The value in Credit MarketsVictor Shohet

2009 Outlook

Deutsche Bank

Page – 2

US debt to GDP back to 1929 – A big pyramid scheme?

Source: Deutsche Bank, Federal Reserve, The Statistical History of the United States, From Colonial Times to the Present. By Ben Wattenberg

0%

50%

100%

150%

200%

250%

300%

350%

400%

1929 1935 1941 1947 1953 1959 1965 1971 1977 1983 1989 1995 2001 2007

Government GSE/Agency Financial ABS Household Corporate

Page – 3

Debt to GDP – International comparisons

0

200

400

600

800

1,000

1,200

1,400

1,600

1979 1983 1987 1991 1995 1999 2003 2007

Corporate Government

Household/Non Profit Financial

0%

50%

100%

150%

200%

250%

300%

350%

400%

450%

500%

1987 1990 1993 1996 1999 2002 2005 2008

Govt Fins Non-Fins HouseHolds

Japan UK

Source: Deutsche Bank, Japanese Ministry of Finance, Office of National Statistics

Page – 4

Global 35-54yr Dependency Ratios

0.30

0.35

0.40

0.45

0.50

0.55

0.60

0.65

0.70

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

US UK European J apan

Source: Deutsche Bank, UN Population Division.

Page – 5

Japanese 35-54yr Dependency Ratio vs. the Nikkei (left) and US 35-54yr Dependency Ratio vs. S&P 500 P/E Ratio (right)

Source: Deutsche Bank, Irrational Exuberance (second edition) Robert Shiller, S&P, UN Population Division

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

1970 1977 1984 1991 1998 2005

0.50

0.55

0.60

0.65

0.70

0.75

0.80Nikkei (LHS)

35-54yr Dependency Ratio (RHS)

0

5

10

15

20

25

30

35

40

45

50

1950196519801995201020252040

0.35

0.40

0.45

0.50

0.55

0.60

0.65

0.70

0.75

0.80P/E Ratio (LHS)

35-54yr Dependency Ratio (RHS)

Page – 6

35-54yr Dependency Ratios for Different Global Regions

0.30

0.35

0.40

0.45

0.50

0.55

0.60

0.65

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

Global North America & Europe (inc. UK) BRIC

Source: Deutsche Bank, UN Population Division.

Page – 7

Real S&P price since 1900 – US equities now back to 1995/96 levels and close to the long-term trend

Source: Deutsche Bank, Bloomberg, Irrational Exuberance (second edition) (Robert Shiller)

0

200

400

600

800

1,000

1,200

1900 1908 1916 1924 1932 1940 1948 1956 1964 1972 1980 1988 1996 2004

Actual Trend (1900-2008) Pre-Bubble Trend (1900-1994)

Page – 8

US profits and nominal GDP – US financials, a trillion dollar mean reversion?

Source: Bureau of Economic Analysis

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006

Nominal GDP

Financial Profits

Non-Financial Profits

Page – 9

Spreads now at levels last seen during the Great Depression but yields still someway of the highs

Source: Deutsche Bank, Bloomberg, Moody’s

0

2

4

6

8

10

12

14

16

18

20

1919 1933 1947 1961 1975 1989 2003

BBB Yield

0

100

200

300

400

500

600

700

800

1919 1933 1947 1961 1975 1989 2003

BBB Spread

Page – 10

5yr cumulative default rates: implied vs. actual

Spread Implied Default Rate Actual Default Rate (since 1970)Average 5yr

SpreadAverage

RecoveryZero Recovery Worst Average

iBoxx Euro Corporate 445 33% 20% 2.4% 0.9% Non-Financial 280 22% 13% N/A N/A Financial 713 49% 31% N/A N/A AA 255 20% 12% 1.8% 0.2% A 442 31% 19% 2.6% 0.6% BBB 640 44% 28% 5.8% 1.8%iBoxx Dollar Corporate 550 39% 24% 2.4% 0.9%

Non-Financial 400 30% 18% N/A N/AFinancial 718 46% 30% N/A N/AAA 360 28% 17% 1.8% 0.2%A 531 37% 23% 2.6% 0.6%BBB 743 47% 31% 5.8% 1.8%

iBoxx Sterling Corporate 771 50% 33% 2.4% 0.9% Non-Financial 348 26% 16% N/A N/A Financial 1,084 64% 43% N/A N/A AA 616 44% 27% 1.8% 0.2% A 713 45% 29% 2.6% 0.6% BBB 995 60% 40% 5.8% 1.8%High Yield USD HY 1,264 59% 44% 31.0% 19.3%

EUR HY 2,027 79% 63% 31.0% 19.3%iTraxx CDS Main 154 13% 7% 2.4% 0.9% Crossover 857 48% 34% 31.0% 19.3%CDX CDS Main 187 15% 9% 2.4% 0.9%

HY 1,262 62% 46% 31.0% 19.3%

Source: Deutsche Bank. (Average recovery levels: IG 44%, HY 38%)

Page – 11

Spreads required to compensate for default based on 5yr cumulative default rates by cohort (1 of 2)

Source: Deutsche Bank.

46.9% Recovery Rate 40.4% Recovery Rate

AAA AA A BBB IG BB B CCC-C SG

1990 0 0 0 7 2 264 676 446

1991 0 3 0 3 2 134 567 815 325

1992 0 3 0 0 1 32 417 649 195

1993 0 0 0 6 2 57 272 818 153

1994 0 0 0 8 2 64 228 330 138

1995 0 0 0 15 4 90 232 573 180

1996 0 0 1 15 5 105 246 845 211

1997 0 0 4 29 10 158 365 1,255 304

1998 0 0 6 37 14 184 529 1,192 414

1999 0 0 8 36 16 144 590 1,230 474

2000 0 0 9 35 16 82 547 1,467 466

2001 0 0 8 33 15 78 493 1,550 434

2002 0 0 4 25 10 81 256 1,265 305

2003 0 0 0 4 1 39 135 825 185

2004 0 2 14 3 7 45 114 486 135

Current Euro 135 282 480 589 442 1,356 1,958 4,962 1,743

Current Dollar 156 344 504 679 521 761 1,195 2,529 1,275

Current Sterling 182 429 681 960 670

2007 Tight Euro 17 28 49 62 48 154 261 468 218

2007 Tight Dollar 48 54 77 109 82 163 229 408 245

2007 Tight Sterling 52 60 89 109 85

Page – 12

Spreads required to compensate for default based on 5yr cumulative default rates by cohort (2 of 2)

Source: Deutsche Bank.

46.9% Recovery Rate 40.4% Recovery Rate

AAA AA A BBB IG BB B CCC-C SG

1970 0 0 5 16 10 99 376 197

1971 0 0 8 12 9 50 52 77

1972 0 0 4 17 10 38 101 67

1973 0 0 0 23 11 42 53 61

1974 0 0 0 20 10 53 103 65

1975 0 0 0 9 4 52 135 69

1976 0 0 0 11 4 50 53 56

1977 0 0 0 7 3 38 208 66

1978 0 9 0 16 7 58 317 97

1979 0 9 6 23 12 77 241 99

1980 0 0 9 20 11 106 424 164

1981 0 0 3 39 15 150 433 186

1982 0 0 13 29 15 250 389 299

1983 28 5 3 44 16 183 416 286

1984 18 20 17 20 19 246 406 304

1985 0 9 29 32 23 251 490 328

1986 0 14 21 68 28 281 549 370

1987 0 4 19 57 23 317 627 424

1988 0 4 14 46 18 324 643 443

1989 0 0 7 38 12 340 707 490

Page – 13

Dispersion of spread performance

Market Value Weighted Asset Swap Spread Single Bond Performance

Tier Sector 03-Dec-08 Current Change Largest Widening

Largest Tightening

Average

All Corporates 347 366 19 2,464 -588 88

All Non-Fin 294 238 -56 354 -588 -55

Senior Basic Materials 340 301 -39 354 -404 -67

Consumer Goods 305 254 -51 110 -204 -48

Consumer Services 363 273 -90 170 -271 -80

Health Care 185 146 -39 31 -137 -41

Industrials 334 282 -51 254 -251 -43

Oil & Gas 400 293 -107 75 -588 -156

Technology 337 287 -51 -29 -83 -50

Telecommunications

299 207 -92 97 -265 -83

Utilities 192 173 -20 75 -242 -17

Sub Basic Materials 642 703 61 159 18 74

Consumer Goods 651 785 134 134 134 134

Industrials 655 719 64 73 59 66

Utilities 513 587 74 112 36 74

All Financials 393 492 99 2,464 -519 222

Senior Financials 277 289 12 1,575 -519 39

LT2 Financials 399 695 296 1,793 -151 360

UT2 Financials 711 914 203 1,609 -90 310

T1 Financials 991 1,476 484 2,464 -50 523

Sub Financials 712 1,043 331 1,739 -78 398

Note: All calculations based on index asset swap spread levels.Source: Deutsche Bank

Page – 14

CDS to Bond Basis – The opportunityon a pro-forma portfolio of Investment Grade bonds

Page – 15

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