european strategy and trades - credit suisse

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European Strategy and TradesInterest Rate Strategy

The ECB’s “OMT” moment; will Spain now ask? While clearly positive for the periphery, the ECB’s new bond purchase

programme (OMT) buys time not growth, and risks remain high. We remain defensive.

We recommend selling Bobls (or paying DBR 2s5s10s) as a hedge to the ‘lower for longer’ swap flattening theme.

We also recommend adding to SPGB Jul-13/Jul-14 steepeners.

European Governments:

We discuss market fragmentation, which requires action across the banking sector and real economy – lower sovereign yields are positive but not enough.

We continue to like being short soft-core versus core ahead of political developments in France, Netherlands, Belgium, and Austria.

We believe Portugal and Ireland will benefit from OMTs easing their path back to the market, but we don’t believe it means bond purchases are imminent

UK Strategy:

We reiterate our view that a Bank Rate cut is unlikely near term. With the 1s2s SONIA curve back in negative territory we find 2y SONIA too rich. We would look to pay 2y SONIA at 0.27%.

Derivatives Strategy:

We recommend selling vol of vol in the middle-right part of the EUR vol surface.

We recommend a GBP 10y5y-15y5y flattener as a cheaper alternative to a 10s30s flattener.

We think it is unlikely that the ECB will out-hike the Riksbank and recommend a EUR-SEK 1y1y-2y1y box (EUR flattener vs. SEK steepener).

Money Market Strategy:

We review the sterilization of the SMP and the new OMT. This is unlikely to have an impact on the Eonia fix.

Technicals:

Game Changer?

07 September 2012Fixed Income Research

http://www.credit-suisse.com/researchandanalytics

Research Analysts

Michelle Bradley+44 20 7888 5468

[email protected]

Panos Giannopoulos+44 20 7883 6947

[email protected]

Helen Haworth+44 20 7888 0757

[email protected]

Thushka Maharaj+44 20 7883 0211

[email protected]

Marion Pelata+44 20 7883 1333

[email protected]

David Sneddon+44 20 7888 7173

[email protected]

Florian Weber+44 20 7888 3779

[email protected]

Sabine Winkler+44 20 7883 9398

[email protected]

07 September 2012

European Strategy and Trades 2

Table of Contents

Summary of views and new trade recommendations 3

Trade Performance 5

Forward supply calendar 6

The ECB’s “OMT” moment; will Spain now ask? 7

The ECB announcement .......................................................................... 7

Add exposure to SPGB Jul-13/Jul-14 steepener ...................................... 9

Sell Bobls in the Schatz-Bobl-Bund fly (or simply outright)

as a hedge to ‘lower-for-longer’ swap flatteners ..................................... 10

European Governments 12

Fragmentation in the markets ................................................................. 12

OMT - a market positive first step .......................................................... 13

Portugal and Ireland benefit from OMTs ................................................. 14

UK Strategy 15

Front end back to extremely rich levels .................................................. 15

Derivatives Strategy 18

EUR Vol – Sell vol of vol in the middle right corner ................................ 18

GBP 10y5y-15y5y flattener @ 15bp ....................................................... 21

EUR-SEK 1y1y-2y1y box (EUR flattener vs. SEK steepener) ................ 22

Money Market Strategy 24

From SMP to OMT: review on sterilization ............................................. 24

A sterilized Eonia? .................................................................................. 25

Technicals 26

Game Changer? ..................................................................................... 26

EUR and UK Supply Analysis 27

Forecasts 31

07 September 2012


Summary of views and new trade recommendations

Exhibit 1: Summary of core views

Currency Market View Expression

EUR

Outright Overall in the current environment long

‘safe’ assets in 0-5y.

Keep a balanced portfolio.

Long front-end, short 30y Swap.

Curve 10s30s continue to steepen.

3s10s flattener.

Pay 5s30s 2y fwd or pay forwards outright

such as EUR 15y15y.

Curvature 5s10s30s to grind lower.

Vol 3m5y gamma is rich.

Left to right vol steepeners.

Buy Eur 3m5y receiver ladder.

Keep existing 1y into 5s30s bull steepener.

Long EUR 2y1y straddles versus 2y10y.

Core ASW Fade bund ‘safe-haven’ premium. Sell OE spreads.

Core Spreads

Tactically trade the core inter-country

spreads.

Soft core to widen versus Germany.

Sell 2-year Austria vs. France or Germany.

Sell 10-year France vs. Germany.

Sell 5-year Belgium vs. Germany.

Sell 5-year Netherlands vs. Germany on ASW.

Periphery We expect Spain to need a full sovereign

bailout.

1s2s steepener in Spain and Italy.

Long outright 1yr Spain.

GBP Funding for lending programme to support

short sterling.

Short 5yr ASW spreads.

GBP 1y1y 3s6s basis tightener.

CHF / SEK

Risk of negative rates in CHF. Pay 2s5s10s, red/greens steepener, 2s5s

steepener

Receive CHF 5s10.s20s.

XCY

Conditional in a sell-off, USD to lead the

way relative to EUR in 5s.

SEK 1y1y-2y1y too flat relative to Europe.

Buy 1y5y OTM USD pay vs. EUR.

EUR 2s5s 1y fwd flattener vs CHF steepener.

EUR-SEK 1y1y-2y1y box.

Money Markets

Long 5y FRA-Eonia.

Libor probe to shift uncertainty from policy

to fixings uncertainty.

Buy EUR 1 x 2 wedge.

Source: Credit Suisse

07 September 2012


Exhibit 2: New trade recommendations

New trades we recommend this week Positions we recommend closing this week

Sell 5y Germany vs 2y and 10y as a cheap hedge

to the lower for longer view. France 5s10s15s fly.

Add to SPGB 1s2s steepener.

EUR-SEK 1y1y-2y1y box (EUR flattener vs. SEK

steepener).

Sell vol of vol in EUR 2y30y.

GBP 10y5y-15y5y flattener.

Pay 2y Sonia.

Source: Credit Suisse

07 September 2012


Trade Performance Exhibit 3: Current trade recommendations

Category Idea Name Start Date End Date CCY P&L (EUR) As OfEuropean Governments Shorten DBR 42s into 34s 02-Mar-12 EUR 879,888 05-Sep-12 Sell DBR 3.25% Jul 2021 into DBR 1.75% Jul 2022 17-May-12 EUR 73,184 05-Sep-12 2.5% Nether 2033 vs. 3.75% Nether 2042-ASW box 14-Jun-12 EUR 120,562 05-Sep-12 Buy 2Y Germany versus 2Y Austria 21-Jun-12 EUR -552,595 05-Sep-12 France 5s10s flattener 12-Jul-12 30-Aug-12 EUR -78,739 30-Aug-12 Sell 10Y France versus 10Y Germany 16-Aug-12 EUR 499,424 05-Sep-12 Sell 5Y Belgium vs. Germany 23-Aug-12 EUR 319,475 05-Sep-12 Sell 2Y Austria vs. France 23-Aug-12 EUR 349,541 05-Sep-12 Sell 5Y Netherlands vs. Germany on ASW 23-Aug-12 EUR -27,082 05-Sep-12 France 5s10s15s fly (receive 10s) 30-Aug-12 EUR 18,708 05-Sep-12

GBP Pay GBP 5s10s30s 29-Mar-12 GBP -2,246,965 05-Sep-12 Buy UKT 52s vs 42s and 60s 12-Apr-12 GBP -514,465 05-Sep-12 GBP 1y1y 3s6s basis tightener 12-Jul-12 GBP 17,038 05-Sep-12 Short UKT 5y ASW 27-Jul-12 GBP 14,864 05-Sep-12 GBP 30y10y-40y10y steepener 27-Jul-12 GBP 179,606 05-Sep-12

EUR Pay EUR 10s30s 2y forward 01-Dec-11 EUR 5,996,141 05-Sep-12 Pay EUR 20y20y 12-Apr-12 EUR 1,950,530 05-Sep-12 Buy OE spreads vs RX ones 21-Jun-12 EUR 1,299,048 05-Sep-12 Pay EUR 2s3s5s 26-Jun-12 30-Aug-12 EUR 99,900 30-Aug-12 EUR 15y5y-20y15y flattener 06-Jul-12 EUR 558,721 05-Sep-12 EUR 2y1y-5y5y flattener 09-Jul-12 EUR -1,257,388 05-Sep-12 EUR 1m into 5s10s bull flattener 31-Jul-12 EUR 550,358 05-Sep-12 Pay EUR 10y10y-20y10y-30y20y 31-Aug-12 EUR 141,029 05-Sep-12

CHF/SEK Receive CHF 5s10s20s 09-May-12 CHF 311,124 05-Sep-12 EUR 1y into 5s30s bull steepener 18-May-12 30-Aug-12 EUR 1,198,522 30-Aug-12 SEK 5s10s steepener 19-Jul-12 04-Sep-12 SEK 22,070 04-Sep-12 SGB 5s10s steepener 19-Jul-12 04-Sep-12 SEK 21,840 04-Sep-12

XCY receive CHF 2s7s15s 3y fwd 18-May-12 CHF -23,544 05-Sep-12 pay CHF 2s5s 1y fwd versus EUR 06-Jul-12 EUR -270,996 05-Sep-12 Pay 2y FRA-OIS EUR vs USD 23-Aug-12 EUR 55,329 05-Sep-12

Volatility 6m5y conditional USD-EUR widener via OTM payers 20-Apr-12 USD 20,652 05-Sep-12 Buy EUR 9m30y 2.75%/3.25%/3.75% payer fly 22-Jun-12 EUR -19,082 05-Sep-12 Buy EUR 2y1y straddles versus 2y10y 06-Jul-12 EUR 131,245 05-Sep-12 Buy EUR 1x2 wedge 12-Jul-12 EUR -352,717 05-Sep-12 Receive EUR 5s10s30s conditionally via 1m receivers 31-Jul-12 EUR 486,625 05-Sep-12 EUR 3m5y receiver ladder 24-Aug-12 EUR 50,557 05-Sep-12

Money Markets Buy 1y1y Euribor-Eonia 04-May-12 EUR -959,263 05-Sep-12 Receive EONIA 4y1y 06-Jul-12 EUR -946,533 05-Sep-12 1s2s steepener in Italy 27-Jul-12 EUR -402,325 05-Sep-12 Long outright 1yr Spain 03-Aug-12 EUR 607,198 05-Sep-12 Pay Nov 1m EONIA 16-Aug-12 EUR -111,205 05-Sep-12 EUR 6s3s tightener vs 3s1s widener 23-Aug-12 EUR 109,105 05-Sep-12 Long EUR 2y5y vega vs 5y5y, short 3m5y 24-Aug-12 EUR 2,347 05-Sep-12 Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at the original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments may be subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. The P&L results shown do not include relevant costs, such as commissions, interest charges, or other applicable expenses. 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

Exhibit 4: Current year-to-date PnL of portfolio (EUR) YTD PnL 45,142,485

WTD PnL 2,307,559

12m rolling weekly PnL average 1,740,926 Source: Credit Suisse

http://locus.csfb.net/index.jsp

07 September 2012


Forward supply calendar

Exhibit 5: Forward supply calendar

Week Day Date T-bills Issues Bonds Issues

2/3y 5/7y 10y 15/20y >=30y Linkers

37 Mon 10-Sep BTF 7.5*

37 Mon 10-Sep SLVNTB 6M,12M 0.2*

37 Mon 10-Sep GTB 1.6*

37 Tue 11-Sep BOT 12M* 7.5* NL/US/UK 3Y Note 32* DSL 22 2.0* UKTi 34 1.25

37 Wed 12-Sep SWTB 10 DE/US New Bobl 17 5.0 10Y Note 24*

37 Thu 13-Sep DTC 3M & 6M 1.7* IT/UK/US BTP 3Y* 3.0* BTP 7Y* 3.0* UK 1T 22s 3.5 30Y Bond 16*

37 Fri 14-Sep UK BGB ORI

EUR total 18.5 EUR total 3.0 8.0 2.0

38 Mon 17-Sep BTB 3M & 12M 3.0*

38 Mon 17-Sep BTF 7.5*

38 Mon 17-Sep SGLT 5.5*

38 Tue 18-Sep GTB 1.6*

38 Tue 18-Sep PTB 6M & 18M 1.6*

38 Wed 19-Sep DE/SK/SE Schatz 14 5.0 SLOVGB 5Y* 0.2* SGB* 3.5

38 Thu 20-Sep Bubill 12M 3.0 FR/US BTAN 2Y* 2.0* BTAN 4Y* 2.0* 10Y Tips 11.0*

38 Thu 20-Sep FR/ES BTAN 3Y* 2.0* SPGB 5Y* 1.5* SPGB 10Y* 1.5* OATei 10 Y* 1.2*

38 Thu 20-Sep UK/SE UK 1s 17s 4.0* SGBi* 0.5

38 Fri 21-Sep UK

EUR total 22.2 EUR total 9.0 3.7 1.5 1.2

39 Mon 24-Sep BTF 7.5* BE BGB 5Y* 0.6* BGB 10Y* 0.4* BGB 15Y* 0.3*

39 Mon 24-Sep SGLT 3.0*

39 Mon 24-Sep BOT 6M* 9.0*

39 Tue 25-Sep IT/NL CTZ 2Y* 2.9* DSL 33 2.0* BTPei 10Y* 1.4*

39 Tue 25-Sep US 2Y Note 35*

39 Wed 26-Sep SWTB 10 DE/US 5Y Note 35* Bund 22 5.0

39 Thu 27-Sep DTC 3M & 6M 1.7* IT BTP 5Y* 3.0* BTP 10Y* 3.0*

39 Thu 27-Sep US 7Y Note 29*

39 Fri 28-Sep UK

EUR total 21.2 EUR total 2.9 3.6 8.4 2.3 1.4

40 Mon 01-Oct BTB 3M & 6M 3.0*

40 Tue 02-Oct AT RAGB 5Y* 0.9* RAGB 15Y* 0.6*

40 Tue 02-Oct UK UKT 1T 22s 3.5*

40 Wed 03-Oct DE/SE Bobl 17 4.0 SGB* 3.5

40 Thu 04-Oct Bubill 6M 4.0 FR OAT 5Y* 3.0* OAT 10Y* 2.5* OAT 15Y* 2.0*

40 Thu 04-Oct ES SPGB 2Y* 1.5* SPGB 5Y* 1.5*

40 Fri 05-Oct BTF 7.5*

40 Fri 05-Oct UK

EUR total 14.5 EUR total 1.5 9.4 3.1 2.0

41 Mon 08-Oct GTB 1.6*

41 Mon 08-Oct BOT 12M* 7.5*

41 Tue 09-Oct NL/UK DSL 2Y* 2.0* UKT 4Q 32s 2.0*

41 Tue 09-Oct US 3Y Note 32*

41 Wed 10-Oct SWTB 10.0 DE/US Schatz 14 5.0 10Y Note 24*

41 Thu 11-Oct DTC 3M & 6M 1.7* IT/UK BTP 3Y* 3.5* BTP 7Y* 2.5* 30Y Bond 16* New UKTi

24 1.4*

41 Thu 11-Oct SE SGBi 0.5

41 Fri 12-Oct BTF 7.5* BE BGB ORI

41 Fri 12-Oct UK

EUR total 18.3 EUR total 10.5 2.5

*Estimates/Likely auction dates, **Syndications/Tenders/Mini-Tenders, *** USD denominated

07 September 2012


The ECB’s “OMT” moment; will Spain now ask? We provide an overview of the ECB press conference in our joint piece with economics: European Economics and Strategy: ECB - Over to you politicians.. Relative to our expectations outlined last week, the ECB delivered considerably more details on the bond buying programme (another acronym: the SMP is now closed; the latest policy tool is the “OMT”) but kept rates on hold and was less ambitious with the collateral revisions than we thought. So, on balance, a more positive outcome than we expected, albeit largely anticipated by the market by the time of the announcement given the leaks earlier in the week.

Mr. Draghi is clearly talking tough with the markets, and seems intent on making it clear that the tail risk of a euro area break up needs to be taken off the table. And the programme that’s been announced is clearly positive for the periphery – at least near term. However, we need to see the implementation, and there remains the small outstanding issue of Spain actually asking for the assistance necessary for the ECB to step in. The most immediate question is what the path for Spanish yields needs to look like for Spain to request assistance, and, in the meantime, there is also the risk of political divisions regarding the best approach for Spain (and Greece) opening up. A statement from the Bundesbank after the ECB press conference immediately reiterated Weidmann’s discomfort with the policy, viewing the proposed purchases as “tantamount to financing governments by printing banknotes”. Expect considerable negative press coverage in Germany.

Buying time, not growth: we remain defensive since risks remain high

Once again, the latest policy is clearly aimed at easing stresses in the system, buying more time, but it does little to change the overall growth outlook. As with the 3yr LTROs, the key remains whether politicians use the time bought by the ECB to effectively implement reforms. We remain skeptical on this front, and given the outlook for growth, the uncertainty surrounding the circumstances that will lead Spain to official ask for support and the considerable outstanding event risk in coming weeks, we continue to like being positioned defensively.

We provide an overview of the ECB’s announcements before summarizing how we would like to be positioned. In our money market section, we further discuss the implications of interventions being sterilized.

Beyond the question of how and when Spain is officially going to ask for support, the main near-term risk events in Europe, we now believe, relate to news from the Spanish banking sector – details of the bad-bank and bottom-up audits. There will obviously continue to be focus on the Dutch election and the German Constitutional Court’s ruling on the ESM next week, and there is the outside risk that the latter derails things; but we believe neither is likely to have a material market impact. News from the US – payrolls and the FOMC announcement - we believe are more important,and Greece continues to be an issuethat could rear its head again in coming weeks – Greek polls suggest Syriza and Golden Dawn continue gaining in popularity.

The ECB announcement We discuss the fragmentation of the bond markets in more detail in our European Governments section. The message from the ECB was clear – rate cuts are not viewed as the right medicine in the current environment, and direct intervention by the ECB in the sovereign debt markets is now essential for the proper transmission of monetary policy. There were considerable details of the new bond purchases programme – the “OMT” replaces the “SMP”, which is now closed – and some changes to collateral eligibility.

Helen Haworth +44 20 7888 0757

[email protected]

Panos Giannopoulos +44 20 7883 6947

[email protected]

Thushka Maharaj +44 20 7883 0211

[email protected]

https://doc.research-and-analytics.csfb.com/docView?language=ENG&format=PDF&document_id=999177241&source_id=emcmt&serialid=jN%2b3ujgnuTZ5%2b2g6%2fKwpkgegbLh13QHNtqpwn%2fC2HFQ%3d

https://doc.research-and-analytics.csfb.com/docView?language=ENG&format=PDF&document_id=998673241&source_id=emcmt&serialid=vtUcqL2ksWU4SC5eaA7Luon4tqqzviFsVxAKNTew60U%3d

07 September 2012


Outright Monetary Transaction (OMT) details

Conditionality: Once again Mr. Draghi underlines that a necessary condition is strict conditionality attached to an appropriate EFSF/ESM programme. He went further to say that the programme does not need to be a full programme as with Portugal and Ireland. A country that has an Enhanced Conditional Credit Line (ECCL) is also eligible, as long as it includes the possibility of primary market purchases by the EFSF/ESM. The ECB can terminate purchases when a country does not comply with the programme. The ECB was also clear that it would be desirable to have IMF involvement in the programme, which could pose presentational problems for the Spanish government.

Coverage and maturity: The ECB will include bonds with residual maturity of 1-3 years. The ECB also states that it could buy bonds of current programme countries when they need to regain bond market access. This should be positive for Portugal.

Size: There is no ex-ante quantitative limit to the size of the programme. Effectively, the ECB will keep the purchases open-ended but we note that the outstanding stock of Spanish bonds with maturity between 1-3 years is €140bn.

Seniority: There will be a legal act on the OMT purchases that allows the ECB to accept pari pasu treatment with other investors under the OMT. So this will apply to any future purchases and will not be retrospectively applied to the old SMP programme.

Sterilisation: Liquidity created under the programme will be fully sterilised. We discuss this in more detail in our money markets section.

Transparency: Aggregate transactions and holdings and their market values will be published on a weekly basis. On a monthly basis, the average duration and the country breakdown will be released.

SMP: This programme will be terminated. The liquidity created under the SMP will still be absorbed as is currently being done, i.e., via one-week term deposits. More importantly, Mr. Draghi committed that existing holdings under the SMP will be held to maturity. Anecdotally, the SMP holdings run up to 5-10y.

Yield spreads/caps: As we were expecting, the ECB did not announce explicit yield caps or targets.

Collateral widening – relaxing rating requirements conditional on bailout

The ECB has suspended the minimum credit rating threshold applied to collateral eligibility requirements for marketable debt instruments issued or guaranteed by the central government. Credit claims granted to or guaranteed by programme countries and countries eligible for OMT purchases are also included under the suspension.

Until now, the ECB has imposed a minimum rating of BBB- for government bond paper, but now this minimum threshold has been suspended. The important point here is that this suspension is conditional on a country being under or applying for a MoU.

The ECB also announced that marketable debt instruments denominated in US dollars, pound sterling, and Japanese Yen will be eligible for credit operations, as was done in October 2008.

The key question is when Spain is going to ask for support

One of the key hurdles for a sustained improvement in market sentiment is now the requirement for Spain to ask for help – and the concern is that it will need to be forced to do so by the markets, and hence require a renewed sell-off in Spanish (and Italian) bonds.

In this regard, the conditionality attached to the support is clearly critical, and here the announcement was lighter than it might have been. The OMT programme allows a country to apply under an Enhanced Conditional Credit Line (ECCL) program which is more flexible than a full bailout program, provided the ECCL includes the possibility of EFSF/ESM primary market purchases.

07 September 2012


To us this indicates that actual primary EFSF/ESM market purchases are not in fact necessary for ECB intervention. So once Spain has signed up, the ECB doesn’t need to wait for the EFSF/ESM to act, and in fact (as far as ECB purchases go) it doesn’t matter if they never do buy in the primary markets for one reason or another. The involvement of the IMF is also sought, but it is not a necessary requirement.

The other point worth highlighting related to the timing of Spain’s request for support is on the collateral framework side. The ECB makes the relaxation of minimum credit ratings conditional on a country being under a programme (or for a country to be eligible for OMT purchases, which requires it to be in a programme). Given the weakness in the Spanish banking sector and its utter dependence on ECB funding, we see this as a neat way for the ECB to put additional pressure on Spain to apply for support.

Seniority has not been properly addressed

The ECB has stated that it will be pari passu when it comes to OMT purchases, but not for outstanding SMP holdings. The two are not consistent, in our opinion, and while it is stronger for the ECB to state it is going to be pari passu than not saying anything (as was the case with the SMP), we do not believe this will be taken credibly by the market. Indeed, if the ECB ends up owning large amounts of short maturity bonds and the policy fails to stem concerns surrounding the viability of the euro area, this issue risks returning with a vengence.

Arguably, the ECB couldn’t say anything about the possibility of no longer being senior with regards to its SMP holdings ahead of the Troika’s report on Greece, and Europe’s subsequent decision about the best approach to take with Greece, since this would weaken Europe’s negotiating position. The ECB may therefore be given some breathing room on this issue; we continue to believe, however, that ultimately the only way in which the ECB can be properly convincing in its pledge to address its seniority status is to restructure its GGB holdings in line with the private sector write-downs.

Add exposure to SPGB Jul-13/Jul-14 steepener On 27 July 2012, we recommended a 1s2s steepener in Spain when it was trading at 83bp. The bull flattening in the run up to the ECB meeting and the flattening post ECB means that this switch is now trading at a mere 36bp.

At current levels we think there is very little downside in holding that position as the curve ought to keep some residual steepeness in 1s2s.

The 1s2s steepener carries very well, roughly 20bp over a one-month period.

The curve would likely steepen if the proposed OMT does not work and Spanish yields rise. There is some risk that the plan does not work, mainly political risk. We recommend adding to 1s2s steepeners given that the investor gets paid to have exposure to the possibility that the plan fails.

The risk to the trade arises mainly from notional exposure. Perhaps this is the reason why 1s2s is so flat (investors have been buying the short-end of periphery, but have focused on bonds further out than 1y so as to reduce notional exposure).

https://doc.research-and-analytics.csfb.com/docView?language=ENG&format=PDF&document_id=989651241&source_id=emcmt&serialid=AikREQx2RaHcKXy%2byO4BRfpGMBeKWyIHPdhdPh2V5%2bA%3d

07 September 2012


Exhibit 6: Spain 1s2s has bull flattened – the rally in 2s has been disproportionately bigger than that in 1s

Exhibit 7: There is a ‘kink’ in the SPGB curve between 1s and 2s.

30-Sep-11 31-Dec-11 31-Mar-12 30-Jun-12

3

4

5

6

2

3

4

5

SPGB 7/14 (RHS) SPGB 7/13

31-Dec-19 30-Dec-29 31-Dec-39

1

2

3

4

5

6

7

-40

-30

-20

-10

0

10

20

MaturityWeek Cls Yield Live YieldLive Day Chg Yield (RHS)

Source: Credit Suisse Locus Source: Credit Suisse

We also recommend staying outright long 1y Italy and Spain. We think that the ECB has effectively removed the tail risks over a 1y period and the very front end of these curves can rally a bit further.

Sell Bobls in the Schatz-Bobl-Bund fly (or simply outright) as a hedge to ‘lower-for-longer’ swap flatteners The ECB conference has given a positive tone to the market and as a result core rates have sold off with the brunt of the sell-off in the belly of the curve. Therefore, a question that is naturally being asked is whether the ‘lower-for-longer’ view still holds.

Our view is that monetary policy is separate to OMT. The OMT in itself, even if successful, is unlikely to cause a big upswing to growth expectations for the periphery. The likely outcome is that at best it has a stabilization effect, and the recession resulting from the required adjustment programme is less severe than it would otherwise have been in the absence of a stabilization mechanism. Given the relatively pessimistic view on global growth, we maintain our lower-for-longer view. The best expressions of the lower-for-longer view are:

Receiver ladders in 6m5y area

Swap flatteners such as 2y1y-3y1y or 2y2y-4y2y

We do, however, think that it makes sense to look for hedges for our low-for-longer view in case our view proves incorrect. Given current levels, we think that Bobls are rich on the curve. We therefore recommend trades centered around this view that can benefit from a continued back up in rates:

Sell OEZ2 @ 125.23 (0.472% in DBR 5y)

Sell OEZ2 versus DUZ2 and RXZ2 (-61.5bp in the benchmark 2s5s10s fly)

Keep shorts in German bonds versus swaps (shift the short we currently have in RX spreads to OE spreads)

The risk to the trade is a dislocation between the swap and the German curve.

07 September 2012


Exhibit 8: DBR 2s5s10s is too low relative to EUR 2y1y-3y1y

Exhibit 9: DBR 2s5s10s is too low relative to the level of rates

30-Sep-11 31-Dec-11 31-Mar-12 30-Jun-12

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0.3

0.4

0.5

0.6

0.7

DBR 2s5s10s EUR 2y1y-3y1y (RHS)

30-Sep-11 31-Dec-11 31-Mar-12 30-Jun-12

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

1.25

1.50

1.75

2.00

2.25

DBR 10s (RHS) DBR 2s5s10s


07 September 2012


European Governments Fragmentation in the markets In the government bond market the fragmentation is seen clearly from a perusal of the intra-country spreads. However this fragmentation extends beyond the government bond market and into the lending markets. Recent data from the ECB show that the cost of borrowing for non-financial corporates (NFC) differs significantly across Europe. We have highlighted this in Exhibit 10 for Germany, Spain and Italy, where the differences are most pronounced.

Exhibit 10: Non-Financial Corporate lending rates Exhibit 11: NFC lending spread to Germany Loans up to and including €1 million Loans up to and including €1 million

3.03.54.04.55.05.56.06.57.07.5

Jan

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g-0

3

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r-0

4

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-05

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06

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Spain Italy Germany

-150-100-50

050

100150200250300

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Spain Germany Italy Germany

Source: ECB Source: ECB

Exhibit 11 shows the spread differential between Italy/Germany and Spain/Germany and the evolution since 2010. This data is for loans up to and including €1 million and so essentially captures lending rates for small businesses. Currently small businesses in Spain and Italy are paying 200-250 bp higher than their counterparts in Germany. Mr. Draghi has discussed the concept of market fragmentation as a rationale for the ECB to proceed with its bond buying programme and this data certainly show the disadvantage that small businesses in Italy and Spain face.

This data also re-emphasizes the interlinkages between the sovereign, banking sector and the real economy. Strong sovereign support gives banks significant funding advantages. This is particularly highlighted in the recent Deutsche Pfandbriefbank Senior Unsecured 3Y deal which came at a level of ms+194 bp. Exhibit 12 shows the relationship between Santander October 2017 bond and the 5Y benchmark in Spain. The funding cost of the sovereign will push up the funding cost of the banking sector and hence lending rates to the real economy.

Michelle Bradley +44 20 7888 5468

[email protected]

Exhibit 12: Higher funding costs

30-Dec-10 01-Jul-11 31-Dec-11 30-Jun-12

3

4

5

6

7

8

Spain 5Y SANTAN 4.125 10/2017

Source: Credit Suisse Locus

07 September 2012


This also creates a growth loop. For the economy to generate growth – something desperately needed in Spain and Italy – investment is required. A way to kick start the economy is to generate an environment where investment is encouraged. Bigger businesses and national champion industries are likely to have access to the capital markets but small and new business will be reliant on the banking sector for funding. An extra 250 bp is a significant hurdle for a small business and is therefore another barrier to growth in these countries. The annual growth rate of MFI loans to non-financial corporates contracted in July (by -0.2%), showing that lending is constricted in Europe.

OMT - a market positive first step We have long discussed the need to break the negative feedback loops. With the new OMT programme, the ECB is trying to break the loop starting from the sovereign side. We have the details and the framework of the ECB buying programme following the 6 September ECB press conference, but there are still numerous questions around its ability to be effective – not least that Spain has first to ask for assistance. Even on the assumption that the OMT programme does succeed, it is not enough just to try bringing down sovereign funding costs without dealing with issues in the banking sector, in our view, and without putting in place the structural reform necessary to create long-term growth.

The danger in this market is that a fall in sovereign funding costs may be seen as the end in itself and so temper any progress on the other issues. The idea of including conditionality on bond buying in terms of structural reform should therefore be a long term positive. A fall in funding costs for the sovereign will help the banking sector, particularly the national champions, but for other entities that remain reliant on the sovereign, it’s the quality of the balance sheet that is key.

The bank recapitalisation programme for Spain is another a positive step in stabilizing the banking sector. But the market is not yet convinced that the potential losses have been captured through this €100 billion. The bottom-up audit of the banking sector, due at the end of September, will be another key data point in terms of creating credibility as to the amount of capital needed in the banking sector. Amidst all this, the austerity measures being introduced by the government in Spain are only now really kicking in and so both the growth and the deficit data are likely to continue to be weak.

A short term stabilization in peripheral yields is possible, in our opinion, but we would view this as the calm before another storm – with the outlook remaining choppy. The event risk calendar is still full of events that can derail a stabilisation phase quickly. The recent PMI data confirms that the growth outlook in European remains extremely weak.

Stay short soft core versus core

The current risk-on phase has seen peripheral yields rally and Bund yields move higher, with the result that soft core spreads to core have generally tightened over the past week. In terms of positioning, we continue to like being short soft core versus core. Our current positions include

Short 10Y France vs. Germany

Short 5Y Belgium vs. Germany

Short 5Y Netherlands vs. Germany on asset swap

Short 2Y Austria vs. 2Y France

In France we think that Mr. Hollande will start to come under pressure to prove his commitment to bringing the budget deficit down, and he will present his 2013 budget in the coming weeks. We don’t think the election in the Netherlands will have systemic implications but we do believe it will keep pressure on Dutch yields. In Belgium, we believe that the Dexia story will continue to weigh on the market and there is the potential for negative headlines around the EC report, which is expected in September. Being short Austria should capture any volatility around Hungary’s decision not to accept the IMF programme.

07 September 2012


Portugal and Ireland benefit from OMTs We believe that Portugal and Ireland are both beneficiaries of the OMT programme announced on 6 September. However, we consider it more of a long term impact rather than an immediate suggestion that the ECB will start buying bonds of Ireland and Portugal. Both Ireland and Portugal are under a macro adjustment programme for the EFSF. However, the ECB press statement makes a clear differentiation between countries in future programmes and countries currently under a programme. For current programme countries the press statement says that that the OMT programme will only be relevant “when they will be regaining bond market access”.

To the extent that both Ireland and Portugal are currently funded and don’t need to come to the bond market right now, this makes sense, and this also gives them an additional buffer when they do need to come back to market. This is particularly relevant for Portugal, which will need to issue in 2013. In the EST of 31 August, we discussed the upcoming troika review in Portugal and the funding gap. We concluded that the IMF would approve the next disbursement and that Portugal would not be a source of contagion. The announcement of the OMT programme makes this even more certain, in our view. We think the possibility of primary market purchases eases the way back into the market for both Portugal and Ireland, and does so in a way that would likely remove the need for additional loans from the EFSF/ESM. Indeed, in a best case scenario it is also possible that the EFSF/ESM would not have to actually buy bonds in the primary market, with the backstop being enough to give investors’ confidence.

Therefore, we think that this announcement eases the path of both countries back into the primary market and hence resulting in the flattening of the curve. However, we do not believe that the OMT announcement implies that there will be buying of Portuguese and Irish bonds any time soon. Portuguese 2Y yields have rallied 90bp, while 5Y yields have rallied 184 bp. There is some room for retracement of these yields, in our view.

Close France 5s10s15s fly (receiving 10s)

We recommend closing our France 5s10s15s fly (receiving 10s) recommendation following the 15-year supply in France.

https://doc.research-and-analytics.csfb.com/docView?language=ENG&source=emfromsendlink&format=PDF&document_id=998673241&serialid=vtUcqL2ksWU4SC5eaA7LupDPOpf8%2bRaYTpkqNWDhvnc%3d

07 September 2012


UK Strategy Exhibit 13: Summary of views

Metric View

Outright level of yields Low yields remain – we expect gilts to trade in range

Curve Flattening bias in 10s30s gilt curve

Curvature GBP 2s5s10s to remain driven by European sovereign performance

Long end curve/ASW Credit easing/FLS supports tighter spreads in <3y maturities; 5s30s ASW curve steepeners

GBP-EUR spreads Favour UKT 30y outperformance versus EUR in cash Source: Credit Suisse

Front end back to extremely rich levels The uncertainty around a Bank Rate cut provides us with a good opportunity to reiterate our view. We do not think a Bank Rate cut is imminent. The main reasons (as stated in Sterling Investor CCC….) are briefly:

FLS acts as a substitute: the aim of the Funding-for-Lending scheme is to bring down market rates. The extent to which the FLS is successful reduces the need to cut rates.

More harm than good: the unintended consequences for small building socieites and their profit margins may impede the effectiveness of a Bank Rate cut.

BoE cannot control the currency effect easily – we were concerned that as the ECB cuts rates, this strengthens Sterling versus EUR and that could be a reason for the BoE to cut rates again. But the realisation that EURGBP is mostly driven by EUR volatility reduces the effectiveness of a rate cut on the FX.

Decoupling of market rates from policy makes unwinding policy stimulus difficult: we have argued before that lowering policy rates further could lead to market funding rates further decoupling from policy. This would make unwinding stimulus later down the road more problematic.

For these reasons we do not think a Bank Rate cut is likely in the near term; we think it is more likely that the BoE extends QE in November. Given this macro backdrop, we find front end SONIAs rich.

Exhibit 14: 1y1y SONIA rates at bottom end of range Exhibit 15: GBP-EUR OIS spreads also richening

0.0

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GBP SONIA 1y1y

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2

gbp-eur 2y1y sonia/eonia

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: Credit Suisse


[email protected]

07 September 2012


Exhibit 14 shows that 1y1y SONIA is back to the recent lows and is also starting to look rich versus EONIA (see Exhibit 15). All the talk about the ECB cutting rates and MPC member Weale’s statement that the MPC is considering a rate cut have sent 1y1y SONIA to new lows. If we do see a sell-off in the front end of the EONIA cut after the ECB left rates unchanged, we would use such an opportunity to go tactically short GBP 1y1y SONIA versus EONIA.

Funding for Lending scheme – having an impact already

We have been tracking this series of marginal funding costs for a while. We approximate this series by summing 3m £ Libor and 5y average bank CDS (we use a similar series to the BoE measure). The interesting point highlighted in Exhibit 16 is that this marginal funding rate has fallen quite sharply since the announcement of the FLS scheme in June. If this pace is kept up to year-end then we think this would rule out a Bank Rate cut for now.

Exhibit 16: Starting to see a decline in our proxy for marginal funding costs

0

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Average bank CDS

3m Libor

1st forward 1m SONIA

Marginal funding cost

UK Floating Mortgage Rate

Source: BoE, the BLOOMBERG PROFESSIONAL™ service, Credit Suisse, Credit Suisse Locus

This is one of the main reasons we are skeptical that the BoE will cut the Bank Rate any time soon. We also heard, Treasury Chief-Secretary Danny Alexander stating that the government is starting to see signs that the FLS is working. We think that the combination of a new government-sponsored bank and an effective FLS reduces the need for a Bank Rate cut.

07 September 2012


Exhibit 17: SONIA 1y forward curve is too flat out to 1y1y point

Exhibit 18: The 1s2s SONIA curve is back to negative territory

0.0

0.5

1.0

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3.5

1y 1y1y 2y1y 3y1y 4y1y 5y1y 6y1y 7y1y 8y1y 9y1y

1y SONIA Forward Curves

1y1y Today

02-Aug-12

14-Jun-120.2

0.4

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1s2s SONIA

2y SONIA

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: Credit Suisse

Exhibit 17 and Exhibit 18 once again highlights the richness in the very front end of the SONIA curve. For example the 1s2s SONIA curve has turned negative once again. We think risk/reward favours paying 2y SONIA at 30bp.

07 September 2012


Derivatives Strategy EUR Vol – Sell vol of vol in the middle right corner The view:

A significant sell-off in rates (200bp) is likely to be associated with a lower vol in 30y tails, not a higher one. This is because if the 30y swap was to move up to ~4.5%, this would be associated with an environment similar to pre-crisis levels (lower 2y30y vol, see Exhibit 22).

A significant (at least 100bp) rally in 30y swap is unlikely in our view. If however 30y was to rally this much, we think that this move would initially (say the first 20bp-40bp part of the move) be associated with a higher vol but eventually with a lower one (similar to Japan).

Therefore in both cases we think that the wing vol that is currently priced in is too high relative to what is likely to materialize.

The rationale:

In an environment where rates have moved back to pre-crisis levels, 30y tails are likely to trade below 10y tails.

In a significantly higher rate environment, callable issuance would likely have a dampening effect on vol.

In a rally, 30y gamma could initially rise, but eventually fall (lower level of rates tends to imply lower level of vol most of the time).

30y swap is currently around 2.4%. Over a two-year horizon it is likely that we could deviate significantly from that level thus buying ATM straddles is a reasonable trade.

The premium outlay to a straddle versus strangle trade is significantly reduced to that of an outright purchase of a straddle while the portfolio remains positive gamma.

The trade: Buy 1x unit of ATMF 2y30y straddle, sell 2.2x units of ATMF-125bp receiver, sell 2.2x units of ATMF+200bp payer, trade details in Exhibit 25.

The risks:

The risk to the trade is essentially mark-to-market risk. The initial phases of a movement in 30y rates could be associated with a higher vol (and vol of vol) and hence the position could initially underperform.

The trade would also underperform in a hyperinflation environment where 30y rates sell off to 6% or higher. We think that scenario is unlikely hence we are comfortable with the risk/reward profile of the trade.


[email protected]

07 September 2012


Exhibit 19: Vol of vol in 2y30y is rich, in other words wing vol is rich relative to ATM (200bp OTM payer and 100bp-150bp OTM receiver)

Exhibit 20: Payer skew is close to the richest ever levels

-200 -150 -100 -75 -50 -25ATM 25 50 75 100 125 150 175 200

-10

0

10

Vol Skew: Swaption-2Y x 30Y

BPs OTM

Ann

ualiz

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plie

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ol a

s S

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AT

M V

alu

Implied Vol

31-Dec-07 30-Dec-08 30-Dec-09 30-Dec-10 31-Dec-11

0

10

20Swaption: 2Y x 30Y (Bps OTM:200)

Ann

ualiz

ed Im

plie

d V

ol a

s S

prea

d to

AT

M V

alue

Implied Vol


Exhibit 21: Receiver skew is struggling to move into negative territory despite

Exhibit 22: EUR 2y30y vol has come off the post-crisis highs but is still reasonably elevated


-10

0

10

20

Swaption: 2Y x 30Y (Bps OTM:-125)

Ann

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M V

alue

Implied Vol

01-Jul-07 30-Dec-09 30-Jun-12

50

75

100

125

EUR 2y30y ann bp vol


07 September 2012


Exhibit 23: 2y30y vol of vol (200bp payer plus 125bp receiver minus 2x ATM vol) is at the richer end of the recent range

Exhibit 24: In an environment where rates have normalized, 2y30y vol would likely be lower to 2y10y one

30-Dec-04 01-Jul-07 30-Dec-09 30-Jun-12

-10

0

10

20

EUR 2y30y-2y10y vol spread


Exhibit 25: Trade details: EUR 2y30y vol of vol trade Indicative mid levels

Side Product CCY Notional Expiry Tenor Strike Fwd Value DV01 Delta N Vega Gamma EQ Vol

Buy Straddle EUR 100,000,000 2y 30y 2.5500% 2.5522% 20,999,450 215,684 -37,864 243,707 1,710 86

Sell Receiver EUR -220,000,000 2y 30y 1.2500% 2.5522% -4,264,370 474,505 72,105 -147,818 -1,059 86

Sell Payer EUR -220,000,000 2y 30y 4.5000% 2.5534% -2,662,909 -474,505 -25,835 -97,886 -291 101

14,072,171 215,684 8,407 -1,998 360 Source: Credit Suisse

07 September 2012


GBP 10y5y-15y5y flattener @ 15bp In swaps trade note, 27 June 2012, we had recommended a GBP 10y5y-15y5y flattener as a ‘cheap’ 10s30s flattener. We then recommended closing the trade on 26 July when 10y5y-15y5y flattened by 12bp and was no longer dislocated in terms of RV.

The trade is back at interesting levels. We recommend re-entering into the 10y5y-15y5y flattener at current levels (15bp or higher). Note that this trade is a mixture of a curve (10s30s flattener) and RV (15s rich on the curve) view.

The risk to the trade is mainly the curve view. We are reasonably confident that the RV aspect of the trade will mean revert, however the risk is that 10s30s could continue to steepen.

Exhibit 26: 10y5y-15y5y is driven by 10s30s Exhibit 27: The 1y carry for 10y5y-15y5y flattener is

only marginally negative

30-Dec-10 01-Jul-11 31-Dec-11 30-Jun-12

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-25

0

25

50

75

100

GBP 10y5y-15y5y 10s30s (RHS)


-100

-50

0

-30

-20

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0

GBP 10y5y-15y5y 1y carry (RHS)


Exhibit 28: GBP 10y5y-15y5y is at pretty extreme levels relative to EUR

Exhibit 29: 10y5y-15y5y is 2bp too steep in a PCA model

30-Dec-04 01-Jul-07 30-Dec-09 30-Jun-12

-50

0

50

GBP-EUR 10y5y-15y5y box

30-Sep-11 31-Dec-11 31-Mar-12 30-Jun-12

-20

-10

0

10

-5

0

5

10

Spread Residuals 10y5y-15y5y, rhs GBP 10y5y-15y5y


https://doc.research-and-analytics.csfb.com/docView?language=ENG&format=PDF&document_id=981751251&source_id=emcmt&serialid=FUrUuPNmG0gs9UoU8yujJby2ow1NbSAoJ9owSN8uekk%3d

07 September 2012


EUR-SEK 1y1y-2y1y box (EUR flattener vs. SEK steepener) The view: We think it is unlikely that the ECB will out-hike the Riksbank.

The rationale: The Riksbank has cut its repo rate by 25bp following its meeting on 5 September. The Riksbank expects inflation to be lower than anticipated in July due to a stronger Swedish Krona and lower unit labor cost. The Riksbank also expects growth to be slower in the second half of 2012 due to weaker exports to the eurozone and a weaker labour market in Sweden.

This led the Riksbank to revise the repo rate path lower. The Riksbank expects the repo rate to stay at the current level of 1.25% until mid 2013 when the repo rate starts to increase gradually to 3% in Q3 2015, as shown in Exhibit 30. However, we expect the Riksbank to cut even further if economic data worsen.

This is in-line with market expectations. Exhibit 31 shows that the STIBOR money market curve prices another 25bp rate cute until March 2013 and then remains relatively flat until 2014. The Euribor curve is flat until mid 2013 and relatively steep thereafter. This indicates that the market prices the ECB to start hiking in mid 2013. We think it is unlikely that the ECB starts raising its repo rate in mid 2013 given the economic situation in Europe.

Exhibit 30: The Riksbank lowered the repo path Exhibit 31: EURIBOR curve steeper than STIBOR curveIn % In %

0.0 %

0.5 %

1.0 %

1.5 %

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2.5 %

3.0 %

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September July

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2.0 %

0 days 500 days 1000 days 1500 days

STIBOR Euribor

Source: Riksbank, Credit Suisse Source: : the BLOOMBERG PROFESSIONAL™ service, Credit Suisse

The 1y1y-2y1y swap curve in Sweden trades at 17.5bp while the 1y1y-2y1y swap curve in Europe trades at 32bp, as shown in Exhibit 32. We think that either the 1y1y-2y1y curve in Europe is too steep or the 1y1y-2y1y curve in Sweden is too flat. The Swedish curve has remained flat due to receiving pressure in the long end. However, we think that neither the 1y1y nor the 2y1y swap should be driven by this. Therefore, the1y1y- 2y1y curve should be steeper. The EUR-SEK 1y1y-2y1y box fits with our macro view of lower rates for longer in Europe, hedged cheaply with Sweden where this view is fully priced in.

The EUR-SEK 1y1y-2y1y box currently trades at 15bp. We expect it to move closer to 5bp as itwas trading ahead of the ECB rate cut in July. Therefore, we recommend a 1y1y-2y1y flattener in Europe and a 1y1y-2y1y steepener in Sweden.

Florian Weber +44 20 7888 3779

[email protected]


[email protected]

07 September 2012


Exhibit 32: EUR 1y1y-2y1y significantly steeper than SEK 1y1y-2y1y

Exhibit 33: EUR-SEK 1y1y-2y1y box is too high

In bp In bp

30-Sep-11 31-Dec-11 31-Mar-12 30-Jun-1220

30

40

50

10

15

20

25

30

EU

R

SE

K

EUR 1y1y-2y1y SEK 1y1y-2y1y (rhs)

30-Sep-11 31-Dec-11 31-Mar-12 30-Jun-12

5

10

15

20

25

EUR - SEK 1y1y-2y1y box

Source: Credit Suisse Locus Source: Credit Suisse Locus

The trade: The Swedish 1y1y-2y1y curve is too flat relative to 1y1y-2y1y curve in Europe, in our view. We recommend a EUR-SEK 1y1y-2y1y box @15bp, steepener in Sweden versus a flattener in Europe.

The main risk is that rates starts rising in Europe sooner than expected.

Alternative trade expressions:

1y1y-3y1y box or simply 2s5s box

Z3-Z4 box

07 September 2012


Money Market Strategy From SMP to OMT: review on sterilization On Thursday’s ECB meeting, M. Draghi formally announced the replacement of the Securities Market Programme (SMP) by the launch of Outrigtht Market Transactions (OMT). Both programs are part of the many non-conventional measures (Exhibit 34), aimed at re-activating some transmission channels in markets where liquidity was at very low levels, i.e., periphery yields. Both are conducted through the outright purchase of debt instruments in the secondary market. Differences are in the details: on conditionality, on duration, on transparency and on seniority (see our macro section).

Exhibit 34: Calendar of ECB non-conventional measures

Phase TURMOIL

Year

Month 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9

Fixed-rate full allotment in:

- Main Refinancing Operations (MRO)

- Longer-Term Refinancing Operations (LTRO)

Special maintenance period operations

Supplementary 3-m LTRO

6-month LTRO

12-month LTRO

3-year LTRO

US Dollar-providing operations

CH Franc-providing operations

Covered Bond Purchase Programme (CBPP)

Securities Markets Porgramme (SMP)

Outright Monetary Transactions (OMT)

P HASING- OUT

2007 2008 2009 2010 2011 2012

SOVEREIGN DEBT CRIS ISCRIS IS- INTENSIFICATION

Source: Credit Suisse, European Central Bank

The liquidity impact of the combined SMP and OMTs will be sterilized through the conduct of weekly liquidity-absorbing operations. Even though M. Draghi did not provide any detail on the full-sterilization process, we expect the ECB to absorb each week the overall amount of the SMP/OMTs – currently €209bn – via 1-week term deposits with variable tender with a maximum bid rate equal to the repo rate. They currently return 0.01%. Note that these fixed-term deposits are eligible as collateral for the Eurosystem's credit operations.

Looking at the ECB balance sheet (Exhibit 35), purchases made under SMP/OMTs are part of net foreign assets, and impact net autonomous factors negatively. It therefore reduces liquidity needs. In order to counterbalance and keep neutrality, the ECB therefore reduces liquidity supply via negative OMOs (refinancing to credit institutions).

Marion Pelata +44 20 7883 1333

[email protected]


[email protected]

07 September 2012


Exhibit 35: Central bank balance sheet term structure

Exhibit 36: Excess liquidity stays in range €780bn-€880bn

=

Assets Liabilities

Refinancing to credit institutions Credit institutions' ho ldings on curr. a/c

M arginal lending facility Deposit facility

Net foreign assets Banknotes in circulation, o ther factors

Can be seen as follows:

Liquidity Supply Autonomous Factors + ReservesRefinancing to credit

institutionsBanknotes in circulation

Credit ho ldings on current accounts

+ marginal lending facility + other factors

- deposit facility - net fo reign assets

0100200300400500600700800900

1,000

EU

R b

n

Current Account (3 wks avg)

Deposit facility Second 3y LTRO

First 3y LTROLaunch SMP

Source: Credit Suisse, European Central Bank Source: Credit Suisse, European Central Bank

A sterilized Eonia? The essence of the sterilization process is that it has no impact on excess liquidity, and thus on Eonia fixings. In practice, we might observe some discrepancies at some points in time (less than 10%). However, effects were minimal and the amount that was unsterilized at the time was sterilized in the following days. In Exhibit 36, we observe the neutrality of the excess liquidity (captured here by both MFI current account holdings and deposit facility usage at the ECB) to the SMP.

The question remains how much can be sterilized before it starts affecting money markets? Indeed, Eonia fixings might be impacted by two main events:

Sterilization fails and excess liquidity increases: downward pressure on fixings

Banks ask for higher compensation: upward pressure on fixings

These effects might become relevant in the case where the ECB interferes massively in the market, which we currently find unlikely. Moreover, on the first aspect, we think with the ECB deposit rate at zero and an excess liquidity of €880bn, the impact on a single sterilization failure will be minimal. We have seen in the recent past wider spreads between Eonia and deposit rate while the excess liquidity was lower than it is currently. What matters more, in our view, is how much banks will be willing to move from overnight deposits remunerated at 0% to 1-week deposit remunerated currently at 0.01%. Should banks be more reluctant to park their liquidity for one week, they can choose to either raise the clearing price (0.01%) or move away from these reverse operations. We don’t find the latter likely as 1bp is still attractive in the current environment, but we find some risk in the rise of clearing prices and consecutively on Eonia fixings.

Overall, we believe pressures are minimal on Eonia. Should OMTs purchases be large, the impact on fixings should be slightly to the upside.

07 September 2012


Technicals Game Changer? The dramatic move in periphery and core yields in Europe following the ECB leaves some potentially important trend changes threatening. Question is, is this enough as yet to be a “game changer”.

For 10yr German yields, the clear answer is not yet. Critical support has yet to be tested, seen starting at 1.63% – the September 2011 low and falling 40-week (200-day average) – and stretching up to 1.69/70% – the late June high and the 38.2% retracement of the entire 2011/2012 rally. Although momentum has shifted dramatically higher, only above 1.70% would suggest the core trend has shifted bearish here, targeting 2.03/2.08%.

For 10yr Spain, the answer is nearly, but not quite. The July move higher in yields saw our key 7.60/65% bear target achieved, and the subsequent rally and break of 6.50% put a small yield top in place. The spotlight is now firmly on more important resistance at 6.00/5.92% – key yield lows from May and June, rising 40-week (200-day) average and the 38.2% retracement of the entire 2009/2012 rise in yields. We remain of the view below 6.00/5.92% is required to mark a medium-term change of trend, and a further fall in yields, with 5.65/60% the next objective. Support at 6.97% needs to hold to keep the risk bullish.

For 10yr Italy, the break below 5.59% has, in our view, seen a decent yield top established, reinforcing a broader sideways trend, which should clear the way for further strength to 5.15/05% next, then 4.90%. An overshoot into the 4.70/4.50% zone would not be ruled out, but at present, we do not look for yields to fall below here.

Additionally, for 10yr Italy/Germany, the completion of a spread top below 411bps should see further significant Italian outperformance. Likewise, a clear break and close below 461bps by 10yr Spain/Germany would see a spread top established here also.

Exhibit 37: 10yr German Yield - Weekly Exhibit 38: 10yr Spain - Weekly

Source: CQG, Credit Suisse Source: Update, the BLOOMBERG PROFESSIONAL™ service, Credit Suisse

David Sneddon +44 20 7888 7173

[email protected]

07 September 2012


EUR and UK Supply Analysis Exhibit 39: Cash-flow analysis – Europe

Week Date Day

Supply

€ bn

Redemptions

€ bn

Coupons

€ bn Total

Cpn

Total

Cash

Inflow Supply

Net

Supply

Net DV01

(€ mn per

bp) Cntry Amt Cntry Amt 0-2 2-5 5-7 7-10 10y+ 37 10-Sep Mon - - - - - - - - - - - - 37 11-Sep Tue NL 2.00 - - - - - - - - 2.00 2.00 1.83 37 12-Sep Wed DE 5.00 - - - - - - - - 5.00 5.00 2.27 37 13-Sep Thu IT 6.00 - 0.13 - - - - 0.13 0.13 6.00 5.87 2.50 37 14-Sep Fri BE 0.60 DE 18.00 0.14 - - - - 0.14 18.14 0.60 -17.54 0.29

38 17-Sep Mon - FI, IT 16.44 0.72 1.27 0.19 0.62 0.48 3.28 19.72 - -19.72 (1.41) 38 18-Sep Tue - - - - - - - - - - - - 38 19-Sep Wed DE 5.20 - - - - - - - - 5.20 5.20 1.00 38 20-Sep Thu ES, FR 10.20 FR 12.40 0.09 0.04 - - - 0.14 12.54 10.20 -2.34 5.11 38 21-Sep Fri - - - - - - - - - - - -

39 24-Sep Mon BE 1.30 - 0.53 - - - - 0.53 0.53 1.30 0.77 0.98 39 25-Sep Tue IT, NL 6.30 - 0.32 - - - - 0.32 0.32 6.30 5.98 4.70 39 26-Sep Wed DE 5.00 - - 0.09 - - - 0.09 0.09 5.00 4.91 4.59 39 27-Sep Thu IT 6.00 - - - - - - - - 6.00 6.00 3.50 39 28-Sep Fri - BE 9.20 1.26 1.31 0.12 1.51 - 4.19 13.39 - -13.39 (2.10) 40 1-Oct Mon - IR 0.02 0.22 - - - 0.00 0.22 0.24 - -0.24 (0.03) 40 2-Oct Tue AT 1.50 - - - - - - - - 1.50 1.50 1.07 40 3-Oct Wed DE 4.00 - - - - - - - - 4.00 4.00 1.81 40 4-Oct Thu ES, FR 10.50 - - - - - - - - 10.50 10.50 6.85 40 5-Oct Fri - - - - - - - - - - - -

41 8-Oct Mon - - - - - - - - - - - - 41 9-Oct Tue NL 2.00 - - 0.28 - - - 0.28 0.28 2.00 1.72 0.30 41 10-Oct Wed DE 5.00 - 0.43 - - - - 0.43 0.43 5.00 4.58 0.91 41 11-Oct Thu IT 6.00 - 0.64 - - - - 0.64 0.64 6.00 5.36 2.29 41 12-Oct Fri BE 0.30 DE 16.00 0.68 - - - - 0.68 16.68 0.30 -16.38 0.35

TOTALS 76.90 72.06 5.14 2.99 0.31 2.12 0.48 11.05 83.11 76.90 -6.21 36.82 Source: Credit Suisse, National Treasuries

Exhibit 40: Issuance, coupon & redemptions summary (€, bn)

Issuance Coupon Redempt. Net Supply

10 Sep-14 Sep 13.60 0.26 18.00 -4.66

17 Sep-21 Sep 15.40 3.41 28.84 -16.85

24 Sep-28 Sep 18.60 5.13 9.20 4.27

01 Oct-05 Oct 16.00 0.22 0.02 15.76

08 Oct-12 Oct 13.30 2.03 16.00 -4.73

Total 76.90 11.05 72.06 -6.21 Source: Credit Suisse

Exhibit 41: Year-to-date bond issuance (€, bn)

Country Amount issued

YTD in 2012 Expected issuance

for 2012 % completed year-to-date

Amount issued in 2011

Austria 18 22 81% 17

Belgium 33 36 90% 41

Finland 13 16 80% 14

France 145 178 82% 208

Germany 131 170 77% 189

Italy* 156 209 74% 223

Netherlands 51 60 84% 53

Spain 66 86 77% 97

Total 611 777 79% 841

Source: Credit Suisse, National Treasuries, * includes retail bonds and exchange transactions

07 September 2012


Exhibit 42: Nominal supply vs. DV01 Exhibit 43: Euro issuance, coupon & redemptions by week (€, bn)

0

2

4

6

8

10

12

14

16

0

5

10

15

20

10-Sep-14-Sep

17-Sep-21-Sep

24-Sep-28-Sep

1-Oct-5-Oct

8-Oct-12-Oct

€m

illion per bp

€bn

Nominal Supply DV01

-20

-10

0

10

20

30

40

10 Sep-14 Sep 17 Sep-21 Sep 24 Sep-28 Sep 01 Oct-05 Oct 08 Oct-12 Oct

€bn

Issuance Coupon Redemption Net Supply

Source: Credit Suisse, National Treasuries Source: Credit Suisse, National Treasuries

Exhibit 44: Net supply by country for the next five weeks - from 10-Sep-12 to 12-Oct-12 (€, bn) Exhibit 45: Euro weekly net supply 2012 (€, bn)

0

-11

-7

2

-12

10

6

-1

6

-15

-10

-5

0

5

10

15

AT BE FI FR DE IT NL PT ES

€bn

-40

-30

-20

-10

0

10

20

30

4002

Jan

-06

Jan

09 J

an-1

3 Ja

n16

Jan

-20

Jan

23 J

an-2

7 Ja

n30

Jan

-03

Feb

06 F

eb-1

0 Fe

b13

Feb

-17

Feb

20 F

eb-2

4 Fe

b27

Feb

-02

Mar

05 M

ar-0

9 M

ar12

Mar

-16

Mar

19 M

ar-2

3 M

ar26

Mar

-30

Mar

02 A

pr-0

6 A

pr09

Apr

-13

Apr

16 A

pr-2

0 A

pr23

Apr

-27

Apr

30 A

pr-0

4 M

ay07

May

-11

May

14 M

ay-1

8 M

ay21

May

-25

May

28 M

ay-0

1 Ju

n04

Jun

-08

Jun

11 J

un-1

5 Ju

n18

Jun

-22

Jun

25 J

un-2

9 Ju

n02

Jul

-06

Jul

09 J

ul-1

3 Ju

l16

Jul

-20

Jul

23 J

ul-2

7 Ju

l30

Jul

-03

Aug

06 A

ug-1

0 A

ug13

Aug

-17

Aug

20 A

ug-2

4 A

ug27

Aug

-31

Aug

03 S

ep-0

7 Se

p10

Sep

-14

Sep

17 S

ep-2

1 Se

p24

Sep

-28

Sep

01 O

ct-0

5 O

ct08

Oct

-12

Oct

15 O

ct-1

9 O

ct22

Oct

-26

Oct

29 O

ct-0

2 N

ov05

Nov

-09

Nov

12 N

ov-1

6 N

ov19

Nov

-23

Nov

26 N

ov-3

0 N

ov03

Dec

-07

Dec

10 D

ec-1

4 D

ec17

Dec

-21

Dec

24 D

ec-2

8 D

ec

Source: Credit Suisse, National Treasuries Source: Credit Suisse, National Treasuries

Exhibit 46: Issued amount % completed YTD Exhibit 47: UK issuance, coupon & redemptions by week (₤, bn)

90%84%

82% 81% 80%77% 77%

74%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

BE NL FR AT FI ES DE IT

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

10 Sep-14Sep

17 Sep-21Sep

24 Sep-28Sep

01 Oct-05 Oct 08 Oct-12 Oct

£ bn


Source: Credit Suisse, National Treasuries Source: Credit Suisse, UK Treasury

07 September 2012


Exhibit 48: Cash-flow analysis – UK

Week Date Day

Supply

₤ bn

Redemptions

₤ bn

Coupons

₤ bn Total

Cpn

Total

Cash

Inflow Supply

Net

Supply

Net DV01

(₤ mn per

bp) Cntry Amt Cntry Amt 0-2 2-5 5-7 7-10 10y+ 37 10-Sep Mon - - - - - - - - - - - - 37 11-Sep Tue UK 1.25 - - - - - - - - 1.25 1.25 2.23 37 12-Sep Wed - - - - - - - - - - - - 37 13-Sep Thu UK 3.50 - - - - - - - - 3.50 3.50 3.23 37 14-Sep Fri - - - - - - - - - - - -

38 17-Sep Mon - - - - - - - - - - - - 38 18-Sep Tue - - - - - - - - - - - - 38 19-Sep Wed - - - - - - - - - - - - 38 20-Sep Thu UK 4.00 - - - - - 0.09 0.09 0.09 4.00 3.91 1.99 38 21-Sep Fri - - - - - - - - - - - -

39 24-Sep Mon - - - - - - - - - - - - 39 25-Sep Tue - - 0.34 - - - - 0.34 0.34 - -0.34 (0.07) 39 26-Sep Wed - - - - - - - - - - - - 39 27-Sep Thu - - - - - - - - - - - - 39 28-Sep Fri - - - - - - - - - - - - 40 1-Oct Mon - - - - - - - - - - - - 40 2-Oct Tue UK 3.50 - - - - - - - - 3.50 3.50 3.23 40 3-Oct Wed - - - - - - - - - - - - 40 4-Oct Thu - - - - - - - - - - - - 40 5-Oct Fri - - - - - - - - - - - -

41 8-Oct Mon - - - - - - - - - - - - 41 9-Oct Tue UK 2.00 - - - - - - - - 2.00 2.00 3.57 41 10-Oct Wed - - - - - - - - - - - - 41 11-Oct Thu UK 1.40 - - - - - - - - 1.40 1.40 1.29 41 12-Oct Fri - - - - - - - - - - - -

TOTAL 15.65 0.00 0.34 0.00 0.00 0.00 0.09 0.43 0.43 15.65 15.22 15.47 Source: Credit Suisse, UK Treasury

Exhibit 49: UK weekly issuance, coupon & redemptions (£, bn)


10 Sep-14 Sep 4.75 0.00 0.00 4.75

17 Sep-21 Sep 4.00 0.09 0.00 3.91

24 Sep-28 Sep 0.00 0.34 0.00 -0.34

01 Oct-05 Oct 3.50 0.00 0.00 3.50

08 Oct-12 Oct 3.40 0.00 0.00 3.40

Total 15.65 0.43 0.00 15.22

Source: Credit Suisse, UK Treasury

Exhibit 50: Year-to-date UK bond issuance (fiscal year, £, bn)

Country Amount issued in 2011-12

Amount issued YTD in 2012-13

Expected issuance for 2012-13

% completed year-to-date

UK 177,587 79,148 164,400 48.14 Source: Credit Suisse, National Treasury

07 September 2012


Exhibit 51: Total issuance fiscal year-to-date (£, mn)

Short Term Medium Term Long Term Total Conventional Index Linked

YTD Total Sales 27,065 15,301 21,054 63,420 15,728

Target for the Year 50,400 34,500 37,200 122,100* 35,800*

% completed 54% 44% 57% 52% 44%

% Remaining 46% 56% 43% 48% 56%

Source: Credit Suisse, * total conventional and index linked issuance does not include £6.5bn in mini-tender

Exhibit 52: DMO issuance calendar

Operation Date Gilt Name Nominal Amount Issue (₤, mn)

11-Sep-2012 0¾% Index-linked Treasury Gilt 2034 1,250

13-Sep-2012 1¾% Treasury Gilt 2022 3,500

20-Sep-2012 1% Treasury Gilt 2017 4,000*

02-Oct-2012 1¾% Treasury Gilt 2022 3,500*

09-Oct-2012 4¼% Treasury Stock 2032 2,000*

11-Oct-2012 A new index-linked gilt maturing on 22 March 2024 1,400*

18-Oct-2012 4½% Treasury Gilt 2019 4,000*

01-Nov-2012 0¾% Index-linked Treasury Gilt 2047 1,400*

06-Nov-2012 1¾% Treasury Gilt 2022 3,500*

15-Nov-2012 3¾% Treasury Gilt 2052 2,000*

20-Nov-2012 1% Treasury Gilt 2017 4,000*

05-Dec-2012 1¾% Treasury Gilt 2022 3,500*

13-Dec-2012 A re-opening of the new index-linked gilt maturing on 22 March 2024 1,400*

Source: DMO, Credit Suisse, * forecasts,.

07 September 2012


Forecasts Exhibit 53: Credit Suisse interest rate forecasts

Euro - German Benchmarks Current 2012 Q3 2012 Q4 2013 Q1 2013 Q2

ECB Repo 0.75 0.5 0.5 0.5 0.5

2-Yr Yield 0.03 0.00 0.00 0.10 0.20

5-Yr Yield 0.47 0.55 0.70 0.80 0.90

10-Yr Yield 1.56 1.40 1.65 1.90 2.10

30-Yr Yield 2.35 2.10 2.30 2.45 2.55

2s5s 44 55 70 70 70

2s10s 153 140 165 180 190

10s30s 79 70 65 55 45

2s5s10s -65 -30 -25 -40 -50

5s10s30s 30 15 30 55 75

UK Gilts Current 2012 Q3 2012 Q4 2013 Q1 2013 Q2

Base Rate 0.5 0.5 0.5 0.5 0.5

2-Yr Yield 0.14 0.30 0.30 0.35 0.40

5-Yr Yield 0.67 0.80 1.10 1.25 1.30

10-Yr Yield 1.71 1.80 2.00 2.30 2.35

30-Yr Yield 3.05 3.00 3.10 3.50 3.55

2s5s 53 50 80 90 90

2s10s 158 150 170 195 195

10s30s 133 120 110 120 120

2s5s10s -51 -50 -10 -15 -15

5s10s30s -29 -20 -20 -15 -15

Source: Credit Suisse, Note current as of 06/09/12 18:00 GMT

Exhibit 54: European inflation forecasts Euro Area HICP ex-tobacco French CPI ex-tobacco UK RPI

Index YoY MoM Index YoY MoM Index YoY MoM

Sep-12 116.10 2.67 0.87 124.98 2.03 -0.07 243.50 2.35 0.29

Oct-12 116.50 2.70 0.34 125.40 2.18 0.34 243.90 2.48 0.16

Nov-12 116.50 2.62 0.00 125.56 2.08 0.13 244.20 2.39 0.12

Dec-12 116.80 2.54 0.26 126.01 2.02 0.36 245.10 2.38 0.37 Source: Credit Suisse

..

INTEREST RATE STRATEGY

Eric Miller, Managing Director

Global Head of Fixed Income and Economic Research

+1 212 538 6480 [email protected]

US RATES EUROPEAN RATES US DERIVATIVES

Carl Lantz, Director US Head +1 212 538 5081 [email protected]

Helen Haworth, CFA, Director European Head +44 20 7888 0757 [email protected]

George Oomman, Managing Director Derivatives Head +1 212 325 7361 [email protected]

Ira Jersey, Director


Michelle Bradley, Director

+44 20 7888 5468

[email protected]

TECHNICAL ANALYSIS

David Sneddon, Managing Director

+44 20 7888 7173

[email protected]

Christopher Hine, Vice President

+1 212 538 5727

[email protected]

Pamela McCloskey, Vice President

+44 20 7888 7175

[email protected]

Cilline Bain, Associate

+44 20 7888 7174

[email protected]

Scott Sherman, Vice President


Sabine Winkler, Director


Michael Chang, Vice President


Panos Giannopoulos, Director


Carlos Pro, Associate


Thushka Maharaj, Vice President


Florian Weber, Associate


Marion Pelata, Analyst

+44 20 7883 1333 marion.pelata @credit-suisse.com

LOCUS ANALYTICS (US AND EUROPE)

Jennifer Drag, Director

Locus Analytics Specialist

+1 212 538 4303

[email protected]

PARIS SINGAPORE TOKYO

Giovanni Zanni, Director European Economics – Paris +33 1 70 39 0132 [email protected]

Jarrod Kerr, Director +65 6212 2078 [email protected]

Tomohiro Miyasaka, Director Japan Head + 81 3 4550 7171 [email protected]

Shinji Ebihara, Vice President +81 3 4550 9619 [email protected]

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Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an associate of CS or CS may be the only market maker in such investments. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgement at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR’s, 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 CS’s 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 CS’s 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 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. 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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 arm’s 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.

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