 3Y5Y 41.9 48.7 09 69 4.4 -0.6 0.0 0.6 18 ER IMMO ra NM MT= En ECI MB En En 2 3M 2Y5Y 668 84.1 0.8 90 -1.2 -0.2 0.3 0.8 1A NNE= ME rro n am En In EMMEN 3 3M 1Y5Y 938 1318 0.7 78 -1.3 -0.1 0.5 0.7 1.4 3 6M7Y10Y 56 28.0 02 75 0.2 In 0.1 0.2 0.7 4 6M 2Y3Y 284 37.8 0.7 77 -IA 0.3 0.5 0.7 1.5 MEMO] KM KIM NM WI= En In E:EMM En 5 3M 1Y7Y 90.7 147.3 0.8 77 -12 -0.1 OA 0.8 1.3 KZ EZThrliMI= ra ff :EMM:M En In KIM ED In 6 3M 2Y7Y 837 109.0 0.8 92 -09 -0.2 02 OA 1.0 rIll CI= WM WI= NM MZ= Ilninrilll In 7 3M 2Y3Y 242 44A 0.8 78 -OS 02 OA OA 1.3 MI MIMI Ma CCM WM WE= En In KIM ED In 8 6M 21T( 43A 79.7 0.5 92 -IA -0.1 0.3 OA 0.9 KZ WEEMEMEIMMEM En1:31•31 ED in 9 1Y 1Y3Y 37.3 71.3 0.5 62 -09 0.1 0.3 06 1.0 EP MEE:MEMO CHM MB M 111 10 6M IVEY 813 122.3 0.5 78 -1.1 -0.1 0.4 0.6 1.0 10 IY3YIDY 8.4 104.2 0.1 11 0.1 In 02 0.3 OA II 3M 1Y3Y 519 101.4 0.5 82 -IA 0.1 0.4 OA 1.5 En EZIEUI MEM t:37 NM =::= lin MEMO In 12 1Y 2Y3Y 21.7 42.7 0.5 81 -0.9 02 0.4 OA 1.1 m® ®o NM =:= En Inn In in 13 3M 3Y7Y 388 78.9 03 93 -0.8 -0.4 0.0 0.3 1.0 so 111=171ESTE Errs entosxm rim mien 14 66I 1Y3Y 483 928 0.5 73 -IA 0.1 OA 0.6 12 in lairillrEN NEENEM MMI En In KEN M In IS I 3M1Y10Y 836 170.9 0.5 74 -1.1 -0.1 0.3 0.6 1.1 KI3 taua MEM Ma EMI =:= EMEIM311:3Mn Sane Deutsche Sank Sateartesebe Sank Top 15 GBP Flatteners I Top 15 GBP Steepeners Rank Trade ly Carry Imp Vol Ratio Percentile Mtn 25th Median 75th Max Rank Tt.iJc le Carry Inc.Vol Ratio Percentile Min 25th Median 75th Max NZ EMI MEM MIZE MIMI IM7i= Ell En CHM In Ma [Mal WEN ilia EINIIMME21 In NM In En MEMIEMEMEN MEM MB MEM En En KEN In ES! NC MEM MEE MIR =:::= CI CB WESin 111 ©®m CM MB ila En En EINEM CI ©i MEE Ellif CM =3= CM MEM En 111 4 66I 1Y3Y 02 27.3 0.0 28 -1.1 0.0 0.3 06 3A 4 8M5Y25Y 218 28.4 09 81 -OA 0.1 OA 0.8 3.3 MIEITIZI WEN MEM KEN M:= En lal Kinn in ©cm= ELM CM KIM MIS EH EEOMIN EU III MCIMIEM ELM KM Ma En en MB In EU NOZINCEEINflIESIEEININEEIEn fl u ®m EIMWM ®Ern MTN in MI= WM re MTM En In WM In En a iyIY3Y WEE rEMICEMOZEI IMEIM7110 8 BM/ TAY MIME MIME:ENO IM OM NM in ® ES MEM Ca Mai =1::= CI in WEI in KM EMEMIEOM KM Ell =I= Mtn KEN EU in ECIEZIMINEEM EMU MEMMEM En MEIMB In EU EMI= CM Ca KM= In En MIN EU En 11 3M 1Y7Y En En rra n ER era Enin II 8M3Y20Y trronnammtnnEnra in COMER tin MEMMEMEEI IIIMEEIIII En m ..1.. wrlz Win MUM MIS Minn Elf in Ell EEC MEM MEM KEN Oen IIIWEE1123 In KENED=IMEN MEM WENMS 11:13III Eli in EU On. 9r - . MITE n!EN MEM En En rim rn In in Ur= EWE MTN =Tr In MIZEITI In NM 1Y 2Y3Y ®MEN EEO MMM CI III CM nal 15 8M 7Y33Y MEM CR KEN MI= En In EMI M in Swan °Noche Sant Carty is calculated for next 3 months and shown in annualized form. VothoTay is calculated as lm realized for CAD and extracted from swaptions prices for other currencies. Percentile statistics are calculated from a Ulmer history. Deutsche Bank Securities Inc. Page 35 EFTA01097849 4 September 2015 US Fixed Income Weekly Top 15 CHF Flatteners Top 15 CHF Steepeners Rank Trade ly Carry Imp. Vol Ratio Percent Min 25th Median 75th Max FIrrw Tract, ly Carry Frp Vol Raho Percent Min 25th Median 75th Max MISEEMIIEMMEMUTEM7MUMCFIKMITVIII LE_II=WENETEMIUMIrrirliTNITI ILI ta 31.12Y5Y 98 19.3 03 63 EUCE1Er EU I _ IIZEZTIMEMZEMMMIEEICEIEENCIMEI El laranonto EEMMI:MICEICI KENal NEI MENITIIIiMEMMISCIEEMENECIM EPFIGEZIMinaMEMMEMO lal O3MINEUMI ElEarlirM CMfl EIMICREIE1M NM 3M2Y7Y EMMEN:EN Se Enrannini =imam M!!!M CEICEI Ninon EICIN3M13M EZEMM ELICI EINEM]] __Ei7III5MIEMEIRMESEXIMMINEIEIM MaFIGEZIMENKENKENO ISO1:31MIN111EEI COMM MIMMI=ECICBCMal m WECI ETWE CM=7= En!TIMMMin Errnirrwro n en Ell MTNIT1ITI o 3M2Y3Y MINEINEEMMZSEEICIIMMEE1Ell IIIMITIMEMa MINMEMEICIIIIMIMEO CU KC.Enmira n KENO CI CI NIMEUKO 1_ EIMMINEEMEINa Ma CC EINIZEIM KMMEMMIS Ca WENM2EMCI CI MINEUEEI __ E=MEEMEMEMINMIMIICIIEEMEMEEIOil WI IV 2V3Y EMMENETEMTMEll Ell ErnItirl MEMMEMWMNW= MEM ETNITIMI KENIIIIMIMMEIIENKENO lal CBCM111ESI _ =lira KIM riMMIMIEIEEIMMEEIOil El MEMMIS MThKENO CMCI CMal EU = ESIIIIMMME2MINMIMEIMEEIMINEEIOil NMEl= WIMENINNTEMTMETIEll MTNIllfri monzra ria no ra ernrn Rimm un Soutoe. Otacho Sank Soave*. Dourstho Sank I I ITop 15 SEK Flatteners !Top 15 SEK Steepeners : fiZTEIC=IMMAI4=1 ...a... in th adorn 3M6Y7Y 122.4 18.4 8.6 1 .1.5 -0.5 01 8.0 1 61.11Y3Y 458.3 1478.4 0.3 I -05 19 ath 8.1 2.2 39 ax 2 1Y 7YIDY 37.1 10.4 3.6 99 .4.6 .1.6 .0.9 -02 4.0 2 6/.11Y5Y 402.1 1480.3 0.3 5 -DS 1i 1.7 3.2 49 3 1Y 5YIDY 75.1 28.6 2.6 99 -AI -1.6 4.6 0.2 2.9 3 GM 1Y7Y 353.9 was 02 8 -DA 1.1 1.7 3.2 BA 4 1Y 1YIDY 417.9 172.6 2.4 56 -4.5 -1.2 18 3.6 7.0 4 61111Y10Y 290.8 1488.5 02 5 -DA 1.1 1.9 3.2 8.3 5 3M5Y10Y 2768 133.6 2.1 103 -3.3 -1.8 -0.6 -02 22 5 31A 1Y3Y 1266.6 11439.0 0.1 1 -OA 21 5.7 9.9 21.1 6 I Y I WY 380.8 181.5 2.1 50 -42 -1.0 2.1 3.9 68 6 31111Y5Y 1170.6 11687.5 0.1 1 -DA 23 5.1 9.1 14.6 7 1Y 517Y 380 19.3 2.0 99 -3.3 -1.2 -0.3 05 22 7 31A 1Y7Y 1048.4 117059 0.1 1 -DA 2.0 5.0 LIS 14.9 6 1Y 3YIDY 169.5 92.4 18 97 4.7 -IA 0.1 1.1 22 8 3/A IY10Y 883.9 11818.3 0.1 1 -0.3 2.8 5.0 9.0 15.0 9 1Y1Y5Y 3428 199.0 1.7 41 -4.3 -0.8 2.4 42 7.6 9 31113Y5Y -940 248.5 -114 33 -2A -0.6 -0.1 OS 32 ID I Y 3Y7Y 132A 63.0 18 42 -4.3 -1.1 OA 1.4 2.5 ID 6143Y5Y -582 141.6 -04 36 -29 -0.7 -0.1 0.9 28 II 1Y3Y5Y 94.4 64.6 1.5 68 -4.0 -08 OA 1.7 32 II 6M3Y7Y -104.4 171.4 -0.6 24 -2A -DA 0.0 1.3 32 12 6615Y7Y 08.2 34.1 1.4 99 -27 -I.5 -0.5 0.2 IS 12 6/43Y10Y -167.5 244.6 -0.7 17 -1.9 -DS 0.4 1.8 3A 13 3/A 7Y10Y 154.5 112.4 1.4 96 -38 -IA -1.1 4.5 3.4 13 3/43Y7Y -218A 266.9 -08 18 -2.1 -DA 0.0 IA 3.5 14 6M5Y10Y 111.3 104.6 1.1 96 -3.3 -1.7 -0.9 42 2.5 14 6/4 7Y10Y 43.1 732 -0.9 8 -38 0.5 1.1 1.8 38 15 3M3Y10Y 3728 379.3 1.0 95 -3.0 -1.7 -0.4 OA 1.5 IS 1Y 1Y3Y -2484 261.7 -a9 86 -9.5 -0.7 -28 08 4.9 Spume. Oemmote Os* Patrice Otreteche Bent Spread of Swap Spreads Trades I-Values as of September 3rd 2015 Current Current Trade Percentile Min 25th Median 75th Tenor Repo Spot Swap Spread 1M Fwd. Swap Spread Carry Level 2Y3Y 1.03 -1.6 59 -4.9 -25 -1.8 -1.0 2 15.00 13.5 13.8 2Y5Y -0.14 -4.4 70 -13.4 -9.2 5.6 -3.6 3 16.00 11.9 13.3 2Y7Y -0.51 -11.0 52 -22.1 -16.0 -11.4 -5.5 2Y10Y -0.23 -8.2 47 -22.1 -12.7 -7.5 -2.8 5 7.50 9.1 9.3 2Y30Y -0.60 -37.3 25 -53.9 -37.0 -22.1 -14.8 7 9.50 2.5 2.3 3Y5Y -1.17 -2.8 69 -11.2 -6.8 -4.6 -2.2 3Y7Y -1.54 -9.4 49 -19.8 -13.3 -9.2 -4.2 10 2.50 53 5.4 3Y10Y -1.26 -6.6 44 -19.9 -10.3 -5.6 -1.6 30 11.50 -23.8 -24A 3Y30Y -1.63 -35.7 23 50.8 -33.6 -20.3 -13.8 Swot& Oa date awe 5Y7Y -0.37 -6.6 25 -10.1 -6.6 -4.2 -1.8 5Y10Y -0.09 -3.8 24 -10.2 -3.7 -1.6 0.6 5Y30Y -0.47 -32.9 11 -42.3 -27.2 -16.3 -11.2 7Y10Y 0.28 28 52 -3.1 1.1 2.7 3.9 7Y30Y -0.09 -26.3 10 -33.0 -19.9 -12.4 -9.2 10Y30Y -0.37 -29.1 10 -35.1 -23.4 -14.8 -12.7 Same: °made ae Page 36 Deutsche Bank Securities Inc. EFTA01097850 4 September 2015 US Fixed Income Weekly IDGX and DVX across different market regimes 'Term structure of 2Y vol 220 160 130 3-Sep-15 —DGX - T- TTTT - 200 - earn 5-Sep-13 DVX(right) 120 140 /4.4‘)V• 3-Sep-10 180 110 I 160 120 100 I i 140 90 I i 100 120 80 100 80 70 60 80 60 50 60 40 40 40 0 5 10 15 20 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 sown: Dolasolo H_ 'Ratios of 2Y to 10Y tenors (quartiles, 5-year history) 'Term structure of 10Y vol 140 s 3.8611.15 1.4 ........... 2Y Tenors,10Y Toms • mean OLast •5•Sep.13 130 o—.3•Sep.10 120 110 100 90 80 70 60 1m 3m 6m 1y 2Y 5y 7y by 10 15 20 SanerDesire tank Sane. Ocean* Etont 'Ratios of 30Y to 10Y tenors (quartiles, 5-year history) 'Term structure of 30Y vol imas i 3-Sep- 15 2.4 130 .Lisr.5-Sep-13 30V Tenors/10Y Tenors EIVean lo Last 2.2 120 --u— 3-Sep- 10 2 110 1.8 100 1.6 90 1.4 80 1.2 70 60 0.8 0.6 50 tm 3m 6m 1y 2y Sy 7y lOy 0 5 10 15 20 Same:Deutsche lent $an °wasn't8w* Deutsche Bank Securities Inc. Page 37 EFTA01097851 4 September 2015 US Fixed Income Weekly 3M carry across different expiries (ATMF receivers) 'Breakdown of 3M carry for 6M expiries (% premium) —0-6m --1}-1y —a-2y 80% 6 60% 4 40% 2 20% 80 0/ -2 -20% -4 -40% 6 6mly 6m2y 6rrty 6m7y 6m10y 6m15y 6m20y 6m30y Tenor Scvere:Onotso Sant IUS surprise index: 10Y Treasury yield 'Trade weighted dollar surprise index 110 100 203 95 90 90 85 80 M AY\14 80 70 75 60 70 —surprise 65 so 60 40 —Deutsche Bankl/C0 tracieweightedindex 55 30 50 Au 44 04.146 Aug-06 Aur10 Aug-12 Aug-14 SWAY:Dourses Bonk 'Combined put/call ratio in Treasury futures 2.25 2.00 —Put/call ratio —Average 1.75 1.50 1.25 1.00 0.75 0.50 0.25 9/1/07 9/1/09 9/1/11 9/1/13 9/1/15 Sant Dowattabak and aME Gm. Page 38 Deutsche Bank Securities Inc. EFTA01097852 4 September 2015 US Fixed Income Weekly / I US Treasury Coupon Auction Calendar Ticker/Coupon/Maturity Date Tap/New Issue Size T TIM 9/18 Tuesday, September 08 New Issue 24btn T2.00% 8/25 Wednesday, September 09 Tap 21bIn T 2.875% 8/45 Thursday, September 10 Tap 13bIn I US Economics & Events Calendar Event DB Forecast Mon. Sep 07 2015 Labor Day Holiday All markets closed Tue, Sep 08 2015 Consumer Credit +20.08 Wed, Sep 09 2015 July JOLTS data released 10:00 AM Thu, Sep 10 2015 Wholesale Inventories +0.1% PI Total -0.1% Fri, Sep 11 2015 Core +0.2% Consumer Sentiment 95.0 Deutsche Bank Securities Inc. Page 39 EFTA01097853 4 September 2015 US Fixed Income Weekly IEuropean Economics & Events Calendar Date Economic Releases Political Events Bond RedemptiordSupply Sep 07 Germany: Industrial Production SAYoY Sep 08 Eurozone: GDP SAYoY Germany: Schaeuble Presents 2016 Federal Draft Germany to Sell EUR1 Bln 0.5% UL 2030 Bonds Budget in Parliament IDE0001030559) Sep 09 Greece: CPI EU Harmonized YoY Germany: Merkel Delivers Remarks in Parliament Germany to Sell EUR4 Bln 1.0%2025 Bonds Keyed to 2016 Budget IDE0001102382) Italy to Sell Bonds Sep 10 Spain: Industrial Output NSA YoY Ireland to Sell Bonds Portugal: CPI EU Harmonized YoY France: Industrial Production YoY Ireland: CPI EU Harmonized YoY Sep 11 Spain: CPI EU Harmonized YoY Germany: CPI EU Harmonized YoY Italy: Industrial Production Vol' (Total/excess return forecasts in HY, IG, leveraged loans HY IR Syr Trsy 10yr Trsy Loans 2yr Trsy Spreads/Yields Spreads/Yields Current 561 163 149 218 Current 540 57 Target 650 170 160 225 Target 575 75 Change 89 7 11 7 Predicted Change 35 18 Rate Duration 1.0 Duration 4.6 6.5 4.8 8.5 Spread Duration 2.7 Change in Yield 100 17 11 7 Avg Par Coupon 440 Change in Price -462 -107 -53 -60 Libor/Tsy Change 18 Current Yield 701 409 Total Change in Yield 53 Current Price 95.8 104.3 Repricings -50 Default Rate 3.5 0.0 Capital Gain -163 Recovery 40 Credit Loss -204 0 Current Yield 440 Default Rate 3.5 Price Return -6.9 -1.0 Price 99.9 Total Return 0.1 3.1 Credit Loss 87 Excess Return -0.9 1.9 Total Return 1.9 Page 40 Deutsche Bank Securities Inc. EFTA01097854 Deutsche Bank Securities Inc. Closed Trade Recommendations Trade Detail Rationale Risks Opened Entry Closed Exit P/L Inflation Underweight 30yr TIPS 30yr tends to cheapen ahead of +11 bp 6/17/15 +12 bp -60k 30yr outperforms 6/5/15 supply Inflation Short 1/2026 breakevens vs 5yr and 10s look rich; sell the rich 1/2026s 10s richen further 1/23/15 +15 bp 6/11/15 +5 bp +308k 30yr breakevens Inflation Long 30yr TIPS breakevens versus 10s-30s breakeven curve appears too Long term inflation 11/26/14 +16 bp 6/5/15 6.54 bp 152K 10yr TIPS breakevens flat on a long term basis expectations decline Being long 2019 BEs versus 2016 BEs 2019 breakevens drop Inflation Long 2019 TIPS breakevens versus has positive carry, and is less more than 2016 11/26/14 +41 bp 2/25/15 +22 bp +4,014k 2016 TIPS breakevens correlated with energy prices than 1yr breakevens BEs Inflation Long 30yr TIPS breakevens Bond TIPS look cheap on a relative Inflation expectations 2.08% 12/9/14 1.97% -1,171k 10/17/14 value basis decline be cheapening of the Inflation Buy 2023 TIPS vs. 7/2019 and 1/2025 The intermediate sector in inflation belly in markets 12/6/13 +38 bp 12/19/14 +8 bp +2,263k TIPS on ASW markets is cheap relative to the wings • relative to the wings Inflation Long 2y2y inflation swap 2y2y inflation looks attractive on Forward inflation falls 10/3/14 2.1% historical basis 12/9/14 2.0% -309k Swaps The spread between 5yr5yr inflation Inflation swaps and 5yr5yr TIPS breakevens is 5yr5yr inflation swaps Sell the 5yr5yr inflation swaps rise 11/7/14 2.58% 12/18/14 2.43% +1,361k Swaps wide. Selling the 5yr5yr inflation swaps looks attractive. Buy $100mn 6M 2y1y 25bp OTM MC Option payers vs. Sell 100mn 1Y 4Y1Y 45bp Curve flattens on a hawkish FOMC Curve bear steepens 9/12114 Ort 3/11/15 -0.74 -32k OTM MC payers at zero net cost Sell $100mn 6M5Y ATMF vs. buy Rates sell off half-way Option $200mn 6M5Y 30bp OTM payers at Skew trades rich in a sell-off and stay there till the 9/12/14 0 bp 3/11/15 0.0 bp -2k zero net cost expiry MM-curve payer: Sell $100mn 1Y 5Y5Y has a limited upside while 1Y2Y Option nigrItnniiMIIAIT ir Fvepayers vs. buy could see significant repricing due to The curve bear steepens 3/14/14 -184 3/13/15 0.04 +184k payers for the adjustments of monetary policy net takeout of 28c Conditional bull steepeners: Sell S32.8mn 3M10Y ATMF receivers vs. Front-end gets re-priced in a delayed Curve bull flattens; Option 9/26/14 -1 by 12/30/14 0 by +19k buy $100mn 3M3Y ATMF receivers at Fed hike unlimited downside net takeout lc Rally below the Buy 1X2 3M3Y ATMF/13.5bp receiver Option Short-term risk off and short covering breakevens; unlimited 9/26/14 0 bp 12/30/14 0 bp +28k spreads for zero net cost downside Buy $1,000mm 6m single reset cap on Carry pays for option, repriced fed Curve flattening, max Option 5/20/14 +9 by 11/20/14 0 by -875k CMS10-CMS5 strike 89bp for 9.75c suggests 5y outperformance loss premium Sell $100mn 3M5Y straddles vs. buy Option $100mn 3M5Y 22bp OTM payers for No big changes in vol near term Rates rally 9/19/14 -100 bp 12/30/14 0 bp +1,028k net takeout of 100c. Sowoe:Down». Sant EFTA01097855 2014 Outlook Closed Trades Trade Detail Rationale Risks Opened Entry Closed Exit P/L 1y 3s10s conditional bearish flattener The curve should bear flatten Option for zero premium: Buy 1y3y + 25 bp as soon the Fed tapers and Curve steepens as rates rise 1216/13 +212.5 bp 12/19/14 +17 bp Ok payer, sell DVOI weighted 1y10y front end sells off +41.5 bp payer for zero premium. Option Receiver spreads: Buy $100mm 2y2y Macro data disappoints, curve Rates rise as recovery 1216/13 +28 bp 12/19/14 +29 bp +19k ATMF/25 bp receiver spreads at 28 bp bull flattens strengthens Contingent payers: Buy 1y30y ATMF Rate hikes unbundled from Option payers subject to 5s< ATMF+50 bp at taper, long end sells off while Curve flattens 12/6/13 12/19/14 259 b • a 57% discount to vanilla 5 remains anchored Curve flattens beyond the Dual digital option on 5s and 10s: Buy Either of the two conditions current forwards; adding Option a 6m dual digital that pays out if 5s a is not true at expiration; additional l rage by shorting 12/6/13 12/19/14 2% & 10s< 3.50%, offer 17% (6:1 maximum loss is premium the correlation between 5y and leverage) outlay 1i rates Contingent curve cap: Buy 6M 5s10s Option ATMF curve caps subject to 10s < Front-end of the curve remains Curve flattens 12/6/13 12/19/14 3.50%, 5.25c offer, a 40% discount to anchored, limited sell off in 10s vanilla at 9c Option Curve caps: Buy 1y single reset, ATMF Economic recovery disappoints Curve flattens 12/6/13 +21.5 bp 12/19/14 0 bp -197k 5s30s curve cap at 21.5 bp and curve remains steep Forward steepener. Receive fixed on Slope of10y 10s30s Swaps Rv $115.71 mm 1y10, pay fixed on level of Ratetoo flat given Curve flattens 3/28/14 +45 bp 3/27115 +33 bp -3,109k $54.85 mm 1v30v Receive $208.2mm 6m5y rate versus 15y par rate rich, 6m5y Swaps RV pay $292.9mm 10y5y rate exposed to repricing Fed with Curve flattenening 5/20/14 +219 bp 11/19/14 +320 bp -7,274k positive carry Curve slope is near its historic Swaps RV Receive 3y1y/2y1y rate spread at 108 . revels; curve is likely to flatten Curve steepens 12/6/13 +108 bp 12/19/14 +80bp +222k bp in both sell-off or rail US Credit Underweight high-yield into Taper HY spreads should widen upon Tapers gets delayed 12/6/13 12/19/14 the onset of the taper Sowee (*tante Minh Pertcomince numenn we basedan "sobr onsTabby awks. anIclo not vat* AS" er spreaor Mix!., costs 14P avoroVe the eatontlenOvnyr• kg an ususs to be romPOSWOR 9v7 Me breiViyK4 0, generavyinorter ntatelOWOMS altos,ark. Holorem oaf<mime a note Downey ofNevepogarance • Deutsche Bank Securities Inc EFTA01097856 4 September 2015 US Fixed Income Weekly Appendix 1 Important Disclosures Additional information available upon request *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.corn/ger/disclosure/DisclosureDirectory.eqsr Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Dominic Konstam/Aleksandar Kocic/Joseph LaVorgna/Alex Li/Stuart Sparks/Daniel Sorid/Steven Zeng/Aditya Bhave The authors of this report wish to acknowledge the contribution made by Shailendra Singh, Ignacio Quintana, Catherine Montecinos, employees of Evalueserve, a third-party provider to Deutsche Bank of offshore research support services. Regulatory Disclosures 1.Important Additional Conflict Disclosures Aside from within this report, important conflict disclosures can also be found at tittp_s_l/qm_.4b.cordequitie_s under the "Disclosures Lookup" and "Legal' tabs. Investors are strongly encouraged to review this information before investing. 2.Short-Term Trade Ideas Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http.//gm db corn. Deutsche Bank Securities Inc. Page 43 EFTA01097857 4 September 2015 US Fixed Income Weekly Additional Information The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively "Deutsche Bank'). Though the information herein is believed to be reliable and has been obtained from public sources believed to be reliable, Deutsche Bank makes no representation as to its accuracy or completeness. Deutsche Bank may consider this report in deciding to trade as principal. It may also engage in transactions, for its own account or with customers, in a manner inconsistent with the views taken in this research report. Others within Deutsche Bank, including strategists, sales staff and other analysts, may take views that are inconsistent with those taken in this research report. Deutsche Bank issues a variety of research products, including fundamental analysis, equity-linked analysis, quantitative analysis and trade ideas. Recommendations contained in one type of communication may differ from recommendations contained in others, whether as a result of differing time horizons, methodologies or otherwise. Deutsche Bank and/or its affiliates may also be holding debt securities of the issuers it writes on. Analysts are paid in part based on the profitability of Deutsche Bank AG and its affiliates, which includes investment banking revenues. Opinions, estimates and projections constitute the current judgment of the author as of the date of this report. They do not necessarily reflect the opinions of Deutsche Bank and are subject to change without notice. Deutsche Bank has no obligation to update, modify or amend this report or to otherwise notify a recipient thereof if any opinion, forecast or estimate contained herein changes or subsequently becomes inaccurate. This report is provided for informational purposes only. It is not an offer or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy. Target prices are inherently imprecise and a product of the analyst's judgment. The financial instruments discussed in this report may not be suitable for all investors and investors must make their own informed investment decisions. Prices and availability of financial instruments are subject to change without notice and investment transactions can lead to losses as a result of price fluctuations and other factors. If a financial instrument is denominated in a currency other than an investor's currency, a change in exchange rates may adversely affect the investment. Past performance is not necessarily indicative of future results. Unless otherwise indicated, prices are current as of the end of the previous trading session, and are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank, subject companies, and in some cases, other parties. Macroeconomic fluctuations often account for most of the risks associated with exposures to instruments that promise to pay fixed or variable interest rates. For an investor who is long fixed rate instruments (thus receiving these cash flows), increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a loss. The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the loss. Upside surprises in inflation, fiscal funding needs, and FX depreciation rates are among the most common adverse macroeconomic shocks to receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation (including changes in assets holding limits for different types of investors), changes in tax policies, currency convertibility (which may constrain currency conversion, repatriation of profits and/or the liquidation of positions), and settlement issues related to local clearing houses are also important risk factors to be considered. The sensitivity of fixed income instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to FX depreciation, or to specified interest rates - these are common in emerging markets. It is important to note that the index fixings may — by construction — lag or mis-measure the actual move in the underlying variables they are intended to track. The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating coupon rates (i.e., coupons indexed to a typically short-dated interest rate reference index) are exchanged for fixed coupons. It is also important to acknowledge that funding in a currency that differs from the currency in which coupons are denominated carries FX risk. Naturally, options on swaps (swaptions) also bear the risks typical to options in addition to the risks related to rates movements. Derivative transactions involve numerous risks including, among others, market, counterparty default and illiquidity risk. The appropriateness or otherwise of these products for use by investors is dependent on the investors' own circumstances including their tax position, their regulatory environment and the nature of their other assets and liabilities, and as such, investors should take expert legal and financial advice before entering into any transaction similar Page 44 Deutsche Bank Securities Inc. EFTA01097858 4 September 2015 US Fixed Income Weekly to or inspired by the contents of this publication. The risk of loss in futures trading and options, foreign or domestic, can be substantial. As a result of the high degree of leverage obtainable in futures and options trading, losses may be incurred that are greater than the amount of funds initially deposited. Trading in options involves risk and is not suitable for all investors. Prior to buying or selling an option investors must review the "Characteristics and Risks of Standardized Options", at htto://www ontionsclearina com/abnidinntiligatinnsicharacter-ricks isp. If you are unable to access the website please contact your Deutsche Bank representative for a copy of this important document. Participants in foreign exchange transactions may incur risks arising from several factors, including the following: ( i) exchange rates can be volatile and are subject to large fluctuations; ( ii) the value of currencies may be affected by numerous market factors, including world and national economic, political and regulatory events, events in equity and debt markets and changes in interest rates; and (iii) currencies may be subject to devaluation or govemment imposed exchange controls which could affect the value of the currency. Investors in securities such as ADRs, whose values are affected by the currency of an underlying security, effectively assume currency risk. Unless goveming law provides otherwise, all transactions should be executed through the Deutsche Bank entity in the investor's home jurisdiction. United States: Approved and/or distributed by Deutsche Bank Securities Incorporated, a member of FINRA, NFA and SIPC. Non-U.S. analysts may not be associated persons of Deutsche Bank Securities Incorporated and therefore may not be subject to FINRA regulations concerning communications with subject company, public appearances and securities held by the analysts. Germany: Approved and/or distributed by Deutsche Bank AG, a joint stock corporation with limited liability incorporated in the Federal Republic of Germany with its principal office in Frankfurt am Main. Deutsche Bank AG is authorized under German Banking Law (competent authority: European Central Bank) and is subject to supervision by the European Central Bank and by BaFin, Germany's Federal Financial Supervisory Authority. United Kingdom: Approved and/or distributed by Deutsche Bank AG acting through its London Branch at Winchester House, 1 Great Winchester Street, London EC2N 2DB. Deutsche Bank AG in the United Kingdom is authorised by the Prudential Regulation Authority and is subject to limited regulation by the Prudential Regulation Authority and Financial Conduct Authority. Details about the extent of our authorisation and regulation are available on request. Hong Kong: Distributed by Deutsche Bank AG, Hong Kong Branch. Korea: Distributed by Deutsche Securities Korea Co. South Africa: Deutsche Bank AG Johannesburg is incorporated in the Federal Republic of Germany (Branch Register Number in South Africa: 1998/003298/10). Singapore: by Deutsche Bank AG, Singapore Branch or Deutsche Securities Asia Limited, Singapore Branch (One Raffles Quay #18-00 South Tower Singapore 048583, +65 6423 8001), which may be contacted in respect of any matters arising from, or in connection with, this report. Where this report is issued or promulgated in Singapore to a person who is not an accredited investor, expert investor or institutional investor (as defined in the applicable Singapore laws and regulations), they accept legal responsibility to such person for its contents. Japan: Approved and/or distributed by Deutsche Securities Inc.(DSI). Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, Type II Financial Instruments Firms Association, The Financial Futures Association of Japan, and Japan Investment Advisers Association. Commissions and risks involved in stock transactions - for stock transactions, we charge stock commissions and consumption tax by multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions can lead to losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming from foreign exchange fluctuations. We may also charge commissions and fees for certain categories of investment advice, products and services. Recommended investment strategies, products and services carry the risk of losses to principal and other losses as a result of changes in market and/or economic trends, and/or fluctuations in market value. Before deciding on the purchase of financial products Deutsche Bank Securities Inc. Page 45 EFTA01097859 4 September 2015 US Fixed Income Weekly and/or services, customers should carefully read the relevant disclosures, prospectuses and other documentation. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are not registered credit rating agencies in Japan unless Japan or "Nippon" is specifically designated in the name of the entity. Reports on Japanese listed companies not written by analysts of DSI are written by Deutsche Bank Group's analysts with the coverage companies specified by DSI. Some of the foreign securities stated on this report are not disclosed according to the Financial Instruments and Exchange Law of Japan. Malaysia: Deutsche Bank AG and/or its affiliate(s) may maintain positions in the securities referred to herein and may from time to time offer those securities for purchase or may have an interest to purchase such securities. Deutsche Bank may engage in transactions in a manner inconsistent with the views discussed herein. Qatar. Deutsche Bank AG in the Qatar Financial Centre (registered no. 00032) is regulated by the Qatar Financial Centre Regulatory Authority. Deutsche Bank AG - QFC Branch may only undertake the financial services activities that fall within the scope of its existing QFCRA license. Principal place of business in the QFC: Qatar Financial Centre, Tower, West Bay, Level 5, PO Box 14928, Doha, Qatar. This information has been distributed by Deutsche Bank AG. Related financial products or services are only available to Business Customers, as defined by the Qatar Financial Centre Regulatory Authority. Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation. Kingdom of Saudi Arabia: Deutsche Securities Saudi Arabia LLC Company, (registered no. 07073-37) is regulated by the Capital Market Authority. Deutsche Securities Saudi Arabia may only undertake the financial services activities that fall within the scope of its existing CMA license. Principal place of business in Saudi Arabia: King Fahad Road, Al Olaya District, M. Box 301809, Faisaliah Tower - 17th Floor, 11372 Riyadh, Saudi Arabia. United Arab Emirates: Deutsche Bank AG in the Dubai International Financial Centre (registered no. 00045) is regulated by the Dubai Financial Services Authority. Deutsche Bank AG - DIFC Branch may only undertake the financial services activities that fall within the scope of its existing DFSA license. Principal place of business in the DIFC: Dubai International Financial Centre, The Gate Village, Building 5, PO Box 504902, Dubai, U.A.E. This information has been distributed by Deutsche Bank AG. Related financial products or services are only available to Professional Clients, as defined by the Dubai Financial Services Authority. Australia: Retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product. Please refer to Australian specific research disclosures and related information at httos://australia db com/australia/content/research-information html Australia and New Zealand: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act and New Zealand Financial Advisors Act respectively. Additional information relative to securities, other financial products or issuers discussed in this report is available upon request. This report may not be reproduced, distributed or published by any person for any purpose without Deutsche Bank's prior written consent. Please cite source when quoting. Copyright 2015 Deutsche Bank AG Page 46 Deutsche Bank Securities Inc. EFTA01097860 David Folkens-Landau Group Chief Economist Member of the Group Executive Committee Raj Hindocha Marcel Cassard Steve Pollard Global Chief Operating Officer Global Head Global Head Research FICC Research & Global Macro Economics Equity Research Michael Spencer Ralf Hoffmann Andreas Neubauer Regional Head Regional Head Regional Head Asia Pacific Research Deutsche Bank Research, Germany Equity Research, Germany International Locations Deutsche Bank AG Deutsche Bank AG Deutsche Bank AG Deutsche Securities Inc. Deutsche Bank Place Gratz. Gallusstrage 10-14 Filials Hongkong 2-11-1 Nagatacho Level 16 60272 Frankfurt am Main International Commerce Centre. Sarno Park Tower Corner of Hunter & Phillip Streets 1 Austin Road West,Kowloon, Chiyoda-ku, Tokyo 100-6171 Sydney, NSW 2000 Hona Kono Japan Australia Deutsche Bank AG London Deutsche Bank Securities Inc. 1 Great Winchester Street 60 Wall Street London EC2N 2ECI New York, NY 10005 United Kinadom li itM Crate¢ of Amnrira GFICM2015PROD034563 EFTA01097861