Negative Real Yields and Heightened Risk Aversion Pose Policy Dilemmas

July 25, 2012
Financial Conditions Watch
Bloomberg
Bloomberg
JULY 25, 2012
FINANCIAL CONDITIONS WATCH

GLOBAL MACRO TRENDS AND STRATEGIES
MICHAEL R. ROSENBERG
Inside This Issue:

Negative Real Yields on Safe Assets, Coupled With Heightened Investor Risk Aversion toward Risky Assets, Pose a Dilemma for Policymakers and Asset-Allocators Alike
and
Whats Left in the Feds Arsenal?
Monetary policy works in the rst instance by affecting nancial conditions, including the levels of interest rates and asset prices. Changes in nancial conditions in turn inuence a variety of decisions by households and rms, including choices about how much to consume, to produce, and to invest. Federal Reserve Chairman Ben S. Bernanke, March 2, 2007
Volume 5 No. 3
Available on the Bloomberg at FCW <go> and FCON <go>
Bloomberg
July 25, 2012
Table of Contents
Yield Spread/Volatility Watch ...........................................3 Overview..........................................................................4
Special Focus ................................................................10

Bloombergs U.S. Financial Condition Index .................19 U.S. Financial Condition Indicators ...............................20 Bloombergs Euro-Area Financial Condition Index ........24 Euro-Area Financial Conditions Indicators ....................25 Japan Financial Conditions Indicators ...........................26 UK Financial Conditions Indicators................................27 Federal Reserve Policy Watch ......................................28 G-10 Economic Outlook ................................................29 EMEA Economic Outlook ..............................................45 Asia Economic Outlook .................................................52 Latin America Economic Outlook...................................63 Yield Pick-Up of Currency Hedged Foreign Bonds .......69 Keeping Up With the Financial Crisis ............................70
July 25, 2012
Bloomberg
Yield Spread/Volatility Watch

Financial Conditions Relative to the Pre-Crisis Period
-- Jan. 1994-June 2008 -Avg. Std. Dev. Z-Score 46.6 19.0 39.2 31.6 20.6 35.9 -0.37 0.55 -0.25
Financial Conditions Relative to the Past 52 Weeks

---- 52-Week ---Avg. Std. Dev. Z-Score 41.2 34.2 43.2 7.6 7.7 7.0 -0.83 -0.49 -1.86
Latest U.S. Money-Market Spreads TED Spread 35 Libor/OIS Spread 30 CP/T-Bill Spread 30 U.S. Yield Curve Spreads 2-Yr./Fed Funds Spread -3.30 10-Yr./3-Mo. Spread 131 10-Yr./2-Yr. Spread 119 U.S. Agency Bond Spreads 2-Yr. Fannie Mae Spread 3 10-Yr. Agency Spread -14 U.S. Municipal Bond Spreads AAA Muni/10-Yr. Spread 76 AA Muni/10-Yr. Spread 106 A Muni/10-Yr. Spread 286 Baa Bond/10-Yr. Spread 373
Latest U.S. Money-Market Spreads TED Spread 35 Libor/OIS Spread 30 CP/T-Bill Spread 30 U.S. Yield Curve Spreads 2-Yr./Fed Funds Spread 10-Yr./3-Mo. Spread 10-Yr./2-Yr. Spread
36.1 137.7 79.9
76.1 116.1 82.5
-0.52 -0.06 0.47
-3 131 119
0.8 189.5 168.3
4.4 26.0 23.5
-0.95 -2.27 -2.10
27.6 56.5
16.1 20.3
-1.52 -3.48
U.S. Agency Bond Spreads 2-Yr. Fannie Mae Spread 3 10-Yr. Agency Spread -14 U.S. Municipal Bond Spreads AAA Muni/10-Yr. Spread 76 AA Muni/10-Yr. Spread 106 A Muni/10-Yr. Spread 286 Baa Bond/10-Yr. Spread 373
9.1 -8.6
5.1 10.9
-1.18 -0.50
-99.1 -91.0 -9.8 15.7
49.9 49.9 63.9 76.4
3.50 3.93 4.62 4.67
32.4 60.9 248.5 332.2
21.7 29.4 31.7 34.1
1.98 1.51 1.17 1.18
U.S. Investment-Grade Corporate Spreads AAA/10-Yr. Govt Spread 183 128.7 AA/10-Yr. Govt Spread 198 154.7 A/10-Yr. Govt Spread 239 175.0 Baa/10-Yr. Govt Spread 333 212.7 U.S. Swap Spreads U.S. 2-Yr. Swap Spread 22 U.S. 10-Yr. Swap Spread 14 U.S. 1-Yr. Fwd. Swap Yld.(%) 2
45.3 51.3 57.1 60.1
1.19 0.83 1.11 1.99
U.S. Investment-Grade Corporate Spreads AAA/10-Yr. Govt Spread 183 195.9 AA/10-Yr. Govt Spread 198 209.3 A/10-Yr. Govt Spread 239 244.9 Baa/10-Yr. Govt Spread 333 324.1 U.S. Swap Spreads U.S. 2-Yr. Swap Spread 22 U.S. 10-Yr. Swap Spread 14 U.S. 1-Yr. Fwd. Swap Yld.(%) 1.7
14.0 12.9 11.0 14.0
-0.96 -0.91 -0.58 0.60
41.2 57.2 5.9
18.5 23.0 1.0
-1.02 -1.89 -4.41
33.1 14.4 2.3
8.2 4.0 0.3
-1.31 -0.17 -2.21
North American Credit Default Swap Spreads IBOX 5-Yr. Invest. Grade 117 57.2 26.9 High-Yield Spreads High-Yield Corp. Spread EMBI+ Spread
2.21
North American Credit Default Swap Spreads IBOX 5-Yr. Invest. Grade 117 115.0 15.1 High-Yield Spreads High-Yield Corp. Spread EMBI+ Spread
0.12
654 358
524.0 583.8
189.5 324.0
0.68 -0.70
654 358
691.4 356.8
52.4 30.1
-0.72 0.06
U.S. Ination Protected Bond Yields 5-Yr. Tips Yield -1.15 10-Yr. Tips Yield -0.68 5-Yr. Breakeven Ination Rate1.68 10-Yr. Breakeven Ination Rate2.00 5-Yr. Breakeven in 5 Years 2.63 U.S. Equity Market S&P 500 S&P Financials MBIA VIX Index
2.41 2.81 2.20 2.06 2.54
1.17 0.90 0.41 0.44 0.08
-3.04 -3.86 -1.25 -0.13 1.15
U.S. Ination Protected Bond Yields 5-Yr. Tips Yield -1.15 -1.04 10-Yr. Tips Yield -0.68 -0.19 5-Yr. Breakeven Ination Rate1.68 1.78 10-Yr. Breakeven Ination Rate2.00 2.11 5-Yr. Breakeven in 5 Years 2.63 2.51 U.S. Equity Market S&P 500 S&P Financials MBIA VIX Index
0.22 0.25 0.18 0.14 0.15
-0.48 -1.96 -0.51 -0.76 0.81
1342.9 191.3 9.8 19.1
1058.4 395.8 42.9 19.3
312.2 59.2 15.7 6.6
0.91 -3.45 -2.11 -0.03
1342.9 191.3 9.8 19.1
1289.2 185.9 9.6 24.3
83.4 15.5 1.8 8.0
0.64 0.35 0.13 -0.65
Fixed Income/FX Market Volatility Move Index 62.9 Swaption Volatility Index 78.7 Euro-Dollar Volatility 11.1 Dollar-Yen Volatility Index 8.0
100.8 91.1 9.8 10.6
22.5 12.1 2.0 2.7
-1.68 -1.02 0.64 -0.98
Fixed Income/FX Market Volatility Move Index 62.9 Swaption Volatility Index 78.7 Euro-Dollar Volatility 11.1 Dollar-Yen Volatility Index 8.0
86.5 89.8 12.8 9.7
15.7 5.6 2.1 1.1
-1.51 -1.97 -0.76 -1.47
Notes: Unless noted otherwise, all indicators are basis-point yield spreads. Indicators highlighted in orange are signicantly above or below their January 7, 2000-June 29, 2008 average levels.
Notes: Unless noted otherwise, all indicators are basis-point yield spreads. Indicators highlighted in orange are signicantly above or below their 52-week average levels.
Bloomberg
Overview
July 25, 2012
When discussing the impact that risk appetite considerations are having on the nancial markets and the broader trend in economic activity, it is useful to distinguish between the level of risk appetite and changes in risk appetite. For example, as shown in Figure 1, not only is the level of nancial conditions lower than its pre-crisis average, but the volatility of nancial conditions has increased signicantly as well. As the stylized diagram in Figure 2 illustrates, the level of risk appetite in the pre-crisis period was fairly high as evidenced by the run-up in the prices of housing and other risky assets. Around that higher level of risk appetite,
Figure 1
monthly changes in risk appetite tended to be muted as evidenced by the persistently narrow Baa corporate-Treasury bond spread (see Figure 3) and the persistently low level of the VIX Index (see Figure 4). The post-crisis period portrays a very different picture for both the level and changes in risk appetite. As illustrated in Figure 2, not only is the level of risk appetite in the post-crisis period considerably lower than the levels that prevailed in the pre-crisis period, but changes in risk appetite around the new lower level are now considerably more volatile as well. Evidence of this pattern can be found in Figure 3, where the Baa corporate-Treasury spread in
Volatility of U.S. Financial Conditions in the Pre- and Post-Crisis Era
Figure 2
Stylized Model of the Post-Crisis Loss of Risk Appetite

Risk Appetite
Pre-Crisis Period of High Risk Appetite
Crisis Period
Pre-Crisis Period -Lower Volatility of Financial Conditions
Post-Crisis Period -Higher Volatility of Financial Conditions
Post-Crisis Period of Low Risk Appetite
2004
2007-08
2012
Source: Bloomberg
Source: Bloomberg
Figure 3
Figure 4
Baa Corporate/ 10-Year Treasury Yield Spreads

(2004-2012)
VIX Index of S&P 500 Volatility

(2004-2012)
Post-Crisis Period Of Higher Equity Market Volatility Post-Crisis Period Of Higher Baa Spreads Pre-Crisis Period Of Persistently Low Baa Spreads Pre-Crisis Period of Persistently Low Equity Market Volatility
Crisis Period Crisis Period
Source: Bloomberg
Source: Bloomberg
July 25, 2012

Figure 5

Figure 6
Bloomberg
U.S. Five-Year Tips Yield
S&P 500 Volume

(1995-2012)
(Treasury Ination Protected Sedcurities, 2004-2012)
Pre-Crisis Period
Crisis Period
Post-Crisis Period
Source: Bloomberg
Source: Bloomberg
the post-crisis period is not only higher than the pre-crisis average, but the volatility in that spread is now considerably greater as well. Figure 4 shows that the VIX Index in the post-crisis period is exhibiting signicantly larger and more frequent volatility spikes than was the case in the pre-crisis era. Distinguishing between the level and change in risk appetite provides insights into the dilemma facing households and fund managers in deciding how much of investor funds should be allocated to safe assets such as Treasuries, and how much to risky assets such as equities. With the overall level of risk appetite now considerably lower than it was pre-crisis, there has been a signicant shift in how economic agents are now allocating their portfolios between equities and bonds. For example, a recent Towers Watson survey of life insurance company CFOs found that a whopping 87% believed that there is a 50% or greater likelihood of a major disruption to the economy in the next 12 to 18 months. Given such extensive fears of potentially large downside risks, life insurance company CFOs are altering their business strategies in terms of exiting or altering existing product lines, and are at the same time adjusting their asset allocations accordingly.
In addition, investor surveys reveal that households are now allocating a greater share of their assets to xed-income products because of the perceived downside (negative tail) risk associated with equities. A recent Belgian central bank survey of Belgian households found that a relatively large number of respondents70.7%indicated that they were unwilling to take any nancial risk in todays environment, while 23.9% were willing to only take average risks with the expectation of earning average returns. Only 5.5% were willing to take above-average or substantial risks with the hope of earning above-average returns. Similar concerns were expressed in a recent survey of Australian households by the Reserve Bank of Australia. According to the RBA, Australian households appetite for risk appears to have declined in recent years with households having actively shifted their portfolios away from riskier assets. Evidence of a declining willingness to take on nancial risk is evidenced by the declining volume of equity market transactions (see Figure 5) and by the negative real yield on U.S. Treasuries. As shown in Figure 6, the real yield on ve-year TIPS has declined from an average positive reading of +2.0%-2.5% to a negative reading of -1.2% today.
Bloomberg
Figure 7

Figure 8
July 25, 2012
German Two-Year Bund Yield

(2004-12)
U.S. Net Household Worth

(1995-2012)
Pre-Crisis Period
Crisis Period
Post-Crisis Period
Source: Bloomberg
Source: Bloomberg
The fact that investors are willing to accept a negative real yield rather than move into potentially higher-returning riskier assets indicates that they are not condent that risky assets will generate signicantly attractive risk-adjusted returns to make such an asset-allocation shift worthwhile. Indeed, risk aversion is so pervasive at the moment in Europe that not only are real yields in the core markets in negative territory, but nominal yields in several core markets in the two-year area of the yield curve are negative (see Figure 7) or close to zero. Economic agents are thus left with a difcult choicehow much to allocate to bonds that offer negative real yields, and how much to allocate to equities that entail large perceived negative tail risk. Interestingly, the Financial Analyst Journal recently had a guest editorial by Andre F. Perold, who posed a question to investors on this subject. If investors set a targeted portfolio return of 5% per annum in real terms to nance current consumption and allocate their funds along traditional 60% equity/40% bonds lines, and given that U.S. real bond yield returns are presently negative at -1.2%, then equities would need to generate an annual expected real return of 9.1% per annum in order to generate a portfolio expected real return of 5% = (60% x 9.1%) + (40% x -1.2%). That would amount to an expected equity risk premium of 10.3% per annum in real terms (9.1% - (-1.2%)), which would be roughly 2.5 times its long-run historical average of 4.1%. (Note that the equity risk premium is dened as the excess return of equities over bonds.) If investors do not believe that the equity risk premium will be that high in the future, then they are left with two options. Then can either increase their exposure to risky assetsby increasing the share of equities in their portfolios to greater than 60%in order to meet their 5% real return target, or they would need to set a lower targeted real return for their portfolio that ts more closely with their more risk-averse leanings.
6
The prospect of anticipated lower real portfolio returns could be having a major bearing on the U.S. economic outlook and could inuence likely policy steps in the future. If it is assumed that households have a target for net household wealth, and allocate their savings to meet that target, then how far current wealth levels are deviating from their targeted levels could determine how much households are willing to spend and how much they are willing to save out of their current incomes. Consider the trend in net household wealth since the onset of the crisis shown in Figure 8. Net household wealth has fallen from a high of $67.5 trillion in the third quarter of 2007 to a low of $51.3 trillion in the rst quarter of 2009. Since the 2009 trough, net household wealth has recovered some of its lost ground, edging up to $62.9 trillion in the rst quarter of 2012. In real terms, net household wealth is probably down some 15% from its pre-crisis peak. If households wish to restore their net wealth to its pre-crisis path, but portfolio real returns are expected to be modest at best, then households will have to choose one of two paths: either (1) accept that it will take longer to restore net wealth back to its desired path, or (2) if they wish to speed up the process of restoring net wealth to its desired path and given the current low level of risk appetite, then more of household funds will need to be allocated to savings and less to consumption. This is an important issue for both the baby boom generation, who are currently saving for retirement, and for the next generation who are saving for a future home and the education of their children. Risk aversion, coupled with negative real yields on safe assets, poses a major hurdle for both of these two large segments of the population either more of household funds will need to be allocated to savings, or signicant shortfalls in desired wealth must inevitably result, which could have consequences for spending in the future.
July 25, 2012

Figure 9
Bloomberg
Short-Run and Long-Run Tradeoffs Between Ination and Unemployment

via the Phillips Curve
Inflation Rate
Elastic ShortRun Philips Curve
Inelastic LongRun Philips Curve
Increase in Inflation
In the short-run, an increase in inflation could lower the unemployment rate from U1 to U2.
U2
U3
U1
Unemployment Rate
Decrease in Unemployment
Source: Bloomberg
The downside risks associated with low real yields discussed here are at odds with conventional macroeconomic theory, which states that lower real yields are needed to boost economic activity when considerable economic slack exists, as it does today. In theory, lower real yields should encourage consumers and businesses to save less and spend more, and at the same time increase investor demand for risky assets. But with real interest rates already in negative territory, the questions become: Could a further decline of real interest rates actually be counterproductive? And how do you push real interest rates lower when nominal interest rates at both the front and back ends of the yield curve are already at or approaching the zero bound?
One way for the Fed to engineer an even lower real interest ratewhich has the support of leading academic economists such as Paul Krugman, Ken Rogoff and Greg Mankiw as well as key IMF economistsis for the Fed to consider raising its implicit target for U.S. ination from 2% today to perhaps 4%-6% for a period of time. Raising the ination rate temporarily would in theory: (1) help lower the real debt burden of over-indebted households and governments, (2) encourage households to spend more now rather than delay purchases to the future when prices are likely to be signicantly higher in a higher ination regime, (3) lower the level of U.S. unemployment by rolling up along a downward sloping Phillips (ination/unemployment tradeoff) curve (see Figure 9), and (4) lower the real interest rate further to encourage greater investment spending along a downward sloping IS curve (see Figure 10 on the following page).
Bloomberg
Figure 10
July 25, 2012
The Impact of Real Interest Rates on the Level of Output

via the Investment-Savings Schedule (IS Curve)
Real Interest Rate
Elastic InvestmentSavings Curve Inelastic InvestmentSavings Curve
In the short-run, an decrease in the real interest rate should increase the level of output from Y1 to Y2. Increase in Output
(+) 0 (-) r1
Decrease in Real Interest Rate
Y1 Y3
Y2 Output
A B C
r2
IS2
IS1
Source: Bloomberg
Raising the Feds implicit ination target faces a number of hurdles, however. First, and foremost, most macro models today posit that the output gap is a key determinant of U.S. ination. Therefore, given that the U.S. presently faces a negative output gap, it may not be easy to push the actual ination rate higher at a time when substantial economic slack exists. Second, simply raising the growth rate of the monetary base may not be enough to raise the U.S. ination rate. After all, U.S. ination has been fairly tame over the past 4-5 years despite the fact that the U.S. monetary base has tripled in size over that period, having risen from $820 billion in 2008 to $2.6 trillion today (see Figure 11). Third, attempting to reduce the real debt burden of households and governments via higher ination may not be that easy if a sizable share of that debt is oating rather than xed, or if the maturity of that debt is short rather than long. If a large share of the debt is oating or has a relatively short maturity, market participants will eventually adjust to the higher ination outlook by pushing up the yield on oatingrate securities and short-maturity debt. In such a case, the overall debt burden of over-leveraged households and governments would not be signicantly reduced, if at all. Fourth, targeting a higher ination rate for a few years and then returning to a lower ination rate down the road can pose problems for U.S. nancial institutions. In such a scenario, yields at the front end of the maturity spectrum would likely rise sharply to reect the higher ination rate in the short run, while yields at the longer end of the maturity
8
spectrum might not rise as much if ination is expected to return to its previous low level in the long run. This implies that the yield curve would likely invert, and an inverted yield curve has typically not been very friendly to the protability of U.S. nancial institutions. Fifth, neither the Phillips curve nor the IS curve illustrated in Figures 9 and 10 may be as elastic as shown. If both curves were more inelastic, as some studies have suggested, the impact of ination on employment and the level of economic activity may prove to be far more modest than ination-advocates contend.
Figure 11
U.S. Monetary Base

(2004-2012)
$2.615 Trillion
$824 Billion
Source: Bloomberg
July 25, 2012
Bloomberg
Finally, lowering the real interest rate deeper into negative territory could complicate asset allocation decisions further, particularly if investors appetite for risk remains depressed. This could have an adverse impact on consumer condence and spending decisions. All told, deliberately raising the ination rate with the hope of boosting the U.S. economy comes with a long list of risks that must be carefully considered before the monetary authorities undertake such a move. Indeed, they need to be aware that the proposed cure could end up being worse than the disease.
This may explain why Fed Chairman Bernanke has expressly ruled out the ination option as a realistic policy consideration at this time. A stronger case for targeting a higher ination rate could be made if outright deation were to present a serious threat. But for now at least, that scenario does not seem to be a near-term risk. In the article that follows, we consider what other policy options might be available to the Fed to help jumpstart the U.S. economy. Michael R. Rosenberg mrosenberg10@bloomberg.net (212) 617-3984
Bloomberg
Special Focus
July 25, 2012
The August FOMC meeting will likely be characterized by a continued debate over the objectives of monetary policy and a debate over Fed tactics during a time of slow growth and elevated unemployment. This latter debate centers on the expected returns of another round of large scale asset purchases by the Federal Reserve, which are generally conceded to be diminished relative to previous efforts. The Fed faces challenges in meeting its dual mandate of achieving maximum sustainable employment within the context of price stability, while playing the role of the de facto global lender of last resort and attempting to provide a modicum of certainty for investors. As such, the Feds afrmation of its zero interest rate policy until 2014 and continuation of Operation Twist, the latest program in an effort to pressure longer-term interest rates even lower, represented a continuation of tactics rather than a shift in policy. Indeed, the outcome of the June FOMC meeting suggested that the Fed might be buying time in hopes the November election will solve the scal gridlock in Washington. The U.S. xed income market had already anticipated the Feds June announcement and kept three-month Treasury bills and 10-year Treasury notes well within their trading ranges (see Figure 1). And as of this writing, the futures market now expects the rst Fed Funds rate hike to occur in mid-2015. Bond market bears were left waiting at the alter once again. As reported by Bloomberg News, the 3 percent return on Treasuries in the second quarter exceeded the 2.25 percent return on company debt and the 1.11 percent gain for mortgages. Compare that to the second-quarter 3.3% loss in
Figure 1
the U.S. equity market and the 7.9% loss in the commodity market as the U.S. economic recovery appeared to stall. Clearly, the global demand for safe-haven assets is having a profound effect on xed-income securities, pushing the yields on Treasuries and Bunds and even Gilts lower. Nevertheless, one would have to argue that at least some of the downward pressure on U.S. longer-term yields is attributable to the Feds zero interest-rate policy and to its quantitative easing programs. The question for investors is when will the Fed take its foot off the accelerator and allow both short-term and longer-term interest rates to rise once again? The FOMC now has a policy of clearly letting the market know exactly where it stands in terms of its economic projections and what it thinks will be the most appropriate
Figure 2
FOMC Projections of U.S. Real GDP Growth

(Projections of % Change in Real GDP as of April and June 2012)
(%)
4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2012 2013 April 2012 Projection
Source: Bloomberg
2.9 2.7 2.2 2.5 2.5 2.4 3.4 3.3
2014
Longer-Run
June 2012 Projection
U.S. 10-Year Treasury Note Yields

(July 2011-July 2012) Figure 3
FOMC Projections of U.S. Ination

(Projections as of April and June 2012)
(%)
2.5 2.0
Second Quarter 2012 Bull Market
2.0 1.8 1.8 1.5
2.0 2.0 1.9 1.8
November 2011February 2012 Range Trading
1.5 1.0
June 2012 Range Trading
0.5 0.0 2012 2013 April 2012 Projection 2014 Longer-Run June 2012 Projection
Source: Bloomberg
Source: Bloomberg
10
July 25, 2012
Bloomberg
monetary policy for the next three years. The FOMC also specically denes its longer-run targets for real economic growth, ination, and unemployment. In June, the FOMC reafrmed that it is looking for a moderate recovery from the Global Financial Crisis of 2007-09, with real GDP growth increasing from roughly 2% in 2012 to 3.25% by the end of 2014. The Fed expects ination to hover below-target at less than 2% while the unemployment rate remains above-target, falling to 7.4% over the next two years. As Figures 2-4 illustrate, changes in the FOMCs June economic projections were fairly predictable, given the Q2 slowdown after a warm winter front-loaded this years growth in the early months of the year. The FOMCs projections for real GDP growth and ination were knocked down a peg in 2012 and 2013, with the unemployment rate stuck closer to 8% than previously projected.
Indeed, the Bloomberg Economic Surprise Index {ECSURPUS Index} trended lower from the end of February to midJune 2012 (see Figure 5). As we reported last December, the deviations of analyst forecasts from the actual releases of economic indicators tend to signal shifts in the leading indicators of U.S. economic growth as well as trends in the bond and equity markets. Consumer condence also took a hit in the second quarter of 2012, as illustrated by the trend in the Bloomberg Consumer Comfort Index {COMF <go>} (see Figure 6). After being moribund for the four years since the onset of the Financial Market Crisis, U.S. consumer sentiment showed a resurgence earlier in the year as unemployment began to trend lower Note that since 2011, the BCCI has displayed a fairly direct relationship to the trends in the U.S. equity market (see Figure 7), perhaps indicating an increase in retail demand
Figure 5
Figure 4
Bloomberg Economic Surprise Index FOMC Projections of U.S. Unemployment

(Projections as of April and June 2012) (Analyst Expectations of Economic Data Releases, 2011-12)
(%)
9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0
7.9 8.1
7.5
7.8 7.1
7.4
4-Month Downswing March-July 2011 7-Month Upswing July 2011-February 2012 4-Month Downswing March-June 2012
5.6 5.6
2012
2013 April 2012 Projection
2014
Longer-Run
June 2012 Projection

Source: Bloomberg
Source: Bloomberg
Figure 6
Figure 7
Bloomberg Consumer Comfort Index

(2007-12)
Bloomberg Consumer Comfort Index and the S&P 500

(January 2011-July 2012)
Consumer Comfort Index S&P 500 Index
-30 -35 -40 -45 -50

2008-2011 Range Trading
1500 1450 1400 1350 1300 1250 1200
-55 -60 Jan-11
1150 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 1100 Jul-12
Bloomberg Consumer Comfort Index

Source: Bloomberg
S&P 500
Source: Bloomberg
11
Bloomberg
Figure 8

Figure 9 (1970-2012)
July 25, 2012
S&P 500 Earnings Yield vs. 10-Year Treasury Yield U.S. Booms and Busts
A Condensed History of U.S. Booms, Bust, and Financial Panics from 1792-2012 1792 1830s Alexander Hamilton has the U.S. Treasury purchase securities to stabilize panicked markets. Gold and silver shortages cause bank runs and the withdrawal of European funds from U.S. banks.
1857-59 Gold shortage and trust fraud spark panic selling of securities. 1869 1870s Fisk and Gould corner gold market, which then collapses under government pressure. Silver prices plunge and faltering railway investments cause closing of NYSE for 10 days. Unemployed mobs riot as businesses fail.
Source: Bloomberg
for higher-yielding equity investments as an alternative to negative real money-market rates and low expected bondmarket returns. Indeed, as Figure 8 indicates, the spread between the earnings yield of the U.S. equity market and the yield of 10-year Treasuries is at near-record levels. Despite projections of below-target ination and abovetarget unemployment throughout 2014, the expected timing of the Feds rst rate hike remains at the end of 2014, according to the poll of FOMC voting members. So after 4+ years of zero interest-rate policy, massive purchases of mortgage-backed securities to prop up the housing market, two massive rounds of purchases of longer-maturity bonds (Quantitative Easing), and two programs to extend the duration of its portfolio holdings (via Operation Twist), is the Fed condent that the economy is on a sustainable recovery path that will allow it to begin raising rates? Or has the Fed simply exhausted all of it options and nds itself in a holding pattern, hoping for the best? Interestingly, there doesnt seem to be much common ground. There are those who vehemently argue that the Fed has already done too much and there are those who adamantly claim that the Fed has not done nearly enough. At the one extreme are those that contend that the Feds quantitative easing has never been necessary and that the presence of the Fed distorts market activity, leading to booms and busts. One could certainly point to recent history, with the Fed being blamed for being too lax for too long after the 2000 recession. The Feds inordinately low policy rates from 2001-05 are commonly cited as prompting housing market excesses, leading to the Global Financial Crisis of 2008, the U.S. recession, and ultimately to the European Sovereign Debt Crisis. Before that, it was the so-called Greenspan Put, in which the Fed indirectly encouraged speculators to believe that the Fed would put a oor on any markets collapse.
12
1893-95 Railway failures cause bank runs and panic selling, depleting the gold in Fort Knox. Real-estate values drop precipitously. 1907 Global shortages of capital, cornering of the copper market, and the failure of New York's third largest trust cause the NYSE to lose half its value in the "Banker's Panic" of 1907. JP Morgan organizes emergency nancing.
1929-45 Stocks, that had quadrupled in value during the Roaring Twenties, crash on Black Monday and Black Tuesday, losing 89% of their value. Retaliatory global trade protectionism brings on the Great Depression. 1961 1970s 1987 The Kennedy recession is countered by stimulus spending, leading to the largest peace-time expansion. Stagation Energy shortages lead to low growth, high unemployment, and high ination. A global stock market crash, attributed to program trading, results in the largest one-day loss in the Dow-Jones Industrials Index.
2008-12 A housing bubble leads to the Lehman collapse, the Global Financial Crisis of 2007-09, the Great Recession, and the European Sovereign Debt Crisis.
Source: Stefan Kanfer, Booms and Busts, Wall Street Journal,
But those who contend that the Fed has done more harm than good are ignoring a long history before the Fed was put in charge of managing both the business cycle and the integrity of the nancial markets. As Figure 9 shows, U.S. history is replete with bank runs and panics, near disasters, and riots and recessions. The most interesting example, perhaps, was the Bankers Panic of 1907, when J.P. Morgan locked his fellow bankers in his mansion until they agreed to bankroll a nancial market bailout. Morgan also cajoled the major industrialists of the day to help fund the troubled trusts and arranged for foreign bankers to replenish the gold supply, thereby averting a collapse of the banking system and the New York Stock Exchange. In essence, J.P. Morgan behaved as an ad hoc modern-day Fed at a time when there was no Fed.
July 25, 2012

Figure 10

Figure 11
Bloomberg
U.S. Housing Inventory
U.S. Beveridge Curve 2001-2011

Relationship of U.S. Job Vacancies and the Unemployment Rate
Job Vacancy Rate (%)
4.0
Existing and Shadow (Foreclosures and 90-Days Late) Inventory

(Millions)
9
2001: Q1
3.5
8 7
3.0
2012: Q2 Esimtated
2.5
6 5 4
2.0
3
1.5 3.5 4.5 5.5 6.5 7.5 Unemployment Rate
2009: Q4 Recession Ends

8.5 9.5 10.5
2 2005 2006 2007 2008 Existing Inventory 2009 2010 Shadow Inventory 2011 2012
Source: Bloomberg
Source: Bloomberg
Then there are those who contend that the Fed has done all that it can in the aftermath of the Financial Crisis and subsequent economic downturn. A forceful argument can be made that the nancial shock to the economy resulted in a structural break in the labor market that the Fed is not well suited to address. The onset of hysteresisa one-time shock that permanently affects the path of the economy, in this case through the labor marketcannot be completely discounted, given the long duration of unemployment and job-mismatch facing many who are without work. Hysteresis may be part of the economic ecosystem that the central bank can likely do little to change, similar to what occurred in Western Europe in the 1970s and 1980s, a time that economists refer to as Euro-sclerosis. Consider a workforce that has become ill-suited to the rapid shift in demand for scientic, technological, and technical skill sets. Under such conditions the duration of unemployment increases, causing the skill sets of the jobless to deteriorate, which makes re-entry to the workforce all the more difcult. Should the duration of unemployment persist for a long enough period of time, individuals become detached from the workforce as do their expectations and attitudes regarding employment shift. While the loss of skills that underscore the development of human capital is paramount, shifting expectations regarding wages, living standards, and the loss of the stigma of unemployment can lead to longer-term problems in the labor market. In this respect, actual unemployment under conditions roughly approximating hysteresis can cause long-term unemployment to increase, reducing the overall pool of labor, which leads to slower growth and lower tax revenues, thus exacerbating the current scal problems of the federal government. So is hysteresis a problem that now affects the U.S. labor market? The evidence points to a potential problem, but is not yet conclusive. It is difcult to precisely identify the
emergence of a structural shift in the labor market in realtime, yet readily available employment data is instructive. In particular the shift outward of the Beveridge curvewhich shows the relationship between the unemployment rate and job vacancy ratesuggests a growing problem with job mismatch (see Figure 10). In 2001, a job vacancy rate of 2.7% was associated with an unemployment rate of 5.5%. But in 2012, a 2.7% job vacancy rate is now associated with 8.1% unemployment. At the same time, both the Federal Reserve and the OECD now estimate that the U.S. natural unemployment rate (NAIRU) has shifted upward from 5% to roughly 5.5%. While economists recognize that NAIRU can shift up or down over time, this could nevertheless suggest a deepseated labor-market problem. One additional issue that might be indicative of a structural form of unemployment is Spatial Lock, or the inability of workers to relocate due to an inability to sell their homes. The 2.4 million homes on the market (see Figure 11), in addition to a conservative estimate of 4.16 million in shadow inventorydened as foreclosures plus those 90 days late on their mortgagestend to indicate that the U.S. economy is not proting from the type of labor mobility that it has in past recoveries. The structural problems in the U.S. housing and labor market are inextricably linked. Roughly 23% of mortgage holders sit on negative equity positions in their homes, and another 5% hold near negative equity positions. The 2.3 million construction jobs that have been lost since the peak in 2007 and the historically subpar 708,000 annualized pace of housing startswhich should be 1.3 million to meet basic demographic changespoint not only to the probability of hysteresis in the domestic labor market, but to the apparent loss of efcacy of monetary policy in stimulating the housing market or bringing down unemployment.
13
Bloomberg
Figure 12

Figure 13
July 25, 2012
U.S. Unemployment Rate and Postwar Recessions

(1950-2012)
(%) (%)
U.S. Unemployment Rate by Education since 2000

(2000-12)
18 16 14 12 10 8 6 4 2 0 2000 2002
Total Some College
Source: Bloomberg
12 11 10 9 8 7 6 5 4 3 2 1950195519601965197019751980198519901995200020052010
Source: Bloomberg
2004
2006
Colege Grad
2008
2010
HS Grad
2012
Less than HS Diploma
As we will discuss below, clogged credit channels through which monetary policy traditionally stimulates the housing market are blocked due to tight credit conditions and the massive inventory of unsellable homes, which the ofcial data likely understates. Although one would need to see 1) a persistent shift in the unemployment rate and 2) an increase in rms difculty in lling of open positions before coming to the conclusion that a structural shift in employment is largely to blame for current high levels of unemployment, the direction of the data is not encouraging. That leads us to the other side of the argument, which is that in the absence of scal alternatives, the Fed could do more to spark a recovery and rectify the unemployment problem. Here, the argument is that the unemployment problem is less a structural issue than as a result of the most severe downturn since the Great Depression. As shown in Figure
Figure 14
12, the unemployment rate during and after the current recession has behaved much the way it has throughout the post-war period, rising sharply and peaking near the end of the past 10 recessions. Moreover, the Great Recession has been an equal opportunity disaster for all segments of the labor force. As shown in Figure 13, education is a major factor in determining whether or not you are unemployed, and the nancial crisis and the recession have clearly affected all education levels of society at the same time. Unemployment rose rapidly at the height of the nancial crisis and then tapered off once the economic stimulus provided by Congress in 2009 kicked in. Gender has also been a determinant of unemployment level in the post-war period (see Figure 14). From 1950 to 1975, females were more apt to be unemployed than males. But as the 1972 equal employment-opportunity legislation took effect and then as females became more highly educated than males, males were the more likely to be unemployed. For example, male unemployment reached 11.2% in October 2009 while female unemployment peaked a year later at 9% in November 2010. The non-structural argument says that this is a balancesheet recession and in the absence of scal alternatives, the Fed needs to take extraordinary actions. As such, there are calls for the Fed to raise ination expectations in order to get corporations and households to begin investing, with economists asking the Fed to drop its ination-ghting mantle until the economy reaches a sustainable level of growth. These voices contend that although the Fed has stated that it will keep the Fed Funds rate at the zero bound for an extended period, the Feds projection of below-target ination (less than 2%) now and in the distant future suggests that, at the slightest hint of ination, the Fed will slam on the brakes.
U.S. Employment Ratio by Gender since 1950

(1950-2012)
(%)
12 11 10 9 8 7 6 5 4 3 2 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Total
Source: Bloomberg
Male
Female
14
July 25, 2012

Figure 15

Figure 16
Bloomberg
U.S. M1 Money Supply
U.S. Monetary Base

(Year-over-Year Percent Change since 2004)
Source: Bloomberg
Source: Bloomberg
The growth of U.S. monetary aggregates has slipped of late, which has also dampened ination expectations. As shown in Figures 15, growth in the U.S. Monetary Base has declined back to pre-crisis levels, and M1 and M2 money-supply growth has slipped since the start of the year (see Figures 16-17). If the economy is in a liquidity trapand with short-term interest rates at the zero bound and long-term yields being pushed steadily lower by the Fed and by the global demand for safe-haven assetsthen is the Feds inaction a sign that the monetary options have run out?
Certainly, Japans experience with quantitative easing during its lost decades was unremarkable and the economy barely righted itself only after Japan nally dealt with its underperforming banks. But even then, an aging population of net savers and the rise of cheaper labor markets in the rest of Asia consigned Japan to low-growth status for roughly two decades. As Figure 18 suggests, the Feds recent experience with quantitative easing could be suffering from diminishing returns. By the end of the rst round of asset purchases by the Fed in 2010, the S&P 500 had shown an 80% increase. But subsequent purchase programs appear to have had a lesser impact, with the S&P 500 gaining 30% by the end of QE2, and then 17% during Operation Twist.
Figure 17
Figure 18
U.S. M2 Money Supply

Diminshing Wealth Effects from Fed Purchases

(Response of the the S&P500 to Fed QE Programs)
S&P 500 Index
1450
End of QE1
1350 1250
End of QE2
S&P 500 Gains 80%

1150 1050
S&P 500 Gains 30%

950 850 750 650 2009
Source: Bloomberg
S&P 500 Gains 17% During Operation Twist
2010
2011
2012
Source: Bloomberg
15
Bloomberg

Figure 19
July 25, 2012
If todays overleveraged U.S. households and underemployed population are the corollary to Japans aging net savers, then is increasing the money supply or bringing down long-term rates likely to have any effect on U.S. consumption and investment, much less the labor market? No matter what the cause of the stubbornly high unemployment rateif it is structural or if it is a result of the Financial Crisis and the economic downturnsolutions to solving the pressing labor market problems are likely to be controversial and expensive, and not within the realm of the Federal Reserve. Worker retraining programs such as those in the Scandinavian countries in response to the era of Euro-sclerosis required a sustained bi-partisan commitment that appears be absent in the U.S. polity currently. Fed Chairman Ben Bernanke has clearly called for a scal partner in reviving the U.S. economy. But that is probably unrealistic to expect. Nevertheless, should events dictate, one would have to assume that the Fed is unlikely to just sit there. Following are four clusters of possible policy options. 1) Buying Time The Fed has chosen to lengthen its extended maturity program by $267 billion, with the pace of purchases at $44 billion per month. Since the Fed started its Operation Twist program, the Fed has lengthened the maturity of its portfolio from 6.09 years to 8.87 years. The Fed could also extend its conditional commitment to keep rates low past 2014 until mid-2015. By extending that conditional commitment, the Fed would nonetheless be making an explicit hedge against further weakness in the domestic economy this year and a potential downdraft associated with the coming scal cliff next year. 2) Explicitly Commit Doves on the FOMC such as Chicago Fed President Charles Evans would prefer a shift in policy from a conditional commitment to explicit pledges linked to specic economic variables. For instance, Evans supports linking forward-looking guidance on policy to a decline in the unemployment rate to 7% or an increase in the ination rate to above 3%. 3) Aggressive Action While not a probable outcome yet, FOMC members Bernanke, Dudley and Yellen are more than willing to turn to further asset purchases to calm markets. While, the marginal benet of further Large Scale Asset Purchases (LSAP) is open to debate, they would be stabilizing during an external nancial shock and therefore cannot be ruled out in coming months. The asset purchases would likely come in two forms: sterilized and unsterilized. 3a) Sterilized LSAP The objective here is to keep rates low at the long end of the curve without the unintended consequences that accompanied the second round of LSAPs (i.e., speculative-driven increases in oil and commodity prices). A sterilized asset purchase program would consist of the Fed purchasing long-term bonds and then draining reserves created via purchases through either reverse
U.S. Output Gap

(1965-2012)
Source: OECD, Bloomberg
repurchase operations or term deposits, effectively quarantining the new money created through the purchases. 3b) Unsterilized LSAP Another full blown asset purchase program that would likely lean away from Treasury purchases toward buying of mortgage-backed securities to target the still depressed housing market. In a white paper released by the Fed earlier this year, the central bank clearly indicated it thinks that the effectiveness of monetary policy has been reduced through a blockage of the monetary transmission mechanism due to the problems in mortgage industry and housing market (which well discuss below). 4) Reducing Interest on Reserves The central bank can reduce interest rate paid on reservescurrently 0.25 basis pointsto zero, in an attempt to spur increased lending by banks, much in the same way the European Central Bank recently has done. The logic of this approach is straightforward: reduced incentives on the parts of banks to hold excess reserves could plausibly lead to an increase in lending to consumers and rms, supporting a rise in overall consumption and investment. While this will most likely be on the agenda at the upcoming August 1 FOMC meeting, scholarly work conducted at the New York Federal Reserve (http://tinyurl.com/lh74eo) suggests that a decline in the rate paid on excess reserves would result in a general shifting of reserves around the banking system, rather than reducing the overall level of reserves, and thus only a modest increase in lending. The quantity of money in the banking system is determined by the central bank. A reduction in that quantity would require reducing a substantial portion of their security holdings on the balance sheet, resulting in a net tightening of policy. Although reducing rates paid on excess reserves would result in marginal lower short-term rates, it will likely not do much to alter the quantity of reserves that banks hold on account at the Fed.
16
July 25, 2012

Figure 20
Bloomberg
Monetary Transmission Mechanism: A Granular Look

Open Market Operations
Reserves Federal Funds Rate Monetary Base
Loan Supply
Market Interest Rates
Asset Prices Levels
Real Interest Rates
Exchange Rate
Blockage
Blockage
Relative Asset Prices
Collateral
Wealth Channel
Blockage
Narrow Credit Channel
Broad Credit Channel
Interest Rate Channel
Exchange Rate Channel
Monetarist Channel
Aggregate Demand
Source: Adapted from Kenneth N. Kuttner and Patricia C. Mosser, The Monetary Transmission Mechanism: Some Answers and Further Questions, New York Federal Reserve, FRBNY Economic Policy Review, May 2002, http://www.newyorkfed.org/research/epr/02v08n1/0205kutt.pdf.
4) Regime Change This would involve a temporary lifting of the Feds ination target from 2% to 5%, and/or targeting growth in nominal GDP, with the central bank taking steps via asset purchases to meet the new policy objective. Although Fed Chairman Bernanke counseled the Japanese to take extraordinary measures during the most intense portion of their deationary trap during the late 1990s, it seems likely that the Fed would only turn to a regime switch in the direst of circumstances. Targeting nominal GDP might work, but it does carry risks of asset-price distortions. Nevertheless, with the policy rate constrained by the zero boundary and with the U.S. output gap currently estimated in the 3.5%-6% range (see Figure 19), another Lehman moment could tip the central bank in that direction. The Fed would probably only turn to regime change if it felt it needed to stabilize aggregate demand in the event of an outbreak of deation triggered by the U.S. slipping back into recession and/or an external nancial shock. The recent lapse in economic activity and the tepid hiring do not appear to have convinced policymakers of the necessity of regime change at this time. That implies more quantitative easing for now. That in turn implies the possibility of short-term prots for xed-income investors and the continued availability of prots for banks taking yield-curve carry-trade positions, earning the spread of
borrowing at nearly zero cost and investing in the long end of the Treasury curve. There are immense potential downsides to the current situation of monetary and scal policy inaction, starting with the deleterious impact of long-term unemployment on the economy and on the labor force. While an economy can make up for lost ground after a downturn by increasing investment, each hour of labor lost during a recession can never be recovered. Even more troubling is that long-term unemployment can leave personal scars that lead to distancing from the labor force and therefore an increased burden on the social safety net and a self-perpetuating poverty of ambition. Now what exactly can the Fed do to bolster employment conditions. Not much. After ve years of progressively unorthodox action, it is unclear what marginal economic benets can be derived from further asset purchases. Although purchasing mortgage-backed securities would likely bring down mortgage rates from already historically low levels near 3.6%, that will not unclog the problems in the credit markets, or reduce the backlog of homes ofcially on the market, nor the nearly 30% of mortgage holders sitting on negative or near-negative home equity positions, all of which are blocking the monetary transmission mechanism shown in Figure 20.
17
Bloomberg
July 25, 2012
If we are in a liquidity trap, and if the expected return on long-term investments is so low, then the amount of investment necessary to get the economy moving again is unlikely to come from the private sector. In fact, it could be argued that in this situation, expectations of low long-term interest rates actually inhibit investments, with investors unwilling to move out along the yield curve for low-returning/ higher-risk assets. While the Fed may ultimately choose to restart its asset purchase programmost likely at the September 13 FOMC meetingthe decline in long-term yields and the boost to asset prices and overall growth is likely to be less than previous efforts.
Monetary policy is a sub-optimal response to the current conditions of high unemployment and insufcient investment. Further security purchases under these conditions will likely not achieve much. Joseph Brusuelas jbrusuelas3@bloomberg.net Robert Lawrie rlawrie2@bloomberg.net
with contributions from
(212) 617-7664
(212) 617-2251
Peter Savvin psavvin3@bloomberg.net
(212) 617-5973
18
July 25, 2012
Bloomberg
Bloomberg U.S. Financial Conditions Index

Bloombergs two composite U.S. Financial Conditions indices track the overall stress in the U.S. money, bond, and equity markets {BFCIUS Index} and trends in selected asset-price movements and real long-term interest rates {BFCIUS+ Index}. These indices are available on the Bloomberg terminal at {FCON <go>}, and provide a useful gauge to assess the level of stress in the U.S. nancial markets.
Bloombergs U.S. Financial Conditions Index Components and Weights
---- Weights ---BFCIUS BFCIUS+ Money Market Ted Spread Commerical Paper/T-Bill Spread Libor-OIS Spread Bond Market Baa Corporate/Treasury Spread Muni/Treasury Spread Swaps/Treasury Spread High Yield/Treasury Spread Agency/Treasury Spread Equity Market S&P 500 Share Prices VIX Index Asset Bubbles Nasdaq/S&P 500 Ratio S&P Homebuilders/S&P 500 Ratio Equilibrium Yield Gap 5-Yr. Treasury Yield less Nom. GDP Growth Real Baa Corporate Yield less Average 11.1% 11.1% 11.1% 33.3% 6.7% 6.7% 6.7% 6.7% 6.7% 33.3% 16.7% 16.7% 33.3% 6.7% 6.7% 6.7% 20.0% 4.0% 4.0% 4.0% 4.0% 4.0% 20.0% 10.0% 10.0% 20.0% 10.0% 10.0% 20.0% 10.0% 10.0% 20.0% 100% 100%
Source: Bloomberg
The table below lists the components and weights used to calculate the Financial Conditions indices. The spreads and indices are normalized and combined, and then presented as Z-scores (dened as the number of standard deviations that nancial conditions are above or below the average level of nancial conditions observed during the January 1994-June 2008 pre-crisis period). According to the BFCIUS index, U.S. nancial conditions are roughly 0.2 standard deviations below their neutral level. The BFCIUS+ index remains positive, but slipping to 0.9 standard deviations above its neutral level on the relative strength of tech share prices, the steady improvement in home-building share prices, and the extremely low levels of medium-term real and nominal bond yields relative to their norms.
Bloombergs U.S. Financial Conditions Indices
(BFCIUS and BFCIUS+ Index, Daily Z-Score Values, 2007-2012)
Total
Contributions of the Money, Bond, and Equity Markets to Financial Conditions

Money-market conditions are once again barely positive for the rst time since last September. Both Ted spreads and commercial paper spreads have improved to the extent that they are now 10 basis points below their pre-crisis norms. The Libor-OIS spread remains about 12 basis points above its norm. Conditions in the bond market have deteriorated slightly as the various components have not kept up with the safe-haven demand for Treasuries. The recent focus on the nancial health of local municipalities and the states appears to be having an effect on the muni spread. Equity prices have been on a two-month uptrend since the beginning of June, with the VIX index trending lower more or less over that same time period. Nevertheless, the health of the economy is still in question and equity-market conditions are choppy and still below normal levels.
U.S. Financial Conditions Index Components
(Normalized Values, January 2007-April 11, 2012)
(Z-Scores)
2 1 0 -1 -2 -3 -4 -5 -6 -7 Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11 Bond Mkt
Jan-12 Equity Mkt
Jul-12
Financial Conditions Index
Money Mkt
Source: Bloomberg
19
Bloomberg
July 25, 2012
U.S. Financial Conditions Money-Market
TED Spread
(Three-Month US$ Libor less Three-Month T-Bill Rate)
(%) 6.0
Market Expectations of the Fed Funds Rate

(Actual Fed Funds Rate and the Futures Implied Rate)
5.0
4.0
3.0
2.0
1.0
0.0 2007
2008
2009 2010 2011 Fed Funds Rate
2012 2013 2014 2015 Futures Market Implied Rate
.TED Index GP <go>
FFA Comdty CT <go>
U.S. Libor-OIS Spread

(Three-Month US$ Libor less Three-Month Swap Rate)
Market Expectations of the Three-Month Euro-$ Rate

(CME 90-Day Euro-$ Futures)
.USLIBOIS Index GP <go>
EDA Comdty GP<go>
Commercial Paper/Three-Month T-Bill Spread

(90-Day Commercial Paper less 3-Mo. T-Bill Rate)
U.S. 2-Year/Fed Funds Rate Spread

(Two-Year Treasury Yield less Fed Funds Rate)
.CP3MOSPD Index GP <go>
.US02YFED Index GP <go>
20
July 25, 2012
Bloomberg
U.S. Corporate and Agency Bond Market Spreads

U.S. 10-Year Agency Spread
(10-Year Agency less 10-Year Treasury Yield))
U.S. 10-Year Swap Spread

(10-Year U.S. Swap less 10-Year Treasury Yield)
FNMGVN10 Index GP <go>
USSP10 Index <go>
U.S. Baa Corporate/Treasury Yield Spread

(Baa Corporate less 10-year Treasury Bond Yield)
U.S. High-Yield Corporate Spread

(JP Morgan Domestic High-Yield Corporate Yield Spread)
JPDFHYI Index GP <go> .BAA10Y Index GP<go>
EMBI+ Spread
(JP Morgan Emerging-Market Yield Spread)
U.S. AA Muni Bond Spread

(AA Muni less 10-Year Treasury Yield)
JPEMSOSD Index GP <go> .MAA10Y Index <go>
21
Bloomberg
U.S. Government Bond Market
U.S. 10-Year Treasury Yield
July 25, 2012
U.S. 10-Year/3-Month Spread

(10-Year Treasury Yield less Three-Month T-Bill Rate)
USGG10YR Index GP <go>
.US10Y03M Index GP <go>
U.S. 10-Year TIPS Yield

(10-Year Treasury Ination-Protected Securities)
U.S. 10-Year/2-Year Spread

(10-Year less Two-Year Treasury Yields)
USGGT10Y Index GP <go>
.US10Y02Y Index GP <go>
U.S. 10-Year Implied Breakeven Ination Rate

(10-Year Treasury less TIPS Yield)
Move Index
(Merrill Lynch One-Month Treasury Options Volatility Index)
MOVE Index GP <go> USGGBE10 Index GP<go>
22
July 25, 2012
Bloomberg
U.S. Financial Asset Prices

S&P 500 Index S&P Financials Index
SPX Index GP <go>
SPF Index GP <go>
U.S. Equity Market Volatility

(VIX Index of S&P 500 Volatility)
S&P 500 Price/Earnings Ratio
VIX Index GP <go>
SPX Index GP <go>
Euro-Dollar Volatility
(Three-Month Implied EUR Volatility)
Dollar-Yen Volatility
(Three-Month Implied JPY Volatility)
EURUSDV3M Index GP <go>
USDJPYV3M Index GP<go>
23
Bloomberg
July 25, 2012
Bloomberg Euro-Area Financial Conditions Index

Bloombergs Euro-area composite Financial Conditions index is now available on the terminal as {BFCIEU Index} and at {FCON <go>}. A counterpart to Bloombergs U.S. Financial Condition Index, the BFCIEU index tracks the overall stress in the Euro-area money, bond, and equity markets and provides a useful gauge to assess the level of stress in the Euro-area nancial markets. The table below lists the components and weights used to calculate the Euro Area Financial Conditions Index. The spreads and indices are normalized and combined, and then presented as Z-scores (dened as the number of standard deviations that nancial conditions are above or below the average level of nancial conditions observed during the January 1999-June 2008 pre-crisis period). According to the BFCIEU index, Euro-area nancial conditions are now roughly 1.8 standard deviations below their neutral (pre-crisis) level during this latest phase of the European sovereign debt crisis.
Bloombergs Euro-Area Financial Conditions Index Bloombergs Euro-Area Financial Conditions Index Components and Weights
---- Weights ---BFCIEU Money Market Euro TED Spread Euribor/OIS Spread 16.7% 16.7% 33.3% Bond Market JP Morgan High-Yield Europe Index EU 10-Year Swap Spread (BFCIEU Index, Daily Z-Score Values, 2003-2012)
16.7% 16.7% 33.3%
Equity Market Ratio of EuroStoxx to Its 5-Yr. Avg. VDAX Index
16.7% 16.7% 33.3%

Source: Bloomberg
Total
Source: Bloomberg
100%
Euro Area Financial Conditions and Euro Area Credit Conditions

After deteriorating in the second quarter, Euro area nancial conditions appear to be recovering once again. Market anxiety appears to have been ameliorated by Spains request for aid in June and by an ECB rate cut early in July. As the chart indicates, much of this years improvement in nancial conditions owes to the rebound of money-market spreads. The ECB has pumped liquidity into the market and both the Euro Ted spread and the Euribor/OIS spread are a third of what they were at the depth of the Sovereign Debt Crisis. Bond-market conditions have lost some ground in recent weeks as the high-yield and swap markets have not been able to keep up with the safe-haven demand for bunds. And the equity market, which appeared to be trending upward, has slipped once again.
24 Euro Area Financial Conditions and Components
(2007-2012)
(Z-Score)
2 0 -2 -4 -6 -8 -10 -12 -14 2007
2008
2009
2010
2011
Money Market (norm.) Equity Market (norm.)
2012
EU Financial Conditions Index Bond Market (norm.)

Source: Bloomberg
July 25, 2012
Bloomberg
Euro-Area Financial Conditions
ECB Policy Rate

(ECB Renancing Rate)
EUIBOR-OIS Spread
(Three-Month Euribor Rate less Three-Month Swap Rate)
EURR002W Index GP <go>
.EULIBOIS Index GP <go>
Euro-Area Equity Prices

(Dow-Jones Euro Stoxx Index)
Euro-Area Yield-Curve Spread

(10-Year less Three-Month Rate Euro Govt Bond Yield)
SX5E Index GP <go>
.EU10Y3M Index GP<go>
Euro 10-Year Swap Spreads
Europe Credit Default Swap Spreads

(iTraxx Europe Credit Default Swap Spread)
EUSS10 Index GP <go>
ITRXEBE Index GP<go>
25
Bloomberg
Japans Financial Conditions
July 25, 2012
Bank of Japan Policy Rate

(BoJ Overnight Call Target Rate)
TIBOR-OIS Spread
(Three-Month Tibor Rate less Three-Month Swap Rate)
BOJDTR Index GP <go>
.JPLIBOISIndex GP<go>
Japanese Equity Prices

(Tokyo Stock Price/TOPIX Index)
Japans Yield-Curve Spread

(10-Year less Three-Month Japanese Government Bond Yield)
TPX Index GP <go>
.JP10Y3M Index GP<go>
Japan 10-Year Swap Spreads
Japan Credit Default Swap Spreads

(iTraxx Theoretical Five-Year Credit Default Swap Spread)
JYSS10 Index GP <go>
ITRXAJE Index GP<go>
26
July 25, 2012
Bloomberg
U.K. Financial Conditions
Bank of England Policy Rate

(BoE Base Rate)
UK Libor-OIS Spread
(Three-Month Libor Rate less Three-Month Swap Rate)
UKBRBASE Index GP <go>
.UKLIBOIS Index GP<go>
UK Equity Prices
(FTSE 100 Share Price Index)
U.K. Yield-Curve Spread

(10-Year less Three-Month Gilt Yield)
UKX Index GP <go>
.UK10Y3M Index GP<go>
U.K. 10-Year Swap Spreads
BPSS10 Index GP <go>
27
Bloomberg
Federal Reserve Policy Watch
July 25, 2012
Baseline Taylor Rule Estimates of the Fed Funds Rate

(1987-2012)
Aggressive Model Estimates of the Fed Funds Rate

(1987-2012)
Source: Bloomberg; {TAYL <go>}
Fed Funds Rate Outlook Matrix

Aggressive Taylor Rule Estimates of the Fed Funds Rate at Selected Levels of Ination and Unemployment
2013 FOMC Central Tendency Projections 7.25 1.00 1.25 1.50 Core PCE Inflation Rate 1.75 1.80 2.00 2.25 2.50 2.75
Unemployment Rate 7.50 -1.30 -0.93 -0.55 -0.18 -0.10 0.20 0.57 0.95 1.33 7.75 -1.80 -1.43 -1.05 -0.68 -0.60 -0.30 0.07 0.45 0.82 8.00 -2.30 -1.93 -1.55 -1.18 -1.10 -0.80 -0.43 -0.05 0.32 8.20 -2.70 -2.33 -1.95 -1.58 -1.50 -1.20 -0.82 -0.45 -0.07 8.25 -2.80 -2.43 -2.05 -1.68 -1.60 -1.30 -0.93 -0.55 -0.18 8.50 -3.30 -2.93 -2.55 -2.18 -2.10 -1.80 -1.43 -1.05 -0.68 8.75 -3.80 -3.43 -3.05 -2.68 -2.60 -2.30 -1.93 -1.55 -1.18 9.00 -4.30 -3.93 -3.55 -3.18 -3.10 -2.80 -2.43 -2.05 -1.68
-0.80 -0.43 -0.05 0.32 0.40 0.70 1.08 1.45 1.83
Baseline Taylor Rule Projections of the Fed Funds Rate

(Based on FOMC Hawk/Dove/Central Tendency Economic Projections)
Source: Bloomberg; ; {G ECO 99 <go>}
28
July 25, 2012
Bloomberg
U.S. Economic Outlook

U.S. Economic Indicator Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 -3.8 2.0 6.6 9.1 0.3 5.0 52.5 581.0 0.2 -49.1 4.6 -44.8 -8.5 9.9 1.8 3.9 2.0 7.0 9.0 0.2 3.9 52.5 647.0 1.2 -53.0 4.9 -44.5 -8.7 9.7 -3.5 2.1 5.8 8.9 0.6 4.5 51.8 630.0 0.9 -53.2 4.4 -45.7 -8.4 9.6 -3.4 2.2 5.6 8.7 0.2 4.0 52.2 708.0 0.5 -50.2 4.2 -48.8 -8.3 9.7 3.0 3.0 2.2 4.7 8.5 0.9 3.3 53.1 697.0 0.0 -47.5 4.0 -51.7 -8.3 9.7 -2.9 2.3 4.1 8.3 0.7 3.2 54.1 720.0 0.6 -44.8 3.1 -52.9 -8.1 10.4 -2.9 2.2 3.4 8.3 0.4 2.9 52.4 718.0 1.0 -38.8 2.9 -45.4 -8.1 10.2 1.9 2.7 2.3 2.8 8.2 -0.6 2.0 53.4 706.0 0.4 -34.7 2.9 -52.6 -8.2 10.0 -2.3 2.3 1.9 8.1 0.8 1.9 54.8 747.0 -0.5 -37.6 2.9 -50.6 -7.5 10.0 -1.7 2.3 0.7 8.2 -0.2 1.8 53.5 711.0 -0.2 -39.3 2.9 -48.7 -7.9 9.7
Real GDP (qoq % saar) -Consumer Price Index (yoy %) 3.6 Core CPI (yoy %) 1.8 Producer Price Index (yoy %) 7.1 Unemployment Rate (%) 9.1 Industrial Production (yoy %) 0.9 Leading Indicator (yoy %) 5.9 Purchasing Managers Index 51.4 Housing Starts (000) 614.0 Retail Sales (yoy %) 0.0 Consumer Condence -47.6 Personal Income (yoy %) 5.0 Trade Balance (US$ bn) -45.6 Govt Surplus/Decit (% of GDP) -8.2 M2 Money Supply (yoy %) 8.0
1.7 2.2 0.7 8.2 0.4 1.5 49.7 760.0 -0.5 -36.1
-8.0 9.3
U.S. Real GDP Growth

(Quarter-over-Quarter Seasonally Adjusted Annualized Rate)
U.S. Consumer Price Ination Rate

(Year-over-Year % Change)
GDP CQOQ Index GP <go>
CPI YOY Index GP<go>
U.S. Unemployment Rate

(%)
U.S. Current-Account Balance

(% of GDP)
USURTOT Index GP <go>
EHCAUS Index GP<go>
29
Bloomberg U.S. Dollar at a Glance
July 25, 2012
U.S. Dollar Index

(DXY Index)
U.S. Short-Term Interest Rate

(Three-Month Deposit Rate)
DXY Index GP <go>
USDRC BDSR Curncy GP <go>
U.S. Dollar PPP % Over/Undervaluation

(Based on Bloombergs Long-Term Averaging Methodology)
U.S. Cumulative Carry Return

(Long-Dollar/Short-Euro Carry Return)
.PPPUSD G Index GP <go>
USDEURCR Index GP<go>
Euro-Dollar Implied Volatility

(One-Month Implied Volatility)
U.S. Credit Default Swap Spread

(Five-Year CDS)
EURUSDV1M BGN Index GP <go>
ZCTO CDS EUR SR 5Y MSG1 Curncy GP<go>
30
July 25, 2012
Bloomberg
Euro Area Economic Outlook

Economic Indicators Real GDP (yoy %) Consumer Price Index (yoy %) Core CPI (yoy %) Producer Price Index (yoy %) Unemployment Rate (%) Industrial Production (yoy %) Leading Indicator (yoy %) Business Condence Index Retail Sales (yoy %) Consumer Condence Index Consumer Credit (EUR bn) Trade Balance (EUR bn, sa) M2 Money Supply (yoy %) Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 -2.5 1.2 6.1 10.1 4.2 0.0 0.4 -0.4 -11.5 629.4 -4129 2.2 -2.5 1.2 5.8 10.2 5.8 -0.4 0.1 0.0 -16.8 630.6 -2415 2.3 1.3 3.0 1.6 5.8 10.3 2.2 -0.8 -0.1 -1.1 -19.3 629.6 788 2.4 -3.0 1.6 5.5 10.5 0.9 -1.1 -0.2 -0.7 -20.1 629.0 276 1.9 -3.0 1.6 5.4 10.6 0.0 -1.4 -0.4 -1.4 -20.5 627.0 3911 1.9 0.7 2.7 1.6 4.3 10.7 -1.7 -1.6 -0.3 -1.7 -21.3 628.1 7414 2.0 -2.7 1.5 3.9 10.8 -1.7 -1.7 -0.2 -1.1 -20.7 624.0 4706 2.2 -2.7 1.5 3.7 10.8 -1.6 -1.7 -0.2 -2.0 -20.3 619.1 2046 2.6 0.0 2.7 1.6 3.5 11.0 -1.5 -1.7 -0.3 0.0 -19.1 617.9 4438 3.1 -2.6 1.6 2.6 11.0 -2.4 -0.5 -3.5 -19.9 618.3 4527 2.5 -2.4 1.6 2.3 11.1 -2.8 -0.8 -1.7 -19.3 619.2 6290 2.8 -2.4 1.6 --
-0.9 -19.8 -21.6
Euro-Area Real GDP Growth

Euro-Area Consumer Price Ination Rate

EUGNEMUY Index GP <go>
ECCPEMUY Index GP<go>
Euro-Area Unemployment Rate

(%)
Euro-Area Current-Account Balance

(% of GDP)
UMRTEMU Index GP <go>
EHCAEU Index GP<go>
31
Bloomberg Euro at a Glance
July 25, 2012
U.S. Dollar/Euro Exchange Rate

(Spot Rate)
Euro Short-Term Interest Rate

EUR Curncy GP <go>
EUDRC BDSR Curncy GP <go>
Euro PPP % Over/Undervaluation

Euro Cumulative Carry Return

(Long-Euro/Short-U.S.Dollar Carry Return)
.PPPEUR G Index GP <go>
EURUSDCR Index GP<go>
Euro Implied Volatility

Germany Credit Default Swap Spread

(Five-Year CDS)
EURUSDV1M BGN Index GP <go>
ZCTO CDS EUR SR 5Y MSG1 Curncy GP<go>
32
July 25, 2012
Bloomberg
Japan Economic Outlook

Japan Economic Indicators Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 -0.5 ---0.6 --2.8 ---0.3 -0.5 -0.9 -0.4 -0.2 -0.2 -0.1 -0.3 -0.5 -0.6 -0.1 -0.4 -0.5 -0.3 -0.4 -0.3 -0.3 -0.5 -0.8 -0.6 -0.2 -0.2 -0.4 -0.1 -0.4 -0.7 -0.2 0.2 0.1 4.2 4.4 4.5 4.5 4.6 4.5 4.5 4.6 4.4 -2.4 0.9 -2.9 -3.0 -1.6 1.5 14.2 12.9 6.0 0.3 0.3 0.2 0.2 0.2 0.2 0.2 47.2 46.4 45.8 45.6 45.7 45.3 48.7 47.6 47.2 46.2 -1.1 1.9 -2.2 2.5 1.8 3.4 10.3 5.7 3.6 38.5 38.5 37.7 38.1 39.4 39.1 40.1 40.3 40.7 40.8 -1.9 -0.4 -3.2 0.5 -2.3 2.3 3.4 2.6 4.0 -57.4 -433.8 -548.8 -486.4 -491.8 -322.9 -621.4 -485.8 -618.3 -300.8 2.7 2.8 3.0 3.2 3.1 2.9 3.0 2.6 2.2 2.2 --
Real GDP (yoy %) --Consumer Price Index (yoy %) 0.1 -0.2 Core CPI (yoy %) -0.1 -0.2 Producer Price Index (yoy %) -0.6 -0.5 Unemployment Rate (%) 4.7 4.4 Industrial Production (yoy %) -1.7 1.6 Leading Indicator (yoy %) 0.4 0.4 Business Condence Index 47.1 46.4 Retail Sales (yoy %) 0.6 -2.6 Consumer Condence Index 37.7 37.5 Household Spending (yoy %) -2.1 -4.1 Trade Balance (JPY bn, sa) -142.5 -266.0 M2+CD Money Supply (yoy %) 3.0 2.7
46.6
Japan Real GDP Growth

Japan Consumer Price Ination Rate

JGDPNSAQ Index GP <go>
JNCPT
Index GP<go>
Japan Unemployment Rate

(%)
Japan Current-Account Balance

(% of GDP)
JNUE Index GP <go>
EHCAJP Index GP<go>
33
Bloomberg Japanese Yen at a Glance
July 25, 2012
Japanese Yen/U.S. Dollar Exchange Rate

(Spot Rate)
Japan Short-Term Interest Rate

JPY Curncy GP <go>
JYDRC BDSR Curncy GP <go>
Japanese Yen PPP % Over/Undervaluation

Japanese Yen Cumulative Carry Return

(Long-Yen/Short-U.S. Dollar Carry Return)
.PPPJPY G Index GP <go>
JPYUSDCR Index GP<go>
Yen Implied Volatility

Japan Credit Default Swap Spread

(Five-Year CDS)
USDJPYV1M BGN Index GP <go>
JGB CDS USD SR 5Y Corp GP<go>
34
July 25, 2012
Bloomberg
U.K. Economic Outlook

U.K. Economic Indicators Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 -5.0 5.0 18.5 7.9 -0.9 -1.3 98.8 49.6 -1.2 -30.0 0.3 -8711 --1.1 -0.5 5.2 5.6 5.3 5.8 16.3 18.1 8.1 8.3 -1.2 -1.5 -1.6 -1.9 93.2 89.8 52.6 51.1 -1.6 0.0 -31.0 -30.0 0.5 0.6 -8746 -10249 --8.8 -0.7 -1.7 -5.4 5.6 14.5 8.3 -2.3 -2.1 89.8 52.8 0.4 -32.0 0.1 -7991 --2.8 -5.2 5.3 13.8 8.4 -3.1 -2.3 89.2 52.9 -0.4 -31.0 0.4 -9273 --2.6 0.6 4.8 5.0 8.9 8.4 -2.7 -2.3 88.6 53.2 1.2 -33.0 0.0 -7471 -8.3 -2.5 -3.9 4.0 6.5 8.4 -3.9 -2.3 93.6 58.6 0.6 -29.0 0.2 -7880 --2.5 -3.7 3.8 7.7 8.3 -2.5 -2.1 93.9 49.7 0.9 -29.0 0.3 -8585 --3.9 -0.2 3.6 3.7 5.4 8.2 -2.8 -2.0 91.5 50.9 2.7 -31.0 0.7 -8582 -8.3 -4.8 -3.5 3.5 1.0 8.2 -2.0 95.7 51.6 -0.8 -31.0 0.4 -9709 --4.0 -3.1 3.1 0.0 8.1 -1.6 91.0 51.1 2.7 -29.0 0.7 -8363 --4.1 -0.8 2.8 2.8 -2.3 --
Real GDP (qoq % saar) Retail Price Index (yoy %) Core RPI (yoy %) Producer Price Index (yoy %) Unemployment Rate (%) Industrial Production (yoy %) Leading Indicator (yoy %) Economic Sentiment Index Mortgage Approvals (000) Retail Sales (yoy %) Consumer Condence Consumer Credit (GBP bn) Trade Balance (GBP mn) Govt Surplus/Decit (% of GDP) M4 Money Supply (yoy %)
92.9 2.2 -29.0
--
U.K. Real GDP Growth

U.K. Retail Price Ination Rate

UKGRABIY Index GP <go>
UKRPYOY Index GP<go>
U.K. Unemployment Rate

(%)
U.K. Current-Account Balance

(% of GDP)
UKUEILOR Index GP <go>
EHCAGB Index GP<go>
35
Bloomberg British Pound at a Glance
July 25, 2012
U.S. Dollar/British Pound Exchange Rate

(Spot Rate)
U.K. Short-Term Interest Rate

GBP Curncy GP <go>
BPDRC BDSR Curncy GP <go>
British Pound PPP % Over/Undervaluation

British Pound Cumulative Carry Return

(Long-Sterling/Short-U.S. Dollar Carry Return)
.PPPGBP G Index GP <go>
GBPUSDCR Index GP<go>
British Pound Implied Volatility

U.K. Credit Default Swap Spread

(Five-Year CDS)
GBPUSDV1M BGN Index GP <go>
UKT CDS USD SR 5Y MSG1 Curncy GP<go>
36
July 25, 2012
Bloomberg
Canada Economic Outlook

Canada Economic Indicators Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Real GDP (qoq % saar) -Consumer Price Index (yoy %) 2.7 Core RPI (yoy %) 1.2 Producer Price Index (yoy %) 5.3 Unemployment Rate (%) 7.3 Industrial Production (yoy %) 2.2 Leading Indicator (yoy %) 0.6 Purchasing Managers Index 45.4 Housing Starts (saar, 000s) 213.1 Retail Sales (yoy %) 4.6 Consumer Condence 83.6 Trade Balance (C$ bn) 0.0 Trade Balance with U.S. (US$ bn) 3.6 M2 Money Supply (yoy %) 4.2 -3.1 1.5 5.4 7.3 2.7 0.6 57.6 191.4 4.4 76.9 -0.5 2.7 4.4 4.5 3.2 1.9 5.6 7.2 4.3 0.5 63.4 209.2 4.9 77.2 1.3 4.3 5.2 -2.9 1.5 4.8 7.4 3.3 0.4 55.6 211.3 5.0 73.9 -0.5 3.6 5.8 -2.9 1.6 4.3 7.5 3.4 0.3 57.1 186.2 3.6 78.6 1.0 4.7 6.4 1.9 2.3 1.3 2.6 7.5 2.7 0.3 53.6 200.4 3.9 72.0 3.2 6.0 6.4 -2.5 1.6 2.4 7.6 1.6 0.2 55.7 200.6 4.8 76.0 2.0 6.1 6.9 -2.6 1.7 1.8 7.4 0.8 0.2 66.0 204.2 4.0 77.4 0.1 4.6 6.7 1.9 1.9 1.5 1.1 7.2 -0.1 0.3 65.0 214.2 4.0 81.8 0.1 4.4 6.6 -2.0 1.9 0.5 7.3 1.1 52.2 252.0 3.2 77.2 -0.6 3.6 6.8 -1.2 1.5 0.7 7.3
1.5 1.7 7.2
66.3 217.4 3.1 83.1 -0.8 3.2 7.3
55.3 222.7 77.5
Canada Real GDP Growth

(Quarter-over-Quarter % Change, Seasonally Annualized Rate)
Canada Consumer Price Ination Rate

CGE9ANN Index GP <go>
CACPIYOY Index GP<go>
Canada Unemployment Rate

(%)
Canada Current-Account Balance

(% of GDP)
CANLXEMR Index GP <go>
EHCACNY Index GP<go>
37
Bloomberg Canadian Dollar at a Glance
July 25, 2012
Canadian Dollar/U.S. Dollar Exchange Rate

(Spot Rate)
Canadian Short-Term Interest Rate

CAD Curncy GP <go>
CDDRC BDSR Curncy GP <go>
Canadian Dollar PPP % Over/Undervaluation

Canadian Dollar Cumulative Carry Return

(Long-C$/Short-US$ Carry Return)
.PPPCAD G Index GP <go>
CADUSDCR Index GP<go>
Canadian Dollar Implied Volatility

USDCADV1M BGN Index GP <go>
38
July 25, 2012
Bloomberg
Australian Dollar at a Glance
U.S. Dollar/Australian Dollar Exchange Rate

(Spot Rate)
Australia Short-Term Interest Rate

AUD Curncy GP <go>
ADDRC BDSR Curncy GP <go>
Australian Dollar PPP % Over/Undervaluation

Australian Dollar Cumulative Carry Return

(Long-A$/Short-US$ Carry Return)
.PPPAUD G Index GP <go>
AUDUSDCR Index GP<go>
Australian Dollar Implied Volatility

Australia Credit Default Swap Spread

(Five-Year CDS)
AUDUSDV1M BGN Index GP <go>
AUSTLA CDS USD SR 5Y MSG1 Curncy GP<go>
39
Bloomberg
July 25, 2012
New Zealand Dollar at a Glance
U.S. Dollar/New Zealand Dollar Exchange Rate

(Spot Rate)
New Zealand Short-Term Interest Rate

NZD Curncy GP <go>
NDDRC BDSR Curncy GP <go>
New Zealand Dollar PPP % Over/Undervaluation

New Zealand Dollar Cumulative Carry Return

(Long-NZ$/Short-US$ Carry Return)
.PPPNZD G Index GP <go>
NZDUSDCR Index GP<go>
New Zealand Dollar Implied Volatility

New Zealand Credit Default Swap Spread

(Five-Year CDS)
NZDUSDV1M BGN Index GP <go>
NZ CDS USD SR 5Y MSG1 Curncy GP<go>
40
July 25, 2012
Bloomberg
Swiss Franc at a Glance
Swiss Franc/U.S. Dollar Exchange Rate

(Spot Rate)
Switzerland Short-Term Interest Rate

CHF Curncy GP <go>
SFDRC BDSR Curncy GP <go>
Swiss Franc PPP % Over/Undervaluation

Swiss Franc Cumulative Carry Return

(Long-Swiss Franc/Short-US$ Carry Return)
.PPPCHF G Index GP <go>
CHFUSDCR Index GP<go>
Swiss Franc Implied Volatility

Switzerland Credit Default Swap Spread

(Five-Year CDS)
USDCHFV1M BGN Index GP <go>
SWISS CDS USD SR 5Y MSG1 Curncy GP<go>
41
Bloomberg Danish Krone at a Glance
July 25, 2012
Danish Krone/U.S. Dollar Exchange Rate

(Spot Rate)
Denmark Short-Term Interest Rate

DKK Curncy GP <go>
DKDRC BDSR Curncy GP <go>
Danish Krone PPP % Over/Undervaluation

(Based on Bloombergs Long-Term Averaging PPP Methodology)
Danish Krone Cumulative Carry Return

(Long-Krone/Short-US$ Carry Return)
.PPPDKK G Index GP <go>
DKKUSDCR Index GP<go>
Danish Krone Implied Volatility

Denmark Credit Default Swap Spread

(Five-Year CDS)
USDDKKV1M BGN Index GP <go>
DENK CDS USD SR 5Y MSG1 Curncy GP<go>
42
July 25, 2012
Bloomberg
Norwegian Krone at a Glance
Norwegian Krone/U.S. Dollar Exchange Rate

(Spot Rate)
Norway Short-Term Interest Rate

NOK Curncy GP <go>
NKDRC BDSR Curncy GP <go>
Norwegian Krone PPP % Over/Undervaluation

Norwegian Krone Cumulative Carry Return

(Long-Krone/Short-US$ Carry Return)
.PPPNOK G Index GP <go>
NOKUSDCR Index GP<go>
Norwegian Krone Implied Volatility

Norway Credit Default Swap Spread

(Five-Year CDS)
USDNOKV1M BGN Index GP <go>
NORWAY CDS USD SR 5Y Corp GP<go>
43
Bloomberg Swedish Krona at a Glance
July 25, 2012
Swedish Krona/U.S. Dollar Exchange Rate

(Spot Rate)
Sweden Short-Term Interest Rate

SEK Curncy GP <go>
SKDRC BDSR Curncy GP <go>
Swedish Krona PPP % Over/Undervaluation

Swedish Krona Cumulative Carry Return

(Long-Krona/Short-US$ Carry Return)
.PPPSEK G Index GP <go>
SEKUSDCR Index GP<go>
Swedish Krona Implied Volatility

Sweden Credit Default Swap Spread

(Five-Year CDS)
USDSEKV1M BGN Index GP <go>
SWED CDS USD SR 5Y MSG1 Curncy GP<go>
44
July 25, 2012
Bloomberg
Czech Koruna at a Glance
Czech Koruna/U.S. Dollar Exchange Rate

(Spot Rate)
Czech Koruna Short-Term Interest Rate

CZK Curncy GP <go>
CKDRC BDSR Curncy GP <go>
Czech Republic Foreign Currency Reserves

(Ofcial Reserve Assets, US$ bn.)
Czech Krona Cumulative Carry Return

(Long-Czech Koruna/Short-US$ Carry Return)
WIRACZEC Index GP <go>
CXKUSDCR Index GP<go>
Czech Koruna Implied Volatility

Czech Republic Credit Default Swap Spread

(Five-Year CDS)
USDCZKV1M BGN Index GP <go>
CZECH CDS USD SR 5Y MSG1 Curncy GP<go>
45
Bloomberg Hungarian Forint at a Glance
July 25, 2012
Hungarian Forint/U.S. Dollar Exchange Rate

(Spot Rate)
Hungarian Foring Short-Term Interest Rate

HUF Curncy GP <go>
HFDRC BDSR Curncy GP <go>
Hungary Foreign Currency Reserves

Hungarian Forint Cumulative Carry Return

(Long-Forint/Short-US$ Carry Return)
HUCRESRV Index GP <go>
HUFUSDCR Index GP<go>
Hungarian Forint Implied Volatility

Hungary Credit Default Swap Spread

(Five-Year CDS)
USDHUFV1M BGN Index GP <go>
REPHUN CDS USD SR 5Y MSG1 Curncy GP<go>
46
July 25, 2012
Bloomberg
Icelandic Krona at a Glance
Icelandic Krona/U.S. Dollar Exchange Rate

(Spot Rate)
Iceland Short-Term Interest Rate

ISK Curncy GP <go>
IKDRC BDSR Curncy GP <go>
Iceland Foreign Currency Reserves

Icelandic Krona Cumulative Carry Return

(Long-Krona/Short-US$ Carry Return)
ICIRRA Index GP <go>
ISKUSDCR Index GP<go>
Iceland Credit Default Swap Spread

(Five-Year CDS)
ICELND CDS USD SR 5Y MSG1 Curncy GP<go>
47
Bloomberg Poland Zloty at a Glance
July 25, 2012
Polish Zloty/U.S. Dollar Exchange Rate

(Spot Rate)
Poland Short-Term Interest Rate

PLN Curncy GP <go>
PZDRC BDSR Curncy GP <go>
Poland Foreign Currency Reserves

Polish Zloty Cumulative Carry Return

(Long-Zloty/Short-US$ Carry Return)
PORAFORX Index GP <go>
PLNUSDCR Index GP<go>
Polish Zloty Implied Volatility

Poland Credit Default Swap Spread

(Five-Year CDS)
USDPLNV1M BGN Index GP <go>
POLAND CDS USD SR 5Y MSG1 Curncy GP<go>
48
July 25, 2012
Bloomberg
Russian Ruble at a Glance
Russian Ruble/U.S. Dollar Exchange Rate

(Spot Rate)
Russia Short-Term Interest Rate

RUB Curncy GP <go>
RRDRC BDSR Curncy GP <go>
Russia Foreign Currency Reserves

WIRARUSS Index GP <go>
Russian Ruble Implied Volatility

Russia Credit Default Swap Spread

(Five-Year CDS)
USDRUBV1M BGN Index GP <go>
RUSSIA CDS USD SR 5Y MSG1 Curncy GP<go>
49
Bloomberg Turkish Lira at a Glance
July 25, 2012
Turkish Lira/U.S. Dollar Exchange Rate

(Spot Rate)
Turkey Short-Term Interest Rate

TRY Curncy GP <go>
TYDRC BDSR Curncy GP <go>
Turkey Foreign Currency Reserves

Turkish Lira Cumulative Carry Return

(Long-Lira/Short-US$ Carry Return)
WIRATURK Index GP <go>
TRYUSDCR Index GP<go>
Turkish Lira Implied Volatility

Turkey Credit Default Swap Spread

(Five-Year CDS)
USDTRYV1M BGN Index GP <go>
TURKEY CDS USD SR 5Y MSG1 Curncy GP<go>
50
July 25, 2012
Bloomberg
South African Rand at a Glance
South African Rand/U.S. Dollar Exchange Rate

(Spot Rate)
South Africa Short-Term Interest Rate

ZAR Curncy GP <go>
SADRC BDSR Curncy GP <go>
South Africa Foreign Currency Reserves

South African Rand Cumulative Carry Return

(Long-Zloty/Short-US$ Carry Return)
SANOFER$ Index GP <go>
ZARUSDCR Index GP<go>
South African Rand Implied Volatility

South Africa Credit Default Swap Spread

(Five-Year CDS)
USDZARV1M BGN Index GP <go>
SOAF CDS USD SR 5Y MSG1 Curncy GP<go>
51
Bloomberg China Economic Outlook

China Economic Indicators
July 25, 2012
Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 -6.2 7.3 -13.5 13.6 50.9 17.0 105.0 17.8 13.6 3263 9.1 6.1 6.5 4.1 13.8 13.3 51.2 17.7 103.4 14.5 13.0 3202 -5.5 5.0 -13.2 12.8 50.4 17.2 100.5 17.0 12.9 3274 -4.2 2.7 -12.4 12.4 49.0 17.3 97.0 14.5 12.7 3221 8.9 4.1 1.7 4.1 12.8 12.1 50.3 18.1 100.5 16.5 13.6 3181 -4.5 0.7 -11.9 12.0 50.5 15.2 103.9 27.3 12.4 3254 -3.2 0.0 -9.3 12.1 51.0 14.1 105.0 -31.5 13.0 3310 8.1 3.6 -0.3 4.1 9.6 12.1 53.1 13.8 100.0 5.4 13.4 3305 -3.4 -0.7 -9.5 12.2 53.3 13.7 103.0 18.4 12.8 3299 -3.0 -1.4 -7.6 2.2 -2.1
Real GDP (yoy %) -Consumer Price Index (yoy %) 6.5 Industrial Product Price Index (yoy %)7.5 Unemployment Rate (%) -Industrial Production (yoy %) 14.0 Leading Indicator (yoy %) 13.7 Manufacturing PMI 50.7 Retail Sales (yoy %) 17.2 Consumer Condence Index 105.6 Trade Balance (US$ bn, sa) 31.5 M2 Money Supply (yoy %) 14.7 Ofcial Reserve Assets (US$ bn.) 3245
50.4 104.2 18.7 13.2 3206
50.2 99.3 31.7 13.6 3240
China Real GDP Growth

China Consumer Price Ination Rate

CNGDPYOY Index GP <go>
CNCPIYOY Index GP<go>
China Unemployment Rate

(%)
China Current-Account Balance

(% of GDP)
CNUERATE Index GP <go>
EHCACNY Index GP<go>
52
July 25, 2012
Bloomberg
Chinese Renminbi at a Glance
Chinese Renminbi/U.S. Dollar Exchange Rate

(Chinese Renminbi/U.S. Dollar Spot Rate)
China Short-Term Interest Rate

(Three-Month Implied NDF Rate)
CNY Curncy GP <go>
CCNI3M Curncy GP <go>
China Foreign Exchange Reserves

WIRACHIN Index GP<go>
Chinese Renminbi Implied Volatility

China Credit Default Swap Spread

(Five-Year CDS)
USDCNYV1M BGN Index GP <go>
CHINAGOV CDS USD SR 5Y Corp GP <go>
53
Bloomberg
July 25, 2012
Hong Kong Dollar at a Glance
Hong Kong Dollar /U.S. Dollar Exchange Rate

(Hong Kong Dollar/U.S. Dollar Spot Rate)
Hong Kong Short-Term Interest Rate

(Three-Month Deposit NDF Rate)
HKD Curncy GP <go>
HDDRC BDSR Curncy GP <go>
Hong Kong Foreign Exchange Reserves

Hong Kong Dollar Cumulative Carry Return

(Long HKD/Short US$ Carry Return)
WIRAHK Index GP<go>
HKDUSDCR Index GP<go>
Hong Kong Dollar Implied Volatility

Hong Kong Credit Default Swap Spread

(Five-Year CDS)
USDHKDV1M BGN Index GP <go>
HONG CDS USD SR 5Y Corp GP <go>
54
July 25, 2012
Bloomberg
Indian Rupee at a Glance
Indian Rupee/U.S. Dollar Exchange Rate

(Chinese Renminbi/U.S. Dollar Spot Rate)
India Short-Term Interest Rate

INR Curncy GP <go>
IRDRC BDSR Curncy GP <go>
India Foreign Exchange Reserves

Indian Rupee Cumulative Carry Return

(Long INR/Short US$ Carry Return)
INMOFCA$ Index GP<go>
INRUSDCR Index GP<go>
Indian Rupee Implied Volatility

USDINRV1M BGN Index GP <go>
55
Bloomberg
July 25, 2012
Indonesian Dollar at a Glance
Indonesian Rupiah /U.S. Dollar Exchange Rate

(Indonesian Rupiah/U.S. Dollar Spot Rate)
Indonesia Short-Term Interest Rate

(Three-Month NDF Rate)
IDR Curncy GP <go>
IHDRC BDSR Curncy GP <go>
Indonesia Foreign Exchange Reserves

Indonesia Rupiah Cumulative Carry Return

(Long IDR/Short US$ Carry Return)
WIRAINDO Index GP<go>
IDRUSDCR Index GP<go>
Indonesian Rupiah Implied Volatility

Indonesia Credit Default Swap Spread

(Five-Year CDS)
USDIDRV1M BGN Index GP <go>
INDON CDS USD SR 5Y Corp GP <go>
56
July 25, 2012
Bloomberg
Malaysian Ringgit at a Glance
Malaysian Ringgit /U.S. Dollar Exchange Rate

(Malaysian Ringgit/U.S. Dollar Spot Rate)
Malaysia Short-Term Interest Rate

MYR Curncy GP <go>
MRDRC BDSR Curncy GP <go>
Malaysia Foreign Exchange Reserves

548.055 Index GP<go>
Malaysian Ringgit Implied Volatility

Indonesia Credit Default Swap Spread

(Five-Year CDS)
USDMYRV1M BGN Index GP <go>
MALAY CDS USD SR 5Y Corp GP <go>
57
Bloomberg Philippines Peso at a Glance
July 25, 2012
Philippines Peso/U.S. Dollar Exchange Rate

(Spot Rate)
Philippines Short-Term Interest Rate

(Three-Month Implied NDF Rate)
PHP Curncy GP <go>
PPDRC BDSR Curncy GP <go>
Philipppines Foreign Exchange Reserves

Philippine Peso Cumulative Carry Return

(Long PHP/Short US$ Carry Return)
PHIRTTL Index GP<go>
PHPUSDCR Index GP<go>
Philippines Peso Implied Volatility

Philippines Credit Default Swap Spread

(Five-Year CDS)
USDPHPV1M BGN Index GP <go>
PHILIP CDS USD SR 5Y Corp GP <go>
58
July 25, 2012
Bloomberg
Singapore Dollar at a Glance
Singapore Dollar /U.S. Dollar Exchange Rate

(Spot Rate)
Singapore Short-Term Interest Rate

SGD Curncy GP <go>
SDDRC BDSR Curncy GP <go>
Singapore Foreign Exchange Reserves

Singapore Dollar Cumulative Carry Return

(Long SGD/Short US$ Carry Return)
SIOFRUS Index GP<go>
SGDUSDCR Index GP<go>
Singapore Dollar Implied Volatility

USDSGDV1M BGN Index GP <go>
59
Bloomberg
July 25, 2012
South Korean Won at a Glance
South Korean Won/U.S. Dollar Exchange Rate

(Spot Rate)
South Korea Short-Term Interest Rate

KRW Curncy GP <go>
KWDRC BDSR Curncy GP <go>
South Korea Foreign Exchange Reserves

South Korean Won Cumulative Carry Return

(Long KRW/Short US$ Carry Return)
WIRASK Index GP<go>
KRWUSDCR Index GP<go>
South Korean Won Implied Volatility

South Korea Credit Default Swap Spread

(Five-Year CDS)
USDKRWV1M BGN Index GP <go>
KOREA CDS USD SR 5Y Corp GP <go>
60
July 25, 2012
Bloomberg
Taiwan Dollar at a Glance
Taiwan Dollar /U.S. Dollar Exchange Rate

(Spot Rate)
Taiwan Short-Term Interest Rate

TWD Curncy GP <go>
TRDRC BDSR Curncy GP <go>
Taiwan Foreign Exchange Reserves

Taiwan Dollar Cumulative Carry Return

(Long IDR/Short US$ Carry Return)
WIRATAIW Index GP<go>
TWDUSDCR Index GP<go>
Taiwan Dollar Implied Volatility

USDTWDV1M BGN Index GP <go>
61
Bloomberg Thai Baht at a Glance
July 25, 2012
Thai Baht /U.S. Dollar Exchange Rate

(Spot Rate)
Thailand Short-Term Interest Rate

THB Curncy GP <go>
TBDRC BDSR Curncy GP <go>
Thailand Foreign Exchange Reserves

Thai Baht Cumulative Carry Return

(Long THB/Short US$ Carry Return)
WIRATHAI Index GP<go>
THBUSDCR Index GP<go>
Thai Baht Implied Volatility

Thailand Credit Default Swap Spread

(Five-Year CDS)
USDTHBV1M BGN Index GP <go>
THAI CDS USD SR 5Y Corp GP <go>
62
July 25, 2012
Bloomberg
Argentine Peso at a Glance
Argentine Peso/U.S. Dollar Exchange Rate

(Spot Rate)
Argentina Short-Term Interest Rate

ARS Curncy GP <go>
APDRC BDSR Curncy GP <go>
Argentina Foreign Currency Reserves

Argentine Peso Cumulative Carry Return

(Long-Peso/Short-US$ Carry Return)
ARVARVUS Index GP <go>
ARSUSDCR Index GP<go>
Argentine Peso Implied Volatility

Argentina Credit Default Swap Spread

(Five-Year CDS)
USDARSV1M BGN Index GP <go>
ARGENT CDS USD SR 5Y MSG1 Curncy GP<go>
63
Bloomberg Brazil Real at a Glance
July 25, 2012
Brazil Real/U.S. Dollar Exchange Rate

(Spot Rate)
Brazil Short-Term Interest Rate

BRL Curncy GP <go>
BCDRC BDSR Curncy GP <go>
Brazil Foreign Currency Reserves

Brazil Real Cumulative Carry Return

(Long-Real/Short-US$ Carry Return)
WIRABRAZ Index GP <go>
BRLUSDCR Index GP<go>
Brazil Real Implied Volatility

Brazil Credit Default Swap Spread

(Five-Year CDS)
USDBRLV1M BGN Index GP <go>
BRAZIL CDS USD SR 5Y MSG1 Curncy GP<go>
64
July 25, 2012
Bloomberg
Chilean Peso at a Glance
Chilean Peso/U.S. Dollar Exchange Rate

(Spot Rate)
Chile Short-Term Interest Rate

(Three-Month NDF Rate)
CLP Curncy GP <go>
CHDRC BDSR Curncy GP <go>
Chile Foreign Currency Reserves

Chilean Peso Cumulative Carry Return

CHMRRSRV Index GP <go>
CLPUSDCR Index GP<go>
Chilean Peso Implied Volatility

Chile Credit Default Swap Spread

(Five-Year CDS)
USDCLPV1M BGN Index GP <go>
CHILE CDS USD SR 5Y MSG1 Curncy GP<go>
65
Bloomberg Colombian Peso at a Glance
July 25, 2012
Colombian Peso/U.S. Dollar Exchange Rate

(Spot Rate)
Colombia Short-Term Interest Rate

COP Curncy GP <go>
CLDRC BDSR Curncy GP <go>
Colombia Foreign Currency Reserves

Colombian Peso Cumulative Carry Return

COIRNET Index GP <go>
COPUSDCR Index GP<go>
Colombian Peso Implied Volatility

Colombia Credit Default Swap Spread

(Five-Year CDS)
USDCOPV1M BGN Index GP <go>
COLOM CDS USD SR 5Y MSG1 Curncy GP<go>
66
July 25, 2012
Bloomberg
Mexican Peso at a Glance
Mexican Peso/U.S. Dollar Exchange Rate

(Spot Rate)
Mexico Short-Term Interest Rate

MXN Curncy GP <go>
MPDRC BDSR Curncy GP <go>
Mexico Foreign Currency Reserves

Mexican Peso Cumulative Carry Return

WIRAMEX Index GP <go>
MXNUSDCR Index GP<go>
Mexican Peso Implied Volatility

Mexico Credit Default Swap Spread

(Five-Year CDS)
USDMXNV1M BGN Index GP <go>
MEX CDS USD SR 5Y MSG1 Curncy GP<go>
67
Bloomberg Peruvian Sol at a Glance
July 25, 2012
Peruvian Sol/U.S. Dollar Exchange Rate

(Spot Rate)
Peru Short-Term Interest Rate

PEN Curncy GP <go>
PSDRC BDSR Curncy GP <go>
Peru Foreign Currency Reserves

Peruvian Sol Cumulative Carry Return

(Long-Sol/Short-US$ Carry Return)
PRRSCB Index GP <go>
PENUSDCR Index GP<go>
Peruvian Sol Implied Volatility

Peru Credit Default Swap Spread

(Five-Year CDS)
USDPENV1M BGN Index GP <go>
PERU CDS USD SR 5Y MSG1 Curncy GP<go>
68
July 25, 2012
Bloomberg
Yield Pick-Up of Hedged 10-Year Foreign Govt Bonds over Domestic Govt Bonds
U.S. 10-Yr. Investor Perspective U.S. Investor Yield Pickup (bps) of Foreign Bonds Hedged into US$ over 10-Yr. Treasuries Euro Investor Yield Pickup (bps) of Foreign Bonds Hedged into Euros over 10-Yr. Euro Bonds Japanese Investor Yield Pickup (bps) of Foreign Bonds Hedged into over 10-Yr. JGBs U.K. Investor Yield Pickup (bps) of Foreign Bonds Hedged into over 10-Yr. Gilts Canadian Investor Yield Pickup (bps) of Foreign Bonds Hedged into C$ over 10-Yr. Canada Bonds Australian Investor Yield Pickup (bps) of Foreign Bonds Hedged into A$ over 10-Yr. Aussie Bonds N.Z. Investor Yield Pickup (bps) of Foreign Bonds Hedged into NZ$ over 10-Yr. Kiwi Bonds Swiss Investor Yield Pickup (bps) of Foreign Bonds Hedged into Sfr over 10-Yr. Swiss Bonds Norwegian Investor Yield Pickup (bps) of Foreign Bonds Hedged into Nkr over 10-Yr. Norway Bonds Latest High Low Avg Z-Score Latest High Low Avg Z-Score Latest High Low Avg Z-Score Latest High Low Avg Z-Score Latest High Low Avg Z-Score Latest High Low Avg Z-Score Latest High Low Avg Z-Score Latest High Low Avg Z-Score Latest High Low Avg Z-Score -1 163 -1 77 -1.87 36 178 33 75 -1.41 21 56 5 36 -1.23 57 102 57 73 -1.71 183 295 162 217 -1.27 46 64 10 40 0.42 54 171 51 114 -1.75 141 257 58 172 -0.63 184 254 144 199 -0.59 1 1 -163 -77 1.87 36 40 -58 -2 1.34 21 25 -123 -41 1.33 58 59 -70 -4 1.62 183 190 84 140 1.60 47 52 -123 -36 1.77 54 104 -61 37 0.40 141 153 -26 95 1.59 185 185 57 122 1.94 -36 -33 -178 -75 1.41 -36 58 -40 2 -1.34 -15 11 -134 -39 0.82 22 29 -77 -2 1.07 147 204 87 141 0.28 11 14 -126 -35 1.46 18 108 -31 38 -0.57 105 158 8 97 0.20 149 159 61 124 1.25 -21 -5 -56 -36 1.23 -21 123 -25 41 -1.33 15 134 -11 39 -0.82 37 58 7 37 -0.03 162 255 109 181 -0.62 26 29 -28 5 1.61 33 145 8 78 -1.39 120 222 16 136 -0.30 164 221 104 163 0.03 -57 -57 -102 -73 1.71 -58 70 -59 4 -1.62 -22 77 -29 2 -1.07 -37 -7 -58 -37 0.03 125 215 102 144 -0.80 -11 -3 -62 -32 1.57 -3 96 -11 41 -1.52 83 183 -13 99 -0.34 127 168 67 126 0.05 -183 -162 -295 -217 1.27 -183 -84 -190 -140 -1.60 -147 -87 -204 -141 -0.28 -162 -109 -255 -181 0.62 -125 -102 -215 -144 0.80 -136 -114 -269 -176 1.32 -129 -45 -200 -103 -0.73 -42 18 -162 -44 0.07 2 21 -74 -18 0.92 -46 -10 -64 -40 -0.42 -47 123 -52 36 -1.77 -11 126 -14 35 -1.46 -26 28 -29 -5 -1.61 11 62 3 32 -1.57 136 269 114 176 -1.32 8 128 -1 73 -1.92 94 216 8 132 -0.70 138 221 94 158 -0.64 -54 -51 -171 -114 1.75 -54 61 -104 -37 -0.40 -18 31 -108 -38 0.57 -33 -8 -145 -78 1.39 3 11 -96 -41 1.52 129 200 45 103 0.73 -8 1 -128 -73 1.92 87 157 -100 59 0.59 131 155 -16 85 1.02 -141 -58 -257 -172 0.63 -141 26 -153 -95 -1.59 -105 -8 -158 -97 -0.20 -120 -16 -222 -136 0.30 -83 13 -183 -99 0.34 42 162 -18 44 -0.07 -94 -8 -216 -132 0.70 -87 100 -157 -59 -0.59 44 108 -61 27 0.41 -184 -144 -254 -199 0.59 -185 -57 -185 -122 -1.94 -149 -61 -159 -124 -1.25 -164 -104 -221 -163 -0.03 -127 -67 -168 -126 -0.05 -2 74 -21 18 -0.92 -138 -94 -221 -158 0.64 -131 16 -155 -85 -1.02 -44 61 -108 -27 -0.41 Euro 10-Yr. Foreign Government Bonds Japan U.K. Canada Australia 10-Yr 10-Yr 10-Yr. 10-Yr. N.Z. 10-Yr. Switz. 1I0-Yr. Norway Sweden 10-Yr 10-Yr
Swedish Investor Yield Pickup (bps) Latest of Foreign Bonds High Hedged into Skr Low over 10-Yr. Swedish Bonds Avg Z-Score
Notes: Three-month rolling hedges. Averages, highs, and lows are based on weekly data for the past year. A Z-score is the number of standard deviations that the latest observation lies away from its average. Yield spreads with Z-scores greater/less than +/-1.96 are considered to be signicantly different from their 52-week averages. Source: Bloomberg
69
Bloomberg
July 25, 2012
Keeping Up with the Financial Crisis

Real Time Fixed Income Spreads, Market Volatility, and Analysis FCON Financial Conditions Monitor Real-Time Indices BFCIUS Index U.S. Financial Conditions Index BFCIUS+ Index U.S. Financial Conditions Plus Index BFCIEU Index Euro-Area Financial Conditions Index ECSURPUS Index U.S. Economic Surprise Index New News NI CRUNCH SBPR Credit Markets BANK GCDS WDCI CCRU WWCC Credit Crunch/Crisis News Subprime News
Monitor bank prices and CDS rates CDS sector graph Writedowns and credit loss vs. capital raised Credit crunch overview Worldwide credit crunch menu
Mortgages / Housing / Delinquency HSST U.S. housing and construction statistics DELQ Credit card delinquency rates BBMD Mortgage delinquency monitor REDQ Commercial real estate delinquencies DQLO Delinquency rates by loan originator Ination Analysis IFMO Ination monitor ILBE World ination breakeven rates Economic Indicators and Financial Markets CRIS Europe/Middle East/U.S. crises monitors
70

Negative Real Yields and Heightened Risk Aversion Pose Policy Dilemmas

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Negative Real Yields and Heightened Risk Aversion Pose Policy Dilemmas

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July 25, 2012

Financial Conditions Watch

FINANCIAL CONDITIONS WATCH

Inside This Issue:

Whats Left in the Feds Arsenal?

Available on the Bloomberg at FCW <go> and FCON <go>

Financial Conditions Watch

July 25, 2012

Whats Left in the Feds Arsenal?

July 25, 2012

Financial Conditions Watch

Yield Spread/Volatility Watch

Financial Conditions Relative to the Past 52 Weeks

36.1 137.7 79.9

76.1 116.1 82.5

-0.52 -0.06 0.47

0.8 189.5 168.3

4.4 26.0 23.5

-0.95 -2.27 -2.10

-99.1 -91.0 -9.8 15.7

49.9 49.9 63.9 76.4

3.50 3.93 4.62 4.67

32.4 60.9 248.5 332.2

21.7 29.4 31.7 34.1

1.98 1.51 1.17 1.18

45.3 51.3 57.1 60.1

1.19 0.83 1.11 1.99

14.0 12.9 11.0 14.0

-0.96 -0.91 -0.58 0.60

41.2 57.2 5.9

18.5 23.0 1.0

-1.02 -1.89 -4.41

33.1 14.4 2.3

8.2 4.0 0.3

-1.31 -0.17 -2.21

2.41 2.81 2.20 2.06 2.54

1.17 0.90 0.41 0.44 0.08

-3.04 -3.86 -1.25 -0.13 1.15

0.22 0.25 0.18 0.14 0.15

-0.48 -1.96 -0.51 -0.76 0.81

1342.9 191.3 9.8 19.1

1058.4 395.8 42.9 19.3

312.2 59.2 15.7 6.6

0.91 -3.45 -2.11 -0.03

1342.9 191.3 9.8 19.1

1289.2 185.9 9.6 24.3

83.4 15.5 1.8 8.0

0.64 0.35 0.13 -0.65

100.8 91.1 9.8 10.6

22.5 12.1 2.0 2.7

-1.68 -1.02 0.64 -0.98

86.5 89.8 12.8 9.7

15.7 5.6 2.1 1.1

-1.51 -1.97 -0.76 -1.47

Financial Conditions Watch

July 25, 2012

Volatility of U.S. Financial Conditions in the Pre- and Post-Crisis Era

Stylized Model of the Post-Crisis Loss of Risk Appetite

Pre-Crisis Period of High Risk Appetite

Pre-Crisis Period -Lower Volatility of Financial Conditions

Post-Crisis Period -Higher Volatility of Financial Conditions

Post-Crisis Period of Low Risk Appetite