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Election fallout
The election results in Europe were broadly as expected. The inability to form a government in Greece has, however, raised the issue of euro breakup again. This is not our base case scenario and certainly not over the next couple of months, and indeed the news that the EFSF will fund Greece until June resulted in a collective sign of relief and talk again of risk on. We think the core issues remain the same lack of growth and a weak banking system, as highlighted by the Spanish governments nationalization of Bankia. And so the volatility will likely continue With the next round of summits approaching, we discuss the role of the EIB. Technically increasing the lending capability of the EIB is relatively straight forward, but the question is whether this is at the cost of a weaker EIB balance sheet this is risk for EIB spreads. European Governments: Volatility continues in European governments with the post election sell-off followed by a recovery rally. We suggest taking profits on long 5Y Belgium versus Austria. We believe the belly of the 5s10s30s fly in France is cheap versus the wings. We recommend receiving it at 47 bp. UK Strategy: The pause in the QE program is expected to support our pay recommendation in GBP 5s10s30s. We also recommend selling 10y ASW spreads to take advantage of this decision and upcoming 10y supply. The next main focus for the UK market will be the May Inflation Report. Although we expect an upward revision to inflation, we view current market pricing for a hawkish report as overdone. We maintain our receive GBP 2s3s5s fly recommendation. Derivatives Strategy: We recommend receiving CHF 5s10s20s. We recommend a L Z2/Z3 conditional bull steepener expressing the view that the FRA-Sonia term structure ought to be upward sloping conditional on low spot fixings and that some residual hike premium ought to be priced in Z3. Money Market Strategy: Looking at Thursdays big sell-off on the short-sterling strip, following the MPC minutes, we think markets are pricing too much of a risk premium on further-dated tenors and recommend going long the Jun-14 contract. Covered Bonds: The notice of the suspension from exchange-based trading caused the asset swap spreads (ASWs) of CIFEURs covered bonds to widen nearly 45bp. On 10 May 2012, the ASWs of CIFEURs outstanding EURbenchmark covered bonds were trading at m/s +120bp. Although the ASWs of CIFEURs covered bonds have widened significantly, those of other French covered bonds have not. However, stress related to CIFEUR may spill over to other French lenders with a similar business model and credit profile. Technicals: Risk Off
ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES ARE IN THE DISCLOSURE APPENDIX. FOR OTHER IMPORTANT DISCLOSURES, PLEASE REFER TO https://firesearchdisclosure.credit-suisse.com.
11 May 2012
Table of Contents
Summary of views New trade recommendations Trade Performance Events Calendar Election fallout 3 4 5 6 7
EIB can support growth but at what cost? .................................................. 8 European Governments 13
Receive CHF 5s10s20s ............................................................................... 20 L Z2/Z3 conditional bull steepener ............................................................... 20 Money Market Strategy 22
CIFEUR: suspended from exchange-based trading .................................... 23 Technicals A momentum sell for Global Risk Appetite should see risk off extend further ............................................................................................... 25 EUR and UK Supply Analysis Forecasts 27 32 25
11 May 2012
Summary of views
Exhibit 1: Summary of core views
Currency Market Outright View Moderately bearish Bunds. Expression Favored shorts are 5y and 10y Germany, 30y swap, or long-dated forwards, such as 20y20y (pay 20y20y outright). Pay EUR 2s10s 10y fwd. Pay 10s30s 2y fwd. Receive a 5s10s30s proxy fly (such as 2s7s20s 2y fwd). Curvature Long-end normalization should cause 5s10s30s to grind lower. Receive EUR 10s15s30s. Pay 2s5s10s hybrid fly (5y Germany vs. 2y and 10y Eonia). Receive 5s10s30s in France. EUR Gamma on tails cheap, outright and vs. GBP. Options can be used as a vehicle to express directional views. Buy cheap payer flies to position for a sell-off in rates in a limited way. Core ASW Bobl and Bund ASW are rich. Negative Netherlands. Move positive on Belgium and France short end. Cautious trade the range. Move to neutral. Pause in QE. 10-year sector rich on the curve. Steepeners in SEK offer good risk/reward. USD to resume its sell-off relative to EUR and lead in a bearish environment. GBP 10s30s is too steep relative to USD and EUR. Risk reversal (buy payer, sell receiver) or payer fly in 30y tails. Buy Bund straddles or 3m10y outright. Buy 1m10y vs. GBP. Express as boxes versus 2y or 30y ASW. 5s10s Nether vs. DBR (long 5y Nether). Buy 2y France vs. Germany. Buy 2y Belgium vs. Germany. 2.5y-3y sector is rich in Spain, 2s10s flattener in Italy. Pay 5s10s30s. Receive 5y5y/10y5y. Receive 2s3s5s fly. Pay SEK 2s10s 1y fwd. Receive CHF 5s10s20s Buy USD payers vs. EUR. Receive GBP 2y2y vs. USD. GBP/EUR 10s30s box.
Curve
Vol
Core Spreads
Periphery
GBP
CHF / SEK
XCY
11 May 2012
11 May 2012
Trade Performance
Exhibit 2: Current trade recommendations
Category Idea Name European Governments 2s10s Flattener in Italy 3s5s Flattener in Spain Shorten DBR 42s into 34s France-Netherlands 5s10s box (OAT flattener) and alternative expressions of the view Netherlands 30s into 5s cash for cash spread Sell SPGB Oct14 versus Oct13 and Jan17 Buy SPGB Jan17 versus Oct14 and Apr20 Sell 10y France vs 10y Germany Buy 2 protection in Ireland (reduced size) Buy 5Y Belgium versus 5Y Austria Buy BTP Mar 15 vs Feb 15 Buy Obl 162 vs Obl 159 5s10s Netherlands-Germany box (Netherlands steepener vs Germany flattener) Sell DBR 3.25% Jul 21 into 5.5% Jan 31 Buy 2-year Belgium versus Germany Buy 2-year France versus Germany UK Sell UKT 4s 22/5s 25/4T 30s fly Buy UKT 52s vs 42s and 60s GBP Pay GBP 5s10s30s GBP 5y5y/10y5y flattener Receive GBP 2s3s5s fly GBP 20y5y-25y5y steepener EUR Pay EUR 10s30s 2y forward Pay EUR 2s10s 10y fwd Receive EUR 2s7s20s 2y fwd Receive EUR 2s7s20s 2y fwd conditionally via OTM payers Receive EUR 10s15s30s Sell Bobl spreads Pay EUR 20y20y CHF/SEK Pay SEK 2s10s 1y fwd Receive CHF 5s10s20s XCY Pay EUR 30y versus GBP Receive GBP 2s20s 5y fwd vs USD, hedged with 5s Receive GBP 2y2y vs USD Volatility Buy EUR 6m30y 2.8%/3.1%/3.4% payer fly Buy EUR OTM payers on 30y tails vs. OTM receivers 6m5y conditional USD-EUR widener via OTM payers Buy EUR 1m10y straddle vs GBP strangle Buy EUR gamma on 10y tails Sell GBP 6m2y payer vs receiver spread Money Markets Receive Oct-12 ECB dated 1m Eonia L-ER 5-7 box (buy L, sell ER) Buy 1y1y Euribor-Eonia
Please see the Structured Securities, Derivatives, and Options Disclaimer. Please note all trades are available and marked daily in Credit Suisse PLUS Analytics Source: Credit Suisse
Start Date 05-Jan-12 12-Jan-12 02-Mar-12 09-Mar-12 15-Mar-12 15-Mar-12 15-Mar-12 22-Mar-12 23-Mar-12 19-Apr-12 19-Apr-12 19-Apr-12 26-Apr-12 30-Apr-12 03-May-12 03-May-12 09-Feb-12 12-Apr-12 29-Mar-12 26-Apr-12 26-Apr-12 30-Apr-12 01-Dec-11 27-Jan-12 10-Feb-12 02-Mar-12 22-Mar-12 29-Mar-12 12-Apr-12 04-Apr-12 09-May-12 19-Apr-12 20-Apr-12 26-Apr-12 02-Feb-12 15-Mar-12 20-Apr-12 25-Apr-12 27-Apr-12 01-May-12 23-Feb-12 26-Apr-12 04-May-12
End Date
03-May-12
09-May-12
04-May-12
CCY EUR EUR EUR EUR EUR EUR EUR EUR USD EUR EUR EUR EUR EUR EUR EUR GBP GBP GBP GBP GBP GBP EUR EUR EUR EUR EUR EUR EUR SEK CHF EUR USD USD EUR EUR USD EUR EUR GBP EUR EUR EUR
P&L (EUR) -2,019,953 -1,651,483 -1,174,982 95,286 -1,021,705 85,709 -228,260 742,827 -704,670 87,675 57,704 96,244 140,555 570,575 147,946 -41,295 -220,994 -98,203 -1,101,766 -841,332 -233,578 57,484 3,044,303 593,447 1,500,722 66,596 -64,456 -1,442,490 -1,288,824 -38,096 0 -131,561 -309,440 61,095 -179,401 -120,708 36,190 1,504,037 103,589 41,951 183,709 23,771 623,707
As Of 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 03-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 04-May-12 09-May-12 09-May-12
11 May 2012
Events Calendar
Exhibit 4: Meetings, economic events, auctions and redemptions
Date Day Meetings / Events Ctry FR IT EA Economic Data Current Account (Mar) CPI (Apr F) Industrial Production (Mar) Auctions Ctry Type FI RFGB 2017 IT BTP 2015 IT BTP 2020 IT BTP 2022 IT BTP 2025 SK SLOVGB 16 SK SLOVGB 17 bn Ctry 1.0* 3.0* 0.5* 0.5* 0.5* 0.3* 0.3* IT Redemptions Type bn 14/05/2012 Mon
15/05/2012 Tue
16/05/2012 Wed
17/05/2012 Thu
US US US FR FR EA/DE US US IT EA UK UK UK US US ES
CPI & Retail Sales/Ex Auto (Apr) Empire Mfg & NAHB Housing Market (May) Business Inventories (Mar) CPI (Apr) & GDP (Q1 P) Non Farm Payrolls (Q1 P) GDP (Q1 P) & ZEW Survey (May) Housing Starts/Permits (Apr) Ind Production/Capacity utilization (Apr) GDP (Q1 P) & Trade Balance (Mar) CPI (Apr) & Trade Balance (Mar) Claimant Count Rate (Apr) Jobless Claims Change (Apr) Avg wkly Earning & ILO Unemp Rate (Mar) Initial Jobless Claims (May 12) Philadelphia Fed (May) & Leading Ind (Apr) GDP (Q1)
BOT
6.6
DE
Bund 2022
5.0*
FR DE
BTF Bubill
5.69 4.0
FR FR FR FR FR ES ES
BTAN 2Y* BTAN 3Y* BTAN 4Y* BTANi 5Y OATi 10Y* SPGB 10Y* SPGB 5Y*
BE
BTB
6.61
18/05/2012 Fri
DE IT
ES GR GR PT BE BE BE NL BGB 10Y* BGB 3Y* BGB 5Y* DSL 2015 0.3* 0.5* 0.4* 3.0*
21/05/2012 Mon
22/05/2012 Tue
23/05/2012 Wed
24/05/2012 Thu
25/05/2012 Fri
EA IT UK US US EA UK UK US EA IT US US DE FR EA EA UK UK US DE IT
Construction Output 9mar) Current Account ( May) Rightmove House Prices (May) Richmond Fed Mfg (May) Existing Home Sales (Apr) Consumer Confidence (May) DCLG House Prices (Mar) CPI & RPI & PSNCR/PSNB (Apr) New Home Sales (Apr) Current Account (Mar) Consumer Confidence (May) Initial Jobless Claims (May 19) Durable Goods Orders (Arp) GDP (Q1) & Ifo Business Climate (May) Business Confidence Indicators (May) PMI Composite/Manufacturing/Serv (May) Ifo Business Climate (May) GDP (Q1) & Retail Sales (Apr) Total Business Investment (Q1) University of Michigan Confidence (May Fin) Gfk Consumer Confidence (Jun) Retail Sales (Mar) & Hourly Wages (Apr)
DE
Schatz 2014
5.0
FR
BTF
8.72
Source: Credit Suisse, National Treasuries, ECB, Bank of England, the BLOOMBERG PROFESSIONAL service
11 May 2012
Election fallout
Michelle Bradley +44 20 7888 5468 michelle.bradley@credit-suisse.com
Politics continue to dominate the European rates market once again. The dynamics of this market continue to move at lightning speed. The post-election reaction seemed to be delayed following public holidays in the UK on Monday and some of Europe on Tuesday. However, Wednesdays sell-off was reversed on Thursday as the market discussed risk on again following the news that the EFSF will fund Greece until June, some stronger data from Europe, and the suggestion that the Bundesbank would adopt a more flexible approach to German inflation. The election results were as expected in both France and Greece. Hollande as president of France raises concern about the future of the fiscal compact but, we expect the preelection talk to be somewhat dampened by the chains of government. Greece is more concerning, bringing to the surface again the idea of euro break-up. Bunds rallied and spreads widened and the euro fell, but we cant help but think the reaction was a little muted and doesnt suggest to us the market really believes that a euro breakup will happen in the next few months. We expect elections in Greece to be the most likely outcome of the post-election discussions, and so we potentially get some breathing space until mid-June. As has happened throughout this crisis, the can has been kicked down the road yet again. In the meantime, the issues remain the same lack of growth and a weakening banking system. Last week we recommended a 1y1y Euribor-Eonia basis widener, as we thought the forward term structure of the basis curve was too flat. We saw this as cheap protection against any event risk arising from the upcoming Moodys downgrade or other concerns on Spain. In fact, this spread widened earlier than we thought due to the election vote in Greece. One of the main moves this week was the widening in the FRA/Eonia spreads across the term structure, which benefited our recommendation.
Exhibit 5: FRA/Eonia basis has started to widen in the recent risk-off move
39 37 35 33 31 29 28 27 25 27 29 30 30 37 37 36 34 34 33 31 32 31 32 31
FRA/EONIA basis
10/05/12 28/03/12
Mar-13
Sep-12
Dec-12
Sep-13
In fact, the 1y1y Euribor-EONIA spread widened 5bp over the week as concerns on Greece increased. We recommend holding this position as cheap protection against further volatility out of Greece. The banking sector is never far from the headlines and the suspension of CIFEUR bonds on exchange-based trading is noteworthy, and we discuss this in the covered bond section. The notice of the suspension from exchange-based trading caused the asset swap spreads (ASWs) of CIFEURs covered bonds to widen by around 45bp. On 10 May 2012, the ASWs of CIFEURs outstanding EUR-benchmark covered bonds were trading at m/s +120bp. Although the ASWs of CIFEURs covered bonds have widened significantly, those of other French covered bonds have not. However, stress related to CIFEUR may spill over to other French lenders with a similar business model and credit profile. Indeed, this may be one of the first tasks facing the new French president and also points to risk for French government bond spreads.
Dec-13
Mar-14
Jun-12
Jun-13
11 May 2012
Spain is also back in the spotlight following the decision of the government to nationalize Bankia. As we discussed in the EST 20 April, we think Spains funding needs are manageable by the domestic banking system to the end of the year, but the impact of support for the banking sector on the already stressed fiscal targets are concerning It was also an eventful week in the UK. The BoE MPC meeting went as we expected the committee decided to pause the QE program. This led to a sell-off and flattening of the 5s30s and 10s30s curves, which benefited our recommendation to pay GBP 5s10s30s. Into next week, the main focus for the UK (other than Europe) will be the May Inflation Report. We expect the MPC to shift the growth projection lower while moving the inflation projection higher. We expect the MPC to guide policy expectations in the Inflation Report and it is possible that the MPC will keep the door open for more QE, if the situation in Europe deteriorates further. For now, we think its too early to be pricing for rate hikes in the UK and maintain our recommendation of receiving GBP 2s3s5s fly. Our core views remain the same moderately bearish and favouring steeper curves. On peripheral spreads, we remain cautious with a very tactical approach. This week we recommend receiving 5s10s30s in France. The next couple of weeks also mark the beginning of another round of European summits, starting with the Eurogroup on May 14. Typically these summits have failed to deliver the high pre-summit expectations, but this time around it seems as if the market is expecting less and this at least sets the scene for some positive summit surprises.
11 May 2012
So its interesting to consider the recent discussions about the EIB increasing its lending programme when that was clearly not the plan of the EIB itself. That is not to say there cannot be a change in strategy; its clear that the EIB increased its total lending over the course of the crisis and this higher lending strategy could be prolonged. However, in order to maintain the higher levels of lending, the EIB would need to increase its capital base to ensure it keeps its triple A rating. The decision to increase the EIBs capital is made by the board of governors and needs a majority of members, where the majority must represent at least 50% of the subscribed capital. The board of governors consists of the ministers designated by the member states. Therefore, the mechanics of increasing the EIBs capital are relatively straightforward as long as a majority in Europe is in favour.
Source: EIB
Source: EIB
The EIB is 100% owned and has explicit support from the 27 EU members. The EIBs capital of 232 billion is paid in by the 27 EU members based on their economic weight at the time of accession. Exhibit 7 shows the capital weighting per country. Of note is that 75% of the capital is provided by the first five countries. At the end of 2011, EIB had total assets of 472 billion, which gave it a capital ratio of 24.9%. This capital ratio is extremely high when compared to commercial banks but also indicates the lending restrictions that the EIB is faced with in order to preserve its triple A rating.
11 May 2012
This is a useful way to gauge the actual country exposure, in our view, and Portugal stands out as the country to which the EIB is most exposed. Over the past five years, the EIB has provided lending worth 8% of GDP to Portugal, 3% of GDP for Greece, and 2% of GDP for Ireland The exposure by country is also relevant to the extent that EIB partner with governments in a significant amount of its lending projects. Of its total lending book, 21% of the ultimate obligors are sovereigns, 24% public institutions, and 22% banks. The EIB also enjoys preferred creditor status and protection from expropriation. The benefit of the preferred creditor status was clear in regard to Greece. Like the ECB, the EIB did not suffer haircuts on its bonds. So although it has high exposure to sovereigns and the banking sector, there is also an additional element of protection through its preferred creditor status and exemption from all forms of requisition or expropriation as stated in the EIBs statue. Therefore the EIB has significant funding advantages over commercial banks in the area of project finance.
10
11 May 2012
The EIB has the advantage of being able to fund at triple A spreads, and so on that basis, it should be able to offer more competitive funding than commercial banks. The fact that the EIB partners with other institutions is also be a positive. However, should a very high level of uncertainty continue especially on the future of the euro project this may not be the optimum time for expansion and development plans, so the supply side is the issue On the whole, from a growth perspective, an announcement to increase the lending capability of the ECB should be perceived as a positive by the market. However, its not clear to us that this plan will have an immediate impact on growth, and therefore the benefit of such an announcement could have limited impact unless it forms part of a great plan to expedite growth Europe.
Issuance
The current expected issuance programme for the EIB in 2012 is 60 billion and compares to 75 billion issued in 2012. Over the last six years, issuance peaked in 2009 at 80 billion. This puts the 60 billion addition lending capacity into perspective. An additional 60 billion of issuance for EIB in one year would be significant and would put an immediate strain on spreads, in our view. However, should the 60 billion increase in lending be spread over a number of years and issuance spread over a similar time frame, we think this is more manageable by the market. Exhibit 10 shows the EIB composite spread calculated by weighting the assets swap spreads of the top five countries by their capital contribution. The EIBs preferred creditor status which was really highlighted with the Greek restructuring may be having an impact. However, given the talk about an increased mandate for the EIB and hence more issuance the spread differential is notable. We think its important that in further discussion about the EIB there is focus on the quality of the lending as well as the amounts. As we have seen with the EFSF, increasing the scope of an entity is not always positive and particularly when the increase results in a different risk profile.
11
11 May 2012
bp
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Apr-12
May-12
The risk for the EIB is that in order to promote growth the lending criteria and scope of the EIB is increased, which results a change in its current risk profile impaired loans of 0.1% of total loan book will be a much envied statistic across the bank board rooms of Europe. Currently the risks are finely balanced. Should the EIB continue on its current path, this would mean issuance would fall over the next few years, which should be positive for spreads. The flip side is that the EIBs lending capacity could be increased and if done over time should be relatively neutral. The risk is a change in mandate that would change the risk profile of the bank. We would be surprised to see this and our base scenario is that the lending capacity is increased gradually through its current lending programmes. We would expect such an announcement to be market positive and relatively neutral for EIB spreads.
12
11 May 2012
European Governments
Michelle Bradley +44 20 7888 5468 michelle.bradley@credit-suisse.com Florian Weber 44 20 7888 3779 florian.weber@credit-suisse.com
Election fever has ended with the market back in risk-off territory following the result of the French and Greek elections. While both election results were as expected, the lack of a government in Greece has propelled the issue of a euro breakup to the top of the agenda again. A euro break-up is not our base-case scenario and even though the probability has increased, we think it is extremely unlikely the project will unwind over the next month. New Greek elections seem the likely outcome at this point but beyond that it is very difficult to have a clear view on where Greece will go. The positive news is that the EFSF has approved the next tranche of lending and so Greece has funds until June. The other main story was the news that the Spanish government has nationalized 45% of Bankia. Although the government was reluctant to provide further state aid, this proved to be the only option. Having sold off around 25 bp at the beginning of the week, Spanish government bonds rallied 7 bp on the day of the announcement.
65.0
62.5
60.0
However, two other banking stories are worth noting this year. In our covered bond section, we discuss CIFEUR and the issues around the exchanged-based 5Y Belgium to Bond Yield Spread (bps) trading suspension. We think the details Source: Credit Suisse Locus on this story are worth watching for cases of further stress in the banking system. In the same way headlines around Dexia may be relevant. Belgium is hoping to renegotiate the guarantees that were agreed in October. At that time Belgium took 60.5% of the guarantees versus Frances 36.5%.
57.5 14-Apr-12 21-Apr-12 28-Apr-12 05-May-12
13
11 May 2012
50 50 50 40
5s10s30s fly
30
25
25
20 0 10
-25 0.00 25.00 50.00 75.00 100.00 125.00 5s30s curve 150.00 175.00 200.00
01-Jul-11
30-Sep-11
31-Dec-11
31-Mar-12
5s10s30 France
Avg(5s10s30 France)
5s10s30s Germany
The 10s30s curves in France and Germany are highly correlated. But the curves still have room to steepen in our view. Their historic maximum was 93bp in France and 99 bp in Germany (Exhibit 15) and they could move back to these levels. At the current level of 74bp for the 10s30s curve, the fly appears cheap. If the 10s30s curve steepens to its historic maximum, we expect the 5s10s30s fly to trade around 25 bp assuming the 5s10s curve remains at its current level of 123 bp (Exhibit 16).
75 75 50
50 50
5s10s30s fly
25
25 25 0
45.00
50.00
55.00
70.00
75.00
80.00
85.00
90.00
10s30s France
Exhibit 17 shows that the 5s10s curves in France and Germany are at their steepest levels in the last 10-years. In our March 9 EST: Holding Pattern, we recommended a 5s10s France-Netherlands box (Netherland steepener vs. FRTR flattener). The rationale is that the Dutch 5s10s curve is too flat and the French curve too steep compared to the German curve. A flattening of the 5s10s curve should move the 5s10s30s fly lower (Exhibit 18) assuming no change in the 10s30s curve.
14
11 May 2012
50 75 75
5s10s30s fly
50 50
25
25 25 0 0 01-Jul-02 30-Dec-04 01-Jul-07 30-Dec-09 0 70.00 80.00 90.00 100.00 5s10s curve 110.00 120.00 130.00
5s10s France
Repo (bps) 19 20 20
The risks are that the 5s10s curve steepens or the 10s30s flattens.
15
11 May 2012
UK Strategy
Thushka Maharaj +44 20 7883 0211 thushka.maharaj@credit-suisse.com
View Expect some resistance to these low yields Change in BoE tone and pause in QE consistent with 5s30s curve flattening 2s5s10s to remain driven by European sovereign performance Pause in QE favours short 5-10y ASW GBP 30y to outperform EUR
16
11 May 2012
Below we review the existing asset purchase program and the skew of purchases in the different rounds of the program. Exhibit 21 shows the nominal purchases per issue and above the graph we show the percentage of freefloat (Outstanding-DMO holdings) that the BoE owns. The main point to highlight here is that the BoE holds a large percentage of bonds in the belly of the curve. Given the QE program has been paused, we expect the 510y area to bear the brunt of any sell-off and maintain our view of 10s30s flattening (see our recommendation to pay GBP 5s10s30s in EST, 29-Mar-12). Below we also discuss selling 10y ASW spreads as another way to position for a pause in QE.
Exhibit 21: Nominal purchase amounts per bond for the entire program (the percentage of freefloat shown in brackets)
20,000 18,000 16,000 14,000 12,000 40% 35% 33% 24% 8,000 6,000 4,000 2,000 27% 6%
UKT 4.5% Mar-2013 UKT 8% Sep-2013 UKT 2.25% Mar-2014 UKT 5% Sep-2014 UKT 2.75% Jan-2015 UKT 4.75% Sep-2015 UKT 8% Dec-2015 UKT 2% Jan-2016 UKT 4% Sep-2016 UKT 1.75% Jan-2017 UKT 8.75% Aug-2017 UKT 1% Sep-2017 UKT 5% Mar-2018 UKT 4.5% Mar-2019 UKT 3.75% Sep-2019 UKT 4.75% Mar-2020 UKT 3.75% Sep-2020 UKT 8% Jun-2021 UKT 3.75% Sep-2021 UKT 4% Mar-2022 UKT 5% Mar-2025 UKT 4.25% Dec-2027 UKT 6% Dec-2028 UKT 4.75% Dec-2030 UKT 4.25% Jun-2032 UKT 4.5% Sep-2034 UKT 4.25% Mar-2036 UKT 4.75% Dec-2038 UKT 4.25% Sep-2039 UKT 4.25% Dec-2040 UKT 4.5% Dec-2042 UKT 4.25% Dec-2046 UKT 4.25% Dec-2049 UKT 3.75% Jul-2052 UKT 4.25% Dec-2055 UKT 4% Jan-2060
, mns
Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12
Nominal purchases (% of freefloat shown above) 52% 52% 63% 62% 42% 70% 48% 44% 56% 20% 15% 19% 66% 58% 16% 10% 41% 42% 32% 34% 28% 38% 29% 26% 31% 32% 25% 56% 44% 10,000 31%
17
11 May 2012
Exhibit 22 compares the previous 75bn program versus last 50bn program (with changed baskets), which shows that the last round was more skewed towards purchases in the 5-10y area of the curve.
Exhibit 22: Nominal purchases in the last round of QE versus the previous round of 75bn
Nom inal purchas es (50bn, changed bas kets ) 5000 4500 4000 3500 Nom inal purchas es (75bn, unchanged bas kets )
, mns
Exhibit 23: As a percentage of total purchases, the last round was more focused in shorts
35 QE2 - % nom inal purchas es (50bn, changed bas kets ) QE2 - % nom inal purchas es (75bn, unchanged bas kets )
UKT_5_070914 UKT_2.75_220115 UKT_4.75_070915 UKT_8_071215 UKT_2_220116 UKT_4_070916 UKT_1.75_220117 UKT_8.75_250817 UKT_1_070917 UKT_5_070318 UKT_4.5_070319 UKT_3.75_070919 UKT_4.75_070320 UKT_3.75_070920 UKT_8_070621 UKT_3.75_070921 UKT_4_070322 UKT_5_070325 UKT_4.25_071227 UKT_6_071228 UKT_4.75_071230 UKT_4.25_070632 UKT_4.5_070934 UKT_4.25_070336 UKT_4.75_071238 UKT_4.25_070939 UKT_4.25_071240 UKT_4.5_071242 UKT_4.25_071246 UKT_4.25_071249 UKT_3.75_220752 UKT_4.25_071255 UKT_4_220160
We also see value in comparing the latest 50bn program (with changed baskets to DMO maturities) versus the 75bn program (with unchanged baskets) in percentage terms. The reallocation of purchases can be seen more clearly in Exhibit 23. Exhibit 23 shows the percentage of total nominal purchases in each maturity bucket as shown, under the most recent 50bn program (with changed baskets) a larger percentage of purchases were in <5y and 5-10y area of the curve. Now that the QE program has been paused, it makes sense to play for underperformance of 5s and 10s on the curve.
Exhibit 24: UKT 10y ASW spreads have richened sharply versus 5y ASW
70 30
60
30 25 20 15 10
20
50
10
40
0
5 0
30
-10
20
1-5
10-15
15-20
20-25
25-30
30-35
35-40
40-45
45-50
5-10
01-Jul-10
30-Dec-10
01-Jul-11
31-Dec-11
Residual maturity
Source: Credit Suisse
5y ASW rhs
Source: Credit Suisse
10y ASW
18
11 May 2012
Exhibit 25: UKT 5s10s30s ASW fly 10y has richened sharply in the last month
30 0
20
Exhibit 26: UKT 10y has richened versus SONIA we expect a correction
40 10y SONIA - UKT 10y 20 0
10
-25
-20 -40
-10
-50
-60 -80
-20
23/05/08
23/08/08
23/11/08
23/02/09
23/05/09
23/08/09
23/11/09
23/02/10 23/05/10
23/08/10
23/11/10
23/02/11
23/05/11
23/08/11
23/11/11
01-Jul-10
30-Dec-10
01-Jul-11
31-Dec-11
Alternative expressions of this view: Sell 10y ASW versus 5s and 30s. Sell 10y gilts versus SONIA. Short 10y ASW versus 30y (10s30s ASW box). The risks to these recommendations include a further widening in FRA/SONIA basis or a sharp rally in gilts possibly due to more negative European headwinds.
23/02/12
19
11 May 2012
Derivatives Strategy
Panos Giannopoulos +44 20 7883 6947 panos.giannopoulos@credit-suisse.com
Expiry Z2 Z2
Underlying L Z2 L Z3
Strike 99 99
Price 7.5 8
20
11 May 2012
Exhibit 28: Front versus mid curve vol is driven by short sterling slope; mid curve vol appears rich
rd
th
50
75
80 3rd FRA-Sonia
40
50 30 25
70
7th FRA-Sonia
60
50
20
40
20
Mar-10 Mar-11 Sep-09 Dec-09 Sep-10 Dec-10 Sep-11 Dec-11 Mar-12 Jun-09 Jun-10 Jun-11
L 3-7 (RHS)
21
11 May 2012
98.750
98.73
0.00 98.63
Price
-0.50
98.500 -1.00
98.250
-1.50
Jun-12 Dec-12
Sep-13
Mar-16
Following last weeks Kings speech, L (Trade) L Z-score(Trade) L (Yesterday) Adam Posens u-turn, and this Source: Credit Suisse Locus weeks MCP minutes, markets are pricing for upward revisions to inflation (see UK section: BoE signal pauses on QE), leading to a more hawkish tone. In our view, we think that the Short-Sterling strip has moved higher too quickly as we find it premature to be pricing aggressive rate hikes in the UK while markets are still positioned for rate cuts in Europe. Looking at Exhibit 31 , markets are pricing too much of a risk premium in the UK relative to Europe for Jun-14 expiry. A risk to this trade is that the MPCs tone becomes more hawkish than expected and/or that the inflation report (16 of May) shows some significantly higher inflation expectations. However, we find it unlikely that these events may surprise on the hawkish side.
Exhibit 31: 18m3m FRA-OIS swaps in GBP seem over-priced relative to Euro
90 80 70 60 50 40 30 20 18m3m Libor-Sonia (bp) 18m3m Euribor-Eonia (bp) 60 55 50 40 35 30 25 20 45
Aug-10
Aug-11
Apr-11
Dec-10
Dec-11
Feb-11
Feb-12
Jun-10
Jun-11
Apr-12
Oct-10
Oct-11
Price
Nov-11
Sep-11
Dec-11
Feb-12
Mar-12
Jan-12
Apr-12
Oct-11
22
11 May 2012
Covered Bonds
Sabine Winkler +44 20 7883 9398 sabine.winkler.2@credit-suisse.com
Exhibit 33: Secondary market performance of CIFEUR and French covered bonds
180 160 140 120 100 80 60 40 20 0 -20 2/07 7/07 12/07 5/08 10/08 3/09 8/09
Source: Credit Suisse
2/12
A suspension of covered bonds from (exchange-based) trading without a statement of the lender is unusual. CCCI1 and CIFEUR have not yet published a press release providing insight into why the AMF has taken such action. The ASWs of CIFEURs covered bonds are likely to remain under pressure as long as uncertainty about the reasons for the AMFs action and the speculation about the group prevails. At m/s +92bp, French covered bonds are currently trading wider than those from Finland (m/s +33bp), Germany (m/s +26bp), Norway (m/s +38bp), the Netherlands (m/s +59bp), the UK (m/s +78bp), and Sweden (m/s +25bp).
Credit Suisse has not reviewed any third-party linked site contained herein and takes no responsibility for the content contained therein. Any such link is provided solely for your convenience and information. Following the link or any other link in Credit Suisse communications or on the Credit Suisse web site shall be at your own risk.
23
11 May 2012
CCCI and CIFEUR are subsidiaries of Credit Immobilier de France Development (CIFD) and have not yet published their annual reports for 2011. CIFDs issuer credit rating (ICR) is A (Fitch). CCCIs issuer credit rating is A (Fitch) and A1 (Moodys). CIFEURs covered bonds are rated triple-A by Fitch and Moodys. Fitchs and Moodys outlook on CIFEURs covered bonds is stable and negative, respectively. The ICR of the sponsor of CIFEURs covered bond programme (CCCI) is affected by Moodys bank credit rating reviews and is on review for downgrade and may be downgraded by up to four notches. If CCCIs ICR would be downgraded by four notches, CIFEURs covered bonds may be downgraded by two notches. Moodys determines a covered bond rating after applying a two-step process: expected loss and TPI framework analysis. The expected loss on a bond is modeled as a function of the sponsors probability of default, measured by its ICR, and the stressed losses on the collateral following sponsor default. The cover pool losses for CIFEURs programme are 8%. Based on the current TPI of Probable-High, the TPI Leeway for CIFEURs programme is two notches, i.e., CCCI would need to be downgraded to below A3 before the covered bonds are affected, all other things being equal. According to Moodys, at the end of 2011, over-collateralisation (OC) was 6.7% and committed OC was zero. According to Fitch, in March 2012, CIFEUR had outstanding covered bonds with a total volume of EUR 25bn. 76% of these bonds collateral (EUR 27bn) was residential mortgage-backed securities (RMBS). 96% of the collateral was from France. In March 2012, nominal OC was 6.4%. The D-Factor of CIFEURs covered bond programme is 15%, meaning that, all else being equal, the covered bonds could be AAA rated as long as the sponsors ICR is at least BBB. CIFEURs covered bond rating on a probability-of-default basis is AA+, i.e., the covered bonds relied upon a one-notch rating uplift to achieve a triple-A rating. In May 2012, the total outstanding volume of EUR-benchmark covered bonds from France was EUR 246bn (25% of the overall EUR-benchmark covered bond market) and the total outstanding volume of EUR-benchmark covered bonds of CIFEUR was EUR 16bn. Two CIFEUR EUR-benchmark covered bonds mature this year (EUR 3bn) one fell due at the end of April 2012. CIFEUR returned to the EUR-benchmark covered bond market in 2011, but did not yet access funding in this market in 2012. CIFEUR is reliant on capital market funding, and thus vulnerable to capital market volatility. Without providing the reason for the suspension, CIFEUR risks forfeiting the confidence of the capital markets.
24
11 May 2012
Technicals
David Sneddon +44 20 7888 7173 david.sneddon@credit-suisse.com
A momentum sell for Global Risk Appetite should see risk off extend further
As we highlighted a couple of weeks ago, we were at a key inflection point for a variety of markets, and the subsequent price action has reinforced this scenario, with yields in Germany the clear beneficiary. What we have also seen though is a clear bearish cross by weekly MACD momentum for Global Risk Appetite. While the more reliable momentum signals are typically seen at/near euphoria and panic, and we are currently at a neutral level, nevertheless, this does increase pressure for the risk off trend of the past eight weeks to extend further, potentially all the way back to panic. Our bias though at present remains to see a fresh risk rally in due course, although if the current momentum sell signal is correct, this would suggest this may be delayed towards the end of Q2, maybe even into Q3. The clear beneficiary from the downturn in Risk Appetite has been bond market/safe assets, with 10yr Germany plummeting to new record lows below 1.63%, and is already at our 1.50/45% target. We look for this to hold for now, for a consolidation phase. Bigger picture though, while 1.76% holds, there is the risk for an overshoot beyond here to medium-term channel resistance at 1.35/30%, but with this expected to hold.
MACD sell
25
11 May 2012
Our main focus though is now on Spain, and Funding stresses. For 10yr Spanish yields, the three-week April recovery was contained by 40-day average and 38.2% retracement resistance at 5.65%, and the subsequent rejection off here maintains the January/April yield base, and the pressure on the 6.16/17% mid-April yield highs. Beyond here can see weakness extend to our 6.32/38% target the measured objective from the yield base and 78.6% retracement of the November/February recovery. It is here, we would then look for a fresh peak in 10yr Spanish yields. Above 6.38% would in our view put the market fully back in crisis mode, for a fresh look at the 6.78% high. Below 5.65% is needed to suggest the worst of the weakness may have been seen. What has been encouraging through the recent rally in risk appetite has been the significant improvement in various funding measures EURUSD Cross-Currency basis swap, EUR FRA/OIS helped in no small part by LTRO. The recent risk off phase and move higher in Spanish yields has as yet not impacted these measures to any serious degree, but we watch the EUR FRA/OIS especially closely. Here, the spread has stabilised above the 2010 and 2011 lows (at 18.62 and 18.29), and there is a risk a small head & shoulders reversal may be forming. Whilst not a particularly large structure, if completed, it would add weight to the scenario the current risk off phase has further to run. Key support is seen from the 37.25/50 recent highs. Only beyond here would suggest a base has been completed though, warning of a near-term increase in funding stresses for a move back to 41, then what should be much better support at 47/50 the target from the base, 38.2% retracement of the tightening from December and 200-day average. We would look for a fresh floor here. While 37.50 caps a base can be avoided, maintaining a benign funding environment.
26
11 May 2012
14-May Bubill 6M 14-May SGLT 12M & 18M 14-May BTF 14-May 15-May BTB 3M & 12M 15-May GTB 3M 16-May 17-May 17-May 17-May 18-May UK EUR total 21-May Bubill 12M 21-May DTC 3M & 6M 21-May BTF 22-May SGLT 3M & 6M 22-May 23-May 24-May 25-May UK EUR total Bubill 12M BTF BOT
UKT 5s 25s 3.5* Bund 22 5.0* 2.5* 1.5* SPGB 10Y* 1.0*
BTAN 2Y* 2.5* BTAN 4Y* BTAN 3Y* 2.5* SPGB 5Y* UKT 5s 14s** 1.5 8.0 0.5* BGB 5Y*
BTANi 5Y* 1.0* OATi 10Y* 0.8* 10Y Tips 11* 1.8
5.6 0.4*
NL DSL 15 3.0* US 2Y Note 35* DE/US New Schatz 14 5.0 US 8.5 CTZ 2Y* 2.9*
5Y Note 7Y Note
Mon 28-May Mon Tue Wed Wed Fri Mon Mon Tue Wed Wed Thu 28-May 29-May 30-May 30-May 01-Jun
UK EUR total
2.5
1.4
04-Jun DTC 3M & 6M 04-Jun BTF 05-Jun 06-Jun PTB 6M & 12M 06-Jun BTB 3M & 6M 07-Jun
5.0 2.5* 1.25* 8.75 2.0 BGB 20Y* 0.25* 1.75 OAT 10Y* 2.0* OAT 15Y* 1.5*
Thu 07-Jun Fri 08-Jun Mon Mon Tue Tue Wed Wed Thu UK EUR total
11-Jun Bubill 6M 11-Jun BTF 12-Jun BTB 3M & 12M 12-Jun SLOVTB 3M 13-Jun BOT 13-Jun 14-Jun
4.0 SK SLOVGB 3Y* 0.3* 7.5* 3.0* NL/AT/US 3Y Note 32* RAGB 10Y* 0.9* 0.1* UK UKT 1s 2017s 4.0* 7.5* DE Bund 22 5.0 US 10Y Note 24* IT/US BTP 3Y* 3.5* BTP 8Y* 2.5* UK
DSL 33
0.9*
3.8
2.5
5.9
*Estimates/Likely auction dates, **Syndications/Tenders/Mini-Tenders, *** USD denominated; Source: Credit Suisse, National Treasuries
27
11 May 2012
GR
IT IT
BE BE
DE ES, FR BE AT, NL DE IT
DE, PT
Supply 6.10 5.00 11.55 1.20 3.00 5.00 4.30 7.75 5.00 8.50 0.25 0.30 3.80 5.00 6.00 72.75
28
11 May 2012
million per bp
bn
15 10
bn
10 0
2 0
-10 -20
14 May-18 May 21 May-25 May 28 May-01 Jun 04 Jun-08 Jun 11 Jun-15 Jun
Issuance
Coupon
Redemption
Net Supply
Exhibit 43: Net supply by country for the next five weeks - from 14-May-12 to 15-Jun-2012 (, bn)
25 20 20 15 15
20
10
10
bn
5 0 -5 -10 -15
5 2 1 1 1
5
-10
-20
-30
-40
AT
BE
FI
FR
DE
IT
NL
PT
ES
60%
54%
50%
bn
26%
40%
30%
20%
10%
0% BE NL ES FR AT IT DE FI
02 Jan-06 Jan 09 Jan-13 Jan 16 Jan-20 Jan 23 Jan-27 Jan 30 Jan-03 Feb 06 Feb-10 Feb 13 Feb-17 Feb 20 Feb-24 Feb 27 Feb-02 Mar 05 Mar-09 Mar 12 Mar-16 Mar 19 Mar-23 Mar 26 Mar-30 Mar 02 Apr-06 Apr 09 Apr-13 Apr 16 Apr-20 Apr 23 Apr-27 Apr 30 Apr-04 May 07 May-11 May 14 May-18 May 21 May-25 May 28 May-01 Jun 04 Jun-08 Jun 11 Jun-15 Jun 18 Jun-22 Jun 25 Jun-29 Jun 02 Jul-06 Jul 09 Jul-13 Jul 16 Jul-20 Jul 23 Jul-27 Jul 30 Jul-03 Aug 06 Aug-10 Aug 13 Aug-17 Aug 20 Aug-24 Aug 27 Aug-31 Aug 03 Sep-07 Sep 10 Sep-14 Sep 17 Sep-21 Sep 24 Sep-28 Sep 01 Oct-05 Oct 08 Oct-12 Oct 15 Oct-19 Oct 22 Oct-26 Oct 29 Oct-02 Nov 05 Nov-09 Nov 12 Nov-16 Nov 19 Nov-23 Nov 26 Nov-30 Nov 03 Dec-07 Dec 10 Dec-14 Dec 17 Dec-21 Dec 24 Dec-28 Dec
-12
-50
Issuance
Coupon
Redemption
Net Supply
29
11 May 2012
UK
UK UK
30
11 May 2012
Source: Credit Suisse, * total conventional and index linked issuance does not include 8bn in mini-tender
31
11 May 2012
Forecasts
Exhibit 52: Credit Suisse interest rate forecasts
Euro - German Benchmarks ECB Repo 2-Yr Yield 5-Yr Yield 10-Yr Yield 30-Yr Yield 2s5s 2s10s 10s30s 2s5s10s 5s10s30s UK Gilts Base Rate 2-Yr Yield 5-Yr Yield 10-Yr Yield 30-Yr Yield 2s5s 2s10s 10s30s 2s5s10s 5s10s30s
Prices as of 10 May 2011 Source: Credit Suisse
Current 1 0.07 0.51 1.51 2.21 43 144 70 -56 30 Current 0.5 0.38 098 1.96 3.23 59 156 127 -38 -30
2012 Q2 1 0.20 1.00 2.00 2.60 80 180 60 -20 40 2012 Q2 0.5 0.45 1.00 2.20 3.30 55 175 110 -65 10
2012 Q3 0.75 0.20 1.10 2.20 2.80 90 200 60 -20 50 2012 Q3 0.5 0.45 1.10 2.25 3.40 65 180 115 -50 0
2012 Q4 0.75 0.20 1.35 2.45 3.00 115 225 55 5 55 2012 Q4 0.5 0.50 1.25 2.30 3.50 75 180 120 -30 -15
2013 Q1 0.75 0.40 1.45 2.55 3.20 105 215 65 -5 45 2013 Q1 0.5 0.50 1.30 2.35 3.55 80 185 120 -25 -15
32
Disclosure Appendix
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As at the date of this report, Credit Suisse acts as a market maker or liquidity provider in the debt securities of the subject issuer(s) mentioned in this report. As at 30-Apr-12, Credit Suisse beneficially owned [long/short] $1mn or more of France (Govt of) 3.000% 25-Apr-22; France (Govt of) 4.500% 25-Apr-41; French Treasury Note 1.750% 25-Feb-17. For important disclosure information on securities recommended in this report, please visit the website at https://firesearchdisclosure.credit-suisse.com or call +1-212-538-7625. For the history of any relative value trade ideas suggested by the Fixed Income research department as well as fundamental recommendations provided by the Emerging Markets Sovereign Strategy Group over the previous 12 months, please view the document at http://research-andanalytics.csfb.com/docpopup.asp?ctbdocid=330703_1_en. Credit Suisse clients with access to the Locus website may refer to http://www.creditsuisse.com/locus. 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Investors in securities such as ADRs, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CSs own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CSs website shall be at your own risk. This report is issued and distributed in Europe (except Switzerland) by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is regulated in the United Kingdom by The Financial Services Authority (FSA). This report is being distributed in Germany by Credit Suisse Securities (Europe) Limited Niederlassung Frankfurt am Main regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). 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(transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); in Japan by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-General of Kanto Local Finance Bureau (Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Securities Investment Advisers Association, Type II Financial Instruments Firms Association; elsewhere in Asia/ Pacific by whichever of the following is the appropriately authorised entity in the relevant jurisdiction: Credit Suisse (Hong Kong) Limited, Credit Suisse Equities (Australia) Limited, Credit Suisse Securities (Thailand) Limited, Credit Suisse Securities (Malaysia) Sdn Bhd, Credit Suisse AG, Singapore Branch, and elsewhere in the world by the relevant authorised affiliate of the above. Research on Taiwanese securities produced by Credit Suisse AG, Taipei Branch has been prepared by a registered Senior Business Person. Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on +603 2723 2020. This research may not conform to Canadian disclosure requirements. In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-U.S. customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. U.S. customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the U.S. This material is not for distribution to retail clients and is directed exclusively at Credit Suisse's market professional and institutional clients. Recipients who are not market professional or institutional investor clients of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not regulated by the FSA or in respect of which the protections of the FSA for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Any services CS provides to municipalities are not viewed as advice within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related information solely on an arms length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such services, there is no agreement, direct or indirect, between any municipality (including the officials, management, employees or agents thereof) and CS for CS to provide advice to the municipality. Municipalities should consult with their financial, accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. Copyright 2012 CREDIT SUISSE GROUP AG and/or its affiliates. All rights reserved.
Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments.
When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay purchase price only.