Barclays Global Rates Weekly Making It Easier

Interest Rates Research
25 April 2013
Global Rates Weekly
Making it easier
The decline in inflation and signs of a global slowdown give room for central banks
to ease monetary policies further. We believe that forward expectations of policy
rates will be anchored at their low levels and term premia will stay compressed. We
maintain our curve flattener view in the US.
Following weak economic data this week, we think ECB will deliver a 25bp refi
rate cut next week. While the outright market implications of this are likely to be
limited, we hold on to our short Bobl ASW versus 30y ASWs position in Germany.
Relentless Italian and Spanish bond performance has continued on less nearterm political uncertainty in Italy and yield-hunting appetite from investors. While
short-term profit taking could lead to limited re-widening, we continue to believe
the periphery will remain resilient in the medium term.
Global
Making it easier
2
The decline in inflation and signs of a global slowdown give room for central banks to
ease monetary policies further. We believe that forward expectations of policy rates will
be anchored at their low levels and term premia will stay compressed because of excess
liquidity and the scarcity of fixed income investments available to investors.
United States
Treasuries: No free lunches
7
We continue to like curve flatteners, given room for long-term real yields to decline.
Recent experience suggests that the market has become more efficient in absorbing
refunding long-end supply, and steepeners from this stage have not been profitable. We
also recommend shorting a weighted 5s10s20s fly to position for a decline in the term
premium embedded in the back end and the relative richening of the 20y sector.
Views on a Page
Trade Portfolio Update
51
Global Supply Calendar
64
Global Bond Yield Forecasts
66
United States
TIPS: Demise of inflation hedging calls
are premature
10
Swaps: FV-TY invoice spread curve

steepeners remain attractive
13
Volatility: Limited long
15
Money Markets: The other repo suppliers
17
Europe
Swaps: EUR ASWs not cheap yet
23
Money Markets: Refi cut Limited effect

on markets rates
26
Covered Bonds: Spanish bank restructuring

and Multi-Cdulas
32
Scandinavia: Inflation suggests room for cuts,
but systemic risks remain a key concern
39
Euro Inflation-Linked: Positioning for
slowing y/y euro HICPx
41
UK Inflation-Linked: Keep the faith
43
Volatility: Range-bound rates
46
Euro Area
The case for further tightening
20
We still believe Spanish and Italian bonds can tighten vs. Germany for several reasons, eg,
positive central bank activity; likely positive economic data surprises; and the continued
search for yield. These outweigh potential negatives in Cyprus/Slovenia.
UK
George and the fiscal deficit dragon
29
With the government and the IMF seemingly at odds over the pace of fiscal tightening,
a medium-term correction of the fiscal position requires the government to make some
hard choices on welfare reform, given its own weak receipts forecasts.
Japan
A second look at JGB yield drivers
48
The correlation between JGB and other markets is partially recovering. However, the
correlation with USTs remains broken, and there is asymmetry in linkages with stocks. If
there is still some correlation with fundamentals, then JGB yields may rise over Jul-Oct.
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Barclays | Global Rates Weekly
GLOBAL THEMES
Making it easier
The decline in inflation and signs of a global slowdown give room for central banks to
ease monetary policies further. We believe that forward expectations of policy rates will
be anchored at their low levels and term premia will stay compressed because of excess
liquidity and the scarcity of fixed income investments available to investors.
Rajiv Setia
+1 212 412 5507
rajiv.setia@barclays.com
Amrut Nashikkar
+1 212 412 1848
amrut.nashikkar@barclays.com
Cagdas Aksu
+44 (0)20 7773 5788
cagdas.aksu@barclays.com
We think declining inflation

and signs of a slowdown in
global markets give central
banks room to announce more
accommodative policies in the
next few weeks
Rates have remained in a very tight range globally over the past few weeks after stabilizing
at close to the lowest levels of the year. Economic data showed continuing softening.
Manufacturing PMIs (47.9 v 49 consensus) in Germany were weak, suggesting that
weakness is spreading to core European countries. UK Q1 GDP came in slightly higher than
expectations (0.3% v. 0.1% consensus q/q), but US durable goods data were disappointing
(-1.4% for durables ex-transportation v. 0.5% consensus). The manufacturing sector in Asia
also appears to be weakening, with the April flash PMI reading in China lower than
expectations (50.5 v. 51.5). US Q1 GDP will be released on 26 April, and the key number to
watch will be consumption growth, which we expect to surprise to the downside (Barclays
forecast of 2.3% v 2.8% consensus).
Policy meetings at all the major developed central banks will be in focus over the next two
weeks: the BoJs on 25 and 26 April, the FOMCs and ECBs next week and the BoEs the
following week. The declines in inflation in most developed markets, falling commodity
prices and subdued growth give central banks more room to ease. Figure 1 shows 5y5y real
swap rates, which are a reflection of the monetary policy stance in the major global
economies. We believe that the loosening of global monetary policy should continue to
exert downward pressure on rates, especially in countries with higher forward real rates
such as Japan and the US.
In the UK, the BoE and the UK treasury announced an expansion of the Funding for lending
scheme on 24 April. The period under which participants can access under the scheme was
extended by one year, and incentives were introduced to promote lending to small and
medium enterprises, as opposed to the earlier focus on households. Lending volumes in the
UK have so far not picked up meaningfully because of the FLS scheme, but the intent of the
BoE to ease financial conditions is clear. In addition, with Governor Carney set to take up the
FIGURE 1
5y5y real rates in the US, Europe and Japan still high, given
the potential for further easing of monetary policy
FIGURE 2
Core PCE inflation has been declining in the US, giving the
Fed room to keep purchasing assets at the current pace
%
%
1.0
0.8
0.6
0.4
0.2
0.0
-0.2
-0.4
-0.6
-1
-0.8
1/25/2013
2/24/2013
Europe
Source: Barclays Research
25 April 2013
3/26/2013
US
UK
4/25/2013
Japan
-2
Apr-08 Jan-09 Oct-09
Eurozone HICP
Jul-10
Apr-11 Jan-12 Oct-12

US PCE
UK CPI

reins in two months, our UK economists believe that some changes in policy such as
moving to a forward rate guidance or QE in other asset classes may be possible (see No
revolution, not much evolution, April 19).
In Japan, the BoJ releases its forecasts for inflation and growth on Friday and is widely
expected to use the communications channel to increase inflation expectations. Our
Japanese economists believe that to maintain credibility, the BoJ will need to communicate
the mechanism through which inflation is expected to pick up (see Long and winding road
to inflation, April 25).
The BoJ faces challenges
meeting its inflation target; we
expect it to announce further
easing measures in H2 13
The BoJ faces challenges along this front. For a sustainable pickup in inflation, wages need to
grow. This requires demand-side pressures in the labor market caused by output growth.
Similar to other developed markets, the relationship between base money and money supply is
weak, given banking system constraints, as well as a lack of credit demand. For BOJ balance
sheet expansion to lead to a pickup in output, other channels are needed, such as the wealth
effect from rising stock prices and the devaluation of the yen. However, these channels are too
weak, by themselves, to lead to higher inflation under realistic expectations for equity market
or currency moves. Our Japanese strategists expect the BoJ to announce further easing
measures in H2 13. This should keep downward pressure on long-term JGB yields.
In the US, it is now apparent that the debate in the FOMC is again shifting from tapering to
extending asset purchases. Since early February (see Opportunity knocks, February 1, 2103),
when we urged investors to buy the dip in bonds, we have argued that concerns about
stopping QE were misplaced. Growth expectations for 2013 appeared too high, and we
expected the drop in core PCE inflation eventually to attract attention (Figure 2).
In the US, the Feds rhetoric

has taken a dovish turn; rates
markets should begin pricing
in some probability of Fed
action, given that it is missing
its inflation target from the
downside
Recent Fed speeches indicate that even notable hawks such as St. Louis Fed president Bullard
and Richmond Fed president Lacker seem to be shifting their stance on asset purchases.
Indeed, with core PCE likely to trend lower on a y/y basis in the near term, rates investors
could soon be wondering what the Fed may do next if inflation stays below its target even as
the unemployment rate continues to decline. In such a scenario, the Fed could increase the
pace of asset purchases, commit to holding the balance sheet at an expanded size for longer,
or lower the 6.5% unemployment threshold for considering rate hikes. We believe that the
market should price for a non-trivial probability of this scenario, keeping US yields lower for
longer; 10y real yields in the US would therefore have room to rally.
FIGURE 3
Market already priced for low rates in Europe, suggesting
that ECB rate cut will not have an immediate effect on rates
JPY bn
1,500
0.18
0.16
1,000
0.14
500
0.12
0.10
0.08
-500
0.06
0.04
-1,000
0.02
0.00
Apr-13
FIGURE 4
Japanese portfolio investors were still selling foreign bonds
after the BoJ announcement
Jun-13
Aug-13
Oct-13
1m EONIA
25 April 2013
Dec-13
Feb-14
-1,500
Oct-12
Nov-12 Dec-12
Jan-13
Feb-13 Mar-13
JP portfolio purchases (JPY bn)


Easy policy and excess global
liquidity mean that forward
expectations of policy rates
should remain anchored at the
current low levels and term
premia embedded in long-term
yields have room to compress.
In Europe, the ECB is also expected to cut the policy rate to provide further accommodation
to the economy, especially as the decline in financial market fragmentation means that the
monetary policy transmission mechanism has improved. As our European economists have
highlighted, the April PMI and survey data indicate that economic weakness is now
spreading to the large core economies; further, the recent fall in commodity prices may
result in more downward pressure on inflation, providing more room for accommodation.
However, the market appears to be priced for a rate cut, which suggests that a cut in itself is
unlikely to cause a move lower in yields (Figure 3).
Given the increasingly accommodative monetary policy backdrop, expectations of the
forward path of short-term rates in developed markets should stay anchored and low for
longer. In addition, given the decline in realized inflation globally, coupled with ample
liquidity and decreasing fixed income supply, the term premia embedded in long-term bond
yields should also remain compressed well below historical norms. Real yields globally have
room to decline, especially in the US and Japan.
As we highlighted last week, core European countries such as France rallied sharply on
expectations of Japanese portfolio purchases. Such purchases are likely to be slow in
coming (as Figure 4 shows, even a week after the BoJs announcement, Japanese portfolio
holders were net sellers of foreign securities), and we expect these purchases to favour US
fixed income at current valuations. As a result, we maintain our recommendation to buy
10y US and Japan versus France.
Periphery to hold on to its recent gains with the ECB likely to cut next week
Relentless Italian and Spanish
bond performance continues
on less political uncertainty in
Italy near term and yieldhunting appetite
The main focus of the week in the European markets has been the strong performance of
the peripheral markets, with Spanish and Italian 10y yields rallying to levels not reached
since 2010 in outright terms. And yield spreads vs. Germany for Italy are at the lows triggered
by the ECB LTROs in early 2012, while for Spain they are a few bp above this level. Positive
sentiment from the high likelihood of a new coalition government in Italy following the
reappointment of Napolitano as president, the covering of short positions by investors and
yield-hunting appetite have been the main drivers of the strong periphery performance.
With spreads to Germany now either back or close to their tightest levels in the wake of the
3y LTROs announcement, further performance seems likely to be at a more measured pace.
Indeed, following the recent sharp tightening, some short-term profit-taking could lead to
limited re-widening. Nevertheless, we believe that several factors support even tighter
spreads, including likely positive economic data surprises, central bank activity, and the
search for yield alongside flows and positioning, outweigh the potential negatives (see the
Euro Strategy section of this publication).
Weak PMIs and bank lending

data increase the prospects of
a refi cut by the ECB...
Elsewhere, data in Europe were generally weak and showed signs that economic softness is
now also spilling over to Germany (this weeks MPIs and Ifo). At the same time, the bank
lending survey still highlights that credit flow to SMEs in Europe is a concern. As such, our
economists expect the ECB to cut the refi rate 25bp (no change in the deposit facility rate)
next week. A refi rate cut has been talked about by the market for a long time, and following
the recent substantial rally in rates, we do not think it will have a big effect on the market.
As we discuss in the Euro Money Markets section, at this stage, a refi rate cut has much
more relevance in terms of counteracting any possible passive tightening of liquidity
conditions than in providing stimulus to the real economy, owing to the frictions in
monetary policy transmission.
... but the rate market

implications are likely limited
Indeed, with all the weak data and now a very likely possibility of a refi rate cut from the ECB
next week, Bunds traded in a 2bp range the whole week. We continue to expect this
outright low volatility to remain in EUR rates. Instead, in EUR ASWs, volatility has been
higher than Bunds recently, but we still think that EUR ASWs are not cheap outright and
25 April 2013
FIGURE 5
Foreign ownership in Spain (Ex ECB) and 10y Spain-Germany yield spread
55%
Spanish Bonos held by foreigners (ex ECB, LHS)

10yr Spain - Ger (RHS, inverted)
50%
0
100
45%
200
40%
300
35%
30%
400
25%
20%
Jan-10
500
Aug-10
Mar-11
Oct-11
Apr-12
Nov-12
Source: Spanish Tesoro, Barclays Research
hold on to our short Bobl ASW on the 5s/30s ASW box trade (see the European Swaps
section of this publication).
In the UK, the two main pieces of news were the Q1 13 GDP release, which surprised to the
upside at +0.3% q/q, and the announcement from the Bank of England of modifications to
its Funding for Lending Scheme. The extension of the scheme to 2015 and clear skew
towards encouraging SME lending (the weakness of which has been a concern to policy
makers) have been welcome. But with much of detail reported in the press ahead of the
release, the market effect was relatively muted. The latest set of public finance data shows
that government borrowing remains stubbornly high. In the UK rates piece, we look at some
of the longer-term trends in the public finances and see that without some politically
difficult decisions about welfare reform, it would seem that the fiscal position may remain
weak. In UK inflation, we remain bullish on the very long end of the linker curve. We think
that the flatness of the breakeven curve is inconsistent with potentially sizeable pent-up
hedging demand from the pensions community. However, we are not particularly negative
on 10y breakevens at present, which are still at least 20bp cheap to fair value, in our view.
25 April 2013
VIEWS ON A PAGE
US
Direction
EUROPE
Economic data in the US remain modest, with the fiscal deal and Next week all eyes will be on the ECB meeting. We expect a
the sequester likely to exert significant drags.
25bp cut only in the refi rate. Markets reaction is likely to be

limited, as rates are already low and probably already
incorporate expectations of a cut. In the EGB market some
temporary profit taking after the recent rally is likely but
should not undermine the resilience on the peripheral
market. The focus will remain on Italy as a new government
could be formed in the next few days.
The larger-than-expected easing by the BoJ is likely to be

supportive of US yields as well.
Curve/
curvature
We remain neutral on duration.
We maintain 7s30s curve flatteners given room for long-term

real yields to decline.
We maintain our long front-end Tsy vs. OIS view, given
EUR: Hold on to short Bobl ASW on Ger 5s/30s ASW box.

GBP: APF transfer may improve the fiscal position, but
20s30s box (20y long).
SEK: Hold SEK/EUR 10y tighteners in swaps and longs in
Pay USD/JPY 1yx1y basis.

Pay USD/JPY 4y basis.
underpinned by low real rates. Reset Gilt 5/30s or Gilt

10/30s steepeners into Q2 13 supply. Declining realised
volatility supports carry-and-roll structures carry: vol ratios
are at their cheapest in the 10-15y part of the curve.
a decline in term premium.
Swap
spreads
Other
spread
sectors
Neutral on 30y spread wideners, considering risks from risky

asset underperformance.
1y1y Libor-OIS tightener hedged with 1y1y 3s1s widener.
We continue to favor long-end agency-Treasury spread

tighteners but find the most upside potential only in the superlong end. 7s have underperformed along the curve and now
offer more than 20bp of spread pick-up to Treasuries; shorten
duration to 10s with no spread give-up.
recovered to the extent hoped. We suspect investors will be

wary of buying actively and do not foresee any rapid fall-off
in yields. However, with the worsening economic outlook
worldwide, yields are being encouraged downward by a
growing number of factors, and we anticipate buying on
dips if 10y JGB yields reach the 0.6% level. Direction-wise,
we recommend a cautious long position.
5x5-10x10 flattener.
2s5s flattener.
5x2-7x3 flattener.
We recommend shorting a weighted 5s10s20s fly to position for

Shorten on the Cs STRIPS curve into the 10-12y area; switch out
of rich 20y Tsy P STRIPS to 20y REFCO P STRIPS.
Though volatility has declined, liquidity still has not
Hold on to receive EUR 5y5y/5y10y/5y15y fwds.

UK: Longer-dated nominal gilt yields remain rich,
improving financing conditions. The 4y sector looks cheap.
JAPAN
fundamentals remain poor. We remain negative on 10y gilt

ASW. Long 5y ASW versus OIS or versus 10y (both versus
6mL).
SEK Sep 13 3m FRA tighteners.
We remain constructive on Canadian covered bonds, given their

relative isolation from Europe and continued significant spread
Hold Spain and Italy 2s/5s/10s.

Hold Spain 5s/10s/30s.
Long 5-8y Netherlands versus France.
Long FRTR Oct 19/Oct 22/Apr 26 fly.
pickup to agencies. Pockets of value persist in USD SSA space.
Inflation
Sell the belly of Apr17-Jul20-Jan23 real yield fly. April14s are
Long 10y Euro HICPx swaps. Selling 5y 1% y/y floors versus Breakevens have started to rise even with negative carry
The recent uncertainty argues for lower real yields, given the
Long linkers stand to benefit from pension de-risking
about 60bp cheap versus our CPI forecast; we will look to be

long April14s energy hedged at 80bp cheap.
slower payroll growth and low realised inflation.
0% in zero cost structure is attractive as a hedge against

low inflation.
demand, which has been dormant so far this year.
Should risk aversion increase, we would expect April18s to
richen versus Jan18s as the real yield curve flattens and the floor
on April18s richens.
Volatility
Sell 1y*10y straddles to benefit from range-bound rates and
Buy EUR1y*30y 100bp wide risk reversal (long receivers) to
Buy 1y*5y receivers funded with 1y SL 5-30y curve cap to
supply from callables.

Long 3y*2y vs 3E and 4E mid curve straddles as a limited-loss
way to benefit from a tight range in rates.
Long 3x13 Libor cap-floor vs 3y10y swaption straddle to
position for a steepening of the vol surface.
hedge a risk flare in the eurozone.
intact, and we expect this trend to continue for now. Over

the short term, there is probably an opportunity for capital
gains. However, it is difficult to determine where levels will
settle over the medium to long term. In establishing long
positions over such an horizon, we recommend paying
attention to levels.
Look to long vol when the market stabilises later in May.
benefit from EUR rates staying low for long.
Buy EUR 6y*5y versus 1y*(5y5y) to position for steepening

of the vol surface and monetise the range in rates.
25 April 2013
UNITED STATES: TREASURIES
No free lunches
Anshul Pradhan
+1 212 412 3681
anshul.pradhan@barclays.com
Vivek Shukla
+1 212 412 2532
vivek.s.shukla@barclays.com
Real yields further out the

curve look high, given the
potential for further
accommodation
We continue to like curve flatteners, given room for long-term real yields to decline.
Recent experience suggests that the market has become more efficient in absorbing
refunding long-end supply, and steepeners from this stage have not been profitable. We
also recommend shorting a weighted 5s10s20s fly to position for a decline in the term
premium embedded in the back end and the relative richening of the 20y sector.
The Treasury market traded in a tight range around 1.7%, even as risk aversion declined
amid mildly weaker economic data. Survey indicators continued to surprise to the downside
with a negative Richmond Fed print, and durable goods were weaker than expected, as well.
On the other hand, initial claims fell more than expected. Our economists tracking estimate
of Q1 real GDP growth declined marginally, to 2.9%. While the headline number is largely in
line with the consensus, we believe personal consumption is likely to surprise to the
downside, as consensus estimates are close to 2.8%, versus our forecast of 2.3%. With the
focus on the effects of tax hikes on consumer spending, such a miss should have a
significant effect on the markets. Meanwhile, there are no signs of risk aversion yet. Italian
and Spanish yield spreads to Germany are already close to the lows of the past two years.
The levels of S&P and VIX also indicate little fear embedded in the market.
With central banks globally looking to ease in this backdrop, rates should remain pegged
with risks to the downside, especially as real yields have room to decline. The FOMC is
scheduled to meet next week and is likely to acknowledge the weakness in the labor market
data since the last meeting and the continued decline in underlying inflation. The minutes
from recent FOMC meetings have focused on when to taper asset purchases but given the
underlying inflation trends, we believe the attention should instead shift to the potential for
further accommodation, which may involve increasing the monthly pace of purchases,
holding securities for longer (ie, reinvesting maturing securities for longer than currently
planned) or modifying the forward guidance. All of these should lead to lower real yields.
Figure 1 shows that 5y5y real yields have not kept pace with the market, pushing out
expectations of the hiking cycle and suggesting that concerns about paring back purchases
are still elevated, which, in our view, is not warranted.
FIGURE 1
5y5y real yields have not declined in line with the hiking
cycle being pushed out
0.50
FIGURE 2
Steepeners ahead of bond auctions have become less
profitable
0.50
0.40
0.45
0.30
0.20
0.10
0.00
-0.10
0.40
0.35
-2
0.30
-0.20
10s30s around 7y auctions, bp

4
-4
-6
-0.30
0.25
-0.40
-0.50
Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13
5y5y real swap rates, lhs
25 April 2013
3m OIS, 2y fwd, rhs
0.20
Business days from the 7y auction
-8
(6)
(4)
(2)
10
12
14
2011
Sep12-Feb13
Mar12-Feb13
Mar13
16
FIGURE 3
Recently, steepeners even the week prior to the bond
auctions have not been profitable
Average P/L in 10s30s steepeners around 7y auctions, bp, 6M
rolling window
6.0
Median Tail, bp
3.5
3.0
3.0
2.5
5.0
2.0
4.0
1.5
1.0
3.0
0.5
2.0
0.0
0.0
-0.5
1.0
0.0
Mar-12
Jun-12
from t-3 to t+9
FIGURE 4
Additional supply in refunding auctions has been easily
absorbed
-1.0
Sep-12
Dec-12
Mar-13
from t-3 to t+1
from t+1 to t+9
Note: time t=0 is the 7y auction. Source: Barclays Research
-0.4
Refunding Bond Auction
2009-11
-0.8
Non-Refunding Bond Auction
2012-13
Source: Barclays Research, Treasury
Auction related steepeners

initiated over the week prior to
the bond auction have not
been profitable over the last six
months
At these yields levels, with a low risk premium priced into the front end, we have argued
that investors should consider curve flatteners (please see Opportunity knocks twice, April
18). While this may seem at odds with the upcoming refunding long-end auctions, we
believe that auction-related steepening has been pulled so far away from the actual auction
date that it may deter investors from participating in such strategies. Figure 2 shows that in
2011, the 10s30s curve steepened 5bp on average through the five business days heading
into the bond auction. However, more recently, it has begun steepening even before the 7y
auction, and the steepening is over a week before the bond auction. It seems that as the
strategy has become popular, investors have tried to initiate and exit such trades before
they become crowded. Figure 3 shows the average P/L in 10s30s steepeners initiated
before the 7y auction and unwound before the bond auction over a rolling 6m window. As
can be seen, over the past six months, the entire P/L would have been generated by the day
after the 7y auction; the trade was not profitable over the second half. For instance, in
March, the curve was at its steepest on the 7y auction date, and those who were late in
exiting were likely stopped out following the BOJ announcement (Figure 2).
Market has become more

efficient in absorbing the
extra supply during
refunding auctions
Given this experience, the curve is unlikely to steepen much from now on, and while the
upcoming refunding auctions are larger, we believe the market has become more efficient in
absorbing this additional supply. Figure 4 shows that refunding auctions tailed by 3bp
during 2009-11, compared with non-refunding ones clearing close to WI, but over the past
year or so, they have also cleared close to WI levels.
Our rationale for curve flatteners remains. Underlying inflation is muted, with core PCE
running at 1.25% y/y; the decline in commodities should also give the Fed comfort in
pursuing asset purchases for longer (or at a higher pace), which should suppress term
premium. Another way to express the view that the term premium should decline is via
being short the 5s10s20s fly as the 10s20s curve is looking too steep, given the 5s10s curve
(Figure 5); the regression coefficients suggest shorting a 0.4:1.4:1.0 5s10s20s fly.
Shorting a weighted 5s10s20s

fly is an attractive alternative
to position for a decline in
term premium
25 April 2013
The trade should benefit from an unwind of the cheapening of the 20y sector as well. Figure
6 shows that controlling for the general richening of long-end ASWs, the 20y sector has
underperformed on the ASW curve. We believe this may have been due to the Feds
allocating a smaller share of purchases in the 10-20y sector in QE3. However, in our view,
what should matter is the stock of Fed holdings. Figure 7 shows that the Fed holds 42% in
the 10-20y sector (vs 39% in the 20-30y sector) and by the end of the year it should still
8

have a higher allocation in the 10-20y sector at 46% (vs 45% in the 20-30y sector). Another
reason may have been the talk of the Treasurys issuing more long-end paper, potentially in
the 20y sector. We believe the Treasury is comfortable with the current pace of terming out
of debt and, given the uncertainty about the deficit outlook, is unlikely to make any changes
to the auction calendar (Figure 8). The absence of issuance in the 10-20y sector, coupled
with a smaller float, argues for higher scarcity premium.
Overall, we continue to like 7s30s curve flatteners as an alternative to long duration views
and also recommend shorting a weighted 5s10s20s fly to position for a decline in term
premium and the richening of the 20y sector.
FIGURE 5
10s20s curve looks too steep, given the 5s10s curve. Short
the 5s10s20s fly (0.4:1.4:1.0)
8
110
FIGURE 6
20y sector has cheapened on the asset swap curve as well
-2
-3
100
4
2
90
0
80
-2
-4
70
-6
-4
-5
-6
-7
-8
-9
-10
-8
Apr-12
Jul-12
Oct-12
Jan-13
Residual (10s20s vs 5s10s), bp, lhs
60
Apr-13
-11
-12
Apr-12
Jun-12
Aug-12
5y5y-10y10y Tsy Curve, bp, rhs
Oct-12
Dec-12
Feb-13
15y20y25y ASW fly
FIGURE 7
Fed more dominant in the 10-20y sector
FIGURE 8
Terming out should continue without any increase in longend nominal supply
42%
45%
40%
39%
42%
37%
75
39%
70
35%
30%
65
25%
60
18%
20%
15%
10%
10%
5%
55
50
5%
45
0%
0 - 4y
44.75 - 5.75 - 7 - 10y

4.75y 5.75y
7y
10 20y
20 30y
SOMA Holdings as % of outstanding

Source: New York Fed, Barclays Research
25 April 2013
TIPS
40
Sep-81 Sep-86 Sep-91 Sep-96 Sep-01 Sep-06 Sep-11 Sep-16
Average Maturity, months
Source: Treasury, Barclays Research
INFLATION-LINKED MARKETS: UNITED STATES
Demise of inflation hedging calls are premature

Michael Pond
+1 212 412 5051
michael.pond@barclays.com
Chirag Mirani
+1 212 412 6819
chirag.mirani@barclays.com
5y breakevens have recovered

post-auction
Despite reports of a mass exodus from the inflation market, buyers have emerged and
breakevens are again largely in line with fundamentals. We recommend selling the belly of
an April17s-Jul20s-Jan23s real yield fly and keeping an eye on TIIApr14s.
Reports of my death have been greatly exaggerated -Mark Twain

The TIPS market was under significant pressure last week in the hours following the largest
ever auction. The 5y breakeven ended down 13bp following the 7bp auction tail, and the 5y5y
broke its post-September 2012 range and fell to 2.64%. We thought the former made sense
because the market had not priced in an auction concession nor increased headwinds to nearterm inflation. However, the decline in longer forwards was unjustified, in our view, because
the Feds response to downward near-term inflation pressures, as highlighted in comments
from relative hawks Bullard and Lacker, is more stimulus, which should lead to heightened
medium-term inflation risks. The sell-off (along with the decline in breakevens since midMarch, which we argued reflected only carry and the decline in gasoline), led many (WSJ:
Advisers Dump TIPS as Inflation Threat Wanes, Barrons: TIPS Confirm Commodities
Deflationary Signal, MarketWatch: TIPS dive as investors dump inflation hedges) to indicate
that investors have been making a structural shift out of the asset class because the near-term
inflation outlook had softened. While there has been selling from TIPS funds starting in late
January on duration concerns and more recently on the fall in gasoline and weakening
economic outlook, we believe this has been on a tactical rather than structural basis. In fact,
buyers have emerged, and while the 5y is still justifiably well off its March highs, it has
bounced back to pre-auction levels, and the 5y5y has moved back to the middle of its range
just above 2.8%. Just as homeowners buy home insurance despite no imminent threat of a
fire, structural TIPS investors seem to understand the value of an inflation hedge within their
fixed income portfolio, despite no imminent threat of high inflation.
Shorty youre my angel

While we have now turned neutral on 5y and 5y5y breakevens, the short end is again
starting to look interesting. In our daily Inflation Forwards Packet, we recently began to
include a rich/cheap analysis of short TIPS versus Barclays NSA CPI forecasts with and
without an adjustment for energy futures moves since the forecasts were last updated. We
FIGURE 1
5y5y breakevens back in the range
3.0
2.9
2.8
2.7
2.6
2.5
2.4
2.3
Jul-12
Aug-12 Sep-12 Oct-12 Nov-12 Dec-12
Jan-13
Feb-13 Mar-13 Apr-13
Barclays 5y5y BE
25 April 2013
10

April14s are now 60bp cheap
versus our CPI forecast;
however, we would wait for
80bp of cheapness before
going long energy-hedged,
given some index outflow next
week
find that TIIApr14s are about 60bp cheap to the Barclays forecast adjusted for the move in
gasoline futures since mid-April (Figure 2). They have cheapened recently as the market has
gone from pricing 1y ex-energy inflation from about 2.2% to 1.3% (Figure 4). While this
may seem quite cheap, we do not recommend going long just yet. First, we find that 1y CPI
swaps, which generally trade fairly close to 1y breakevens, have been cheap by about 70bp
on average since 2004 versus subsequently realized CPI (Figure 3). Therefore, the TIIApr14s
are less cheap than the average at the 1y point and, as an added headwind, are about to fall
out of most TIPS indices. While we do not expect the full issue size of about $15bn to be for
sale at month-end next Tuesday, sales from some passive index investors may weigh on
performance in the coming week. We recommend watching this issue closely and buying
on an energy-hedged basis if they get to 80bp cheap.
FIGURE 2
Front-end breakeven cheapness (versus forecast and versus energy adjusted forecast)
TIPS
maturity
TIPS
real yield
BE
Jul-13
Jan-14
Apr-14
Jul-14
Jan-15
-1.22
-1.01
-0.99
-1.67
-1.41
1.28
1.13
1.13
1.84
1.63
BE versus
BE versus Barclays
BE versus Barclays
Barclays CPI CPI forecast BE (bp), CPI forecast BE (bp),
forecast BE (bp)
crude adjusted
gasoline adjusted
-21
-36
-54
-37
-42
-21
-57
-69
-49
-49
-28
-46
-63
-43
-48
and as I looked up a fly went by

Over the past few years, we have looked at 3s-5s-7s, 5s-7s-10s and 7s-10s-13s real yield
flys to detect relative value along the TIPS curve and to see whether 5s and/or 10s have
cheapened ahead of the auction. Ahead of the April five-year auction, we noted the relative
richening of 3s5s7s (Figure 5) real yield fly to highlight that the sector had not set up ahead
of the largest ever TIPS auction. Subsequently, the auction tailed by about 7bp. The TIPS
market has recovered in less than a week after the sell-off, and 5y breakevens have widened
more than 10bp. Similarly, after the 10y reopening in March (Figure 5), the 7s10s13s real
yield fly looked cheap, but then it richened as the 19s and Jan25s cheapened relative to the
10s. Figure 6 shows that on March 15, the 7s10s13s fly traded at its cheapest levels, right
before the 10y reopening.
FIGURE 3
Short-end CPI swaps have on average traded about 70bp
cheap versus realized inflation
600
FIGURE 4
Ex-energy April14 breakevens (seasonally adjusted) have
declined sharply over the past month
2.6
2.4
400
2.2
200
2.0
1.8
1.6
-200
1.4
-400
1.2
-600
Jan-04
1.0
Jul-09
Jan-06
Jan-08
Jan-10
Jan-12
Apr-10
25 April 2013
Oct-11
Jul-12
Apr-13
Ex-energy Apr14 BE SA
1y CPI swap cheapness (bp)

Source: BLS, Barclays Research
Jan-11
11
FIGURE 5
5s did not cheapen ahead of 5y supply
FIGURE 6
10y has normalized from cheap levels post-March supply
16
14
-5
12
-10
10
8
-15
-20
-25
-30
Jul-12
Sep-12
Nov-12
Jan-13
0
Jul-12
Mar-13
Sep-12
Nov-12
Jan-13
Mar-13
Jan19 Jan22 Jan25RY FWD Fly
Jan15 Apr17 Jan19RY FWD Fly

Trade Idea: Sell the belly of Apr17-Jul20-Jan23 spot real yield fly
April17-Jul20-Jan23 real yield
fly is trading at significantly
rich levels; we recommend
selling the belly of it
The z-spread ASWs curve (Figure 7) indicates that Jul20s are significantly rich versus
April17s and Jan23s. The richening in Jul20s is confirmed in our latest forwards packet (page
2). We constructed a real yield fly to see whether Jul20s are indeed rich versus April17s and
Jan23s. Because of the larger effect of carry on the shorter end of the curve, we like to look
at TIPS flys on a forward basis to avoid any carry bias. We use Jan14s as the fwd anchor and
construct a fwd fly using Apr17fwdJan14s, Jul20fwdJan14s, and Jan23fwdJan14. A forward
yield is constructed using weighted modified duration (ie, Apr17FwdJan14=
(Apr17ModDur*Apr17Yield Jan14ModDur*Jan14Yield)/(Apr17ModDur-Jan14ModDur)).
Figure 8 shows a significant richening in the Apr17-Jul20-Jan23 real yield fly over the past
month. It is also rich versus comparable July issues; as such, the richening is not due to any
seasonality correction in Jul20s (Figure 8). We think the fly is likely to correct and
recommend being short the belly of April17-Jul20-Jan23 spot real yield fly. We initiate the fly
at -16bp (0.5:1:0.5 weights) and look to close the trade at -5bp, with a stop-loss at -22bp.
FIGURE 7
Jul20s look rich versus April17s and Jan23s versus z-spread
ASWs
FIGURE 8
Sell the belly of the Apr17-Jul20-Jan23 real yield fly
20
12
Jan23s
10
2
0
-2
-4
-6
-8
-10
-12
-14
-16
-18
18
16
14
12
4
2
10
April17s
-2
-4
Jul20s
-6
0
Jul-12
-8
1.0
2.8
4.6
6.4
Proceeds ASWs
25 April 2013
8.2
10.0
Sep-12
Nov-12
Jan-13
Mar-13
Jul17 Jul20 Jul22RY FWD Fly

Apr17 Jul20 Jan23 RY FWD Fly (RHS)
Note: Fwd fly created using Jan14s Source: Barclays Research
12
UNITED STATES: SWAPS
FV-TY invoice spread curve steepeners

remain attractive
Amrut Nashikkar
+1 212 412 1848
The richness of the FV futures contract makes structures such as an FV-TY invoice
spread steepener and receiving the belly of the TU-FV-TY invoice spread fly attractive
from a carry perspective, despite the move in these trades so far.
Over the past two months, spreads in the 5y sector have tightened relative to spreads
further out the curve, as well as at the front end. Figure 1 shows the FV-TY invoice spread
curve, which is trading at historically high levels, as well as the TU-FV-TY invoice spread fly,
which has tightened to levels seen last June, when European sovereign stress had caused a
blowout in front-end spreads. One question that gets asked is whether this steepening of
the FV-TY spread curve can continue.
Vivek Shukla
+1 212 412 2532
The FV-TY invoice spread

curve has room to steepen
and the roll-down profile
is attractive
We believe there is room for the FV-TY invoice spread curve to steepen further, and for the
TU-FV-TY fly to tighten, purely as the futures contracts come closer to expiration. Roll-down
until last delivery date on the former is 1.5bp, while that on the latter is nearly 2bp. Further,
these trades may get an added boost next month when the futures roll comes up.
We think that the main driver of these trades is the relative richness of the FV contract that
is evident in the high CTD implied repo rates relative to TY. While the implied repo rate for
the June FV contract is trading upwards of 20bp, that for the corresponding TY contract is
below 0bp. Furthermore, since April 4, the implied repo on the FV contract has increased
8bp, while that on the TY has declined marginally.
The FV contract looks rich,

even after accounting for its
higher CTD repo rate, relative
to TY
Part of the difference between the FV and TY implied repo rates is because the actual repo
rates on the FV CTD has been somewhat higher than the TY CTD. However, even if we look
at the difference between the implied repo and actual CTD repo, the FV contract stands out
as rich. For the FV contract, this repo differential is still ~20bp greater than the differential
for the TY (Figure 2).
FIGURE 1
The FV-TY invoice spread curve is trading at historical highs,
driven by the richness of the FV contract
FV-TY Invoice Spread Curve, bp
10
FIGURE 2
The FV contract looks richer than the TY contract, even after
taking into account its higher CTD repo rates
0.2%
TU-FV-TY Invoice Spread fly, bp
TY, Front Implied Repo-Actual CTD Repo

FV, Front Implied Repo-Actual CTD Repo
0.1%
6
4
0.0%
2
0
-0.1%
-2
-4
-0.2%
-6
-8
-0.3%
-10
-12
Apr-12
Jun-12
25 April 2013
Aug-12
Oct-12
Dec-12
Feb-13
Apr-13
-0.4%
20-Mar
27-Mar
3-Apr
10-Apr
17-Apr
24-Apr
13
FIGURE 3
FV CTD is flat relative to its neighbors, while the CTD of the
TY contract is cheap
0.3
FIGURE 4
CTD asset swap spreads themselves have widened for TY
compared with FV
bp
bp
-5.5
0.2
-6.0
0.1
0.0
-6.5
-0.1
-7.0
-0.2
-0.3
-7.5
-0.4
12-Apr 14-Apr 16-Apr 18-Apr 20-Apr 22-Apr 24-Apr
-8.0
4-Apr
TY CTD fly
We expect more cheapening

pressure on the FV front CTD
than TY
9-Apr
FV CTD fly
14-Apr
19-Apr
24-Apr
TY-FV CTD ASW

Not only is the FV contract rich relative to its CTD, but its CTD is flat relative to its neighbors,
while the CTD of the TY contract is cheap. Figure 3 plots the FV and TY CTDs flys versus
neighboring securities of the same series. Since mid-April, the TY CTD fly has cheapened
more than the FV CTD fly. As the RV community sets up for the next calendar roll, one
would have expected more cheapening pressure on the FVM3 CTD than TYM3, given that
in the previous few rolls the FV calendar has cheapened more than the TY.
Over the past few weeks, the FV-TY invoice spread curve has steepened because the rally
was driven by the 7y sector (Figure 4), which caused spreads in the sector to widen overall.
Over the next few weeks, we think the move should continue but for a different reason:
because of the financing advantage of the FV invoice spread position through its higher
implied repo rate. Any rally in rates should only help, in our opinion. For investors who
hesitate in taking the spread curve risk that FV-TY entails, especially given the steepness of
the 5s-7s spread curve, we would recommend a FV invoice spread tightener against a
headline 5y spread widener.
The main risk to our

recommendation is a sell-off in
rates, which we think is unlikely
over the next few weeks
25 April 2013
The main risk, in our opinion, is from a sell-off in rates, which would cause TYM3 to
underperform and tighten TY invoice spreads. However, with central banks continuing to
increase accommodation, and the Fed now worried about missing its 2% inflation target
from the downside, we believe that the risk of a sell-off over the next few weeks is small.
14
UNITED STATES: VOLATILITY
Limited long
Piyush Goyal
+1 212 412 6793
piyush.goyal@barclays.com
We recommend buying a 3m*30y receiver vs. USM3 call calendar spread to position for
rates staying low for longer than is priced by the market. The trade also benefits from a
steep curve, wide long-end swap spreads and relatively high board vol.
Trade details
Long $100mn 3m*30y ATM receiver (=2.88%)
Short 1200 1 USM3 Call 148 (ref. USM3 = 147-28)
Premium outlay = $1.5mn
To understand the moving parts, we break the trade into a swaption calendar spread
(1m*30y versus 3m*30y) and a bull flattener (USM3 versus 1m*30y).
3m*30y vs 1m*30y calendar spread

There are four reasons to like a calendar spread.
Entry levels for 1m vs. 3m*30y
calendar spread are good
First, this is a limited loss trade. The longer-dated option will always have the same intrinsic
value and more time value compared to the shorter-dated option. As a result, any losses
would be limited to the premium outlay. In practice, over one month, the structure would
not lose even half the premium outlay if the 30y swap rate was within 2.45-3.1%, a range
the long end swap rate has not broken in the past six months.
Second, the entry level is attractive. Figure 1 plots the entry cost of ATM 1m*30y versus
3m*30y receiver calendar spread over the past five years. As shown, the calendar spread has
required a premium outlay of 111-312cts and an average of 167cts over the period. The
current cost of 130cts is at the lower end of its trading range. Lower premium outlay reduces
the potential for significant losses if the 30y rate moves outside the six-month range.
FIGURE 1
Entry level for 1m vs. 3m*30y receiver spread is attractive
350
300
250
200
150
100
50
0
Apr-08 Jan-09 Oct-09 Jul-10 Apr-11 Jan-12 Oct-12
1m vs 3m30y recr spread (cts)
Source: Barclays. As of 4/25/13
Imp Vol
2y
5y
10y
30y
1m
3m
6m
1y
17
19
23
32
40
41
48
57
59
61
67
73
68
69
71
75
20d rlzd vol

1m
3m
6m
1y
2y
11
12
15
22
5y
34
35
39
46
10y
57
57
60
65
30y
77
78
79
81
2y
1.61
1.58
1.52
1.46
5y
1.18
1.19
1.22
1.23
10y
1.04
1.07
1.11
1.13
30y
0.89
0.88
0.90
0.92
Imp/rlzd
1m
3m
6m
1y
Source: As of 4/24/13
1
25 April 2013
FIGURE 2
Barring 30y tails, implied vol is at premium to delivered vol
30y swap dv01 = 20.1; USM3 dv01 = 16.75; so the hedge ratio for 100mn 3m*30y is 20.1/16.75 *1000 =1200
15

Third, gamma on 30y is cheap. As Figure 2 shows, implied vol is at a premium to delivered
vol for all expiries and tails, except for 30y. This matters, as investors looking to own vol
given the absolute low implied volatility, will likely concentrate on long-tail gamma as only
the 30y tail is able to recoup the time decay. The calendar spread being long vega would
benefit from a rise in implied vol.
Fourth, rates are already quite low. Nominal yields did not respond to the recent upheaval in
the commodity market. This suggests that a significant decline in yields may need help from
the Eurozone, perhaps in the form of a risk flare similar to that of May 2012. Given the
absence of any catalyst in the near term, the one-month receiver will likely expire worthless
and the investor can own the upside potential from an eventual decline in long end yields.
1m*30y vs USM3 calls

Furthermore, selling USM3 calls instead of 1m*30y receivers is better in our opinion, for a
couple of reasons.
Curve is steep and swap
spreads wide
Currently, the exchange vol is ~ 5% expensive to comparable swaption vol. For example,
USM3 and US3 options are priced at about 67bp/y and 70bp/y, premiums of 7% and 5%,
respectively, to the comparable swaption. Such pricing reflects that swap spreads are priced
to widen in a rate rally and vice-versa, something that has not played out in a while.
Specifically, over the past six months, long-end swap spreads have widened even as rates
first ratcheted higher and then fell. As a result, a long swaption position versus short US
option position likely did well. Price action in swap spreads is likely to remain uncorrelated
to rates. Also, rates should stay more or less range-bound. Consequently, board options
that are priced for larger moves should continue to underperform swaption.
Moreover, the long-end curve is steep and long-end spreads quite wide. The 10-30y swap
curve at 96bp is a couple of basis points away from the steepest levels in more than two years.
At the same time, 30y swap spreads are the widest they have been since the 2008 crisis.
3m*30y receiver vs. USM3 call

takes advantage of good levels
and positions for rates to
remain low for longer
25 April 2013
A 1m*30y vs USM3 bull flattener takes advantage of the above: ie, relatively higher board
vol, a steep yield curve and the widest swap spreads since the 2008 crisis. As a result, we
like the trade standalone.
The calendar spread and bull flattener put together is: long 3m30y vs USM3 calls. The main
risk to the trade is a further easing by the Fed. In such a scenario, rates would likely sell off
and the curve steepen more. However, the losses would be limited to the premium outlay; if
the curve sells off ~ 30bp in one month, the remaining 3m*30y receiver would still be worth
about 70cts; implying losses of about 80cts only. The losses would likely be smaller,
however, as vol on 30y would be higher in a rising rate scenario. Given the risk/reward, we
like the trade and recommend it to investors who expect rates to remain low for longer than
is currently priced by the market and expect to earn a windfall in a significant rally few
weeks down the line.
16
UNITED STATES: MONEY MARKETS
The other repo suppliers

Joseph Abate
+1 212 412 7459
joseph.abate@barclays.com
Money market funds hold nearly $600bn in repo and supply nearly one-third of the cash
in the tri-party repo market. But over the past two years, the mix of collateral suppliers
has shifted, moving toward large, non-primary dealer banks.
Collateral sourcing has shifted in the past two years. Although most money fund repo is
done with the 21 primary dealers, the share from outside this group is rising.
Non-primary dealers tend to do proportionally more Treasury repo and less other
collateral than primary dealers. The rates they pay on government collateral, however,
are similar.
There is a significant rate differential in other collateral between primary and nonprimary dealers, which most likely reflects differences in the underlying collateral.
Primary and non-primary dealer holdings of other collateral repo declined abruptly in
June 2012 and have not recovered.
Restricted balance sheet capacity, along with market de-concentration, suggests that nonprimary dealer activity will continue rising. However, we suspect that regulatory pressure
will keep other repo collateral holdings in money market funds from rising.
Primary dealers
The bulk of taxable money fund repo is done with the 21 primary dealers those large bank
institutions that are the Feds counterparts in monetary policy operations. At the end of
March, money market funds had approximately $400bn worth of repo on with primary
dealers, although this amount declined roughly $80bn from February. Indeed, in August
2011, it appears that the quarter-end decline in all money fund repo holdings originated
from the primary dealers balance sheet reporting pressures. These, plus a similar corporate
calendar across firms probably pushed the banks to curtail their repo borrowings sharply in
the weeks leading up to quarter-end.
FIGURE 1
MMF repo with non-primary dealers (% total MMF repo)
FIGURE 2
Collateral composition (% total repo)
21
60
19
50
17
40
15
13
11
30
20
10
5
Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13
Source: imoney.net
25 April 2013
TSY
AGY
NonPrimary
Other
Primary
Source: imoney.net
17

Curiously, these same balance sheet-driven supply pressures are much less evident in the
money fund activity with non-primary dealers. These institutions include the US branches of
several large Canadian and Japanese banks, as well as some large US custody banks. Although
some repo leaking away from primary dealers seems to flow toward non-primary dealers, the
amount is relatively small generally under $10bn and is certainly not sufficient to absorb
the reduced supply from primary dealers (of roughly $75bn per quarter-end).
Rising non-primary dealer activity

But repo with non-primary
dealers is rising
Beyond the quarter-end seasonality, however, taxable money fund repo balances with nonprimary dealers have been rising steadily. In fact, in the last year alone, non-primary dealer
repo has increased by nearly 50%, rising to $96bn from $64bn. As a share of overall taxable
fund repo holdings, repo with non-primary dealers climbed to 22% in March (Figure 1). But
why is that happening?
And set to rise further
As we have written before, there has been a significant push toward de-concentration in
the tri-party repo market that is, reducing the market concentration of the biggest dealers
so that unwinding a large repo borrower is not disruptive and does not spread systemic risk.
Since the biggest firms in the tri-party market are generally primary dealers, the push
toward de-concentration has probably motivated money funds to seek out alternative
supply from non-primary dealers.
Is non-primary dealer repo different?

Non-primary dealer
repo is skewed more
toward Treasury collateral
Money market funds report details on their repo holdings (along with their other assets) at
least once per month to the SEC. Repo holdings regardless of the cash borrower are split
into three major categories: Treasuries, agencies, and an undifferentiated residual called
other. By asset type there are slight, but statistically significant, differences in the repo
from primary and non-primary dealers. Since June 2012, non-primary dealers collateralized
borrowings from money funds have been skewed toward Treasuries more so than they are
for primary dealers. Of the non-primary dealer collateral pool, 39.1% is Treasury collateral,
compared with 33.3% for primary dealers (Figure 2). By contrast, primary dealers appear to
finance proportionally more agency and other collateral with money market funds.
Although the collateral mix is slightly different, primary and non-primary dealers finance
their government collateral at roughly the same rates. In other words, there does not appear
to be a significant difference in perceived counterparty credit. 2
FIGURE 3
Other collateral repo rates in MMFs (bp)
FIGURE 4
Other collateral in MMFs ($bn)
140
60
130
50
120
110
40
100
90
30
80
20
70
60
10
50
0
Jun-12
Aug-12
Oct-12
Dec-12
Note: These are volume weighted averages. Source: imoney.net
Feb-13
40
Aug-11
Dec-11
Apr-12
Aug-12
Dec-12
Source: imoney.net
Keep in mind that most rated money funds cannot look through to the underlying collateral in determining
suitability.
25 April 2013
18
Other collateral and non-primary dealers

Collateral differences
probably account for
the difference in rates
However, there is a large and persistent difference in the other collateral repo rate
between primary and non-primary funds. Since June 2012, the non-primary dealer financing
rate on this collateral has been approximately 16bp lower than the corresponding rate on
transactions with primary dealers (Figure 3). 3 Since the average tenor of the transactions for
both types of dealers is similar, the financing rate differential most likely reflects differences
in the underlying collateral mix.
Unfortunately, other collateral is not identified any further, although with a yield of 3050bp, these holdings are at the upper end of the distribution of money fund investment
yields. Based on statistics from Fitch Ratings, a portion of the collateral in the other
category probably includes structured product (such as ABS and CMOs), along with a fair
amount of high grade corporate bonds and other liquid securities. 4 Without being certain,
we suspect that the primary dealers holdings of other collateral are skewed more toward
structured products and the non-primary dealers might be financing more liquid nongovernment securities in this bucket.
Interestingly, other collateral has shrunk sharply, as a share of both money fund assets and
their repo holdings. The decline in the volume of this collateral financed by money market
funds occurred abruptly, in June 2012 (Figure 4). Moreover, the reduction occurs in primary
and non-primary dealer suppliers. It is not exactly clear why (or specifically, what type of)
other collateral migrated out of money market financing. But given the abruptness of the
decline, we suspect that the move was driven largely by regulatory pressure, although it is
also possible that the aggregate supply of other collateral shrank because it might have
become cheaper to finance it outside the repo market, perhaps using internal cash.
In the coming year, we expect repo holdings in money market funds to continue to change.
Holdings of non-primary dealer repo are likely to increase as balance sheet capacity at the
primary dealers gets increasingly scarce. Likewise we expect the nature of other collateral
also ro shift; as non-primary dealer activity becomes larger, the underlying collateral may
migrate toward more liquid assets and, corresponding, yields may decline.
As we describe later, money fund repo against other collateral declined sharply in June 2012 without an obvious
cause. It has not recovered since. For comparison, we do our analysis on the post-June 2012 data.
4
See, A Deep Dive into the Collateral Pool, Fitch Ratings, August 1, 2012.
25 April 2013
19
EURO AREA: RATES STRATEGY
The case for further tightening

Laurent Fransolet
+44 (0)20 7773 8385
laurent.fransolet@barclays.com
Huw Worthington
+44 (0)20 7773 1307
huw.worthington@barclays.com
Cagdas Aksu
+44 (0)20 7773 5788
We still believe Spanish and Italian bonds can tighten vs. Germany for several reasons eg,
positive central bank activity; likely positive economic data surprises; and the continued
search for yield. These outweigh potential negatives in Cyprus/Slovenia.
Yield spreads vs. Germany for Italy are at the lows triggered by the ECB LTROs in early 2012,
while for Spain they are a few bp above this level. From here, the question for the bull case is:
will spreads stay at current levels or move back down further, to the levels seen prior to the
sell-off of H2 11 (ie, the peak of the crisis note that May will be the third anniversary of the
euro crisis)? Clearly, in the near term, outright yields are less attractive and active short
positioning by hedge funds and dealers is likely to have been closed following recent moves.
Thus, further very strong near-term tightening seems unlikely.
FIGURE 1
10y Yield Spreads vs Germany in Italy and Spain since early 2012
650
600
Italy
Spain
550
500
450
400
350
300
250
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Jan-13
Mar-13
However, is there room for further tightening in the medium term? In our view this is possible,
but it would likely take more time; there are three key factors to watch see below.
Political progress
While 2012 was a year full of announcements at the national or euro area levels, 2013 will
likely be the year of implementation. How the banking union progresses further and how
quickly may be important catalysts: the move (by mid-year) towards a Single Resolution
Mechanism (and the confirmation of the Single Supervisory Mechanism) is a key step.
Similarly, the discussions (scheduled for June) around potential direct bank recapitalizations
by the ESM may provide a further impetus towards tightening, if they lead to a lessening of
the banks sovereign feedback loops. A lot of things need to fall in place, and expectations
are mixed in terms of the scope and speed of implementation. Progress would likely lead to
a better performance of peripheral countries.
Economic data
PMIs seem to have stabilized
25 April 2013
While PMIs across the euro area were stable, albeit low, the data for Italy and Spain seem to
have stabilized, at least indicating that the worst of the growth was in Q4 12 (Spain GDP
declined 0.8% q/q in Q4 12 vs. latest official expectations from the Bank of Spain of -0.5%
for Q1 13 while Italy contracted 0.9% in Q4 vs our expectations of 0.5% in Q1 13. For Spain
20

in particular, the news that the housing market decline was decelerating, with prices falling
0.8% in Q1 13 vs. recent quarterly falls of 2-3% is important given its read across to banks
and households. Signs that the recession is lessening will be important for investors, but will
probably be relatively slow to appear over the coming weeks and months.
Buying by foreign investors

A small pickup in foreign
ownership seems likely
As we have argued frequently, one of the key features of the sell-off in H2 11 was the large
liquidations by the more conservative real money investors. These have been absent since Q1 12
and have helped the stabilization of Italian and Spanish debt. Since the Draghi whatever it takes
comments in late July 12, foreign participation in Spain has gone back up (both in absolute and
relative terms to Italy). These flows have been key in driving market pricing, as evidenced in
Figure 2. From here, though, it will be more difficult for foreign ownership to rise as it would
involve Italy and Spain having to re-attract some of the foreign investors who left in H2 11, and
who are probably the most risk averse. We expect a small pickup in the foreign ownership, as
Japanese investors, or some north European investors are likely dragged back in their search for
yield. However, the overall level of foreign involvement will likely remain lower than before,
because of risk aversion, rating or regulatory constraints, etc. In the coming months we may also
see a certain rotation in foreign owners, with some traditional investors replacing some of the
US-based buyers from H2 12.
FIGURE 2
Foreign Ownership in Spain (Ex ECB) and 10y Spain- Germany Yield spread
55%
Spanish Bonos held by foreigners (ex ECB, LHS)

10yr Spain - Ger (RHS, inverted)
50%
0
100
45%
200
40%
300
35%
30%
400
25%
20%
Jan-10
500
Aug-10
Mar-11
Oct-11
Apr-12
Nov-12
Source: Spanish Tesoro, Barclays Research
Using only fundamental

variables-based models
produces satisfactory results
Notably, we use foreign ownership in some of our fair value models for 10y peripheral
spreads, along with very front-end spreads (1y spread, as an anchor) and the level of
debt/GDP. One might argue about the causality, or the predictability of the foreign
ownership, as well as using short-end spreads, but the literature shows that using only
fundamental variables to explain bond yields or spreads since 2010 is not very satisfactory
(these models are unstable and typically unable to explain the large shifts in spreads, due
more to sentiment and imbalanced flows). Note that the modelling of a fair value spread in
Italy is particularly difficult to relate to fundamentals.
10y spreads still fair value or a

little cheap for Italy and Spain
Given the recent developments in foreign ownership and short-end spreads these models
suggest that 10y spreads are still roughly fair value for both Spain and Italy (if anything they are
still a bit cheap). The potential for a very front-end rally is more limited in the near term, we think,
but the 1y1y forward spreads (figure 3 and 4) could still rally 100bp over time, worth about 50bp
on 10y spreads. Equally, the foreign ownership could increase, but even a 5pp move (towards
35%) would translate into a 25bp move in spreads only from here, on our estimates.
25 April 2013
21
FIGURE 3
Selected Forward Yield Spreads: Italy vs Germany, bp
FIGURE 4
Selected Forward Yield Spreads: Spain vs Germany, bp
10
10
9
8
7
1y Italy vs Germany
1y1yfwd Italy vs Germany
5y5yfwd Italy vs Germany
Average 2 to 5y Italy fwd vs Germany
1y1yfwd Spain vs Germany
5y5yfwd Spain vs Germany
0
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
1y Spain vs Germany
0
Jan-10
Average 2 to 5y Spain fwd

vs Germany
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Conclusion
Factors supporting even tighter
spreads outweigh the potential
negatives, in our view
We have been bullish for some time now on the prospect for Spanish and Italian bond
tightening vs. Germany. With spreads now either back, or close to their tightest levels seen
in the wake of the 3y LTROs announcement, further performance from here seems likely to
be at a more measured pace.
Indeed with 10y Italy and Spain having tightened by 60bp and 70bp respectively since end
March alone (as at the time of writing) some short-term profit-taking could see limited rewidening. Nevertheless, we believe that several factors support even tighter spreads,
including likely positive economic data surprises, central bank activity, and the search for
yield alongside flows and positioning, outweigh the potential negatives here (seemingly
principally focused on Cyprus and Slovenia, given that the impact of the political situation is
likely to diminish). As such, any back-up in spreads may now be seen more as an
opportunity, as opposed to a threat by investors. In reality investment flows into the
periphery from ex euro area foreign investors may take time to come to fruition; however,
anticipation of such flows, should mean that shorter-dated bonds and bills, will be the most
resilient instruments.
25 April 2013
22
EUROPE: SWAPS
EUR ASWs not cheap yet

Cagdas Aksu
+44 (0)20 7773 5788
Q1 generally saw EUR swap

spreads widening on
fundamental cheapness, a
German outright yield rally and
increased political risks
A large part of the tightening in EUR ASW since early April was due to the FRAEONIA
tightening. We still do not think the EONIAGermany component of EUR ASWs are cheap.
We continue to recommend holding onto short Bobl ASWs on the 5s/30s ASW box.
EUR swap spreads have been very volatile since the beginning of the year with the moves
again being much larger than the US and UK ASWs. Generally, from the beginning of the
year until the end of March, EUR swap spreads have been in a widening trend, with Bobl
ASW widening from 30bp to 60bp. From early January until mid March, this was mainly led
by fundamental cheapness on ASWs and the subsequent rally in German yields in February,
on the back of reduced concerns about quick LTRO repayments and increased uncertainty
from Italian elections. Thus, this widening was also driven significantly by EONIABobl, with
the basis component of the Bobl ASW (vs Libor) being rather stable. However, the second
15bp widening of the Bobl ASW (from 45bp to 60bp) from mid-end March was largely
driven by the basis component (FRA-EONIA) expanding due to concerns about liquidity
drying up in the banking system, after the Cyprus bailout.
EUR ASWs have been tightening back again in the past couple of weeks, from their local
wides at endMarch, with Schatz, Bobl and Bund ASW tightening by 18bp, 16bp and 12bp,
respectively. Nonetheless, notably, the reversal of the basis widening (seen in the second
half of March) accounted for a large part of this. For instance, of the 16bp Bobl ASW
tightening since early April, around 10bp has been due to FRAEONIA with the remaining
6bp owing to the EONIABobl component. As such, at EONIA +15bp, the EONIABobl
component of the Bobl ASW is still much wider than the tights at the beginning of the year
(around EONIA +3bp).
Trade views in EUR ASWs from here

At the beginning of the year, we had recommended going long Bund and 5y5y fwd ASW on
fundamental cheapness and as a hedge versus some political risks likely to arise from the
Eurozone debt crisis (see Buy 5y5y fwd ASW on 10 January). We took profit in this trade on
8 March after a notable widening (see Take profit on Bund ASW widener). Following the last
FIGURE 1
Evolution of German ASWs versus EONIA
60
40
FIGURE 2
Bobl ASW - breakdown of its components
120
Schatz EONIA - Ger

Bobl EONIA - Ger
100
Bund EONIA - Ger
80
60
20
Bobl ASW
Bobl EONIA - Ger
Bobl FRA - EONIA
40
0
20
0
-20
-40
Jan-10 Jul-10
-20
Jan-11 Jul-11
25 April 2013
Jan-12 Jul-12
Jan-13
-40
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12
23
FIGURE 3
Fair value for Bobl ASW vs EONIA with German and Euro
area deficit expectations
FIGURE 4
FRA-EONIA basis is back to its tightest level after some
volatility post the Cyprus bailout
30
70
20
60
10
50
EUR 1y1y fwd Libor - EONIA
40
-10
30
-20
-30
-40
20
Bobl EONIA - Ger
Predicted with 1yr fwd Euro deficit
Predicted with 1yr fwd German deficit
-50
Nov-03 Apr-05 Sep-06 Feb-08
Jul-09 Dec-10 May-12
Source: Consensus Economics, Barclays Research
10
0
Apr-08
Apr-09
Apr-10
Apr-11
Apr-12
Apr-13
leg of the Cyprus-related widening in ASWs, on 28 March, we recommended selling Bobl

ASW on the 5s/30s ASW box (See Escape velocity versus Bund yields). Since then the trade
has worked very well for two reasons: first Bobl ASW has corrected 15bp from its expensive
levels but at the same time, 30y ASWs have remained supported relative to the rest of the
that curve, tightening only 5bp during the same period thanks to the BoJ QE announcement
of support for long-end ASWs.
We do not believe that EUR
ASWs are outright cheap yet
We still believe that this trend of long-end ASW outperformance versus Bobl ASW can
continue for a while for a few reasons. First, as mentioned earlier, a large part of the
tightening in Bobl ASW since early this month has come from the FRAEONIA. While the
latter is back to its tightest levels again, it is unlikely to rewiden in the near term as the ECB
is likely to cut the refi rate by 25bp without a depo rate cut next week. Second, following
limited tightening in the EONIA-Bobl component of Bobl ASWs, fundamentally we still find it
expensive and insufficiently cheap to buy outright. We would find fundamental value in Bobl
ASW only if it tightens towards 35bp (to around EONIA + 5bp). In the near term, the
sentiment for EGB periphery is still strong. While Cyprus has probably increased the
necessity for quicker progress on institutional reforms to facilitate banking union, nothing
suggests to us a new increase in risk flare, for now.
and continue to recommend

being short Bobl ASW on
5s/30s ASW box
Lastly, most of the moves post the BoJ announcement were due to anticipation of demand
for EGB paper. If and when these flows materialise, we would expect them to go to the 10y
and post-10y parts of the curve, given low yields at the belly of the core country curves. This
should also support 30y ASWs in relative terms going forward. Therefore, for now, we
continue to recommend holding onto short Bobl ASW on the 5s/30s ASWs box. If and
when Bobl ASW tightens towards 35bp (versus Libor), we will think about outright longs,
depending on the general risk circumstances in the market at that stage.
25 April 2013
24
FIGURE 5
ASW changes since 28 March: 30yr ASWs have been a
relative outperformer
90
0
-2
FIGURE 6
We expect more relative cheapening of Bobl ASW versus
30yr ASWs
2yr
5yr
10yr
60
-6
50
-8
40
-10
30
-12
-16
-18
25 April 2013
80
70
-4
-14
30yr
20
Change in ASWs
5s/30s ASW box
10
0
Jun-10
Mar-11
Dec-11
Sep-12
Jun-13
25
EUROPE: MONEY MARKETS
Refi cut: limited effect on markets rates

Giuseppe Maraffino
+44 (0)20 3134 9938
giuseppe.maraffino@barclays.com
Laurent Fransolet
+44 (0)20 7773 8385
We expect a 25bp cut only in

the refi rate
Commitment to an
accommodative stance
but no announcement yet of
a new LTRO
We expect a 25bp cut only in the refi rate at next weeks ECB meeting. The markets
reaction is likely to be limited, as the very short rates are already low and probably
already incorporate expectations for a cut.
As discussed in ECB Watching: Ready to act, 24 April, we have changed our ECB call from
on hold to a 25bp cut in the refi rate (but not in the deposit facility rate) as early as at the
ECBs meeting on 2 May. Our view is underpinned by the economic weakness that has
started to spread also to the core economies of the euro area, with some signs of
disinflationary pressures supported by lower oil prices. Moreover, we noted that several ECB
members over the last few days have focused on the possibility of a refi rate cut.
We also expect President Draghi to remark that monetary policy stance will remain
accommodative as long as needed, with liquidity conditions remaining consistent with such
a stance. However, we do not believe the ECB will announce a new LTRO at this stage. ECB
members latest comments on this topic do not seem to support expectations of an
imminent announcement. Also, the latest Bank Lending Survey showed a general easing of
tightening in euro area credit conditions, although the economic uncertainty and weakness
of demand continue to weigh. Interestingly, the survey indicates less pressure on the
funding side for banks, and this could make the announcement of new LTROs at the current
juncture less urgent 5.
Since the ECBs April meeting we have highlighted the possibility of the ECB taking action on
the refi rate, as at the meeting President Draghi left the door open for a policy rate cut,
should the economic weakness persist.
Refi rate cut: more important

to counteract any passive
tightening than to provide
stimulus to the real economy
At this stage, a refi rate cut has much more relevance in terms of counteracting any possible
passive tightening of liquidity conditions than in providing stimulus to the real economy
owing to the frictions in monetary policy transmission. This is because a reduction would
reduce the reference level for short rates in a context of a lower liquidity surplus. The
likelihood of such a scenario is not negligible in our view, especially if the reimbursement of
the 3y LTRO liquidity continues at the same pace of the last few weeks 6.
Decline in cost of ECB borrowing

could reduce the incentive to
reimburse the 3y LTROs
Moreover, the decline in the cost of borrowing at the ECB could reduce the incentive for
banks to repay the 3y LTROs. At the margin, the decreased cost of ECB liquidity borrowing
should make the 3y ECB liquidity more convenient, especially for those banks that borrowed
for lending or carry-trade purposes. Maybe, for banks that borrowed for precautionary
reasons, a 25bp reduction in the cost of parking liquidity (because the deposit facility rate is
zero) would not make any particular difference (although such banks have likely already
repaid a large part of their 3y liquidity). Here, important indications on the likely banks
behaviour might come from the announcement on 26 April of the 3y LTRO repayment next
week (on 2 May, the settlement day of the MRO). If the benefit of lower cost of borrowing
would prevail in banks decision, a low amount of repayment will likely be announced (note
that banks already informed the central bank of their decisions on Wednesday, 24 April).
Market impact is likely to

be limited
In terms of markets impact, we expect a limited reaction, as rates are already low and
probably already incorporate expectations of a refi rate cut. Indeed, it is hard to extract from
the current market prices an accurate estimate of the expectations on the ECBs actions, as
there is no accurate estimate of the fair level of the spread of the money market rates vs. the
refi rate in such an environment of abundant liquidity. After the sharp rally since the
5
6
25 April 2013
See Focus II in the April 22 Euro Money Markets Weekly The ECBs options
See Focus I in the April 22 Euro Money Markets Weekly The ECBs options
26

beginning of the year, we believe that white contracts on the Euribor strips already
incorporate a high chance of a 25bp cut by June. Here, it is worth noting that the June
Euribor contract has richened 3bp since the ECBs April meeting to 18bp currently. We see
very limited room for a further rally, based on our expectations for a fair level of 15bp for the
3m Euribor from 20.6bp currently. The decline in the fixing would be the result of a further
tightening of the FRA/Eonia rather than a reduction in OIS rates.
Likely no impact on EONIA and
marginal effect on Euribor
We do not believe the refi rate cut will affect the Eonia fixing, which is driven more by the level of
the deposit facility rate (which we expect will be left unchanged at zero). Therefore, we continue
to envisage the Eonia fixing moving at around 8bp, as long as the liquidity surplus will stay above
the psychological level of 200bn 7. We expect also the daily volatility that has characterized the
fixing over the past few weeks to remain high. This is because in a context of low EONIA
(reported) volume, the fixing has become more sensitive to a particular flow reported by panel
banks. OIS rates should remain broadly stable, reflecting the low Eonia fixing.
Figure 1 summarises our view on the potential impact from a 25bp cut in the refi rate (with
the depo rate remaining at zero) on short rates. In general the ECBs decision should
continue to support the carry-trade driven bull flattening of the curve, apart from some
initial temporary volatility mainly driven by profit-taking. Indeed, expectations that the
policy rate cut could be the beginning of a series of measures to counteract the passive
tightening of liquidity conditions should reduce the term premium currently priced at the
long tenors on the money markets curve, which is based on the uncertainty around liquidity
conditions after the natural maturities of the two 3y LTROs in January and March 2015.
Here, the ECBs report Financial Integration in Europe April 2013contains an interesting
chart (chart 37 EONIA-ECB deposit rate spread evolution in a low interest rate context).
This shows the EONIA-ECB deposit rate spread over various time periods, which take into
account particular events (eg, allotment of the first 3y LTRO, the policy rate cut in July 2012,
the first repayment of the 3y LTRO). The main message is that the spread level seems to be
a function of time that has passed, suggesting a gradual adjustment of rates to a change in
excess liquidity conditions and to the new level of policy rates. In general, this could be
related to the fact that the compression of market margins and spreads encourage the
search for yield (or the exit from the market in some cases), with a corresponding increase
in risk exposure or maturity extension. The speed of such adjustment in market rates
depends on several factors like credit risk policy and may take time. This supports our bullflattening view on money market rates and on the front end of the peripheral curves.
FIGURE 1
Expected impact on money market rates from a possible 25bp cut in the refi rate
ECB decision
25bp cut in the refi
rate, depo rate
unchanged at zero
Eonia Fixing
Eonia curve
No impact on Eonia: the

3m OIS: Stable at
fixing should stay at about 7/8bp. Gradual
about 8bp
flattening of the curve
Euribor strip
3m FRA/EONIA
3m Euribor
Continuation of the
carry trade driven by
bull flattening
Gradually to 8bp on
reinforcement of ECBs
accommodative stance
Moving towards 15bp
Carry trades on the peripheral

curves could become more
attractive
Indeed, the reduced cost of ECB borrowing should make the carry trade on the peripheral curve
even more attractive, despite the recent decline in yields, thus leading some banks in the
peripheral countries to postpone their 3y LTRO reimbursement. Due to the particular steepness
of the 3m-3y parts of the Italian and Spanish curves, the 1y1y forward and the 1y 2y forward at
2.32% and 2.9% respectively, still look quite interesting even if they are close to their historical
low level. Room for a further richening led by yield hunting is likely, in our view.
See April 22 Euro Money Markets Weekly, Focus I repayment and risks of passive tightening for an in depth
analysis of EONIA movements under different reimbursements scenarios
25 April 2013
27

The very front end is already
quite rich
Notably, the very front end of the peripheral EGB curves have been supported over the past
few months by stable demand both from domestic and international accounts, which use
bills up to the 6m area as deposits for liquidity with interesting pick-up vs. the core and
semicore bills. This explains the sharp drop of the T-bill yields in general with the 3m yields
on the Italian and Spanish curves to about 20bp (approximately the same level of the 3m or
6m GC rates). Assuming no richening of the repo rate, a structural decline of the 3m BOT to
below such a level is unlikely. More likely in our view would be an extension of duration,
with investors searching for a yield pick-up in maturities beyond 6m and 12m. For the 1y
tenor, which is a bit more volatile than shorter maturities on the T-bill curve, 50bp (ie, the
main refinancing rate in case of a cut) could be a floor.
any further richening would

depend on the GC rate
Repo market: no impact on

rates but activity probably
could be affected by the lower
cost of ECB funding
We would not expect repo rates to be affected much by a reduction in the refi rate because
the core collateral already trades at close to zero, thus limiting room for a possible richening
in the Eonia spread. Peripheral collateral (Italy and Spain) trades at about 8-10bp spread vs.
the core. Any richening, in our view, would be more related to increased support from
domestic banks rather than to a refi rate cut.
However, activity in the repo market might be affected by a refi rate cut. Indeed many banks
over the last few months decided to replace their ECB borrowing, especially at short
maturities like MRO, with repo borrowing (less expensive compared with the main
refinancing rate). This has been the case especially for Spanish banks, which since last
summer have reduced their ECB borrowing, particularly at the MRO, as shown in the Bank
of Spain data, and have increased their usage of the domestic repo market as confirmed by
the MEFF data. In this case a 25bp refi rate cut could reduce the convenience of using the
repo market, especially at long tenors.
Bull-flattening trend in the

money markets curve likely to
continue in anticipation of
more ECB actions
In summary, we believe a reduction in the refi rate would have more relevance in terms of
counteracting any possible passive tightening of liquidity conditions than in providing
stimulus to the real economy. The Eonia fixing should be not affected with only a marginal
impact on the 3m Euribor. In general we expect the bull flattening trend of the money
markets curve to continue in anticipation of more actions by the ECB to keep the monetary
policy stance accommodative. Repo market activity could be affected by the reduced cost of
borrowing at the ECB operations, which would make the carry trade at the front end of the
peripheral issuers curves even more attractive.
FIGURE 2
3y LTRO payback: weekly and cumulative repayment
300
Cumulative repayment, eur bn, lhs

Weekly repayment, eur bn, rhs
250
FIGURE 3
3m Euribor future: bull flattening, with minor changes in
whites contracts since ECBs April meeting (%)
160
140
120
200
1.00
25-Apr-13
04-Apr-13
0.75
100
150
80
0.50
60
100
40
50
0.25
20
0
1
Number of repayments
Source: ECB, Barclays Research
25 April 2013
10 11 12 13
0.00
Apr-13
Dec-13
Aug-14
Apr-15
Dec-15
Aug-16
28
UNITED KINGDOM: RATES STRATEGY
George and the fiscal deficit dragon

This article was previously published in Global Macro Daily (Sydney Open), 24 April 2013.
Moyeen Islam
+44 (0)20 7773 4675
moyeen.islam@barclays.com
Fitch has joined in Moodys

has also downgraded the UKs
sovereign ratings
as the debate over growth vs
austerity has picked up
Despite strong rhetorical

commitment to austerity, the
weakness of the economy has
forced increasing back loading
of the plan
With the government and the IMF seemingly at odds over the pace of fiscal tightening, a
medium-term correction of the fiscal position requires the government to make some
hard choices on welfare reform, given its own weak receipts forecasts.
After Fitch Ratings decided to join Moodys in downgrading the UKs sovereign credit rating
to AA+, the weekend news 8 reported a developing argument between the IMF and the UK
government on the wisdom (or otherwise) of fiscal austerity with the IMF saying the UK
should consider greater flexibility in its deficit reduction plan. Meanwhile, EC President
Barroso recently said that Europe was approaching the political limits as to what austerity can
be delivered without a loss of social and political cohesion. So it seems that, increasingly,
Chancellor George Osborne and the Treasury are the sole proponents of fiscal tightening.
Since coming to power in 2010, the current administration had staked its economic
reputation on delivering stability to the public finances. If we rewind to 2010, the 10y
Gilt/Bund spread was at +100bp. we faced with the first-peacetime coalition government in
80 years, and the Bank of England recently pausing asset purchases. There was real concern
that the gilt market was facing a genuine loss of investor confidence. To widespread approval
at the time, the government announced a program of fiscal austerity from which it has,
rhetorically at least, never strayed. But Figure 1 shows that there has been considerable
slippage in the intervening period.
FIGURE 1
Evolution of cumulative planned fiscal consolidation over the forecast period (bn)
Budget March 2010
2011/12
2012/13
2013/14
2014/15
Total
25
39
55
68
Spending
14
24
37
49
11
15
17
19
56%
62%
67%
72%
Total
41
61
88
110
126
Spending
22
38
59
80
95
Tax
Spending as % of total
Budget 2011
20
23
29
30
30
62%
67%
73%
75%
Total
41
59
82
106
134
155
Spending
23
37
57
79
106
126
Tax
18
22
25
27
28
29
56%
63%
70%
75%
79%
81%
41
74
84
103
130
Budget 2013
2016/17
54%
Tax
Budget 2012
2015/16
Total
Spending
23
53
58
80
105
Tax
18
21
25
23
25
56%
72%
69%
78%
81%
Source: HM Treasury Budget documents
25 April 2013
See UK and IMF face dust up-on austerity , The Financial Times, 18 April 2013
29

Public sector net investment
was negative in FY2012/13,
for only the second time in 50
years
The table illustrates the evolution of the Treasurys planned discretionary consolidation
program since Budget March 2010, the final one of the previous administration. The key
points that we take away from Figure 1 are how the Treasury has had to backload the fiscal
consolidation over time as it has struggled to deliver fiscal tightening in the face of a
chronically weak economy; and, additionally, the dependency and the clear bias to reducing
expenditure over increasing taxation as the medium of delivery of consolidation. The latest
public finance data for the UK indicate that borrowing is stuck at obstinately high levels.
What was most notable to us was the public sector net investment (a proxy for
departmental capital expenditure) in FY 2012/13 at -0.4% of GDP was negative for only the
second time in 50 years (Figure 2).
The upcoming Spending

Review on 26 June will likely
see departmental expenditure
cone under severe pressure
So in attempting to rein in expenditure, the government, in the face of a rising welfare bill,
has had to cut capital expenditure. The upcoming Spending Review published on 26 June
will see the government set out departmental expenditure plans for the next three years and
is likely to see the unprotected departments (those where real spending growth is not
guaranteed as it is for health and education) come under severe pressure.
The Treasurys forecasts for

expenditure look ambitious
when s een in a historical
context
However, we believe that there are more structural reasons why gilt investors should be
nervous about the ongoing weakness in the public finances. Figure 3 shows historical
expenditure as a percentage of GDP and overlays the Treasurys latest forecasts. The
Treasurys forecasts see the ratio falling to about 40% by the end of the forecast periods. A
cursory glance at the chart suggests that over the past 40 years, getting to this level has
historically been extremely difficult to sustain. The only time when this was achieved was in
the late 1990s when the first Labour administration under Tony Blair chose to adhere to the
spending plans bequeathed to it by the previous Conservative administration plans that
the previous Conservative Chancellor Kenneth Clarke has subsequently said that he would
never have stuck to had they been returned to power in 1997. Additionally, the economy
was growing sharply out of the recession of the early 1990s. Even in the 1980s under the
Thatcher administration, which saw wholesale privatisation of state-owned utilities and a
diminution in the role of the state in the economy, spending did not sustainably fall below
40% of GDP. This resilience in expenditure has been underpinned by the rising share of
benefits in overall expenditure. Indeed, by the end of the forecast period (FY 2017/18), as a
percentage of total expenditure, benefits will account for 23% of all government
expenditure (Figure 4).
especially given the share

of benefits in total expenditure
FIGURE 2
Public sector net investment was negative in FY 12/13 (% GDP)
8
7
PS Net Investment (% GDP)
Budget 2013 forecast
5
4
3
2
1
0
-1
-2
1963
1968
1973
1978
1983
1988
1993
1998
2003
2008
2013
Source: National Statistics, Haver Analytics
25 April 2013
30

FIGURE 3
Total managed expenditure: historical and forecasts (% GDP)
52
Total managed expenditure (% GDP)
50
Budget 2013 forecasts
48
FIGURE 4
Benefit expenditure has inexorably risen.
25%
20%
46
15%
44
42
10%
40
38
5%
Total as % of TME
36
34
1967-68
Total as % of GDP
1977-78
1987-88
1997-98
2007-08
2017-18
Source: HM Treasury
0%
1978/79
1988/89
1998/99
2008/09
Source: Department for Work and Pensions
A large share of the overall

benefits bills is paid in age
related payments
When we look at the composition of benefit payments, the bulk of the benefit bill is paid to the
elderly rather than those of working age (Figure 5). The Institute for Fiscal Studies which
remains the pre-eminent independent commentator on fiscal affairs in the UK estimates that,
overall, some 42% of the entire welfare bill is devoted to expenditure on the elderly almost
double what is spent on the unemployed and those on low incomes. With the problems of an
ageing population common to all European economies, clearly some hard choices will have to
be made to stabilise the welfare bill and hence stabilise total expenditure.
The Treasurys receipts

forecasts remain flat even
though it has growth returning
to the economy
Is there any compensating factor from this worsening demographic profile from the receipts
side? Figure 6 shows the Treasury forecasts for tax receipts versus growth and the history of the
same series. What is telling here is that, despite a pickup in growth towards the end of the
Treasurys forecast period, overall tax receipts do not notably increase and remain static at c.
38% of GDP for the entire forecast period. So a rebalancing of the economy away from
consumption reduces the tax gains from economic growth. This suggests that the Treasurys
view on medium-term consumption is considerably weaker than it has been prepared to publicly
acknowledge. Without growth in the receipts base and in the absence of new taxable revenue
streams, the government faces some hard choices on welfare reform because it seems that the
fiscal shortfall cannot be closed by relying on higher receipts alone. But it may be the case that
fiscal weakness with associated high gilt issuance is likely to become a fixture of the gilt market in
the medium term and gilt valuations need to begin to reflect these new fiscal realities.
With flat receipts forecast and

expenditure underpinned by
age related payments, large
deficits and high issuance may
be here to stay
FIGURE 5
Benefit expenditure by age group (% GDP)
FIGURE 6
GDP (% y/y) vs tax receipts (% GDP, RHS)
% TME
46
44
14%
42
12%
40
-2
38
-4
36
18%
16%
10%
8%
6%
4%
Working age
2%
Pensioners
0%
1978/79
1988/89
1998/99
Source: Department for Work and Pensions
25 April 2013
2008/09
-6
34
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
GDP (% y/y)
Budget 2013 forecast
Current receipts (% GDP)
Budget 2013 forecasts
Source: Office of Budget Responsibility and HM Treasury
31
COVERED BONDS
Spanish bank restructuring and

Multi-Cdulas
(This is an edited extract from The AAA Investor, published 25 April 2013).
Fritz Engelhard
+49 69 7161 1725
fritz.engelhard@barclays.com
Jussi Harju, CFA
+49 69 7161 1781
jussi.harju@barclays.com
Michaela Seimen
+44 (0) 20 3134 0134
michaela.seimen@barclays.com
We expect further homogenisation of participating banks and collateral quality in

outstanding Multi-Cdulas in the next 1-2 years. In cases where valuations differ
substantially we advise less rating-sensitive investors to switch into those cheaper bonds.
Following the publication of YE 12 accounts and Moodys covered bond performance
reports, we have had a closer look at the effect of asset transfers to the Spanish bad bank in
December. Unsurprisingly, asset quality improved with the respective banks and the amount
of outstanding covered bonds decreased.
The combination of asset transfers and recapitalisations reduces uncertainty and creates
the basis for further consolidation of the Spanish banking sector. This will finally lead to a
more homogeneous composition of outstanding Multi-Cdulas transactions.
Multi-Cdulas that were downgraded to double-B by S&P tend to trade 35-40bp cheaper
versus peers. Investors with less rating-sensitive mandates should consider a switch into the
cheaper bonds, with a view that the valuation gap will converge back to zero over the
medium term.
FIGURE 1
Change of mortgage portfolio risk factors following asset transfer from FROB-owned
banks to SAREB
0%
-5%
-10%
-15%
-20%
-25%
-30%
-35%
BKIASM
CAIXAC
Moody's C-Score (change in percentage points)
NOVAGA
Commercial Mortgages (change of weight)
Note: Change between 30 September 2012 and 31 December 2012. Source: Moodys, Barclays Research
Asset transfers to SAREB

The mortgage portfolios of troubled Spanish banks, most of which have significant
participation in Multi-Cedulas transactions, are subject to substantial changes. In December
2012, the so-called group 1 banks those who were owned by FROB (the Fund for Orderly
Bank Restructuring) prior to the execution of the independent stress test last summer
transferred about 40bn of mortgage assets to the bad bank SAREB (ie, Sociedad de
Gestin de Activos procedentes de la Reestructuracin Bancaria).
Because the portfolio transfer also lead to a 22bn reduction in mortgages eligible to issue
mortgage covered bonds, the respective banks redeemed a net 17bn of bonds between Q3
25 April 2013
32

12 and Q4 12. In the case of Bankia (BKIASM) and NCG Banco (NOVAGA), eligible OC levels
increased slightly; only in case of Catalunya Banc (CAIXAC) did the eligible OC level
decrease, by 21 percentage points, albeit from a more elevated level.
Through the asset transfer to SAREB, the quality of the underlying mortgage portfolios
improved substantially. The weight of commercial mortgage decreased 19-31pp and the
Moodys C-Score decreased 8-17pp, while within the remaining commercial mortgage
book, the average loan size decreased 100,000-360,000.
FIGURE 2
Change of Cdulas issuance, overcollateralisation and mortgage pool risk factors
between 30 September and 31 December 2012
BKIASM
CAIXAC
NOVAGA
Covered bonds (mn)
-11,747
-3,520
-1,735
Cover pool (mn)
-22,932
-11,483
-7,306
Eligible pool (mn)
-12,863
-7,298
-1,948
Eligible/Total mortgage pool
4%
2%
12%
Issuance capacity
1,457
-2,318
177
OC
-4.1%
-36.2%
-34.4%
Eligible OC
4.0%
-20.8%
2.3%
Moodys C-Score (change in percentage points)
-8.3%
-16.8%
-11.8%
Moodys Collateral Risk
-5.6%
-11.3%
-7.9%
Market risk
-1.6%
-0.6%
-0.7%
Residential mortgage
18.8%
31.1%
21.6%
Residential mortgages (mn)
2,160
-201
-90
Number of loans
23,317
-1,073
-5
Average loan size
-5
-578
-479
-18.8%
-31.1%
-21.6%
Commercial mortgages (mn)
-25,092
-11,283
-7,216
Number of loans
-44,863
-9,819
-4,915
Average loan size
-102,564
-359,215
-234,514
Commercial mortgages (change of weight)
Source: Moodys, Barclays Research
The three issuers have a combined weight of 19.8% in outstanding Multi-Cedulas. The
planned 14bn aggregate asset transfer of so-called group 2 banks (CEISS Banco,
Liberbank, Caja3, Banco Mare Nostrum) will improve the average quality of assets finally
backing the Multi-Cedulas. These entities have a combined weight of about 25% in
outstanding cedulas.
When it comes to asset quality, the overall situation remains challenging, particularly when
taking into account that the Spanish mortgage law does not oblige issuers to adjust the
eligible cover pool for a decrease in house prices nor an increase in non-performing loans.
However, we believe it is more important that the clean-up process and related
recapitalisations help reduce uncertainty regarding the troubled banks and create the basis
for further consolidation of the Spanish banking sector. This also means that differentiating
between good and bad banks participating in individual Multi-Cdulas transactions
becomes less applicable over time.
Despite the homogenisation and transformation of the former savings banks sector towards
fewer healthy banks, ratings of individual banks and thus the ratings of individual MultiCdulas can differ still quite significantly. For example, with S&P, ratings of individual MultiCdulas differ by seven notches, and with Moodys, the ratings differ by three notches. Once
25 April 2013
33

the clean-up and transformation processes are closer to finishing, we would expect those
ratings to converge again.
There are cases in which valuations differ, not least because of varying ratings. For example,
the 1.5bn AYTCED 4.75% May 27 (rated BB+ by S&P) trades about 40bp cheaper versus
the 3.8bn CEDTDA 4.25% April 27 (rated BBB- by S&P). In our view, for investors with less
rating sensitive mandates this makes a switch from the CEDTDA 4.25% April 27 into the
CEDTDA 4.25% April 27 attractive. Also, the 2.0bn CEDTDA 3.5% June 17 trades about
35bp cheap versus the 2.0bn AYTCED 4.0% March 17. In this case, we recommend a
switch from the AYTCED 4.0% March 17 in to the CEDTDA 3.5% June 17.
FIGURE 3
Development of swap spread differentials between selected Multi-Cdulas transactions
Swap spread
differential (bp)
80
60
40
20
0
-20
-40
Sep 12
Oct 12
Nov 12
Dec 12
Jan 13
Feb 13
Mar 13
CEDTDA 3.500% Jun 17 - AYTCED 4.000% Mar 17

AYTCED 4.750% May 27 - CEDTDA 4.250% Mar 27
Recapitalisation of the banking sector

Over the past two years, the Spanish government has established a series of laws and
regulations designed to improve the health of the financial sector by increasing provisioning
and capitalisation standards, particularly with regards to the very heavy exposures of some
institutions to the domestic real estate sector. The last and most important of these
measures was an independent evaluation of the 14 largest banking groups conducted by
Roland Berger and Oliver Wyman in mid-2012. The results of this process were presented
on 28 September 2012.
25 April 2013
34

FIGURE 4
Capital needs (after tax effect) and categorization of Spanish banking groups
Banking group
Baseline scenario (mn)
Adverse scenario (mn)
Group
Grupo Santander
19,181
25,297
BBVA
10,945
11,183
Caixabank+Cvica
9,421
5,720
Kutxabank
3,132
2,188
Sabadell+CAM
3,321
915
393
399
Bankinter
Unicaja Banco
CEISS
Ibercaja Banco
969
452
-1,269
-2,063
389
-226
Liberbank
103
-1,198
Caja3
-188
-779
BMN
-368
-2,208
Popular
-677
-3,223
-1,846
-3,462
Banco de Valencia
NCG Banco
-3,966
-7,176
Catalunyabanc
-6,488
-10,825
Bankia-BFA
-13,230
-24,743
Source: Ministry of Finance Spain
Based on the results of the stress test and recapitalisation plans that were submitted, the
respective banking groups were allocated to four different buckets.
FIGURE 5
Categorisation of Spanish banking groups following the independent stress test
Group
Criteria
Group 0
Banks for which no capital shortfall is identified and no further action is required.
Group 1
Banks in which the Fund for the Orderly Restructuring of the Banking Sector (FROB)
already has a capital holding.
Group 2
Banks with capital shortfalls identified by the stress test and unable to meet those capital
shortfalls privately without having recourse to state aid.
Group 3
Banks with capital shortfalls identified by the stress test, with credible recapitalisation plans
and able to meet those capital shortfalls privately without recourse to state aid.
Source: Ministry of Finance Spain
Seven banks fell in group 0 (no further action required) and four banks in group 1 (already
owned by FROB). From the four banks falling in group 1, Banco de Valencia was sold to
Caixabank in February 2013 and has already carried out its hybrid management
transactions. The other three group 1 entities are carrying out hybrid management
transactions defined by FROB. Within these exercises, preferred securities and perpetual
subordinated debt will be bought back at significant haircuts (47% on average for preferred
securities, 39% on average for perpetual subordinated debt). Dated subordinated debt
holders have the option to either exchange their holdings into shares after the application of
a haircut, or invest in bank deposits or bonds with the same maturity after application of a
1.5% discount per month against the nominal value.
25 April 2013
35

FIGURE 6
Overview recapitalisation measures for group 1 banks
Banking
group
Baseline
scenario
Adverse
scenario
NCG Banco
-3,966
-7,176
Catalunyabanc
-6,488
Bankia-BFA
-13,230
Banco de
Valencia
Total:
FROB conversion of
ESM
Economic preferen- Recapitavalues ce shares* lisation
Total
capital
support
Avg. haircut
preferred
securities
Avg. haircut Avg. haircut

Asset
perpetual
term sub transfer to
sub debt
debt
SAREB
5,425
6,587
43
41
22
-3,091
1,162
-10,825
-6,674
1,250
9,084
10,334
61
40
15
6,708
-24,743
-14,592
4,465
13,459
17,924
38
36
13
22,318
90
85
-1,846
-3,462
-6,341
1,044
4,500
5,544
-25,530
-46,206
-30,698
7,921
32,468
40,389
5,707
1,962
36,695
Note: in the case of Banco de Valencia the number represents the gain from writing down shares Source: FROB, SAREB, Bank of Spain
Banco Popular and Ibercaja Banco managed to meet the respective capital shortfall without
recourse to state aid and, thus, were group 3 banks. Four banks were allocated to group 2.
They received a total of 1,865mn of capital support from FROB. All group 2 banks are obliged
to undertake burden-sharing operations and transfer assets to the bad bank (SAREB =
Sociedad de Gestin de Activos procedentes de la Reestructuracin Bancaria). In the case of
Banco Mare Nostrum (BMN), Liberbank and Cajatres, FROB has already implemented financial
aid packages. These three banks are carrying out voluntary burden-sharing measures, which
will be followed by mandatory measures in case of insufficient conversion. Measures for
Banco CEISS are still pending as possible corporate transactions are being analysed by
authorities. The bank has been in merger talks with Unicaja Banco since 2011.
The clean-up process in the Spanish banking system was accompanied by a massive
consolidation among various banking groups. It was particularly pronounced in the savings
bank sector. This merger activity has resulted in significant concentration. Figure 8 provides
an overview of the entities in which the original 45 savings banks have ended up. So far,
only two rather small entities have not yet been involved in any merger: Caixa Ontinyent and
Caixa Pollensa.
FIGURE 7
Overview recapitalisation measures for group 2 banks
Banking Group
CEISS*
Baseline
scenario
-1,269
Adverse
scenario
-2,063
Economic
values
-288
ESM
Recapitalisation
604
Asset
transfer to
SAREB Restructuring plan
3,137
FROB will become majority shareholder. Disposal of the bank

"when the time is right". Unicaja Banco has been in merger
talks since 2011.
Liberbank
103
-1,198
1,113
124
2,917
Subscription of CoCos by FROB. Downsizing staff and offices.

Focus on regional retail and SME business. Shares from
conversion of hybrids will be listed at the stock exchange.
Caja3
-188
-779
370
407
2,212
Subscription of CoCos by FROB and full transfer of ownership

to Ibercaja
BMN
-368
-2,208
569
730
5,819
FROB will become majority shareholder. Disposal of the bank

before end of 2017.
Total
-1,722
-6,248
1,865
14,085
Note: Finalisation pending on the execution of a corporate transaction Source: FROB, SAREB, Bank of Spain
25 April 2013
36

FIGURE 8
Small and mid-sized Spanish savings banks Where have they ended up?
Name
Banco Bilbao Vizcaya Argentaria SA
Caixabank SA
Total assets
YE 12
(EURmn)
Total equity
YE 12
(EURmn)
Ticker
637,785
43,802
BBVASM
Unnim Banc SA (Sabadell / Terrasa / Manlleu)
CABKSM
La Caixa / Girona / Banca Civica SA (Cajasol /

Guadalajara / Navarra / General e Canarias /
Municipal de Burgos) / Banco de Valencia*
7
7
348,294
22,711
Former Cajas
No. of
Cajas
Bankia SA
282,310
-5,204
BKIASM
Madrid / Bancaja / vila / Segovia / Rioja /

Laietana / Insular de Canarias
Banco de Sabadell SA
161,547
9,261
SABSM
Cajame
Banco Mare Nostrum SA
68,797
2,674
BMARE
Murcia / Penedes / Sa Nostra / Granada
Kutxabank SA
66,707
4,602
KUTXAB
KUTXA / Caja Vital / BBK Group (BBK /

Cajasur)
Ibercaja Banco SAU
44,664
2,156
CAZAR
Ibercaja / Banco Grupo Cajatres SA (CAI / CC

Burgos / Badajoz)
Catalunya Banc SA
CAIXAC
Catalunya / Tarragona / Manresa
NCG Banco SA
NOVAGA
Caixanova / Galicia
Unicaja Banco SA**
UNICAJ
Unicaja Banco SA (Unicaj / Jaen) / Banco CEISS

(Espana / Duero)
LIBERB
CajaStur (Caja Asturias / Caja Castilla La

Mancha) / Caja Extremadura / Caja de
Santander y Cantabria
Liberbank
4
4
Caixa Ontinyent
CAONTE
Caixa Pollensa
Caixa Ontinyent
Caixa Pollensa
Note: *Banco de Valencia has been a private bank **Integration of Banco CEISS is still pending. Source: Company filings, Banco de Espana, news reports
In Figure 9, we provide an overview of cdulas issuance, as well as the overcollateralisation

and major risk factors of Spanish banks. The figures for Banco Santander (SANTAN) reflect
the integration of Banesto (BANEST) on a pro forma basis.
25 April 2013
37

FIGURE 9
Overview Cdulas issuance, overcollateralisation, mortgage pool risk factors (YE 12)
BBVASM KUTXAB BKIASM
BKTSM
CABKSM CAIXAC
CAZAR NOVAGA POPSM
SABSM SANTAN* UNICAJ
Covered Bonds (mn)
50,063
8,805
48,454
12,796
76,321
10,080
8,655
10,225
27,038
26,307
44,403
10,225
Cover Pool (mn)
83,746
28,207
84,389
23,672
142,766
18,779
21,320
18,789
59,367
58,305
83,089
18,789
Eligible Pool (mn)
63,765
18,544
62,990
17,889
100,102
12,814
15,293
13,072
33,824
36,049
58,798
13,649
76%
66%
75%
76%
70%
68%
72%
70%
57%
62%
71%
73%
Eligible / Total
Mortgage Pool
Issuance Capacity
949
6,030
1,938
1,515
3,761
171
3,580
233
22
2,532
2,636
694
OC
67.3%
220.3%
74.2%
85.0%
87.1%
86.3%
146.3%
83.8%
119.6%
121.6%
87.1%
83.8%
Eligible OC
27.4%
110.6%
30.0%
39.8%
31.2%
27.1%
76.7%
27.9%
25.1%
37.0%
32.4%
33.5%
Moody's Collateral Score
16.5%
18.4%
21.6%
19.0%
19.9%
20.0%
22.0%
18.4%
25.2%
38.4%
20.5%
18.4%
Moody's Collateral Risk
11.1%
12.3%
14.4%
12.7%
13.3%
13.4%
14.7%
12.4%
16.9%
25.7%
13.7%
12.4%
Moody's Market Risk
24.3%
23.6%
22.6%
25.5%
24.8%
21.9%
24.4%
22.1%
28.2%
26.0%
24.7%
22.1%
Floating rate assets
97.0%
98.8%
97.6%
99.9%
98.4%
99.1%
99.4%
98.4%
10.9%
95.5%
90.1%
98.4%
Residential Mortgage
78.2%
78.2%
78.6%
66.8%
69.7%
83.7%
71.8%
78.4%
40.6%
44.1%
66.3%
78.4%
Residential Mortgages
(mn)
65,519
22,048
66,317
15,823
99,448
15,722
15,302
14,731
24,090
25,730
54,232
14,731
No. of loans
784,878
221,173
714,675
133,440 1,248,850 200,256
182,757
186,883
254,796
302,793
589,281
186,883
Avg. Loan size
83,476
99,686
92,793
118,577
83,727
78,822
94,544
84,976
92,031
78,822
79,631
78,510
WA Seasoning (months)
68
60
n/d
69
74
64
57
60
58
62
n/d
60
LTV (res.)
n/d
60.4%
n/d
53.7%
57.9%
61.1%
57.5%
59.8%
57.5%
59.9%
n/d
59.8%
NPL (res.)
n/d
2.9%
6.7%
2.2%
1.8%
6.5%
3.3%
1.4%
8.9%
n/d
n/d
1.4%
Foreclosure (res.)
2.9%
1.0%
n/d
n/d
1.9%
4.9%
1.2%
3.4%
n/d
n/d
n/d
3.4%
Buy to let
0.0%
0.7%
0.0%
0.5%
1.3%
n/d
0.4%
n/d
n/d
n/d
0.0%
n/d
Vacation
9.2%
4.8%
8.6%
5.8%
9.0%
n/d
4.9%
n/d
12.6%
22.5%
3.3%
n/d
Commercial Mortgage
21.8%
21.8%
21.4%
33.2%
30.3%
16.3%
28.2%
21.6%
58.3%
55.9%
33.7%
21.6%
Commercial
Mortgages (mn)
18,227
6,159
18,072
7,849
43,319
3,057
6,018
4,058
34,585
32,575
27,600
4,058
No. of loans
44,213
19,520
54,356
32,359
214,800
16,538
27,455
21,986
77,693
122,572
80,196
21,986
Avg. Loan size
412,247
315,539
332,480
242,547
201,669
184,827
219,206
184,587
445,153
265,761
344,162
184,587
50
64
n/d
55
62
57
54
58
39
48
n/d
58
WA Seasoning (months)
Top 10 borrowers
4.6%
13.1%
n/d
5.2%
3.9%
6.0%
12.7%
7.4%
9.8%
9.3%
7.9%
7.4%
Developer
63.3%
50.0%
48.8%
58.2%
34.9%
62.1%
34.9%
40.2%
20.6%
48.8%
n/d
40.2%
Land
0.0%
10.9%
3.9%
6.1%
12.0%
3.7%
7.5%
12.1%
17.9%
9.0%
n/d
12.1%
Office
0.0%
0.5%
0.0%
0.8%
8.1%
0.0%
0.9%
4.7%
9.8%
5.3%
n/d
4.7%
n/a
27.1%
18.7%
7.1%
12.3%
21.9%
12.2%
13.5%
23.9%
n/d
n/d
13.5%
20.0%
1.6%
n/d
n/d
14.0%
14.1%
7.2%
4.4%
n/d
n/d
n/d
4.4%
NPL (com)
Foreclosure (com)
Source: Moodys, Barclays Research
25 April 2013
38
SCANDINAVIA: RATES STRATEGY
Inflation suggests room for cuts, but systemic

risks remain a key concern
Given the magnitude of the revisions to the inflation forecast, it is surprising that the
Riksbank did not cut rates at its recent meeting. Hence we will look to the minutes to gain
more colour. We still see value in the front end and in receiving SEK10y swaps vs EUR.
Mikael Nilsson Rosell

+44 (0)20 7773 6057
mikael.nilsson@barclays.com
As expected, the Riksbank (RB) lowered its inflation forecast significantly at its recent policy
meeting (see Unchanged policy rates, but inflation suggest room for cuts, 11 April). This
week saw March producer price inflation (PPI) plummeting to its lowest level (-4.4% y/y) in
over twenty-years, unsurprisingly nourishing market expectations for further RB cuts. The
benign inflation outlook still suggests room for another policy rate cut. That said, the
downside risks to the RB inflation forecast going into the July meeting are, in our view, less
evident than they were going into the April meeting, not least considering the recent c.3%
depreciation of the trade-weighted SEK (KIX).
We were surprised there was
no rate cut, given the large
downward revisions to the
inflation forecast
In retrospect we are also a bit surprised that the RBs downward revisions to its inflation
forecast did not trigger a rate cut at the recent meeting, even considering that the Executive
Boards reaction function has changed due concern of the majority that a too low policy
rate for too long might nourish potential medium-term systemic risks. Hence we will look
to gain significantly more colour on how the various Board members weigh the trade-off
between the benign inflation environment and medium-term systemic risks in the minutes
published on Monday (29 April) next week.
Medium-term systemic risks

will likely be a key topic in the
minutes
Interestingly, in its April Monetary Policy update (MPU) the RB assumes that debt levels will
increase at a faster level than previously assumed, with household debt as a percentage of
income now expected to rise from 174% to just over 177% by the beginning of the year. Given
the benign inflation outlook and prospects of reduced nominal income growth, there is a risk
that even a moderate pick-up in credit growth might accentuate inconsistencies between the
formal inflation target and the implicit target of a relatively stable debt-to-income ratio. Also,
there is no known way to establish exactly what constitutes a medium-term sustainable
household debt level. A variety of indebtedness measures may develop differently if there are
changes in the balance sheet --- for example, if there are lasting change in asset prices.
FIGURE 1
Household debt as a percentage of disposable income
FIGURE 2
Household wealth and credit gap
Standard deviations
3
%
200
180
160
140
-1
120
-2
100
-3
80
Feb 80
-4
May 86
Aug 92
Nov 98
Debt % disposible income

Source: Riksbank, Barclays Research
25 April 2013
Feb 05
April
May 11
February
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
1 Stdev
Wealth gap
Credit gap
Source: Riksbank, Barclays Research
39

Indeed, as we show in previous research (Slightly better days ahead, 10 April) various measures of
Swedish households debt-to-value ratios have shown a significantly more steady development
than debt-to-income measures. Given the outlook of relative steady nominal income growth (and
low inflation) it is also notable that our calculation for the household wealth gap, derived as the
sum of house prices 80% and equity prices (20%) deviation from trend, suggests upside risks to
credit growth and potential escalation of the RB policy dilemma.
Swedish banks had strong Q1
results and solid capital ratios
The RBs medium-term systemic concerns are obviously closely related to the wider, debate
about the need to establish a macro-prudential framework. While there has been progress,
some RB Board members have continued to argue that the absence of a clear mandate and
efficient tools for macro prudential policy have limited the scope for using the policy rate to
stabilise inflation and the real economy. A chief concern here is how to evaluate and
manage potential systemic risk in the Swedish banking sector.
In November 2011, the Swedish regulators announced that the four dominant Swedish
banks should meet the capital adequacy requirement of 10% of risk-weighted assets from 1
January 2013 and 12% from 1 January 2015, according to the Basle III definition. The Q1 13
results showed that all banks are already ahead of the 2015 requirements (Handelsbanken
17.5% , Nordea 12.1% , SEB 13.8% and Swedbank 16.4% ). However, we are doubtful that
the strong result will lessen the RBs concern materially. It is also unclear how the Swedish
FSAs announcement to introduce 15% risk-weight floors on the banks portfolios of
Swedish mortgage loans ultimately will affect the capital ratios.
Trade ideas
While short-end rates have rallied notably over the past few weeks and we still remain
hesitant on the outcome of the RB policy meeting in July, we continue to see value in
holding longs in the very-front end (Sep 13 3m FRAs), as near-term data likely will likely
continue to nourish market expectations of further cuts. From here we also see value in
entering shorts the belly in the Sep 13/ Sep 14/ Sep 15 3m FRAs fly.
We also continue to see value in receiving 10y swaps versus EUR, despite recent
outperformance. Besides Swedens unchallenged AAA status, the spread should continue to
benefit from near-term rate cut prospects and the benign inflation outlook. Indeed, we
expect Swedish inflation to remain significantly below euro area inflation late into 2014.
FIGURE 3
Solid Q1 results have benefit dampened Swedish banks CDS
spreads
Index
FIGURE 4
Hold SEK/EUR 10y tighteners
Bp
80
400
350
300
250
200
150
100
50
0
60
40
20
0
Stibor banks
Source: Reuter, Barclays Research
25 April 2013
Feb 13
Jun 12
Oct 12
Feb 12
Jun 11
Oct 11
Feb 11
Jun 10
Oct 10
Feb 10
Jun 09
Oct 09
Feb 09
Jun 08
Oct 08
Feb 08
-20
-40
-60
Apr 10
Oct 10
iTraxx Senior Financials
Apr 11
Oct 11
Apr 12
Oct 12
SEK/EUR 10y swap rate spread

40
INFLATION-LINKED MARKETS: EURO AREA
Positioning for slowing y/y euro HICPx

Khrishnamoorthy Sooben
+44 (0)20 7773 7514
khrishnamoorthy.sooben@
barclays.com
This is an extract from Inflation Volatility Digest, 24 April 2013.

The risks of decelerating euro area inflation in the coming years are not insignificant.
We believe buying 5y 1% y/y euro HICPx floors versus selling a leveraged amount in 0%
floors provides an attractive way to hedge low, but not extremely negative, inflation.
European inflation is slowing. Barclays economists have recently revised down their forecasts
and now look for y/y euro area HICP to average 1.5% in 2013 and 1.4% in 2014 (versus 1.7%
and 1.5% previously). The view on falling inflation is consistent with the ECBs latest staff
forecasts and likely explains, to a large extent, the low bond breakevens and inflation swaps
currently. With the broad situation in Europe still fragile and the monetary policy transmission
mechanism probably perceived by many as ineffective, thereby failing to encompass any
significant inflationary impetus, we believe there are genuine concerns that inflation may drop
to very low levels. In addition, indirect tax increases have in recent years been a key element
keeping European inflation elevated, but there is growing perception that room to implement
further VAT hikes is now limited in many countries. As a result, although inflation may be
expected to rise eventually, disinflationary risks in the coming years are not insignificant.
The European inflation bond and swaps markets already seem braced for that scenario, with
curves there relatively steep. The low levels of 5y and shorter euro HICPx swaps implies that
the cost of positioning for or hedging against low inflation is now relatively unattractive.
However, we believe there are still interesting opportunities in the options market, although
less compelling than before. Our economists euro HICPx forecasts currently stretch out to
end-2014; they expect y/y HICPx to fall to as low as 1.07% (in September 2013 and
February 2014). We look at how a scenario of y/y inflation decelerating below this level, but
without falling to extreme negative levels, can be hedged for the coming years.
We consider buying a 5y 1% y/y euro HICPx floor (note the current reference month for
floorlets is January). We look to achieve a zero-cost structure; selling a corresponding floor
at a 0% strike appears appropriate here, in our view. Based on current market levels and our
estimate of transaction costs, we calculate that the leverage ratio on the 0% floor needs to
be about 1.9 (ie, for every 1mn notional bought in the 1% floor, 1.9mn in the 0% floor
needs to be sold). Such a structure has a negative payoff every time y/y January HICPx
FIGURE 1
European inflation set to remain below target in 2013-14
2.4
% y/y
forecast
4.0
FIGURE 2
Swaps are pricing in a benign inflation scenario
3.0
2.2
2.0
2.0
1.8
1.0
1.6
0.0
euro area headline HICP
-1.0
euro area 'eurostat' core HICP

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Source: Haver Analytics, Barclays Research
25 April 2013
1.4
5y euro HICPx swaps

10y euro HICPx swaps
1.2
Apr-11
Oct-11
Apr-12
Oct-12
Apr-13
41

prints below -1.1% in the coming five years. It has a positive payoff for y/y inflation
between -1.1% and 1%, and pays nothing if inflation prints above 1%. In the past, such
structures could be entered at much more attractive levels; the leverage needed on the 0%
floor to achieve zero cost was, at times significantly lower, which meant a lower threshold
for the negative pay-offs and a lower gradient for losses if inflation is below the threshold.
The leverage needed has increased significantly since August last year for two reasons: first,
such structures would typically be short vega, and implied vols have decreased dramatically
since last summer; second, euro HICPx swaps have sold off over the past few months, and
1% floors, being less out-of-the-money, have increased in price relative to 0% strikes.
Therefore, we do not view such structures as tactical or alpha-generating trades but purely as
hedges. In particular, given the sharp fall in y/y euro HICPx implied vols since last summer, an
upward correction is possible in the coming months, and the structure would lose money on a
mark-to-market basis. However, the structure appears appealing relative to inflation swaps for
those who believe inflation may slow further in the coming years but without reaching
extreme lows. Shorting inflation via swaps, on the other hand, carries the risk that extremely
accommodative policies worldwide generate inflation sooner than expected. We highlight that
even in the deflationary phase of 2008, y/y euro HICPx did not fall below 1%; the -1.1% y/y
threshold for negative payoffs on the structure above therefore appears attractive, in our view.
FIGURE 3
Implied vols have corrected significantly lower
180
FIGURE 4
Structures less attractive on lower vols
Premium ratio (5y 1% floor to 0%
floor)
5y 0% y/y euro HICPx foor implied
vol (rhs, inv)
1.9
bp/yr
170
1.8
160
150
140
130
120
5y 0% y/y euro HICPx floor implied vol
110
100
Dec-10
120
130
1.7
140
1.6
150
1.5
160
1.4
170
1.3
180
5y 1% y/y euro HICPx floor implied vol

Jun-11
Dec-11
Jun-12
1.2
Dec-10
Dec-12
190
Jun-11
Dec-11
Jun-12
Dec-12
FIGURE 5
Payoff: Buying 5y 1% y/y euro HICPx floor vs selling 1.9X 5y 0% y/y euro HICPx floor
Annual pay-off on structure
1.0%
0.5%
0.0%
-3%
-2%
-1%
0%
-0.5%
1%
2%
3%
January y/y euro HICPx fixings
-1.0%
-1.5%
-2.0%
25 April 2013
42
INFLATION-LINKED MARKETS: UNITED KINGDOM
Keep the faith

Henry Skeoch
+44 (0)20 7773 7917
henry.skeoch@barclays.com
We retain our bullish view on ultra-long linkers. Pension hedging demand has been slow
to materialise, but we think current valuations are inconsistent with this potentially
sizeable buying. We see more value in ultra- long linker breakevens than RPI swaps.
The UK linker market has seen a partial reversal in demand dynamics this year. Traditionally,
the market was dominated by pension funds hedging long-dated real rate liabilities which
left both UK linker supply and demand skewed much longer than in other inflation markets,
where the 5-10y sector is typically most liquid. This has been increasingly the case in the UK
market as well, with the decision by the National Statistician not to materially alter RPI
leading to increased investor confidence in the linker market. Strong buying of the 10y
sector of the curve from a broad range of investors ensued, while activity in the longer end
of the curve remained subdued. This pushed the breakeven curve extremely flat, which
generated some subsequent interest in the long end. We think that the outright rally in
breakevens has been justified, and regard the recent sell-off as a buying opportunity. At
3.1%, the new IL24 breakeven is priced consistent with the MPC current CPI forecast, once
adjusting for the formula effect. However, we expect the RPI/CPI basis to average 1.1-1.4pp
over the medium term. Therefore, we see fair value in 10y breakevens as at least 20bp
higher than current levels, but recognise that the market is unlikely to price in significant
medium-term rate hikes by the MPC at this point.
Ultra-long breakevens offer

more structural value than 10y
We see greater value in ultra-long breakevens for those with longer-term investment
horizons. We think that the relative flatness of the breakeven curve is under-pricing the
potential for structural pent-up demand from the pensions community to materialise. By
contrast, demand for 10y linkers is much more fleeting, as given its macro-focused nature it
is inherently subject to the ebb and flow of broad-based sentiment. Analysing the long-run
history of long-dated linker valuations is not particularly straightforward, as the market has
been distorted over the past ten years by factors that are no longer relevant. The run-up in
commodity prices in 2008, followed by the evaporation in market liquidity has been well
documented, and saw the breakeven curve invert. Prior to this, the breakeven curve tended
to trade relatively flat. This was because of heavy corporate ultra-long supply, which
dwarfed ultra-long gilt linker supply in 2006/07. Much of this issuance was bought by
FIGURE 1
Breakeven curve has resteepened, but is still quite flat
IL55 vs IL35 breakeven spread
45
FIGURE 2
Over-35y RPI-linked bond issuance (bn notional)
16
Corporate
Government
14
35
12
25
10
15
8
6
4
-5
-15
Oct-05
2
0
Apr-07
25 April 2013
Oct-08
Apr-10
Oct-11
Apr-13
2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Dealogic, Bloomberg, UK DMO, Barclays Research
43

investors on asset swap, which generated significant supply of ultra-long RPI to the market.
Consequently, this weighed on the long end of the RPI curve, and pushed 50y RPI through
30y. The majority of the corporate issuance came from the utilities sector, and also from PFI
deals, with some wrapped by monoline insurers. As Figure 2 shows, corporate linker
issuance tailed off amid the financial crisis and has not materially recovered. Nowadays,
Network Rail is the predominant corporate issuer, though there is still some opportunistic
linker issuance by other corporates but activity is low we estimate that less than 2bn of
UK corporate linkers were issued in 2011 and 2012 combined. There is potential for some
long-dated linker issuance from the nuclear industry from the construction of new reactors,
but it remains unclear if and when this may materialise.
RPI market size is dwarfed by
pension liabilities outstanding
The potential demand for long-dated linkers vastly outweighs the available stock of RPIlinked assets and RPI swap market capacity. The Pension Protection Fund 7800 index of
defined benefit pensions schemes estimated aggregate scheme liability of 1,385.1bn at the
end of March 2013. There are approximately 280bn (inflation-uplifted notional) of indexlinked gilts outstanding, 32bn of corporate linkers by market value (as measured by the
Barclays GBP non-govt inflation-linked index) and additional capacity from the RPI swap
market. We are often asked for estimates of the total amount of RPI swaps outstanding.
However, it is almost impossible to estimate this given the OTC nature of the market. The
general consensus seems to be about 100bn of outstanding RPI swaps, which does not
seem unreasonable to us. The main issue we have with estimating of RPI market size is the
risk of double counting. For example, assume an investor asset swaps 100mn of a linker,
leaving a dealer long 100mn of an RPI swap. This can then be sold on to a pension fund to
hedge its liabilities. A turnover based estimate would report this as 200mn of RPI
transacted, when in reality only 100mn of net RPI supply has occurred.
Ultra-long linker breakevens

offer more value than RPI
swaps at present
Caveats aside, we think that the potential hedging demand from pension funds vastly
outstrips the supply of hedging assets. We believe that very few schemes have entirely
hedged their inflation exposure. Uncertainty surrounding first the switch of statutory
indexation measure from RPI to CPI, then the RPI formula effect has understandably
deterred some schemes from hedging inflation. However, we think that the worsening in
scheme solvency ratios from the marked fall in yields and risks of persistent inflation may
create significant demand for long-dated inflation protection. It is worth remembering that
it is just three months since the National Statisticians announcement of RPI, and the
removal of the RPI formula effect uncertainty. This is a short period of time in the pensions
landscape, and we think that demand for long-dated inflation protection has simply been
FIGURE 3
50y RPI traded through 30y when asset swapping was heavy
50y RPI swap
4.1
30y RPI swap
3.9
FIGURE 4
Long relative asset swaps could richen into nominal supply
20
IL62 relative z-spread asw

IL55 relative z-spread asw
15
3.7
10
3.5
3.3
3.1
0
2.9
2.7
May-05
Nov-06
25 April 2013
May-08
Nov-09
May-11
Nov-12
-5
Apr-12
Jun-12
Aug-12
Oct-12
Dec-12
Feb-13
Apr-13
44

relatively slow to materialise rather than having gone away. We therefore retain our view
that the breakeven curve should steepen further, led by the ultra-long end. In our view, long
RPI swaps are higher than levels where trigger-related demand has historically been
apparent. However, we see potential for long linkers to benefit from special cash
contributions made by scheme sponsors to plug deficits. Additionally, we think that ultralong linkers are close to levels where we would expect asset swap demand to materialise.
Ultra-long linkers are currently trading 7-10bp cheaper than comparable nominals on a zspread basis. Given the DMO plans to sell a super-long nominal gilt in the second half of
June, we see potential for relative z-spread asset swaps to correct richer, which could place
ultra-long dated RPI swaps under some cheapening pressure.
25 April 2013
45
EUROPE: VOLATILITY
Range-bound rates
Buy GBP 1x11 cap-floor versus GBP 1y*10y swaption wedge to position for 10y rates
staying in a tighter range than priced by the market. It is limited-loss and would benefit
from a steeper vol surface.
Hitendra Rohra
Vol on short-to-mid tails is rich
Piyush Goyal
+1 212 412 6793
+44 (0)20 7773 4817

hitendra.rohra@barclays.com
Easy monetary policy of the

BOE should keep short-to-mid
rates range-bound and
realised vol low
Implied vol in GBP is currently trading at a significant premium to realised vol (Figure 1).
Essentially, implied vol being sticky has not come off as much as realised volatility. Further,
rates have been stuck in a tight range, implying few gains for investors who are long options
for a move higher or lower in rates.
With the economic recovery remaining weak, the BOE is likely to stay accommodative and
keep policy rates low. Indeed, on Wednesday, the central bank exhibited its resolve to
support the recovery by extending the FLS program. As front-end rates remain pegged due
to the easy monetary policy, we expect short-to-mid rates in GBP to continue to trade in a
tighter range than over the past few months, and much tighter than what is currently priced
by the option market.
As an illustration, a short ATM GBP 1y*10y straddle is currently priced at c.69bp/y and should
make a profit if the 10y rate is roughly between 1.6-2.7% (c.110bp range) on expiry. In
comparison, the 10y swap rate has remained within a tight corridor of 50bp in the past year
and has not breached the upper breakeven limit since November 2011. Such tight range
trading should eventually be reflected as lower implied vol. We recommend positioning for this
potential decline by selling GBP 1y*10y versus cap-floor straddles, which we discuss next.
Buy GBP 1x11 cap-floor straddle versus GBP 1y*10y swaption straddle
Buy GBP 1x11 cap-floor vs GBP
1y*10y swaption straddle
Sell 100mn 1y*10y ATM straddle

Buy 100mn 1x11 ATM cap-floor straddle
As of 25 April 2013, the trade requires an initial premium intake of 1,100 cts (mid-levels).
Unlike an outright short view on GBP 1y*10y, the trade is limited-loss in nature. This is
because while both option structures refer to the same underlying rate (ie, GBP 1yf 10y), the
FIGURE 1
Short-to-mid tails in GBP are rich compared with delivered vol
Imp Vol
2yr
5y
7y
10y
30y
1m
3m
6m
1y
27
27
32
40
39
42
48
56
44
50
56
62
50
58
64
69
50
57
62
66
20d rlzd vol
2y
5y
7y
10y
30y
1m
3m
6m
1y
12
14
17
22
29
31
33
38
36
37
39
43
42
43
44
46
46
46
47
48
Imp/rlzd
1m
3m
6m
1y
2y
5y
7y
10y
30y
2.35
1.96
1.93
1.78
1.34
1.38
1.45
1.49
1.24
1.36
1.44
1.44
1.18
1.33
1.46
1.48
1.09
1.24
1.33
1.37
Note: As of 24 April 2013. Source: Barclays Research
25 April 2013
FIGURE 2
Vol surface in GBP flatter than in USD despite similar 10y rates
1.3
Ratio of 5y*5y to 1y*10y
1.2
1.1
1.0
0.9
0.8
0.7
0.6
Apr-08
Apr-09
Apr-10
EUR
Apr-11
USD
Apr-12
Apr-13
GBP
Note: As of 24 April 2013. Source: Barclays Research
46

cap-floor straddle, consisting of a series of 40 3m Libor options, has more optionality and
higher time value. Therefore, the trade is always worth more than zero, and the loss is
limited to the initial premium intake.
To gain a better understanding of the factors affecting the premium of the trade, we carried
out a regression of the trade premium versus the slope of the rate curve (GBP 2y-10y slope),
the level of implied vol (GBP 5y*5y vol) and the slope of the vol surface (GBP 5y*5y GBP
1y*10y). Figure 3 shows these factors explain the premium of the structure very well.
The trade should gain as GBP
vol surface steepens
Of these parameters, we expect the slope of the vol surface to steepen further, as shortdated vol declines, and bring gains to the trade. Figure 2 shows that while the vol surface in
GBP has steepened over the past few years as range-bound rates have led to a gradual
decline in short-dated vol it is still much flatter than the surface in USD. Given that 10y
rates in GBP and USD have traded at similar levels, with similar realised volatilities, recently,
the vol surface in GBP looks flat and has further room to steepen.
However, even if the vol surface does not steepen much, the trade should still gain from
carry, provided the 10y rate remains range-bound. To elaborate, the trade has an attractive
positive carry of about 90cts in 6m and 180 cts in 12m if the rate curve and vol surface
remain unchanged.
It also carries positively and

should be profitable as long
as the 10y rate is 1.6-2.8%
on expiry
Besides this, the trade also has a relatively wide breakeven range for the 10y rate. Figure 4
shows the trade stands to profit if the GBP 10y rate is roughly 1.6-2.8% at the end of one
year. Given that the MPC is likely to keep policy rates low, a sharp sell-off in the 10y rate (of
about 100bp) in the next one year seems unlikely.
Therefore, the major threat to the trade comes from a sharp rally in the 10y rate, possibly on
the back of a risk flare in the eurozone. While possible, the GBP 10y rate is unlikely to fall
much below 1.60%, which is c.20bp below its lowest level ever. On the other hand, earning
in excess of 200cts from an unchanged rates scenario is much more likely, in our opinion,
so we like the risk-reward potential of the trade.
FIGURE 3
The trade premium, while rich, can increase further as the
vol surface steepens
FIGURE 4
The trade gains if the 10y rate, in one year, is c.1.6-2.8%
P&L (cts)
500
1,200
400
1,000
300
800
200
100
600
0
400
Jan-07
Jan-08
Jan-09
Premium (cts)
Jan-10
Jan-11
Jan-12
Jan-13
Regression fit
Note: The light blue line corresponds to out-of-sample 1y rolling regression using
rate slope (GBP2y-10y), level of vol (GBP 5y*5y) and slope of vol surface (GBP
5y*5y GBP 1y*10y). The correlation between the two series is 98.8%. Note the
GBP 1y*10y is calculated vs 6m Libor, while the GBP 1x11 cap-floor straddle has
quarterly payments and is calculated vs 3m Libor. As of 24 April 2013. Source:
Barclays Research
25 April 2013
-100
1.40%
1.70%
2.00%
2.30%
2.60%
2.90%
GBP 10y rate, 1y from now

Note: Shows the P&L for the trade in one years time for different values of the GBP
10y rate (vs 6m Libor). The trade assumes the ATM implied vol remains constant.
The 3m vs 6m Libor basis for the 10y rate have also been kept constant at the
current value of 10.5bp. Note that GBP 1y*10y is calculated vs 6m Libor, while GBP
1x11 cap-floor straddle has quarterly payments and is calculated vs 3m Libor. As of
24 April 2013. Source: Barclays Research
47
JAPAN: RATES STRATEGY
A second look at JGB yield drivers

Chotaro Morita
+81 3 4530 1717
chotaro.morita@barclays.com
Reiko Tokukatsu, CFA
+81 3 4530 1532
reiko.tokukatsu@barclays.com
Noriatsu Tanji
+81 3 4530 1346
noriatsu.tanji@barclays.com
There is no sign of clear

recovery in the correlation
between JGBs and USTs
The correlation between JGB and other markets is partially recovering. However, the
correlation with USTs remains broken, and there is asymmetry in linkages with stocks. If
there is still some correlation with fundamentals, then JGB yields may rise over Jul-Oct.
JGB markets have discounted monetary easing by the BoJ since February 2012, when the bank
first announced its large JGB purchasing scheme. This is also behind the growing disparity
between JGB yields and both share prices and economic fundamentals. Looking at correlations
of short term windows, the longest period in which the linkage between JGBs and other
markets was broken was from February 2013 until the beginning of this month (Figure 1).
That period, of course, included the selection of the new BoJ leadership and the banks
dramatic monetary easing announcement on 4 April. The weakened relationship between
JGBs and share prices finally appears to be staging a recovery. In contrast, there is no sign of
a recovery in the correlation between JGBs and USTs. The broken linkage with USTs over
such a long period is a more extraordinary phenomenon than that with share prices. And
this prolonged situation is not easy to explain. But one factor, we think, is that markets
began in mid March to price in the possibility that the BoJ would leave the interest on excess
reserves (IOER) unchanged, which would have had the same impact on the yield curve as a
hike in short-term interest rates. In the short and intermediate sectors, monetary policy in
the US and Japan appeared at one point to be going in precisely the opposite directions.
Although the disruption caused by the IOER speculation has now largely faded, there is still
no repair whatsoever in the JGB-UST correlation. It may be that the upswing in JGB volatility
has sparked a reduction in arbitrage trading aimed at the spread between UST and JGB
yields. Once a certain relationship is restored, this trading activity may revive. But we
suspect that it would first require a decline in JGB market volatility.
Meanwhile, let us consider the gradual recovery in the correlation between JGBs and
Japanese share prices.
There are two competing viewpoints among domestic investors at present regarding the
long-term outlook for JGB markets. One is that with the 2% inflation target set by the BoJ
and government, the yield curve will bear steepen as market participants price in future
FIGURE 1
Correlation between 10y JGB yields and other markets
FIGURE 2
Leading economic index and bond yields
1.0
110
0.8
105
0.6
100
0.4
95
0.2
90
0.0
85
-0.2
80
-0.4
75
-0.6
70
-0.8
65
-1.0
Jan-12
(%)
2.5
2.0
1.5
1.0
0.5
60
Apr-12
TOPIX vs JGB
Note: 20-day window
25 April 2013
Jul-12
Oct-12
UST vs JGB
Jan-13
Apr-13
USD/JPY vs JGB
3.0
0.0
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
Leading Index (LHS
10y JGB yields (RHS)
Note: Circled portions show five-month period after leading index has hit
bottom. Source: Cabinet Office, Bloomberg, Barclays Research
48

inflation. The other view is that the inflation target is effectively unachievable, and that the
supply/demand-driven downward pressure on JGB yields stemming from the BoJs JGB
purchasing will persist for the long term, keeping yield levels stable. The equity rally may
strengthen the first view. At the same time, the tightness in supply/demand caused by BoJ
activity is considerable, and even if CPI growth were to reach 2% y/y/ in the future, banks
may not want to hurt their own returns by immediately shedding their interest rate risk
volume. As a result, while the JGB relationship with shares may be recovering, the upward
rigidity in JGB yields with respect to share price fluctuations has strengthened, and
asymmetrical responses have become conspicuous.
If the patterns of 2005, 2003
and 1998 hold true, yields
would begin to rise in JulyOctober 2013
A clear connection between JGBs and economic fundamentals has yet to return. However,
over a longer horizon, we find that the correlation between the economic cycle and JGB
yields has not disappeared entirely. JGB yields are most prone to rise in the early stages of an
economic recovery, and some 4-5 months after hitting bottom, tend to trend downward for
some time. The timing of the decline in 10y yields from the 0.7% level in late February was
consistent with the historic pattern (Figure 2).There are no clear implications regarding the
direction of the yield trend after the decline, but in sustainable economic recoveries, yields
have been known to spring back once they have bottomed. For example, the economy
bottomed in June 2005 and yields began to rise from February 2006, the economy
bottomed in April 2003 and yields began to rise from March 2004, and, the economy
bottomed in October 1998 and yields began to rise from June 1999. In these cases, we can
see that yields reversed course 8-11 months after the economy touched bottom. On the
other hand, the economy reached a low in February 2009, but the subsequent yield rise
halted in June 2009 and the upward move did not happen again in any genuine manner.
The bottom of the present economic cycle was November 2012. If the pattern of 2005,
2003 and 1998 holds true, then yields should begin to rise over July-October 2013.
However, the BoJs JGB purchasing strategy may have disrupted this movement, and
developments may turn out to be closer to 2009.
Where to buy for the next dip

The JPY market appears to have overcome the post April MPM-induced volatility, at least for
the time being, after the BoJ made its commitment to the short-end sector and there are
fewer overseas fundamental factors to support higher rates. As such, we think it makes
sense to adopt a dip buying strategy to earn some carry and potential capital gains.
Figure 3 compares some benchmark rates/curves from the point of view of: 1) how much
of a rebound was seen after the post MPM-bottom; and 2) where the rates/curves stood
before the market started pricing in the expected announcement from the April MPM (we
use the week to the end of February, before Kurodas appointment was announced). We
also chart the changes in the 1y forward basis (Figure 4). Basically, the more the rebound
from the post-MPM richness (A-B) relative to the moves going into the MPM (B-C), the
more attractive the trade. The cheap spot appears to be 5y, which has rebounded to its preFebruary level. We already recommend a 5y long in the form of short 5y swap spread, but a
2s5s flattener also looks good now, given the steepness in the JGB 2s5s curve (9bp). We
think the next opportunity is likely to be in the 7s10s sector relative to 5s7s, which has
retraced about 64%. This week, expectations for some concession are building ahead of the
next 10y auction on 1 May. It appears that auction concessions have become more
important, as seen in some rinban operations recently: while the BoJ is buying significant
amounts of JGBs, there are more sellers (ie, 5+ times submission for the 1-5y sector on April
24). While 10x2y has also cheapened, it looks smaller than 10x10. Therefore, we think that
long 7-10y sector on the curve is better than 10x2y outright. We add 2s5s and 5x2-7x3
flatteners to our recommended portfolio. We also roll our 1mx20y vs 1mx10y bear flattener
where spread strike prices are set wider than the forward, therefore offering some
protection from a potential bear steepening.
25 April 2013
49
FIGURE 4
Comparison of recent retracement in 1y forward curve (bp)
Post MPM
bottom (B)
1w avg to end
Feb (C )
A-B (bp)
B-C (bp)
(A-B)/(B-C)
40
4/24 close (A)

Swap
FIGURE 3
Comparison of recent retracement in swap benchmark sector
2s5s
11.4
5.5
8.2
-3
216%
2s5s10s
-25.5
-17.3
-41.9
-8
25
33%
5s7s10s
-10.6
-4.0
-14.4
-7
10
64%
5x2-7x3
48.0
25.9
65.0
22
-39
56%
5x5
1.12
0.95
1.31
17
-37
48%
10x2
1.83
1.57
2.20
26
-64
41%
10x10
2.44
2.07
2.76
37
-69
54%
5s10s
36.9
32.3
50.1
-18
26%
cheap
rich
30
20
10
0
-10
-20
-30
cheap
-40
-50
-60
0
5
10
Change from Feb-April 4
15
20
25
Change from April 4-now
FIGURE 5
Trade recommendation updates (bp)
1y OIS pay
Swap
Swap
spread
Entry
date
Year
end/
Entry
level
13-Jul
6.0
Current
(incl
Level
Weekly
at last carry)
P&L
report or closed (JPY mn)
5.5
5.5
Risk
(DV01,
JPY mn)
Target
(including
carry)
Stop
Horizon
Action
0.8
100bn
face
8.0
5.0
1y
Hold
5s10s steepener
11-Apr
35.0
35.0
36.8
9.0
5.0
50.0
30.0
3m
Close
5x5-10x10 flattener
10-Apr
120.0
127.0
132.0
-25.0
5.0
100.0
130.0
3m
Hold
2s5s flattener
25-Apr
11.0
n/a
11.5
-2.5
5.0
8.0
15.0
1m
New
5x2y-7x3 flattener
25-Apr
47.0
n/a
47.5
-2.5
5.0
43.0
53.0
1m
New
20s30s fly (JL142/JX38)
13-Mar
10.50
9.0
9.5
-3.0
11.0
30.0
1-3m
Remaining
20s30s leg
Short 10y swap spread

(JB327)
19-Apr
-15.0
-14.5
-12.5
12.5
-10.0
-20.0
1-3m
Hold
Short 5 y swap spread (JS109)
19-Apr
-15.0
-14.5
-14.0
2.5
-10.0
-20.0
1-3m
Hold
-15
1m
Close and
reestablish
Short 1mx20y (atm+20bp) vs.

long 1mx10y (atm+11bp)
28-Mar
-9.0
22.0
15.0
-7.0
10bn face
(for 10y)
Short 1mx20y (atm+15bp) vs.

long 1mx10y (atm+9bp)
25-Apr
-9.5
n/a
-10.0
-0.5
10bn face
(for 10y)
-15
1m
reestablished
Pay 1yx1y
10-Nov
-44.0
-40.0
-38.0
20.0
10
-30.0
-80.0
mediumlong
Hold
Xccy basis Pay 1yx1y
11-Apr
-46.0
-46.0
-46.0
0.0
-30.0
-80.0
long
Hold
-70.0
mediumlong
Hold
Swaption
Pay 4y
7-Mar
-51.0
-54.0
-54.0
0.0
-40.0
Weekly P&L =4.3 ; total P&L since 2013: 366.3; balance sheet=20.9
Note: Current levels based on the absolute maturity to capture rolldown correctly; therefore, it is different from the constant-maturity spread.
25 April 2013
50
TRADE PORTFOLIO UPDATE
Trade portfolio update

Piyush Goyal
+1 212 412 6793
Vivek Shukla
Since the previous publication (April 18, 2013), the portfolio has gained $0.9mn. It has
increased $11.7mn year-to-date and $59.9mn since inception. 9
FIGURE 1
Mark-to-market performance of the portfolio cumulative P&L, $mn
+1 212 412 2532
mn
70
$59.9
60
50
40
30
20
10
0
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Note: As of April 18, 2013. Portfolio stop loss = $10mn. Given this total loss allowed, we allocate $500k as the stoploss for high-conviction trades and less for low-conviction trades. Source: Barclays Research
Total equity = $100mn, stop-loss = $10mn

We estimate an initial and variation margin for each derivative trade and a haircut for cash
trades. The total of all such margins and haircuts is less than $100mn. In other words, the
portfolio is assumed to have $100mn of equity. Thus, all returns are computed on a base of
$100mn. Any unused equity is invested in fed funds and assumed to earn the daily funds rate.
25 April 2013
Since January 2009.
51
TRADE PORTFOLIO
New Trades
Inception
Date
Theme
Trade
Weights/Notional
Amount
Levels @
Inception
Current
Level
Net Change (Gain Total Stop

(+) /Loss (-))
Loss (bp)
Horizon
Initial
Margin
Variation
Margin
Total
Margin
Relative Value
Sell the belly of Apr17Jul20-Jan23 real yield fly
$50k DV01
-15.5bp
-16.5bp
($89,000)
($500,000)
3m
$1,000,000
$89,000
$1,089,000
Decline in term
premium
Short 5s10s20s
(0.4:1.4:1)
$50k DV01
-30.4
-30.6
($10,000)
($500,000)
1m
$750,000
$10,000
$760,000
Delta hedge to
existing trade:
1y30y risk-reversal
from 8/3/12
Rec fix 20mn 8/5/13 30y swap 2.875%
$20mn
$0
($12,500)
($12,500)
($500,000)
1y
$500,000
$12,500
$512,500
Rangebound GBP
rates
Long gbp 50mn 1x11

cfs vs gbp 50mn 1y10y
straddles
50mn:50mn
$5,420,000
$5,350,000
($70,000)
($500,000)
1y
$1,800,000
$70,000
$1,870,000
US TIPS
4/25/2013
US Treasury
4/25/2013
US Options
4/25/2013
EUR Options
4/25/2013
Note: All prices as of April 25, 2013. Source: Barclays Research
25 April 2013
52

Trades Outstanding
Inception
Date
Theme
Trade
Weights/Notional
Amount
Levels @
Inception
Current Level
Net Gain (+)

Stop Loss (bp)
/Loss (-)
$500mn
Libor - 13bp
Libor -5bp
$1,280,000
($100mn): +50
($376,500)
($231,500)
$145,000
$100mn
14bp
9bp
$125,000
$10mn
22bp
31bp
($125,000)
20k DV01
11bp
10bp
$20,000
Horizon
Initial Margin
Variation
Margin
($250,000)
1y
$2,500,000
($1,280,000)
($200,000)
1y
$800,000
($145,000)
($300,000)
1y
$1,000,000
($125,000)
($400,000)
1y
$400,000
$125,000
($200,000)
3m
$1,250,000
($20,000)
US TIPS
$6,720,000
Front-end Asset
Long Jan '14 TIPS ASW
Swap Tightener
Long Core
Sell 1% 2y CPI Floors vs. Long CL4 Puts
8/3/2012
Inflation
65
10/5/2012
Carry
Long Jan '15 ASW relative to nominals
1/12/2012
10/18/2012 Supply unwind
Long Feb 40 Relative ASW

Apr16-Jan22 rel ASWs flattener (20K
DV01)
3/8/2013
Supply
3/27/2013
Low realized CPI

vol
Sell 3y y/y CPI strangle, energy hedged
$100mn 1%-3.5%
($1,400,000)
($1,520,000)
($120,000)
($500,000)
3m
$2,000,000
$120,000
4/18/2013
Dovish Fed
Long 5y5y breakeven (Apr 17-Jul22) fwd

BE
$25k dv01
266bp
278bp
$255,000
($500,000)
Unwound
$350,000
($255,000)
Curve trade
Long OBLi18 vs OATi40 BE
$50k dv01
95bp
81bp
($100,000)
($500,000)
4m
$39,000
$100,000
EUR Inflation
2/14/2013
Balance Sheet
Used
$139,000
US Treasury
$1,665,000
Improvement in
3/14/2013
funding
environment
Curve too steep
4/18/2013
given inf exp
JGB
End of extreme
low short end
4/18/2013
means flatter
curve
Eurozone Sovereign debt
10/5/2012 UFR positioning
Long OTR3y versus OIS
$100k DV01
8.9
8.7
$50,000
($500,000)
3m
$1,000,000
($50,000)
7s30s curve flattener
$50k dv01
172.2
176.4
($215,000)
($500,000)
1m
$500,000
$215,000
$852,000
JGB 10s20s flattener
$40k dv01
90
90.5
($20,000)
($300,000)
3m
$832,000
$20,000
Receive 5y5y/5y10y/5y15y fwd
$15k dv01
102bp
93bp
$135,000
($375,000)
3-6m
$600,000
($135,000)
$465,000
US Swaps / Futures
$3,070,000
3/8/2013
RV
1y1y Libor-OIS tightener against 1y1y

3s1s widener
4/18/2013
Cross mkt
relative value
Sell 10y France vs eq wgt US and Japan
$50k dv01
64.8
60.6
($210,000)
($300,000)
3m
$1,500,000
$210,000
Pay 1y OIS
$160k dv01
6bp
6.55bp
$88,000
($350,000)
1y
$1,600,000
($88,000)
Swap spread 10s20s30s long
usd 60 k dv01
23
24
($60,000)
($450,000)
1y
$1,500,000
$60,000
Short 1mx20y (ATM+20bp) payers vs.

long 1mx10y (ATM+15bp) payers
100mn
-5
20
$250,000
($200,000)
6m
$1,200,000
($250,000)
Swap 5s10s steepner
$60k dv01
35
37
$120,000
($450,000)
3m
$1,500,000
($120,000)
$100k DV01
13.6
12.2
$140,000
($500,000)
1m
$1,500,000
($140,000)
JPY Swaps
7/13/2012
Short front-end
Swap spread
3/13/2013 term structure is
distorted
Volatility is high
3/28/2013 for 20y tail vs.
10y tail
4/11/2013
Swap 5s10s
steepner
25 April 2013
$5,402,000
53

Trades Outstanding (continued)
Inception
Date
Theme
Trade
Weights/Notional
Amount
Levels @
Inception
Current Level
7/19/2012
Short vol
Short 1y*10y straddles
($20mn)
($1,220,000)
($440,000)
Net Gain (+)

Stop Loss (bp)
/Loss (-)
Horizon
Initial Margin
Variation
Margin
6m
$880,000
($780,000)
US Options
$10,275,000
$780,000
9/7/2012
Short vol
($20mn)
($1,242,000)
($587,000)
$655,000
9/27/2012
Short vol
($10mn)
($596,000)
($316,000)
$280,000
($10mn)
($597,000)
($342,000)
($380,000)
$3,164,000
$1,200,000
$1,850,000
10/5/2012
Short vol
11/15/2012
Short vol
6/14/2012
Relative Value
8/3/2012
Long riskreversal
8/9/2012
Tactical
8/16/2012
Relative Value
1/4/2013
Short vol
1/17/2013
Sell skew
1/24/2013
cheap flattener

($10mn)
($570,000)
Long 1x11 cap -flr straddles 2% vs
$20mn: ($20mn)
$1,964,000
1y*10y straddles 2%
Long 1y*30y 100bp wide risk-reversal
$100mn
($450,000)
(long recr), delta hedged
Long 3y*1y 25bp low-strike recr vs 45bp
$200mn:($200mn)
0
high-strike payer
Short belly of 2y5y - 2y10y - 2y30y payer +$94mn : ($100mn):
($300,000)
fly
+$22mn
sell 2y*10y straddles @ 2.65%
($50mn)
($4,105,000)
6/1/2012
Short vol
9/7/2012
Short vol
10/5/2012
Long vol
2/1/2013
Low for long
3/8/2013
RV
6m
$880,000
($655,000)
6m
$880,000
($280,000)
$255,000
6m
$880,000
($255,000)
$190,000
Expiry
$880,000
($190,000)
($500,000)
1y
$880,000
($1,200,000)
$2,300,000
($500,000)
6m
$725,000
($2,300,000)
$540,000
$540,000
($500,000)
1y
$800,000
($540,000)
$0
$300,000
($500,000)
1y
$2,200,000
($300,000)
($200,000)
($1,000,000)
($3,905,000)
$200,000
($500,000)
6m
$2,200,000
($100mn):($40mn)
($2,115,000)
($2,220,000)
($5,000)
($500,000)
1y
$1,200,000
$5,000
+2000: (2000)
($650,000)
($500,000)
$150,000
($500,000)
Expiry
$500,000
($150,000)
(1000): $129mn
($200,000)
($20,000)
$180,000
($250,000)
Expiry
$500,000
($180,000)
+$50mn: ($50mn)
$100mn: $100mn:
$50mn
+$50mn: -$50mn
$3,320,000
$3,800,000
$480,000
($500,000)
1y
$1,000,000
($480,000)
($430,000)
($420,000)
$10,000
($500,000)
6m
$725,000
($10,000)
$4,650,000
$4,590,000
($500,000)
1y
$1,600,000
+20mn: (500 each)
-15000
($100,000)
($500,000)
Expiry
$1,000,000
$100,000
EUR 20mn: (40mn)

EUR 100mn:
EUR 1x2 1y5y 1.15 vs 0.9 recr ladder
(200mn)
Long EUR 1y*10y 1x2 payer spread (2.2
(EUR 50mn): EUR
vs 2.6)
100mn
EUR 100mn:
6m5y 1x2x1 1.3 - 0.95 - 0.7 recr fly
(200mn): 100mn
Short 3m*4y GBP straddles vs 30bp high- +GBP 100mn: gbp
strike 3m*4y payer
100mn
$20,000
$20,000
($250,000)
6m
$744,000
($20,000)
$250,000
$250,000
($250,000)
6m
$1,692,000
($250,000)
($70,000)
($70,000)
($500,000)
6m
$550,000
$70,000
$650,000
$1,065,000
$415,000
($250,000)
Expiry
$500,000
($415,000)
($1,040,000)
($1,090,000)
($50,000)
($500,000)
Expiry
$1,200,000
$50,000
Sell 3y*5y 2.5% payer, delta hedged
long 2ez3 p 99 vs short 4ez3 p 97.75

short TYM3P 128 vs matched expiry
2/1/2013
put-payer
payer
2/14/2013 Calendar spread
long 5y30y p 3.6 vs 1y30y p 3.15
Long 1y30y recr, Short 1y30y payer, Pay
2/28/2013
Fade skew
fix 1y30y
4/11/2013
Steeper Vol
Long 3x13 cfs vs 3y10y swaption
Surface
straddle
Long 6/14/13-30y receiver 2.725% vs
4/18/2013
Bull-flattener
short 3EM3C 99 and 34EMC 98.375
EUR Options
$40,000
($40,000)
$4,121,000
EUR 1x2 1y5y 1.25 vs 1 recr ladder
Cross-currency
10/11/2012
3/8/2013
Balance Sheet
Used
Carry
Paying demand
is larger in 4-5y
basis
25 April 2013
$980,000
Pay 1yx1y Xccy basis
$40k dv01
-53.5
-40
$540,000
($400,000)
1y
$400,000
($540,000)
pay 4y Xccy basis
usd 40 k dv01
-51
-54
($120,000)
($400,000)
3m-6m
$1,000,000
$120,000
54

Trades Outstanding (continued)
Inception
Date
Theme
Trade
Weights/Notional
Amount
Levels @
Inception
Current Level
Net Gain (+)

Stop Loss (bp)
/Loss (-)
Horizon
Initial Margin
Variation
Margin
US BMA
Balance Sheet
Used
$2,130,000
1/12/2012
5/10/2012
6/7/2012
Sell Front-end
Ratios
Long 3m1y BMA ratio vs short 3y1y

ratio; 3m1y matured on 4/12 at 1y ratio $200mn : ($200mn)
= 50, implying p&l -$42k
Sell Front-end
Ratios
Sell Front-end
Ratios
54, 84
50, 69
$150,000
($250,000)
1y
$800,000
($150,000)
Short 3y ratio
$200mn
65.375
60
$80,000
($250,000)
1y
$800,000
($80,000)
Short 3y ratio
$200mn
66.75
62
$40,000
($250,000)
1y
$800,000
($40,000)
Cash
Cash Used as Collateral/ Haircut
Fed Funds (residual cash)
Return on Fed Funds
Return on trades
Total
4/18/2013
4/25/2013
$37,399,000
$40,050,500
$81,430,657
$79,608,557
$106,841
$108,741
$19,550,316
$119,659,057
Note: All prices as of April 25, 2013. Source: Barclays Research
25 April 2013
55

Trades Unwound
Inception
Date
US TIPS
Unwound
Date
Theme
Trade
Weights/Notional
Amount
Levels @
Inception
Levels @
Unwind
Net Change (Gain

(+) /Loss (-))
Total Stop
Loss (bp)
Horizon
9/29/2011
1/12/2012
Front-end Asset Swap Tightener
Long Jan '12 TIPS ASW
$500mn
Libor - 34bp
$170,000
($250,000)
Unwound
Unwound
1/6/2012
1/19/2012
Supply Trade
Sell Apr '16 - Jul '21 - Apr '28
$25k dv01
Libor 15.75bp
20bp
21bp
$25,000
($500,000)
10/20/2011
2/23/2012
Relative Value
10y-30y breakeven steepener
$20k dv01
21.5bp
5bp
($260,000)
($250,000)
Stop-out
3/9/2012
3/28/2012
Relative Value
Long Apr '14 - Apr '15 breakeven
$30k dv01
165bp
185bp
$500,000
$200,000
Unwound
1/27/2012
4/6/2012
Dovish Fed
Long 5y5y breakevens
$20k dv01
232bp
251bp
$250,000
$300,000
Unwound
6/16/2011
4/19/2012
Eurozone contagion
$20k dv01
5.5bp
7bp
($20,000)
($75,000)
Unwound
8/5/2011
5/24/2012
Long TIPS
$0
Unwound
Relative Value
-60.5bp,
267.76
33bp
$865,000
6/1/2012
12k dv01, Short 40

XBH2 (XBM2)
45k dv01
-253bp, 288
3/29/2012
Long the belly Jan '16 - Apr '16 - July '16 real
yield fly
Long July'12 TIPS energy hedged; bought 20
XBM2 on 4/6/12 for 327.66
Long TII Jan 22 Relative Asset Swap
31bp
$10,000
($500,000)
Unwound
4/19/2012
7/6/2012
Eurozone contagion
Long Apr '17 vs Jan '17
$50k dv01
6bp
-5bp
$550,000
($500,000)
Unwound
6/1/2012
7/19/2012
Inflation risk premium
Long 10y10y vs 5y5y BE
$15k dv01
-19bp
-8bp
$80,000
($150,000)
Unwound
6/28/2012
7/19/2012
Supply
$20k dv01
-12bp
-9bp
$90,000
($250,000)
Unwound
7/19/2012
8/30/2012
Flattener
Short belly of Jan '18 - Jan '21 - Jan 26 real

yield fly
Jan '14 - Apr '17 breakeven flattener ; energy
hedged
Apr '17 - Feb '42 breakeven flattener
$15k dv01; (30

contracts)
$15k dv01
67bp, 94.44
52bp, 96.35
($100,000)
($250,000)
Unwound
39bp
35bp
-103bp, - -107bp, 4bp,

36bp, 249.83
275
8/16/2012
10/18/2012
Supply Trade
11/2/2011
10/25/2012
Normalization
Long Apr' 13 TIPS vs. sell 2% CPI cap and sell

XBH3
$30k dv01; 45
contracts
9/20/2012
11/8/2012
Dovish Fed
$20k dv01
8/17/2012
11/15/2012
Sell Deflation Floor
Receive 2y forward 2y break-even (Jan '14 vs

Jan '16)
Long Jan' 17 vs. Apr '17
$50k dv01
9/7/2012
11/29/2012
Carry trade
$100mn
$12,000
($250,000)
Unwound
$1,100,000
$700,000
Unwound
215bp
($250,000)
($500,000)
Unwound
0bp
-1bp
($50,000)
($100,000)
Unwound
32.3bp
16bp
$690,000
($500,000)
Unwound
Unwound
228bp
11/8/2012
1/4/2013
Fiscal Cliff
Buying German I/L Apr 2016, asset swapped

into USD
Short Jul17 Breakeven
25k/$56mn
215bp
228bp
($292,344)
($500,000)
11/29/2012
1/4/2013
Supply Fly: 5s
Sell the belly of Jan15-Jan17-Jan19 RY Fly
$15K DV01
-21
-18
$60,000
($200,000)
Unwound
11/29/2012
1/4/2013
Risk Premium
10s30s BE steepener ahead of Dec. FOMC
15K DV01
2bp
6.2bp
$70,000
($250,000)
Unwound
1/4/2013
2/7/2013
Concession unwind
Long Jan15-Apr17-Jan19 RY Fly
$15k dv01
-10
($175,000)
($150,000)
Stop-out
2/21/2013
1/10/2013
Front-end Underpriced
$250mn
$1,003,000
($600,000)
Unwound
3/14/2013
Long the belly and fade the roll
$20k dv01
-134bp,
91.74
32bp
-226bp, 93.5
1/17/2013
Long $250mn TIIJan14s hedged with sell 100

CLZ4
Jan19-Jul22-Jan25 real yield fly
37bp
($10,000)
($160,000)
Unwound
UK Inflation
6/1/2012
6/14/2012
Macro
Long IL20 vs. pay match-maturity swap
GBP 7mn
280bp
262bp
($515,000)
($500,000)
Stop-out
6/22/2012
7/6/2012
Macro
Buy IL29 Breakeven (vs. UKT 4.75%)
GBP 13mn: (GBP

13.3mn)/ $35.7k dv01
262bp
263bp
$35,700
($500,000)
Unwound
6/29/2012
7/26/2012
Real Yield curve flattener
Long IL32 vs IL17
$45k dv01
126bp
145bp
($720,000)
($500,000)
Stop-out
7/13/2012
9/28/2012
Relative Value
Sell IL17 vs IL16, IL22 real yield fly
$37.5k dv01
-24bp
-24bp
$150,000
($300,000)
Unwound
9/14/2012
10/18/2012
Cheap forward real rates
Receive 20y20y forward RPI real rate swap
$17.2k dv01
36bp
42bp
($103,000)
($500,000)
Unwound
9/28/2012
11/29/2012
Real yield flattener
IL22 - IL42 real yield flattener
$25k dv01
97bp
100bp
($175,000)
($500,000)
Unwound
25 April 2013
56

Trades Unwound (continued)
Inception
Date
UK Inflation
Unwound
Date
Theme
Trade
Weights/Notional
Amount
Levels @
Inception
Levels @
Unwind
Net Change (Gain

(+) /Loss (-))
Total Stop
Loss (bp)
Horizon
11/16/2012
1/10/2013
UK Linker RV
Sell IL22 vs IL17+32 RY barbell
62.5k DV01
0bp
1bp
$125,000
($500,000)
Unwound
12/12/2012
1/10/2013
10y UK breakevens rich
Sell IL22 Breakeven
$25k DV01
250
293
($1,075,000)
($1,000,000)
Stop-out
1/17/2013
2/7/2013
UK 5y5y fwd real yield rich
Sell IL22 into IL17 cash for cash
$30k DV01
-20
-15
$150,000
($500,000)
3m
2/21/2013
2/1/2013
UK Linker RV
IL24 vs IL17+IL34 real yield barbell
$125k dv01
32
37
($500,000)
($500,000)
Stop-out
2/14/2013
3/8/2013
Real Yield
IL32-IL55 real yield flatteners
$50k dv01
26bp
33bp
($500,000)
($500,000)
Stop-out
EUR Inflation
6/1/2012
6/22/2012
Macro
Receive 5y Euro HICPx Inflation
EUR 25mn
1.35%
1.48%
$390,000
$390,000
Stop-out
6/29/2012
7/26/2012
Relative Value
Sell Bund i23 vs. OBL i18 breakeven
$27.2k dv01
47bp
50bp
($106,000)
($300,000)
Unwound
8/10/2012
9/7/2012
Short inflation
Sell 10y FRCPIx ZC Inflation
$37k dv01
2.32%
2.4%
$50,000
$100,000
Stop-out
9/14/2012
9/28/2012
Relative Value
Sell 10y FRCPIx vs. Euro HICPx
$39.5k dv01
27bp
37bp
($388,000)
($400,000)
Unwound
Real Yield
Short BTPi16/19 fwd real yield
$5.4k DV01
346bp
360bp
$75,000
($250,000)
Stop-out
Curve
Buy BTPi41 versus BTPi21
EUR 10mn 21s vs EUR

4.5mn 41s ($11k
dv01)
77bp
36bp
$411,000
$75,000
Unwound
Relative value
Buy OATi23 versus OATi22
3.5bp
1bp
$105,000
($75,000)
11/29/2012 12/14/2012
1/17/2013
2/28/2013
1/4/2013
3/14/2013
EUR21.3mn 23s vs
25mn 22s ($35k dv01)
Unwound
US Treasury
1/12/2012
1/26/2012
Fed-on-hold
Long 2y-5y-10y treasury fly
$50kdv01
-49.5bp
-66.5bp
$850,000
($500,000)
Unwound
1/19/2012
1/26/2012
Dovish Fed
10y-30y tsy curve steepener
$50k dv01
106.25 bp
117.25 bp
$550,000
($500,000)
Unwound
2/9/2012
2/23/2012
Unwind of auction concession
7y-30y tsy curve flattener
$50k dv01
177.75bp
174.75bp
$150,000
($500,000)
Unwound
3/1/2012
3/9/2012
Bond auction concession
$50k dv01
111.5bp
116.25bp
$237,500
($500,000)
Unwound
3/29/2012
4/6/2012
$50k dv01
111.5bp
117.5bp
$305,000
($500,000)
Unwound
3/1/2012
4/19/2012
Increase in odds of QE3
Long 5y-10y-30y fly
$50k dv01
1.75bp
-1.7bp
$172,500
($500,000)
Unwound
3/1/2012
4/19/2012
Fading 7yr
Short 5yr - 7yr - 10yr
$50k dv01
-4.5bp
-11.8bp
($365,000)
($500,000)
Unwound
3/16/2012
4/19/2012
Dovish Fed
Long ct2
75k dv01
36.9bp
26.7bp
$865,000
($500,000)
Unwound
4/20/2012
5/17/2012
Low front-end term premium
Vol weighted 2y - 3y steepener
-2bp
-7.5bp
($270,000)
($500,000)
Unwound
4/26/2012
5/17/2012
$80k dv01: ($50k

dv01)
$50k dv01
117.2bp
112.2bp
($250,000)
($500,000)
Unwound
5/10/2012
6/1/2012
Fading 7yr
Short 5yr - 7yr - 10yr
$50k dv01
-12.2bp
-18.2bp
($325,000)
($300,000)
Stop-out
5/10/2012
6/14/2012
Relative Value
Short HC Nov '15 Ps vs. HC Feb '15 Ps
$50k dv01
6.25bp
8bp
$87,500
($300,000)
Unwound
6/7/2012
7/6/2012
Fading Operation Twist
Long 3% Sep '16 vs. OIS
$50k dv01
16.1bp
13.5bp
$130,000
($250,000)
Unwound
6/28/2012
7/19/2012
Dovish Fed/ Relative Value
Long 9.25% Feb '16s
$40k dv01
0.525%
0.40%
$500,000
($400,000)
Unwound
6/14/2012
7/26/2012
Macro
Long 10y treasury
$25k dv01
1.635%
1.425%
$570,000
($300,000)
Unwound
7/12/2012
7/26/2012
Flattener
10y-30y tsy curve flattener
$50k dv01
108.4bp
106bp
$115,000
($300,000)
Unwound
7/26/2012
8/9/2012
Macro
Long 7y tsy
$50k dv01
0.94bp
1.045bp
($525,000)
($500,000)
Stop-out
25 April 2013
57

Inception
Date
US Treasury
Unwound
Date
Theme
Trade
Weights/Notional
Amount
Levels @
Inception
9/7/2012
8/10/2012
9/13/2012
Steepener
7y-30y steepener
$50k dv01
9/20/2012
Fed on hold
Long 5y
$25k dv01
Flattener
7y-30y flattener
10/11/2012 11/29/2012
Levels @
Unwind
Net Change (Gain

(+) /Loss (-))
Total Stop
Loss (bp)
Horizon
171.5bp
184bp
$625,000
($500,000)
Unwound
0.694%
0.68%
$50,000
($500,000)
Unwound
$50k dv01
177bp
178bp
($45,000)
($500,000)
Unwound
9/20/2012
1/10/2013
Low funding rates
Long 3y
$50k dv01
35.5bp
33.2bp
$219,000
($500,000)
Unwound
11/15/2012
1/10/2013
Liquidity Premium
Long OTR 10s vs Old 10s
$100K DV01
3.8bp
4.7p
($89,000)
($500,000)
Unwound
12/13/2012
1/10/2013
Long end Fed purchases
7s30s Tsy curve flattener
25k dv01
175.8
175.7
$5,000
($500,000)
Unwound
2/14/2013
1/24/2013
bond refunding steepener
10s30s
$50k dv01
119.7
120.3
$28,000
($500,000)
Unwound
1/10/2013
2/28/2013
Long front end
Long 4y
$50k DV01
59.4bp
53.3bp
$378,000
($500,000)
Unwound
1/17/2013
2/28/2013
Long 5s10s30s fly
$50k DV01
-9.6bp
-12.5bp
$194,370
($500,000)
Unwound
Long 2s5s7s gross fly
$50k DV01
8.6bp
3.6bp
$243,700
($500,000)
Unwound
Long Feb23s vs Nov22s
$100k dv01
2.95bp
2.76
$53,000
($500,000)
Unwound
2/1/2013
2/28/2013
Lower growth, higher fiscal risk

premium
Easy Fed, Fading richness of 7s
2/14/2013
3/14/2013
Not enough liq premium in OTR
9/20/2012
3/27/2013
QE underpriced
Long 10y
$25k dv01
1.78%
1.76%
$260,000
($500,000)
Unwound
2/14/2013
3/27/2013
sequester/post auction dynamics
10s30s curve flattener
$50k dv01
116.65
124.2
($414,000)
($500,000)
Unwound
2/28/2013
4/5/2013
Fade the curve steepness
7s10s flattener
$100k DV01
62.8
61.39
$175,000
($500,000)
Unwound
3/27/2013
4/11/2013
4/5/2013
4/18/2013
Risk aversion
Low front end risk premium
7s30s flattener
5s10s Flattener (65% dv01 on 10s)
$50k DV01
$50k dv01
186
43.5
175.9
39.9
$530,000
$179,000
($500,000)
($500,000)
Unwound
Unwound
6/8/2012
6/21/2012
Fading monetary policy easing
5y-10y flattener
$125k dv01
66bp
61.8bp
$525,000
($250,000)
Unwound
6/8/2012
6/21/2012
relative value
10y-20y flattener
$125k dv01
81bp
84.4bp
($425,000)
($375,000)
Stop-out
10/17/2012 10/25/2012
Bear flattener
JGB 10y-20y bear flattener
$50k dv01
90.5bp
91.5
($50,000)
($150,000)
Unwound
12/13/2012
Auction Concession Unwind
60k DV01
19
16.4
$156,000
($150,000)
Unwound
1/29/2013
Tactical
$60k dv01
30.2
29.8
$24,000
($150,000)
Unwound
3/7/2013
JGB 20s30s steepener
JGB 20s30s steepener
$120K
17.5
14
($400,000)
($400,000)
Stop-out
3/28/2013
Still flattening room for JGB

10s20s
60
95
91
$240,000
($150,000)
Unwound
Short FRTR Apr '20 vs. 50% RFGB Apr '20 and
50% RAGB Jul '20
Short BTPS 3.75% Mar 21 vs SPGB 5.5% Apr
21
Long SPGB 4.75% Jul 14 vs BTP 4.25% Jul 14
$35k dv01
-42bp
-58.5bp
$542,500
($250,000)
Unwound
$12.5k dv01
-37bp
-70bp
($425,000)
($350,000)
Stop-out
$10k dv01
60bp
102bp
($420,000)
($350,000)
Stop-out
$15k dv01
-48bp
-24bp
($360,000)
($350,000)
Stop-out
$30k dv01
-4
15
$570,000
($450,000)
Unwound
JGB
11/8/2012
2/21/2013
3/21/2013
Eurozone Sovereign debt

4/19/2012
5/17/2012
Eurozone contagion
4/27/2012
5/25/2012
Italy vs. Spain
9/7/2012
11/21/2012
Front end periphery convergence
6/15/2012
2/28/2013
Relative Value
1/10/2013
3/8/2013
Fundamental cheapness
Short Bobl ASW vs. EONIA long Schatz ASW

vs. libor
Long 5y5y fwd EUR ASW
25 April 2013
58

Inception
Date
Unwound
Date
Theme
Trade
Weights/Notional
Amount
Levels @
Inception
Levels @
Unwind
Net Change (Gain

(+) /Loss (-))
Total Stop
Loss (bp)
Horizon
Unwound
US Swaps / Futures
1/19/2012
2/23/2012
Calendar roll
USH2 invoice spread widener
$100k dv01
0.45bp
-2.4bp
($285,000)
($500,000)
1/6/2012
3/15/2012
Eurozone Contagion
Short EDU2 Long EDU4
2000 contracts
47.75bp
54.75bp
($525,000)
($500,000)
Stop-out
3/16/2012
4/6/2012
Spread widener
FV invoice spread widener
$50k dv01
17.75bp
28.25bp
$525,000
($500,000)
Unwound
4/19/2012
5/24/2012
Relative Value
$50k DV01
12.15bp
19.7bp
($377,500)
($500,000)
Unwound
5/18/2012
5/30/2012
Calendar Roll
Sell TYM2 Invoice spread vs. 1/3rd dv01 1y1y

libor-OIS
Long TUU2 Short TUM2
2000:(2000)
2.875 (ticks) 1.75 (ticks)
$70,313
($250,000)
Unwound
5/18/2012
5/30/2012
Calendar Roll
Long TYU2 Short TYM2
2000:(2000)
31.75 (ticks)
30 (ticks)
$109,375
($250,000)
Unwound
1/6/2012
6/21/2012
Issuance
Sell 30y spreads
$50k dv01
-31bp
-24bp
($350,000)
($250,000)
Stop-out
4/6/2012
7/12/2012
Front-end spd widener
March '14 FRA-ois (USFOSC8) widener
$50k dv01
38.5bp
33.5bp
($250,000)
($250,000)
Stop-out
7/19/2012
8/3/2012
Flattener
4y1y vs 1y1y flattener
$50k dv01
109.5bp
120bp
($525,000)
($500,000)
Stop-out
6/7/2012
8/30/2012
Relative Value
Short 5y - US - 30y spread
$50k dv01
13.15bp
8.4bp
$237,500
($250,000)
Unwound
10/11/2012 10/18/2012
Long duration
Receive 3y1y
$50k dv01
103.25bp
116.9bp
($500,000)
($500,000)
Stop-out
9/13/2012
11/23/2012
Relative Value
"$130mn: (1000)
$684,000
$684,000
($500,000)
Expired
9/7/2012
1/4/2013
Spread Curve Flattener
Long 11/23/12 -> Aug '19 vs short TYZ2 C

133
5y - 10y spread curve flattener
$100k dv01
-7.2bp
263bp
($130,000)
($500,000)
Unwound
9/13/2012
1/4/2013
Macro
30y Spread widener
$50k dv01
-22.5bp
-20.5bp
$100,000
($500,000)
Unwound
10/11/2012
1/4/2013
Flattener
Pay 3y1y Rec 5y9y
$50k dv01
237bp
263bp
($500,000)
($500,000)
Stop-out
2/14/2013
2/1/2013
7y auction concession unwind
Long dv01 weighted OTR7y TYH3 basis
$100mn/820 TYH3 cts
-260.1
-260.5
($9,000)
($500,000)
Unwound
2/14/2013
4/5/2013
UK v US steepener
UK 10s-30s steepener against US flattener
100K DV01
6bp
16bp
$1,000,000
($500,000)
Unwound
1/24/2013
Pause in one-way steepening in

long end
Volatility and rates are both high
Long 1yx10y straddle vs. 1yx20y straddle
$120mn
-60
-43
$204,000
($250,000)
Unwound
Short 1yx8y ATM+10bp payers
USD60mn
-92
-90
$12,000
($150,000)
Unwound
5/25/2012
Fade excessive bull-flattening
6x2-8x2 steepener
$120k dv01
48.75bp
50.5bp
$210,000
($450,000)
Unwound
5/24/2012
6/7/2012
Calendar Roll
Short calendar spread (JBM2-JBU2)
100 contracts
20 ticks
18 ticks
$26,000
($12,500)
Unwound
5/18/2012
6mx1y pay
$60k dv01
-53bp
-44bp
$540,000
($420,000)
Unwound
6/14/2012
6/21/2012 Good carry trade with stable front

end.
6/21/2012
Tactical
5y5y-10y10y flattener
$60k dv01
99.5bp
104bp
($270,000)
($120,000)
Stop-out
6/7/2012
7/6/2012
Long spreads
Long 30y swap spread
$30k dv01
19bp
18.8bp
($6,000)
($120,000)
Unwound
5/22/2012
7/20/2012
Long spreads
Long 20Y swap spread
$60kdv01
11.4
12.3
($54,000)
($400,000)
Unwound
7/13/2012
7/20/2012
Long spreads
Reestablish 30Y swap spread
$30k dv01
21.2bp
20bp
$36,000
($54,000)
Unwound
7/19/2012
7/25/2012
Long spreads
Short 20y swap spread vs 10y10y (1:3 )
$60kdv01
84.4bp
86.9bp
$150,000
($200,000)
Unwound
6/14/2012
7/26/2012
Tactical
Short 7Y (future) swap spread
$60k dv01
-9.1bp
-8.5bp
$36,000
($144,000)
Unwound
7/6/2012
7/26/2012
Carry
Long 6Y swap spread
$120kdv01
-16.1bp
-12.7bp
($408,000)
($300,000)
Stop-out
8/3/2012
8/16/2012
Tactical
pay 1y1y swap
$75k dv01
-26.1bp
-29bp
$218,000
($300,000)
Unwound
8/9/2012
8/16/2012
Relative Value
long 30y swap spread and receive 20yx10y at

2:1
$100k dv01
123.13
123
$13,000
($300,000)
Unwound
JPY Swaps
2/14/2013
2/5/2013
5/18/2012
25 April 2013
59

Inception
Date
Unwound
Date
Theme
Trade
Weights/Notional
Amount
Levels @
Inception
Levels @
Unwind
Net Change (Gain

(+) /Loss (-))
Total Stop
Loss (bp)
Horizon
JPY Swaps
7/20/2012
9/14/2012
Carry
Receive USD/JPY Xccy basis 6yx2y vs. 4yx1y
$60kdv01
-11.7
$1,120,000
($360,000)
Unwound
8/3/2012
9/28/2012
Tactical
long 8y swap spread
$120k dv01
-5.75bp
-5.2bp
($62,000)
($300,000)
Unwound
8/31/2012
10/5/2012
Relative Value
short swap 7s10s20s
$100k dv01
-42.125
-44.5
($238,000)
($300,000)
Unwound
9/14/2012
10/5/2012
Tactical
pay 3yx5y Xccy basis
$40k dv01
-83
-57
$1,040,000
($400,000)
Unwound
9/21/2012
10/11/2012
Limited rally in 10s
Sell 1mx10y receiver spread
$40mn
-28cts
-32cts
($16,000)
($100,000)
Unwound
10/5/2012
11/8/2012
Tactical
10y10y - 20y10y steepener
$60k dv01
-26bp
-18bp
$48,000
($50,000)
Unwound
11/7/2012
11/15/2012
Relative Value
Swaps 5s10s flattener
120k DV01
44.75
42
$33,000
($250,000)
Unwound
8/31/2012
11/29/2012
Macro
long 30y swap spread
$60k dv01
21
15.3
$342,000
($200,000)
Unwound
11/7/2012
12/21/2012
Rate Directionality
Pay 5y vs 3m Libor
60k DV01
21.5
21
($3,000)
($150,000)
Unwound
9/28/2012
12/28/2012
hedge to overall portfolio
Long receiver fly 3mx10y (0.72-0.77-0.82%)
$40mn
8cts
17cts
$36,000
($50,000)
Expired
11/1/2012
1/7/2013
Carry Trade
Sell 1y1y ATM receiver
USD40mn
-6
-8
($8,000)
($100,000)
Unwound
Unwound
12/7/2012
1/7/2013
Hedge to short 1y1y
long 30y swap spread
$60k dv01
14.3
-1
$918,000
($200,000)
1/7/2013
1/17/2013
5s swap spread too rich
5s7s box spread
$120k dv01
7.5
6.9
($60,000)
($400,000)
Unwound
1/23/2013
2/28/2013
Pause in easing speculaion
Swap 20s30s box (20y long)
$80k dv01
-7
-4.6
$232,000
($500,000)
Unwound
1/17/2013
3/8/2013
Carry
short 5x5, long 10x10, short 20x10
$60k dv01
-149
-140
$360,000
($250,000)
Unwound
2/5/2013
3/8/2013
Volatility
Short 1yx8y ATM+10bp payers
$60mn
-92
-62
$180,000
($150,000)
Unwound
10/18/2012
3/21/2013
Widener
2y Tibor 6v1 widener
$120k dv01
19
19.2
$24,000
($400,000)
Unwound
2/7/2013
3/28/2013
Volatility and Rates
Short 1yx8y ATM straddle with 5x2 long
$30mn
-235
-202
$99,000
($150,000)
Unwound
10/7/2011
1/9/2012
Sell GBP Gamma
Sell 3m5y straddles
GBP 25mn
($650,000)
($491,000)
$159,000
($500,000)
Expired
10/7/2011
1/9/2012
Sell EUR Gamma
Sell EUR 3m2y straddles
EUR 25mn
($225,000)
($175,000)
$50,000
($100,000)
Expired
10/20/2011
1/20/2012
Sell US Gamma
Sell 3m*10y straddles
$10mn
($420,000)
($285,000)
$135,000
($125,000)
Expired
1/19/2012
1/26/2012
Steepener
$100mn: (2400)
($100,000)
$700,000
$800,000
($500,000)
Unwound
11/18/2010
2/3/2012
Fed on hold
Long 4m30y payer spread (1.8 vs 2.1) and

short TYM2 puts @ 128.5
long 1y1y collar
$300mm:($300mm)
$1,546,000
$2,069,000
$523,000
($500,000)
Unwound
3/10/2011
2/3/2012
Fed on hold
1y5y covered call
$10mn
($150,000)
$108,000
$258,000
($250,000)
Unwound
5/19/2011
2/3/2012
Hedge to Fed on hold
$240mn: ($100mn)
$100,000
$100,000
($250,000)
Unwound
7/8/2011
2/3/2012
GBP options
470mn: (100mn)
($125,000)
$517,000
$642,000
($250,000)
Unwound
11/4/2011
2/6/2012
Sell US Gamma
Long 1y*2y payer spread (atm vs 100bp highstrike) and sell high-strike 1y*5y payer;
unwound the long 1y2y payer on 9/2/11
1y1y vs 1y5y bear flat; unwound the long 1y1y
payer on Sep 22 '11
$10mn
($431,000)
($233,000)
$198,000
($250,000)
Expired
2/4/2011
2/9/2012
Fed on hold
Rec 1y1y and sell 25bp low 1y*1y recr
$100mn
($225,000)
$249,000
$474,000
($250,000)
Expired
11/17/2011
2/17/2012
Sell US Gamma
$10mn
($440,000)
($134,000)
$306,000
($250,000)
Expired
12/15/2011
2/24/2012
Sell US Gamma
Sell TYH2 straddles
100
($284,375)
($64,375)
$220,000
($100,000)
Expired
12/2/2011
3/2/2012
Sell US Gamma
$10mn
($393,000)
($259,000)
$134,000
($250,000)
Expired
US Options
25 April 2013
60

Inception
Date
Levels @
Inception
Levels @
Unwind
Net Change (Gain

(+) /Loss (-))
Total Stop
Loss (bp)
Horizon
$50k dv01
$225,000
($350,000)
($575,000)
($500,000)
Stop-out
($200mn):$20mn
($90,000)
($630,000)
($540,000)
($500,000)
Stop-out
($112.5.mn): $50mn
($20,000)
($560,000)
($540,000)
($500,000)
Stop-out
Sell TYJ2 straddles
100
($201,000)
($150,000)
$51,000
($100,000)
Expired
Sell TYK2 straddles
100
($232,813)
($67,813)
$165,000
($100,000)
Expired
Unwound
Date
Theme
Trade
11/10/2011
3/9/2012
Eurozone contagion
6m 10y-30y CMS Bull Flattener
2/3/2012
3/22/2012
Steepener
5y*2y vs 5y*30y bear steepener
2/16/2012
3/22/2012
Steepener
2y*10y vs 2y*30y bear steepener
2/9/2012
3/23/2012
Sell US Gamma
2/23/2012
4/20/2012
Sell US Gamma
Weights/Notional
Amount
US Options
3/1/2012
4/20/2012
Sell US Gamma
Sell TYK2 straddles
100
($212,500)
($117,500)
$95,000
($100,000)
Expired
11/4/2011
5/4/2012
Eurozone contagion
$485mn: ($100mn)
$0
($250,000)
Expired
2/9/2012
5/9/2012
Eurozone contagion
$490mn: ($100mn)
($110,000)
$270,000
$380,000
($500,000)
Expired
11/17/2011
5/11/2012
Eurozone Contagion
Long 6m1y payer spread vs. short 6m5y payer

spread
spread
Buy 6m2y payr spd vs 6m10y payr spd
$0
($500,000)
Unwound
2/23/2012
5/11/2012
Higher rates
Buy 3m*10y payer 2.25% KO 2.75%
EUR 225mn:
(EUR50mn)
$100mn
$570,000
$40,000
($530,000)
($500,000)
Unwound
3/9/2012
5/17/2012
Sell US Gamma
Sell TYM2 straddles
100
($245,313)
($320,313)
($75,000)
($100,000)
Unwound
3/22/2012
5/17/2012
Rangebound rates
Long 1y30y @ 3.1% vs short 3m30y @ 3.1%
$20mn:($20mn)
$1,540,000
$1,035,000
($505,000)
($500,000)
Stop-out
3/29/2012
5/17/2012
Sell US Gamma
Sell TYM2 straddles
200
($440,625)
($750,625)
($310,000)
($100,000)
Unwound
4/6/2012
5/17/2012
Sell US Gamma
Sell TYM2 straddles
100
($190,625)
($280,625)
($90,000)
($100,000)
Unwound
4/12/2012
5/17/2012
Sell US Gamma
Sell TYM2 straddles
100
($193,750)
($273,750)
($80,000)
($100,000)
Unwound
4/19/2012
5/17/2012
Sell US Gamma
Sell TYN2 straddles
100
($221,875)
($266,875)
($45,000)
($100,000)
Unwound
4/26/2012
5/17/2012
Sell US Gamma
Sell TYN2 straddles
100
($192,188)
($192,188)
($30,000)
($100,000)
Unwound
1/26/2012
5/25/2012
Cross -currency
Long EUR 4m*7y vs TYM2 straddles
EUR 10mn: (100)
($20,000)
$160,000
$180,000
($500,000)
Expired
4/13/2012
6/1/2012
Higher rates
Buy EUR 3m*5y payer 1.55% KO 2.05%
EUR 100mn
$560,000
$50,000
($510,000)
($500,000)
Stop-out
1/6/2012
6/21/2012
Eurozone Contagion
$490mn: ($100mn)
($340,000)
$340,000
($500,000)
Unwound
2/17/2011
7/12/2012
Relative Value
$50mn: ($350mn)
($100,000)
$100,000
($500,000)
Unwound
8/18/2011
7/12/2012
Eurozone contagion

spread
Buy 3y*10y payer @ 5% Sell 3y SL 10y CMS
Cap @ 5%
Long 1y2y payer spread vs 1y10y payer spread
$90mn: $20mn
($130,000)
$10,000
$140,000
($500,000)
Unwound
Unwound
2/3/2012
7/12/2012
Eurozone contagion
Long 1y1y payer spread (0.55% vs 1.05%)
$100mn
$105,000
$55,000
($50,000)
($50,000)
6/15/2012
7/12/2012
Eurozone contagion
1m*10y vs 1m*30y bull flattener
($116.5mn):$50mn
($510,000)
($510,000)
($500,000)
Stop-out
4/20/2012
7/26/2012
Long EUR vs. US gamma
Long EUR 4m*7y std vs. TYU2 std
EUR 50mn: (750)
($945,000)
($1,495,000)
($550,000)
($500,000)
Stop-out
4/26/2012
7/26/2012
Relative Value
$100mn:(2000)
($250,000)
($10,000)
$240,000
($500,000)
Unwound
6/28/2012
7/26/2012
Short vol
Long 1y5y straddles vs 3EM2 straddles; sold

3EU2 straddles for $1.75mn
($300,000)
($250,000)
Stop-out
5/18/2012
8/3/2012
Eurozone contagion
Buy 1y*30y flr 2.25% vs 3m*30y flr 2.25%
$200mn: ($200mn)
$350,000
$1,090,000
$740,000
($250,000)
Unwound
7/12/2012
8/3/2012
Eurozone contagion
Long USU2 156-157 Call spread (digital floor)
3000 contracts
$515,625
$195,625
($320,000)
($250,000)
Stop-out
8/9/2012
9/13/2012
Tactical
3m*10y vs 3m*30y bull steepener
$117mn: ($50mn)
$725,000
$725,000
($500,000)
Unwound
9/7/2012
9/20/2012
Steepener
1y*7y vs 1y*30y bull steepener
$63mn: ($20mn)
$90,000
$90,000
($500,000)
Unwound
9/20/2012
11/23/2012
Relative Value
Short TYZ2 straddles vs 11/23-12 -> 7y

swaption straddles
+$100mn: (820
contracts)
($250,000)
($70,000)
$180,000
($500,000)
Expired
25 April 2013
($20mn)
($1,260,000) ($1,560,000)
61

Inception
Date
Unwound
Date
Theme
Trade
Weights/Notional
Amount
Levels @
Inception
Levels @
Unwind
671,875
781,875
Net Change (Gain

(+) /Loss (-))
Total Stop
Loss (bp)
$110,000
($200,000)
Horizon
US Options
10/23/2012 11/23/2012
Election
Long FVZ2 straddles: strike 124
1000 contracts
5/24/2012
11/29/2012
Short vol
($20mn): $200mn
($1,160,000) ($1,015,000)
$145,000
Unwound
6/7/2012
11/29/2012
Short 1y*10y straddles vs. long 1y1y payer

spread 1- 1.25
($50mn)
($3,250,000) ($2,350,000)
$900,000
Unwound
1000
$0
Unwound
11/15/2012 12/11/2012
Short vol
unwind fvz2 std
1/15/2009
12/13/2012
Longer Rates could Rise
2/9/2012
12/13/2012
Hike expectations
Short FVZ2 to hedge the long FVZ2 124

straddles
Buy 5y*10yr Payr Spd (ATM vs 100 bp high),
added the short CMS cap @ 5% on 7/2/10 ;
sell 6w*10y payer @ 2.75% on Nov 10 '11
Long 1y*1y - 1y*3y - 1y*5y payer fly
5/25/2012
12/13/2012
Short vol
6/21/2012
12/13/2012
Short vol
$100mm: - $100mm
124-25
124-25+
($1,924,000) ($1,910,000)
($30,000)
($3,000)
Expired
$14,000
($250,000)
Unwound
$27,000
($500,000)
Unwound
($1,000,000)
Unwound
($300mn): $200mn:
($60mn)
($20mn)
($1,830,000) ($1,465,000)
$365,000
($20mn)
($1,800,000) ($1,445,000)
$355,000
Unwound
8/16/2012
12/13/2012
Short vol
($10mn)
($935,000)
($805,000)
$130,000
10/23/2012
1/4/2013
Election volatility
220mn:(50mn)
($580,000)
($725,000)
($145,000)
($200,000)
Expired
1/4/2013
4/5/2013
Tactical
Long 220mn 2m*5y ATM payer vs. 50mn

2m*30y ATM payer
3m*7y vs 3m*30y bear flattener
Unwound
+$75mn:($25mn)
Front end looks cheap
Long Jul13s energy hedged
$200mn:65 XBM3
$110,000
$300,000
Expired
4/11/2013
$0
-330bp:
284.39
($500,000)
3/27/2013
($110,000)
-491bp:
308.12
($500,000)
Unwound
12/13/2012
Capped steepener
2y5y vs 2y30y bear steepener, short 2y SL 5y30y curve cap @ 75bp
(EUR 90mn): EUR

20mn: (EUR 400mn)
($530,000)
($500,000)
Stop-out
5/30/2012
6/29/2012
Higher rates
Sell 1m*20y receiver spread
$27mn
41cts
20cts
$110,700
($225,000)
Unwound
6/28/2012
7/20/2012
Tactical
1m*10y risk reversal (long payers)
$80mn notional
0 cts
-38 cts
($304,000)
($160,000)
Stop-out
7/6/2012
10/5/2012
Relative Value
Long 6mx10y 1x2 payers
$80mn notional
-26cts
1.8cts
$222,000
($200,000)
Unwound
EUR Options
3/9/2012
($1,597,000) ($2,127,000)
JPY Options
10/25/2012 11/15/2012
Tactical
Conditional 10s20s flattener
80mn
-8
$64,000
($200,000)
Unwound
7/13/2012
12/7/2012
Long vol
$80mn notional
80cts
121cts
$328,000
($160,000)
Unwound
11/29/2012
1/17/2013
Bear flattener
$100mn
-10
-7
$30,000
($200,000)
Unwound
1/10/2013
1/24/2013
Low vol
Long JPY 5y5y OTM recr , delta hedged with

10y swap
ATM+10bp 6mx5y payer long vs. 6mx10y
payer short
sell 1mx10y receiver (0.8% at 20 sen)
$80mn
-20
-43
($24,000)
($200,000)
Stop-out
1/10/2013
1/24/2013
Low vol
sell 3mx20y receiver (1.65% at 74 sen)
$50mn
-74
120
($15,000)
($200,000)
Stop-out
11/28/2012
3/28/2013
Volsurface is too flat
Long 10yx10y straddle vs. 5yx5y straddle
$120mm
88
96
$96,000
($250,000)
Unwound
25 April 2013
62

Inception
Date
Unwound
Date
Theme
Trade
Weights/Notional
Amount
Levels @
Inception
Levels @
Unwind
Net Change (Gain

(+) /Loss (-))
Total Stop
Loss (bp)
Horizon
5/4/2012
6/28/2012
Tactical
Long EUR 6m*2y payer vs GBP 6m*2y payer
$135,000
$135,000
($250,000)
Unwound
Receive USD/JPY Xccy basis 20yx10y
EUR 100mn
:(GBP82mn)
$30k dv01
8/17/2012
10/25/2012
Tactical
9/21/2012
11/23/2012
US vs EUR gamma
53bp
29bp
$720,000
($200,000)
Unwound
Long RXZ2 std vs. TYZ2 std
+500: (860)
$300,000
$663,000
$363,000
($500,000)
Expired
($200,000)
$65,000
$265,000
($500,000)
Unwound
($90,000)
($80,000)
$10,000
($500,000)
Unwound
$100,000
($720,000)
($820,000)
($1,000,000)
Stop-out
Cross-currency
10/15/2009 12/13/2012
Cross -currency
2/3/2012
12/13/2012
Cross -currency
11/29/2012
2/28/2013
EUR vs US
12/21/2012
3/7/2012
2/28/2013
3/7/2013
USD funding supplied via MoF

program
JPY long end is too rich vs. USD
Short 5x10 US caps @ 8% vs Long 5x10 EUR ($75mm): EUR 50mm

caps @ 5%
Long EUR 3y10y P @ 4% vs USD 3y10y P @
EUR 10mn: (13mn)
4%
Long RXH3 std 144.5 vs short TYH3 std 133.5
+400: (740)
Pay 8y Xccy basis
$40k dv01
-66.5
-55
$460,000
($400,000)
Unwound
short 10yx10y JPY swap vs. USD (beta = 0.4)
usd 40 k dv01
107
97
($400,000)
($400,000)
Stop-out
25 April 2013
63
GLOBAL SUPPLY CALENDAR

Country
Euro Area
29-Apr-13
29-Apr-13
29-Apr-13
29-Apr-13
29-Apr-13
29-Apr-13
May-13
May-13
May-13
02-May-13
02-May-13
03-May-13
07-May-13
07-May-13
08-May-13
08-May-13
09-May-13
09-May-13
09-May-13
13-May-13
13-May-13
13-May-13
14-May-13
14-May-13
14-May-13
15-May-13
16-May-13
16-May-13
16-May-13
16-May-13
17-May-13
21-May-13
22-May-13
23-May-13
23-May-13
23-May-13
Japan
01-May-13
08-May-13
14-May-13
16-May-13
21-May-13
23-May-13
UK
08-May-13
14-May-13
16-May-13
US
07-May-13
08-May-13
09-May-13
23-May-13
28-May-13
29-May-13
30-May-13
Bond
Coupon
Maturity
Size - bn
Italy
Italy
Belgium
Belgium
Belgium
Belgium
Spain
Italy
Belgium
France
France
Spain
Austria
Austria
Germany
Italy
Spain
Spain
Spain
Italy
Italy
Italy
Holland
Ireland
Ireland
Germany
France
France
France
France
Spain
Belgium
Germany
Spain
Spain
Spain
5yr BTP Auction (2-3bn)

10yr BTP Auction (2-3bn)
5y BGB Auction
8y BGB Auction
10y BGB Auction
15y BGB Auction
New 15y
New 30y BTP
New 30y
10y OAT
15y OAT
Bond Announcement
5y RAGB
10y RAGB
New 5y OBL Auction
Nominal Bond & Size Announcement
2y SPGB
3y SPGB
10y SPGB
3yr BTP Auction
5yr CCT Auction
15y BTP
5y DSL Tap (1.5-2.5bn)
5y IRISH
10y IRISH
New 2y Schatz Auction
5yr BTAN
2yr BTAN
2yr BTAN
OATi/ei Auctions
Bond Announcement
Bond Announcement
10y Bund Auction
5y SPGB
10y SPGB
20y SPGB
3.50%
4.50%
1.25%
4.25%
2.25%
5.50%
01-Jun-18
01-May-23
22-Jun-18
28-Sep-21
22-Jun-23
28-Mar-28
2.25%
2.75%
25-Oct-22
25-Oct-27
3.00
3.00
1.00
0.75
1.25
1.00
4.00
5.00
4.00
4.50
2.50
1.75%
15-Apr-18
20-Oct-23
Apr-18
0.825
0.825
5.00
1.00%
0.25%
1.00%
31-Mar-15
30-Jul-16
31-Jan-23
01-May-16
15-Jun-17
01-Sep-28
15-Jan-18
18-Oct-17
20-Mar-23
Jun-15
25-May-18
01-Nov-15
25-Oct-16
1.50
1.50
1.00
3.00
1.00
2.00
2.50
0.25
0.25
5.00
3.50
3.00
1.50
1.50
May-23
31-Jan-18
31-Jan-23
30-Jul-32
5.00
4.50%
5.40%
5.75%
Japan
Japan
Japan
Japan
Japan
Japan
10y JGB Auction

Liquidity Enhancement Auction
30y JGB Auction
5y JGB Auction
40y JGB Auction
Liquidity Enhancement Auction
UK
UK
UK
UKT linker 2044

UKT 2018
UKT 2044
US
US
US
US
US
US
US
U Unconfirmed Barclays Estimate
R Rich
C Cheap
3y Note Auction
10y Note Auction
30y Bond Auction
10y TIPs Auction
2y Note Auction
5y Note Auction
7y Note Auction
2.75%
3.30%
5.40%
FRN
4.75%
5.50%
4.25%
2.00
2500.00
300.00
700.00
2600
400
300
0.125%
1.250%
3.250%
22-Mar-44
22-Jul-18
22-Jan-44
1.2
4.5
2.5
32
24
16
13
35
35
29
25 April 2013
64
Next weeks cash flows

On Monday Italy plans to auction 5y and 10y bonds for up to 6bn, while Belgium plans to
auction 5y, 8y, 10y and 15y bonds. Thursday will see France issue longer-term OAT bonds.
Support for the market will come in the form of redemption and coupon flows from Spain
and Italy, totalling just over 37bn between them.
FIGURE 1
Barclays cash flow expectations for week beginning 29 April
Beginning
Weekly
Net
Cash flow
15-Apr
22-Apr
-22.85
-31.46
06-May
13-May
-20.20
10.52
11.48
29-Apr
Net Cash Flow is issuance minus redemptions minus

coupons. Negative number implies cash returned to
the market.
Auction Date
Issuance
Redemptions
Coupons
Net Cash Flow
Germany
0.00
0.00
0.00
0.00
France
8.00
0.00
0.95
7.05
Italy
6.00
12.44
4.52
-10.96
Spain
0.00
14.94
4.17
-19.11
Belgium
3.00
0.00
0.00
3.00
Greece
0.00
0.00
0.00
0.00
Finland
0.00
0.00
0.00
0.00
0.00
Ireland
0.00
0.00
0.00
Holland
0.00
0.00
0.00
0.00
Austria
0.00
0.17
0.00
-0.18
Total issuance
17.00
Portugal
0.00
0.00
0.00
0.00
Total redemptions
27.55
Total
17.00
27.55
9.65
-20.20
Total coupons
Net cash flow
9.65
-20.20
25 April 2013
65
GLOBAL BOND YIELD FORECASTS

US Treasuries
US swap spreads
Fed funds
3m Libor
2y
5y
10y
30y
10y RY
2y
5y
10y
30y
Q2 13
0.00-0.25
0.25
0.20
0.75
1.80
3.00
-0.75
Q3 13
0.00-0.25
0.25
0.20
0.75
1.80
3.00
-0.80
Q2 13
15
15
10
-15
Q3 13
15
15
10
-10
Q4 13
0.00-0.25
0.20
0.25
0.80
2.00
3.15
Q1 14
0.00-0.25
0.20
0.30
0.90
2.00
3.15
-0.65
Q4 13
15
15
10
-5
-0.75
Q1 14
15
15
10
-5
Euro government (Germany)
Euro area swap spreads
Refi rate
3m
2y
5y
10y
30y
10y RY
2y
5y
10y
Q2 13
0.50
0.15
0.10
0.55
1.60
2.35
-0.15
Q3 13
0.50
0.15
0.15
0.65
1.75
2.45
-0.10
Q4 13
0.50
0.15
0.20
0.70
1.80
2.50
Q1 14
0.50
0.15
0.30
0.85
1.95
2.60
Q2 13
40
40
30
Q3 13
40
40
30
-0.10
Q4 13
40
40
30
Q1 14
40
40
30
UK government
30y
UK swap spreads
Bank rate
3m
2y
5y
10y
30y
10y RY
2y
5y
10y
30y
Q2 13
0.50
0.50
0.30
1.00
2.00
3.15
-1.35
Q3 13
0.50
0.50
0.35
1.10
2.10
3.20
-1.30
Q2 13
40
15
10
-15
Q3 13
40
15
10
-15
Q4 13
0.50
0.50
0.40
1.20
2.20
3.30
Q1 14
0.50
0.50
0.45
1.30
2.30
3.35
-1.25
Q4 13
35
10
-10
-1.15
Q4 14
35
10
-10
Japan government
Japan swap spreads
Official rate
3m
2y
5y
10y
30y
10y RY
2y
5y
10y
Q2 13
0.10
0. 23
0.11
0.22
0.55
1.60
0.00
Q2 13
15
12
30y
-4
Q3 13
0.10
0. 23
0.11
0.22
0.55
1.60
0.00
Q3 13
15
13
-10
Q4 13
0.10
0.23
0.10
0.20
0.45
1.45
0.10
Q4 13
15
13
-10
Q1 14
0.10
0.23
0.10
0.20
0.45
1.45
0.10
Q1 14
15
13
-10
25 April 2013
66
GLOBAL RATES RESEARCH

Global
Ajay Rajadhyaksha
Head of Rates and Securitised
Products Strategy
+1 212 412 7669
ajay.rajadhyaksha@barclays.com
US
Joseph Abate
Fixed Income Strategy
+1 212 412 6810
joseph.abate@barclays.com
Piyush Goyal
+1 212 412 6793
James Ma
+1 212 412 2563
james.ma@barclays.com
Chirag Mirani
+1 212 412 6819
chirag.mirani@barclays.com
Amrut Nashikkar
+1 212 412 1848
Michael Pond
Head of Global Inflation-Linked
Research
+1 212 412 5051
michael.pond@barclays.com
Anshul Pradhan
Treasury Strategy
+1 212 412 3681
anshul.pradhan@barclays.com
Rajiv Setia
Head of US Rates Research
+1 212 412 5507
rajiv.setia@barclays.com
Laurent Fransolet
Head of European Fixed Income,
Commodities and Credit Research
+44 (0)20 7773 8385
Cagdas Aksu
European Strategy
+44 (0)20 7773 5788
Fritz Engelhard
German Head of Strategy
+49 69-7161 1725
fritz.engelhard@barclays.com
Jussi Harju
European Strategy
+49 69 7161 1781
jussi.harju@barclays.com
Moyeen Islam
+44 (0)20 777 34675
moyeen.islam@barclays.com
Sreekala Kochugovindan
Asset Allocation Strategy
+44 (0)20 7773 2234
sreekala.kochugovindan@
barclays.com
Giuseppe Maraffino
+44 (0)20 313 49938
giuseppe.maraffino@barclays.com
Amy Mignosi
Barclays Live
+ 44 (0)20 3134 9774
amy.mignosi@barclays.com
Mikael Nilsson
+44 (0)20 7773 6057
mikael.nilsson@barclays.com
Hitendra Rohra
+44 (0)20 7773 4817
hitendra.rohra@barclays.com
Michaela Seimen
SSA & Covered Bond Strategy
+44 (0) 20 3134 0134
michaela.seimen@barclays.com
Henry Skeoch
Inflation-Linked Strategy
+44 (0)20 777 37917
henry.skeoch@barclays.com
Khrishnamoorthy Sooben
Inflation-Linked Strategy
+44 (0)20 7773 7514
khrishnamoorthy.sooben@
barclays.com
Huw Worthington
European Strategy
+44 (0)20 7773 1307
huw.worthington@barclays.com
Vivek Shukla
+1 212 412 2532
Europe
Asia Pacific
Igor Arsenin
Head of Fixed Income Strategy
Research, Emerging Asia
+65 6308 2801
igor.arsenin@barclays.com
Chotaro Morita
Head of Fixed Income Strategy
Research, Japan
+81 3 4530 1717
chotaro.morita@barclays.com
Reiko Tokukatsu
Senior Fixed Income Strategist,
Japan
+81 3 4530 1532
reiko.tokukatsu@barclays.com
For any questions about Barclays Live for Rates, please contact:
Jason Howell
+1 212 412 6706
jason.howell@barclays.com
25 April 2013
Amy Mignosi
+44 (0)20 3134 9774
amy.mignosi@barclays.com
67
Analyst Certification
We, Cagdas Aksu, Amrut Nashikkar, Rajiv Setia, Giuseppe Maraffino, Anshul Pradhan, Vivek Shukla, Chirag Mirani, Michael Pond, Piyush Goyal, Joseph
Abate, Laurent Fransolet, Huw Worthington, Moyeen Islam, Fritz Engelhard, Jussi Harju, CFA, Michaela Seimen, Mikael Nilsson Rosell, Henry Skeoch,
Hitendra Rohra, Chotaro Morita, Noriatsu Tanji and Reiko Tokukatsu, CFA, hereby certify (1) that the views expressed in this research report accurately
reflect our personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensation was, is
or will be directly or indirectly related to the specific recommendations or views expressed in this research report.
Each research report excerpted herein was certified under Reg AC by the analyst primarily responsible for such report as follows: I hereby certify that: 1)
the views expressed in this research report accurately reflect my personal views about any or all of the subject securities referred to in this report and; 2)
no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
Important Disclosures:
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Interest Rates Research

Global Rates Weekly

Trade Portfolio Update

Global Supply Calendar

Global Bond Yield Forecasts

Swaps: FV-TY invoice spread curve

Volatility: Limited long

Money Markets: The other repo suppliers

Money Markets: Refi cut Limited effect

Covered Bonds: Spanish bank restructuring

UK Inflation-Linked: Keep the faith

Volatility: Range-bound rates

Barclays | Global Rates Weekly

We think declining inflation

Source: Barclays Research

Apr-11 Jan-12 Oct-12

Source: Barclays Research

Barclays | Global Rates Weekly

In the US, the Feds rhetoric

Source: Barclays Research

JP portfolio purchases (JPY bn)

Barclays | Global Rates Weekly

Weak PMIs and bank lending

... but the rate market

Barclays | Global Rates Weekly

Spanish Bonos held by foreigners (ex ECB, LHS)

Source: Spanish Tesoro, Barclays Research

Barclays | Global Rates Weekly

25bp cut only in the refi rate. Markets reaction is likely to be

The larger-than-expected easing by the BoJ is likely to be

We remain neutral on duration.

We maintain 7s30s curve flatteners given room for long-term

We maintain our long front-end Tsy vs. OIS view, given

EUR: Hold on to short Bobl ASW on Ger 5s/30s ASW box.

20s30s box (20y long).

SEK: Hold SEK/EUR 10y tighteners in swaps and longs in

Pay USD/JPY 1yx1y basis.

underpinned by low real rates. Reset Gilt 5/30s or Gilt

a decline in term premium.

Neutral on 30y spread wideners, considering risks from risky

1y1y Libor-OIS tightener hedged with 1y1y 3s1s widener.

We continue to favor long-end agency-Treasury spread

recovered to the extent hoped. We suspect investors will be

We recommend shorting a weighted 5s10s20s fly to position for

Though volatility has declined, liquidity still has not

Hold on to receive EUR 5y5y/5y10y/5y15y fwds.

improving financing conditions. The 4y sector looks cheap.

fundamentals remain poor. We remain negative on 10y gilt

We remain constructive on Canadian covered bonds, given their

Hold Spain and Italy 2s/5s/10s.

pickup to agencies. Pockets of value persist in USD SSA space.

Sell the belly of Apr17-Jul20-Jan23 real yield fly. April14s are

Long linkers stand to benefit from pension de-risking

about 60bp cheap versus our CPI forecast; we will look to be

slower payroll growth and low realised inflation.

0% in zero cost structure is attractive as a hedge against

Should risk aversion increase, we would expect April18s to

Sell 1y*10y straddles to benefit from range-bound rates and

Buy EUR1y*30y 100bp wide risk reversal (long receivers) to

Buy 1y*5y receivers funded with 1y SL 5-30y curve cap to

supply from callables.

hedge a risk flare in the eurozone.

intact, and we expect this trend to continue for now. Over

Look to long vol when the market stabilises later in May.

Buy EUR 6y5y versus 1y(5y5y) to position for steepening

3m30y vs 1m30y calendar spread