Relative Value Weekly

Fixed Income Research
Fixed Income Relative-Value Weekly

Roger Quick, CFA Graham Chubb
Highlights
The volatility in the US Treasury market remained high this past week. 10-year yields reached new highs toward 3.60% support. There were however a few signs that the selloff may be ending. US Treasury yields and Quantitative Easing: the Treasury market response to QE2 has been surprisingly similar to the response to QE1. There are substantial differences between the two episodes, however, which suggests a further selloff is unwarranted (or would provide a good buying opportunity). CanadaUS Spreads: the 10-year Canada bond declined only moderately as the Treasury market sold off, causing the spread to tighten more than 50 bps. We think 10-year Canadas are now fairly expensive relative to the US. Canada 19s remain cheap. We update the 14/19/23 butterfly recommendation from earlier in the week. Bond futures basis: although 19s are cheap, futures are even cheaper, a situation that has persisted for some time. The implied repo remains around 0.8% or lower, compared to term OIS closer to 1.05%. Canada 14s are expensive vs 12s and 17s. Selling the butterfly carries positively. Buy provincial bonds for income. We reiterate this view from October, and take the opportunity to show off our new long-term 10-year provincial benchmark spread series. Provincial spreads vs risk aversion: We look at the relationship between provincial spreads and the VIX, something we havent updated since May, when we had argued provincials were cheap. The 10-year spread seems to provide better protection to a rise in the VIX than the 5-year. New Canada auction schedule: One less 2 year auction, one more 3 and 5 year auction. Publishing schedule: we are not publishing until the New Year. Happy Holidays! The appendix shows 1) the Canada curve when the BoC was on hold for an extended period, 2) extracts from the daily butterfly reports for bonds and swaps, 3) implied central bank rate expectations, 4) Canada bonds valued off our theoretical multi-factor yield curve model, 5) carry and convexity-adjusted rolldown returns on Canada bonds, and 6) Canada bond asset-swap spreads.
Friday, December 17, 2010
Fixed Income & Relative-Value Strategy
Treasury Yields and Quantitative Easing: Comparison of QEs 1 and 2 (originally published Thursday December 16th) The selloff in the Treasury market since October has been dramatic, especially in the past two or three weeks, when yields have increased more than 50 bps. It has been driven by several factors, but one of the main ones has been the Feds asset-purchase program, and the markets perception of how this will affect growth and inflation. We had argued previously (Sep 27) that the best strategy would be to sell a post-announcement rally, but even so the speed of the selloff was a surprise. To provide some perspective on the current Treasury selloff, the attached chart compares todays response to QE2 with the Treasury markets response to the Feds first round of quantitative easing in 2008-09. The similarity is striking, though the pace of the recent Treasury selloff still looks extreme, even by the already dramatic standard of the 2009 Treasury selloff (n.b. see the end of this note for discussion about our choice of the start date for QE1). A superficial comparison of the two episodes suggests that US 10-year yields could rise even further, up to another 50 bps in the next two months, to 4.0%. But is this likely? The answer to that question depends a lot on how valid it is to compare the two episodes. There are of course similarities. Most obviously, both involve Fed stimulus driving expectations of higher growth and higher inflation, or at least of avoiding severe deflation. There are at least as many differences as similarities between the two periods. We discuss a few of the ones that seem most important: 1. Coordination of policy: in 2008-09, QE1 was one part of a coordinated set of measures, both with fiscal policy in the US, and with policies in other countries. These programs were intended, for better or worse (AIG bailout?), to restore confidence and avert another 1930s-style depression and deflation. Today, policy coordination is not anywhere near as close, with most government stimulus programs set to expire. The recent deal to extend tax cuts in the US has however brought a bit more coordination in policy than might have been anticipated when the Fed first announced the new asset-buying program.
US 10-Year: Comparison of QE 1 and 2

3/18/2009 11/2/2010 Forwards
4.5
4.0
3.5
Aug 10, 2010: Fed announces reinvstment of MBS principal into Treasuries.
Yield (%)
.
3.0
Nov 25, 2008: Fed announces $500 bn MBS purchase plan.

2.5
March 18, 2009: Fed expands QE1 to target $1.25 trillion MBS, $200 bn agency, and $300 bn Treasuries.
Dec 16, 2008: Fed cuts rates from 1.0% to 0.0% - 0.25% range Source: Scotia Capital Constant-Maturity Series
2.0 -200 -180 -160 -140 -120 -100 -80 -60 -40 -20 0 20
Nov 2, 2010: Fed announces will purchase up to an additional $600 bn of Treasury securities.
40
60
80
100
120
140
160
180
200
Business days before/after Fed QE announcement
2. Growth: QE1 and other measures preceded a massive increase in growth and growth expectations, as the economy recovered from a deep recession. Growth today may be higher because of more monetary stimulus and the extension of the tax cuts, but I think most forecasts would put growth next year at about half of its pace reached during the 2009 recovery. 3. Risk appetite: In 2008-09 investors were extremely risk averse. This was one of the key factors driving many of the Fed programs, from lending to primary dealers, to the asset-backed securities program (TALF). The subsequent increase in risk appetite in 2009 caused a massive shift out of Treasuries into credit and equities. In contrast, investors today have been risk tolerant for a long time (notwithstanding the current reluctance of US banks to put capital at risk at bank year end). 4. Deflation v Inflation Debate: In 2008-09 it was expectations that the Fed, in combination with other measures, would succeed in averting a 1930s-style Deflation. Today, it was also the expectation that the Fed would avoid deflation, albeit a more modest risk of deflation. But there is I think also the sense in at least some sectors of the market that the Fed is somewhat less in control today, and could be underestimating economic strength. 5. Debt levels: This is a much bigger concern today than it was in 2008-09. The high level of government debt has been an important theme for much of the past year, because of the problems in peripheral Europe. It became a bigger theme in the US Treasury market more recently (at least in some circles) with the tax deal, in particular the deficit-financed extension to jobless benefits. Conclusion? The first three differences suggest that yields dont need to rise as much this time, while the last two suggest that yields could rise further. I think the most significant risk to higher Treasury yields in the future probably comes from an increase in new private-sector borrowing, because that would drive money supply growth, and also provide competition for Treasury issuance. There will need to be some increase in private-sector borrowing simply due to technological obsolescence. But with a lot of excess slack still in the economy, it is not yet clear to me that new loan demand will increase substantially for a long time. In the event the 10-year yield does rise to 4.0% again in the next month or two, that would seem to be a pretty good buying opportunity. Background on the chart: Note that in the case of QE1, we are showing day zero as March 18, 2009, the day that the Fed greatly expanded the program to a total of $1.75 trillion of securities, including $300 bn of Treasuries. This is technically not the start of the program. The original program of buying $500 bn of MBS was announced in November 2008. However, at that time, the Fed was still cutting interest rates, which likely had as big or bigger an impact on Treasury yields than the announcement of the initial QE program. Background note on the size of the two QE programs: we deliberately didnt list the smaller size of the current program as an important difference, even though it might seem that the smaller program today might justify a smaller impact on markets and the economy, all else equal. What matters the most is how much of the market the Fed would ultimately own, not how much it buys each week. The Fed already holds a lot of securities, so it didnt need to buy as much in QE2 as it did the first time in order to have a substantial impact (in that sense the first round of QE still has its effect felt).
US Treasuries The Treasury market selloff this past month has been dramatic. As we noted on pages 2-3, it even looks extreme when compared to the 2009 Treasury selloff, which was already quite something. The selloff was driven by a combination of factors, including concerns that the Fed was underestimating growth and that its policies would be inflationary, and concerns about the level of US debt, which received a lot of attention after the announcement of the deal to extend the tax cuts, which also included a deficitfinanced increase in jobless benefits. Another big factor pushing yields higher was mortgage hedging, made necessary by the increase in effective mortgage durations following the recent rise in rates. And finally, relatively thin pre-holiday markets and the reluctance of banks to risk capital ahead of year end has likely helped to exaggerate some of the market moves. A striking example of the markets unease about the Fed was evident in the response to the FOMC statement. Yields were already some 10 bps higher on the day after a very strong US retail sales report. They backed up another 10 bps and the curve steepened following the FOMC statement, which was not materially different from the previous statement. The market seems increasingly concerned that the Fed may be underestimating growth, and may be underestimating the risks of its bond-buying program. Especially on a day when we got very strong US retail sales data, investors were looking for the Fed to recognize that growth has been better, and to indicate that it might consider curtailing its asset-purchases in the future if conditions improved. US CPI on Wednesday was benign, though the long end continued to selloff, and break-even inflation rates moved higher. There were however a couple of signs that the selloff may be reversing or at least stalling. For example, in two of this weeks reverse auctions, the market offered relatively few bonds to the NY Fed (Mondays 6-7 yr had just over 18bn offers, and Wednesdays 4-6 yr had only $13 bn). This could just be a reflection of thin volumes. But, given that it follows a more than 50 bps backup in yields in two weeks, it may also indicate that a lot of positions have already been cleared out, and/or investors didnt see the selloff extending a lot further. The market was stronger again at the time of writing Friday. In the near term, the NY Feds reverse auctions should continue to provide support to the market the week of Dec 20. Note though that US supply returns the week of Dec 27th, which could be a challenge given what will likely be relatively thin markets.
New Canada Bond Auction Schedule: There are a couple of changes to the auction schedule for the upcoming quarter. There will be fewer two-year and more 3 and 5-year auctions than we have had lately. There will only be two auctions of 2-year bonds, instead of the three auctions per quarter that we have had for some time. However, there will also be two auctions of 3 and 5-year bonds; in the past quarter there was only one of each. This may reflect the fact that 3y and 5y bonds have tended to be relatively expensive recently (though the best time to issue more 5s would have been earlier in the last quarter). There will be no long auction, but this had already been announced at the start of the year in the Governments Debt Management Strategy. There will be one long switch-buyback, on March 10. The only other switch buyback is a 2-year on Feb 16, which will undoubtedly target the June-dated bonds again. The other long issue will be the quarterly RRB auction on Feb 23. The first auction in the new year is a 5-year, on January 12 (no more supply in Canadas this month, though the US has 2s, 5s, and 7s the week of Dec 27th).
Canada/US Govt Yield Spreads (Constant-Maturity Theoretical Bonds)
Canada-US spreads Canada 10-year bonds held in extremely well during the US Treasury selloff of the past month, outperforming the US Treasury market substantially. The 10-year Canada has moved from 35 bps over Treausies to 16 bps through in less than 3 weeks, a change in spread of more than 50 bps (those are constant-maturity spreads. The benchmark 10-year spread, which includes a 5-month term mismatch, has moved from about +30 to minus 19 bps). Canadian 10-year bonds are now at fairly expensive levels vs the US. If the US market sells off further, in particular if it sells off further on concerns about high debt levels, then Canada would still outperform, given its better fiscal position. However, the potential for much further outperformance seems limited now. For example, the scatterplot at right shows the 10-year spread graphed against the level of Treasury yields, and highlights the generally negative relationship between the spread and Treasury market direction. The spread is already toward the outer edge of the typical levels we would expect to see given current Treasury yield levels. There have been times when the 10-year spread was substantially more negative, e.g. 40 to 60 bps, but those tended to be periods when the Canadian overnight target was 50 to 100 bps below the US overnight target (chart 3). Today, with the spread between overnight targets at +75 to +100 bps, it seems it would be difficult to get the 10-year Canada more than about 30 bps through the US without a substantial further increase in concerns about US debt levels and/or the Feds credibility.
150 CU1 0 CU30
100
Yield spread (bps)
50
-50
Source: Scotia Capital constant-maturity par bond series (spline model)
Nov-07
-100
Mar-08
Mar-09
May-09
Nov-09
Jan-08
Jul-08
Sep-08
Nov-08
Jan-09
Mar-10
Jan-10
May-10
Sep-10
Jul-09
May-08
Canada - US 10-Year Spreads & US 10 Year Yields

80 Can -US 1 0Y Sp read vs . US 1 0Y Yiel d Cu rren t: D ec 1 7, 20 10 60
40
Can-U S 10s Spread (bp s)
20
-20 y = -35.21 7x + 120.94 R2 = 0.7833 -40
-60
Source: Bloomberg
-80 2 2.5 3 3.5 4 4.5 5 5 .5
US 10Y Yield (%)
Canada-US Spreads: 10 Year Govt Bonds & Central Bank Target Rates
250 Can-US 10s 200 Can-US Central Bank Targets 400 500
Nov-10
300 200 100 0 -100 -200 -300 Dec-10 Can-US Central Bank Target Spread (bps)
Sep-09
150
CDA/US 10/30 Box (not shown) Back on November 10th we noted that the 10/30 box was at extreme levels, that long spreads in Canada were very negative in comparison to wide 10-year spreads more than +30 bps. Since that time, the box spread has moved some 40 bps to less extreme levels, as the 10-year spread has tightened faster than the 30 year.
Can-US 10s Spread (bps)
100
50
-50
Source: Bloomberg -100 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09
Jul-10
Canada J14/J19/J23 Butterfly.

40.0
3 Jun14 / 3.75 Jun19 / 8 Jun23 Fly and 3 Jun14 / 8 Jun23 Slope

160
30.0
120
It has cheapened a lot with the selloff in the market of the past couple of months, reflecting in part the influence of selling via the futures market. Historically though it has not been strongly related to market direction, suggesting that the recent cheapening of the fly may have gone too far. Carry is only slightly negative. For example, the butterfly would have to tighten less than 1 bp in the next three months to break even.
110
25.0
100
90
Source: Scotia Capital Fixed Income Research Constant-Maturity Series

20.0 80
3 Jun14 / 3.75 Jun19 / 8 Jun23 Fly [LHS]
3 Jun14 / 8 Jun23 Slope [RHS]
3 Jun14 / 3.75 Jun19 / 8 Jun23 Fly versus 3 Jun14 / 8 Jun23 Slope

38.6
36.6
34.6
y = 0.1057x + 16.157 2 R = 0.3774 ? Current 1 day ago ? 1 week ago ? 1 month ago
32.6
Fly (bps)
30.6
28.6
26.6
24.6
22.6
20.6 88.28 98.2 8 108.28 118.2 8 128.28 138.28
Source: Scotia Capital

148.28
Slope (bps)
1.5 Jun12 / 2 Dec14 / 4 Jun17 Fly versus 1.5 Jun12 / 4 Jun17 Slope
y = 0.5447x - 51.857 2 R = 0.9089 ? Current 1 day ago ? 1 week ago ? 1 month ago
CDA 2/4/7-Yr Butterfly December 14s are expensive relative to the curve. The J12/D14/J17 butterfly tends to be strongly related to the slope of the curve, but since the start of the month this relationship has broken down. It now looks to be 7 or so bps expensive vs the curve. Selling Dec14s versus the 1.5 Jun12 and 4 Jun17 carries positively. This butterfly tends to be positively related to market direction, which makes it more unusual that it has richened this month. Under normal times, selling this butterfly would tend to be a bearish trade.
25.2
20.2
15.2
Fly (bps)
10.2
5.2
0.2
-4.8 84.10 9 4.10 104.10 114.10 12 4.10 134.10
Source: Scotia Capital

144.10
Slope (bps)
Slope (bps)
Fly (bps)
The J14/19/23 butterfly is cheap vs the curve. It has richened a bit more than a basis point since we recommended this trade on December 15. However, it still is 6 bps or so cheap vs the slope of the curve, as shown in the scatterplot (n.b. all butterfly spreads use 50/50 weights on the wings unless otherwise noted).
150
35.0
140
130
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Provincial Bonds: Buy for Spread Income We still think provincial spreads are attractive from an income standpoint. This is a reiteration of our view since October 12th (prior to that we had been more bullish see the discussion on the next page under Provincial Spreads and Risk Aversion). We dont expect substantial spread tightening, though over time as provincial issuance gradually declines, spreads could tighten further. There is a risk of spreads widening on a resumption of global risk aversion, but we think this would be fairly moderate, as we discuss on the next page. As the graph shows, provincial spreads provide reasonable compensation for the level of fiscal risk in Canada. The graph shows the Ontario 10-year benchmark spread, which we are using here to represent provincial bonds generally. Issuance will remain quite high for some time, but is projected by our economics group to gradually decline in the next few years. The graph also only tells one part of the story. Although issuance and deficits are high today, albeit below the early 1990s levels, overall debt levels today are substantially lower than in the 1990s.
Provincial Spread vs. Net Global Issuance as a % of GDP
175 Ontario 10-Year Benchmark Net Global Issuance (Actual), as % of GDP Net Global Issuance (Projected), as % of Projected GDP 150 7 125 8 9
5 100 4 75 3
50
1 25 0 Sources: Scotia Capital Inc., Department of Finance Canada, Bloomberg 0 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 -1
Background info on the data in the graph: This is a new version of a graph we have used many times over the past couple of years. It is a kind of crude measure of reward vs risk. We used to show this graph using the spread between yields on the DEX Provincial and Canada bond indexes, because that was the only very long history we had. We now have a better measure, the 10-year benchmark Ontario bond spread over the interpolated Canada curve. The data from 2002 onward are from Scotias trading system. The data prior to that are from Bloomberg. The Bloomberg spread data is quite noisy in the early 1990s, but we think it still provides a reasonable indication of the general level of 10-year spreads at that time. The overall pattern of spreads is generally consistent with the aggregate index yield spreads from the DEX Index. There are two limitations to using the Index data: yields change as the composition of the index changes, and hence index spreads might change independent of any spread changes on the underlying bonds. Second, the Provincial and Canada indexes measure bonds of different terms, so the resulting spread will capture differences in the slope of the Canada yield curve, as well as the true credit spread.
Net Global Issuance as % of GDP
Average Yield Spread (bps)
Provincial Spreads and Risk Aversion

Ontario 5-Year spread and the VIX Index
These two charts show provincial 5 and 10year spreads graphed against the VIX index, which provides a sort of proxy of market risk aversion. The series tend to be reasonably closely related. We had been bullish on provincial bonds back in May and June, arguing that the widening of spreads on global risk aversion was unsustainable. It was not based on much that was Canada-specific, and the threat of contagion to US banks, let alone Canadian banks, was overstated, and therefore the VIX was likely to decline as well. That was a pretty good call 10-year spreads tightened some 25 bps, and the VIX declined. We shifted to our current more neutral buy for income stance on October 12. The more recent rounds of sovereign debt problems in Europe have not led to the same kind of increase in global risk aversion, as it has become clearer that US banks are not exposed to peripheral Europe in the same way as European banks, hence a repeat of the contagion that happened during the subprime crisis is far less likely. Provincial spreads have been relatively stable through the Europe turmoil of recent months.
Spread (bps)
150
90
80 125 70
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60
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50
30
20 25 10
Ontario 5Y Spread
0
10-Dec-08 11-Mar-09 10-Sep-08
VIX
10-Dec-09 10-Jun-09 10-Sep-09
Source: VIX, Bloomberg; Ontario Spreads, Scotia Capital

0
11-Mar-10 10-Dec-10 10-Jun-10 10-Sep-10
Ontario 10-Year spread and the VIX Index

90 225 80 200 70 175 60 150
Spread (bps)
50 125 40 100
30 An increase in risk aversion, as measured by 75 the VIX, would likely have some widening 20 50 impact on provincial spreads. However, we think that kind of impact would again likely 10 25 be fairly temporary, and so would be a buySource: VIX, Bloomberg; Ontario Spreads, Scotia Capital Ontario 10Y Par Spread VIX 0 0 ing opportunity. Second, with Fed policy expansionary and some of the tax uncertainty reduced after the recent agreement to extend the Bush tax cuts, it seems less likely that the VIX would spike higher in the near term, say at least over the next quarter. In the event risk aversion were to rise, the graphs at right suggest to me that there is more protection in the 10-year spread than in the 5-year, which has followed the VIX more closely, and is already comparatively tight.
11-Mar-09 10-Dec-08 11-Mar-10 10-Jun-09 10-Dec-09 10-Jun-10 10-Dec-10 10-Sep-08 10-Sep-09 10-Sep-10
Index Level
Index Level
Fixed Income Relative-Value Strategy:
Rate-Cycle Charts: Canada Curve when the BoC Pauses for an Extended Period in a Tightening Cycle
Canada 2s vs. BoC Overnight Target during BoC Extended Pause (Tightening)
1/30/1998 7/18/2002 10/19/2004 5/18/2006 9/8/2010 1/30/1998
2s/10s Par Slope vs. BoC Extended Pause (Tightening)

7/18/2002 10/19/2004 5/18/2006 9/8/2010 Forwards
300.0
300.0
250.0 250.0 200.0 200.0 150.0
Spread (bps)
100.0
.
50.0
Slope (bps)
150.0
.
100.0
0.0 50.0 -50.0 0.0 -100.0
-150.0
Source: Scotia Capital Constant-Maturity Series

-180 -160 -140 -120 -100 -80 -60 -40 -20 0 20 40 60 80 100 120 140 160 180 200
-50.0

-180 -160 -140 -120 -100 -80 -60 -40 -20 0 20 40 60 80 100 120 140 160 180 200
-200
-200
Business days before/after start of extended pause in tightening cycle
10s/30s Par Slope vs. BoC Extended Pause (Tightening)

1/30/1998 7/18/2002 10/19/2004 5/18/2006 9/8/2010 Forwards 1/30/1998
5s/10s/30s Par Fly vs. BoC Extended Pause (Tightening)

7/18/2002 10/19/2004 5/18/2006 9/8/2010 Forwards
70.0
35.0
60.0
30.0
50.0
25.0
20.0 40.0 15.0
Slope (bps)
Fly (bps)
30.0
.
20.0
10.0
5.0 10.0 0.0 0.0
-5.0
-10.0
-10.0
-20.0

-180 -160 -140 -120 -100 -80 -60 -40 -20 0 20 40 60 80 100 120 140 160 180 200
-15.0

-180 -160 -140 -120 -100 -80 -60 -40 -20 0 20 40 60 80 100 120 140 160 180 200
-200
-200
Fixed Income Relative-Value Strategy:
More Rate-Cycle Charts: Canada Curve when the BoC Pauses for an Extended Period in a Tightening Cycle
3m BA vs. 3rd BAX during BoC Extended Pause (Tightening)
1/30/1998 7/18/2002 10/19/2004 5/18/2006 9/8/2010 1/30/1998
2s/5s Swap Slope vs. BoC Extended Pause (Tightening)

7/18/2002 10/19/2004 5/18/2006 9/8/2010 Forwards
250.0
180.0
160.0 200.0 140.0 150.0 120.0 100.0 100.0
Slope (bps)
Slope (bps)
50.0
80.0
60.0 0.0 40.0 -50.0 20.0 -100.0 0.0
-150.0

-180 -160 -140 -120 -100 -80 -60 -40 -20 0 20 40 60 80 100 120 140 160 180 200
-20.0

-180 -160 -140 -120 -100 -80 -60 -40 -20 0 20 40 60 80 100 120 140 160 180 200
-200
-200
5s/10s Swap Slope vs. BoC Extended Pause (Tightening)

1/30/1998 7/18/2002 10/19/2004 5/18/2006 9/8/2010 Forwards 1/30/1998
2s/5s/10s Swap Fly vs. BoC Extended Pause (Tightening)

7/18/2002 10/19/2004 5/18/2006 9/8/2010 Forwards
120.0
50.0
100.0
40.0
30.0 80.0
20.0
Slope (bps)
60.0
Fly (bps)
.
40.0
10.0
0.0 20.0 -10.0
0.0
-20.0
-20.0

-180 -160 -140 -120 -100 -80 -60 -40 -20 0 20 40 60 80 100 120 140 160 180 200
-30.0

-180 -160 -140 -120 -100 -80 -60 -40 -20 0 20 40 60 80 100 120 140 160 180 200
-200
-200
10
Fixed Income & Relative-Value Strategy: Canada Par Bond Conventionally Weighted Butterfly
Can Par 7/10/12 Fly
Spread 1-Day Chg 5-Day Chg 13.17 0.19 0.36 55.18 0.77 -1.09 MA500 MA1250 ZScore500 ZScore1250 RegrZScoreRegrZScore1CorrSlope5CorrSlope12 CorrBody5 CorrBody125Rolldown1mo Z-Score 500 Day 1250 Day 0.93 0.55 Z-Score vs. Regr. 500 Day 1250 Day 3.11 2.51 - Fly vs. Slope 500 Day 1250 Day 0.87 0.82 - Fly vs. Body 500 Day 1250 Day -0.09 -0.30 Roll/Carry Carry 1-month 1-month -14,409 -3,714
Fly: Slope:
Moving Average 500 Day 1250 Day 11.43 12.13
DV01 Weight: Par Weight:
Wing 1 0.50 0.67
Wing 2 0.50 0.43
20 18 Butterfly Spread (bps) 16 14 12
Fly
Slope
117 107 Wing Slope (bps) 97 87 77 67

Butterfly Spread (bps)
20 18 16 14 12 10 8 6 37
Fly Current Day Ago Week Ago Month Ago Linear (Fly)
y = 0.1073x + 4.5233 R2 = 0.6694
10 8 6 D-08 F-09 A-09 A-09 D-09 F-10 A-10 A-10 O-09 O-10 D-10 J-09 J-10
57 47 37
47
57
67
77
87
97
107
117
Wing Slope (bps)
Can Par 7/8/9 Fly

Spread 1-Day Chg 5-Day Chg 1.48 -0.07 0.09 29.95 0.36 0.06 2 2 2 Butterfly Spread (bps) 1 1 1 1 1 0 0 0 D-08 A-09 A-09 D-09 A-10 A-10 O-09 O-10 D-10 F-09 J-09 F-10 J-10 23 18 43 38 33 28 Fly Slope 53 48
Fly: Slope:
Z-Score 500 Day 1250 Day 1.86 1.92
Z-Score vs. Regr. 500 Day 1250 Day 1.82 2.42
- Fly vs. Slope 500 Day 1250 Day 0.63 -0.33
- Fly vs. Body 500 Day 1250 Day 0.24 0.52
Roll/Carry Carry 1-month 1-month 733 289
Wing 1 0.50 0.56
Wing 2 0.50 0.45
2 2 2 y = -0.0158x + 1.4727 R2 = 0.1086 Fly Current Day Ago Week Ago Month Ago Linear (Fly)
Wing Slope (bps)
1 1 1 1 1 0 0 0 18 23 28 33 38 Wing Slope (bps) 43 48
53
11
Fixed Income & Relative-Value Strategy: Canada Swap Conventionally-Weighted Butterflies

Can Swap 2/3/4 Fly
Spread 1-Day Chg 5-Day Chg -0.29 -0.04 -0.50 54.69 -2.95 -0.63 17 15 13 Butterfly Spread (bps) 11 9 7 5 3 1 -1 -3 M-06 D-05 M-07 J-06 S-06 D-06 M-08 J-07 S-07 D-07 M-09 J-08 S-08 D-08 M-10 J-09 S-09 D-09 J-10 S-10 D-10 -3 37 17 77 57 Fly Slope 117 97
MA500
MA1250
ZScore500 ZScore1250 RegrZScoreRegrZScore1CorrSlope5CorrSlope12 CorrBody5 CorrBody125CarryRolldown1mo Z-Score 500 Day 1250 Day -1.51 -0.83 Z-Score vs. Regr. 500 Day 1250 Day -1.38 -2.63 - Fly vs. Slope 500 Day 1250 Day 0.87 0.89 - Fly vs. Body 500 Day 1250 Day 0.21 -0.63 Inc + Roll Income 1-month 1-month 2,312 -140 DV01 Weight: Par Weight: Wing 1 0.50 0.77 Wing 2 0.50 0.37
Fly: Slope:
17 15 13 Fly Current Day Ago Week Ago Month Ago Linear (Fly) y = 0.0986x - 1.0235 R2 = 0.801
Wing Slope (bps)
11 9 7 5 3 1 -1 -3 -3
17
37
57 Wing Slope (bps)
77
97
117
Can Swap 5/10/30 Fly

Spread 1-Day Chg 5-Day Chg 20.90 0.11 0.06 132.37 1.22 1.55 Moving Average 500 Day 1250 Day 10.64 5.17 Z-Score 500 Day 1250 Day 1.50 2.28 Z-Score vs. Regr. 500 Day 1250 Day 1.25 2.28 - Fly vs. Slope 500 Day 1250 Day -0.71 0.54 - Fly vs. Body 500 Day 1250 Day 0.68 -0.44 Inc + Roll Income 1-month 1-month 62,908 34,085 DV01 Weight: Par Weight: Wing 1 0.50 0.94 Wing 2 0.50 0.24
Fly: Slope:
25 20 Butterfly Spread (bps) 15 10
Fly
Slope
201
25 20
Wing Slope (bps)
151
15 10 5 0 -5
y = 0.0663x - 1.1407 R2 = 0.2934
101 5 0 -5 -10 D-05 M-06 J-06 D-06 S-06 M-07 J-07 D-07 S-07 M-08 J-08 D-08 S-08 M-09 J-09 D-09 S-09 M-10 J-10 D-10 S-10 1
51
-10 1 51 101 Wing Slope (bps) 151 201
12
Fixed Income & Relative-Value Strategy: US Swap Conventionally Weighted Butterfly

U.S. Swap 2/3/4 Fly
Spread 1-Day Chg 5-Day Chg -1.36 -0.01 0.59 95.81 0.08 11.02 MA500 MA1250 ZScore500 ZScore1250 RegrZScoreRegrZScore1CorrSlope5CorrSlope12 CorrBody5 CorrBody125CarryRolldown1mo Z-Score 500 Day 1250 Day -1.25 -0.64 Z-Score vs. Regr. 500 Day 1250 Day -2.27 -2.49 - Fly vs. Slope 500 Day 1250 Day 0.75 0.78 - Fly vs. Body 500 Day 1250 Day 0.85 -0.47 Inc + Roll Income 1-month 1-month 10,927 8,573
Fly: Slope:
Wing 1 0.50 0.78
Wing 2 0.50 0.37
10
Fly
Slope
128 108
10
68 0 48 28 8 -10 M-06 M-07 M-08 M-09 M-10 N-05 F-06 A-06 N-06 F-07 A-07 N-07 F-08 A-08 N-08 F-09 A-09 N-09 F-10 A-10 N-10 -12
Wing Slope (bps)
88
y = 0.0665x - 2.0968 R2 = 0.6116
-5
-5
-10 -12 8 28 48 68 88 108 128 Wing Slope (bps)
U.S. Swap 2/4/6 Fly

Spread 1-Day Chg 5-Day Chg 5.70 0.62 3.38 180.21 -1.09 15.29 Moving Average 500 Day 1250 Day 13.20 5.93 Z-Score 500 Day 1250 Day -0.80 -0.02 Z-Score vs. Regr. 500 Day 1250 Day -1.77 -2.22 - Fly vs. Slope 500 Day 1250 Day 0.62 0.83 - Fly vs. Body 500 Day 1250 Day 0.93 -0.57 Inc + Roll Income 1-month 1-month 107,309 32,946 DV01 Weight: Par Weight: Wing 1 0.50 1.05 Wing 2 0.50 0.34
Fly: Slope:
29 24 Butterfly Spread (bps) 19
Fly
Slope
29
189
24 Butterfly Spread (bps) 19 14 9 4 -1 -6
139 14 9 4 -1 -6 -11 N-05 A-06 N-06 A-07 N-07 A-08 N-08 A-09 N-09 A-10 M-06 M-07 M-08 M-09 M-10 N-10 F-06 F-07 F-08 F-09 F-10 -11 39 89
Wing Slope (bps)
y = 0.1213x - 3.7577 R2 = 0.6865
-11 -11 39 89 Wing Slope (bps) 139 189
13
Appendix: Implied Central Bank Rate Expecations (Break-Even Forwards)

Canada
Meeting Date
1.00%
Forward Rate Cumulative Change
AU
Meeting Date
19%
4.75%
Forward Rate Cumulative Change
18-Jan-11 1-Mar-11 12-Apr-11 31-May-11 19-Jul-11 7-Sep-11 US

Meeting Date
1.05% 1.12% 1.22% 1.34% 1.47% 1.57% 0.25%

Forward Rate
4.7 11.8 21.8 33.9 47.1 57.1
1-Feb-11 1-Mar-11 5-Apr-11 3-May-11 7-Jun-11 5-Jul-11 JP
4.77% 4.82% 4.84% 4.85% 4.94% 5.10% 0.10%

Forward Rate
2.1 7.5 9.2 10.4 18.5 35.2
8%
Cumulative Change
Meeting Date
-32%
Cumulative Change
26-Jan-11 16-Mar-11 27-Apr-11 22-Jun-11 10-Aug-11 21-Sep-11 UK

Meeting Date
0.17% 0.20% 0.20% 0.24% 0.30% 0.35% 0.50%

Forward Rate
-7.9 -4.5 -4.7 -0.5 5.2 10.1
21-Dec-10 25-Jan-11 17-Feb-11 15-Mar-11 7-Apr-11 20-May-11 EU
0.09% 0.10% 0.11% 0.11% 0.10% 0.10% 1.00%

Forward Rate
-1.0 -0.1 0.6 0.9 0.3 -0.3

0.54%
-4%
* Effective Fed Funds rate is 0.22%
Cumulative Change
Meeting Date
15%
Cumulative Change
*
13-Jan-11 10-Feb-11 10-Mar-11 7-Apr-11 5-May-11 9-Jun-11
0.54% 0.55% 0.56% 0.58% 0.61% 0.65%
3.9 4.6 5.6 7.7 11.2 15.4
13-Jan-11 3-Feb-11 3-Mar-11 7-Apr-11 5-May-11 9-Jun-11
0.62% 0.69% 0.76% 0.78% 0.80% 0.87%
8.1 15.6 22.4 23.9 26.6 33.8
32%
* Over the 1 week EONIA rate of 0.54%
All calculations use Overnight Indexed Swaps, except for the US, which use Fed Funds futures. Break-even forwards assume no risk premiums, and hence may be biased predictors of future rates. Data from Bloomberg, calculations by Scotia Capital Fixed Income Research.
Evolution of Implied BoC Rates

(break-even forward OIS rates on Bank of Canada dates)
2.00%
1.75%
Forward Rate (%, computed from OIS levels)
1.50%
1.25%
1.00%
0.75%
Source: Bloomberg data, Scotia Capital calculations 0.50% 7-Apr-10 8-May-10 8-Jun-10 9-Jul-10
9/7/2011 9-Aug-10
7/19/2011 9-Sep-10
4/12/2011 10-Oct-10
1/18/2011 10-Nov-10
12/7/2010 11-Dec-10
14
Appendix: Canada Bonds vs Theoretical Yield Curve

Coupon Maturity Dt 2.000 9/1/12 1.500 12/1/12 1.750 3/1/13 5.250 6/1/13 3.500 6/1/13 2.500 9/1/13 2.000 3/1/14 3.000 6/1/14 5.000 6/1/14 2.000 12/1/14 4.500 6/1/15 2.500 6/1/15 3.000 12/1/15 2.000 6/1/16 4.000 6/1/16 4.000 6/1/17 4.250 6/1/18 3.750 6/1/19 3.500 6/1/20 3.250 6/1/21 8.000 6/1/23 8.000 6/1/27 5.750 6/1/29 5.750 6/1/33 5.000 6/1/37 4.000 6/1/41 Yield 1.610 1.685 1.760 1.828 1.833 1.917 2.060 2.124 2.109 2.247 2.355 2.365 2.483 2.612 2.590 2.776 2.970 3.154 3.254 3.363 3.454 3.595 3.649 3.717 3.734 3.674 OAS 0.0 -2.2 -3.1 -5.2 -5.3 -6.2 -8.3 -8.9 -9.2 -11.5 -11.3 -12.1 -11.6 -10.6 -10.4 -9.7 -4.7 0.4 0.0 1.9 7.5 6.7 4.4 6.7 6.2 0.0 Chg 1 0.0 -0.3 -0.4 -0.7 -0.7 -0.4 0.4 -1.0 -1.0 -1.3 -1.6 -1.6 -1.7 -1.5 -1.4 -1.1 -0.5 -0.4 0.0 0.4 0.1 0.9 0.9 0.5 0.3 0.0 Chg 5 0.0 -0.9 -0.2 -1.3 -1.3 -1.5 -0.9 -2.5 -2.5 -2.0 -1.9 -1.9 -1.8 -2.1 -1.7 -0.9 -0.4 0.3 0.0 0.5 0.6 0.3 -0.2 0.6 0.1 0.0 Avg 20 0.0 -2.0 -2.9 -4.8 -4.9 -5.6 -8.4 -7.0 -7.0 -9.6 -9.8 -10.6 -10.4 -9.2 -9.3 -9.3 -4.6 0.4 0.0 1.9 7.2 7.2 5.2 7.1 5.9 0.0 Chg vs 20 MA 0.0 -0.2 -0.3 -0.4 -0.5 -0.6 0.1 -1.9 -2.1 -1.9 -1.5 -1.5 -1.2 -1.5 -1.1 -0.4 -0.1 0.0 0.0 0.0 0.3 -0.5 -0.8 -0.4 0.3 0.0 SD 20 0.0 0.4 0.6 0.7 0.7 0.8 0.8 1.1 1.1 1.1 1.1 1.1 1.3 1.2 1.3 1.1 0.5 0.5 0.0 0.2 0.4 1.4 1.3 0.7 0.3 0.0 # SD 20* 0.0 -0.5 -0.4 -0.5 -0.6 -0.8 0.2 -1.8 -1.9 -1.8 -1.3 -1.4 -1.0 -1.2 -0.9 -0.4 -0.3 0.1 0.0 0.1 0.7 -0.4 -0.6 -0.6 1.1 0.0 Avg 75 0.0 -2.3 -3.4 -6.7 -6.7 -7.2 -8.4 -10.2 -9.9 -11.9 -12.8 -13.3 -12.9 -10.6 -11.3 -10.8 -5.4 0.1 0.0 2.7 10.5 13.4 11.2 10.7 7.0 0.0 Chg vs 75 MA 0.0 0.3 0.6 1.9 1.8 1.6 0.0 3.2 2.9 2.3 3.0 2.7 2.4 1.5 2.1 1.5 0.8 0.3 0.0 -0.8 -3.3 -6.1 -5.9 -3.6 -1.1 0.0 SD 75 0.0 0.9 1.4 2.1 2.0 2.4 0.8 3.8 3.8 4.4 5.0 5.0 4.7 3.0 4.1 3.0 2.1 1.1 0.0 0.6 2.2 4.8 4.5 2.7 1.1 0.0 # SD 75* 0.0 0.1 0.2 0.7 0.7 0.4 0.2 0.3 0.2 0.1 0.3 0.2 0.3 0.0 0.2 0.3 0.3 0.3 0.3 -1.3 -1.4 -1.4 -1.5 -1.5 -0.8 -0.3
Canada OAS (Multifactor Model)

OAS 40 5 Days Prior Yield Fitted Par Curve 4.00
3.50 30 3.00 20
Can 5.75 Jun-33 Can 8.0 Jun-23 Can 8.0 Jun-27 Can 5.0 Jun-37
2.50
OAS (bps)
10
Can 3.75 Jun-19
Can 3.25 Jun-21
2.00
Can 5.75 Jun-29
1.50
Can 4.0 Jun-41
0
Can 2.0 Sep-12 Can 3.5 Jun-20
1.00
Can 2.0 Mar-14
-10
Can 5.25 Jun-13
Can 4.0 Jun-17
Can 4.25 Jun-18
-20 0 2
Can 3.0 Dec-15 Can 2.0 Jun-16
Can 2.0 Dec-14
0.50
0.00 8 10 12 14 16 18 20 22 24 26 28 30 32
Term (Years)
Description of the model: The option-adjusted spread (OAS) is the spread to the theoretical curve that would equate the model price to the market price. A positive OAS means that a bond is cheap to the theoretical curve, all else equal, while a negative OAS means that a bond is rich. The term-structure model that underlies this report is similar to models used for option pricing, in that it explicitly models the uncertainty in the future evolution of interest rates (as a simplified analogy, think of the standard binomial optionpricing tree). However, it differs from the usual option pricing model in two main ways. First, the term structure model used here has multiple, partially-correlated sources of risk, which enables it to capture a wide range of interest-rate and volatility term structures. Second, it is a so-called equilibrium model. Models for interest-rate options typically try to fit the underlying term structure exactly. In contrast, the equilibrium model is calibrated to fit the prices of just a few key benchmark bonds (typically 6-month T-Bills, and 2, 10, and 30-year benchmarks). We do, however, make use of optionmarket data to estimate the models volatility and correlation parameters. 15
Yield (%)
Canada Bond Carry & Rolldown Returns (with Convexity Adjustment)

Canada Bond Carry and Convexity Adjusted Rolldown Returns (6 month horizon)
Carry 3.75 Jun 19 Roll 3.5 Jun 20 3.25 Jun 21 4.25 Jun 18 Carry+Roll Convexity Adjusted Carry+Roll 5.75 Jun 29 5.75 Jun 33 Yield
4.0% 3.5%
3 Dec 15
8 Jun 27
4 Jun 17
8 Jun 23
5 Jun 37
3.0% Return (annualized, %) 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% 2011 2013
1.25 Dec 11 2 Mar 14 2 Dec 14
2 Sep 12
5.25 Jun 13
2015
2017
2019
2021
2023
2025
2027
2029
2031
2033
2035
2037
2039
2041
Maturity
Carry + Rolldown Convexity Value (%) (bps) 0.46% 0.88% 1.02% 1.17% 1.24% 1.26% 1.42% 1.67% 1.76% 1.71% 2.00% 2.20% 2.13% 2.37% 2.49% 2.60% 2.73% 2.90% 3.04% 3.04% 3.03% 2.77% 2.85% 2.87% 2.73% 2.48% 2.14% #DIV/0! #VALUE! 0.51% 0.0 0.3 0.5 0.8 1.2 1.2 1.6 2.5 3.0 2.9 4.3 5.8 5.5 7.3 8.9 9.3 12.3 15.1 18.0 20.5 22.6 20.8 24.0 29.0 37.5 50.2 68.1 #DIV/0! #VALUE! 0.0
Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada 0 Issuer Ontario
Coupon 1.25 2 1.5 1.75 5.25 3.5 2.5 2 3 5 2 2.5 4.5 3 4 2 4 4.25 3.75 3.5 3.25 8 8 5.75 5.75 5 4 0 Coupon
Maturity 12/1/2011 9/1/2012 12/1/2012 3/1/2013 6/1/2013 6/1/2013 9/1/2013 3/1/2014 6/1/2014 6/1/2014 12/1/2014 6/1/2015 6/1/2015 12/1/2015 6/1/2016 6/1/2016 6/1/2017 6/1/2018 6/1/2019 6/1/2020 6/1/2021 6/1/2023 6/1/2027 6/1/2029 6/1/2033 6/1/2037 6/1/2041 1/0/1900 Maturity 4.4 12/2/2011
Carry (bps) 24.2 50.0 56.4 64.6 70.8 71.3 80.8 94.7 100.5 99.0 112.8 124.7 123.7 136.5 147.3 149.5 166.0 185.5 204.1 214.2 225.1 234.3 248.4 254.0 260.8 262.5 256.5 #DIV/0! #VALUE! 29.9
Rolldown (bps) 21.4 38.2 45.8 52.2 52.9 54.6 60.7 72.1 75.1 71.5 87.1 94.3 88.5 99.6 101.0 109.2 106.2 103.4 98.6 89.0 76.9 42.2 36.4 33.1 12.0 -14.3 -41.6 #DIV/0! #VALUE! 20.9
Total (%) 0.46% 0.89% 1.03% 1.18% 1.25% 1.27% 1.43% 1.70% 1.79% 1.74% 2.05% 2.25% 2.18% 2.44% 2.58% 2.69% 2.85% 3.05% 3.22% 3.25% 3.25% 2.98% 3.09% 3.17% 3.10% 2.98% 2.82% #DIV/0! #VALUE! 0.51%
* Carry, Roll, and Value of Convexity calculations over a 6 month horizon. The Value of Convexity uses historical basis point yield volatility over the past six months.
16
4 Jun 41
Appendix: Canada Asset-Swap Spreads

Coupon Maturity Dt 2.000 9/1/2012 1.500 12/1/2012 1.750 3/1/2013 5.250 6/1/2013 3.500 6/1/2013 2.500 9/1/2013 2.000 3/1/2014 3.000 6/1/2014 5.000 6/1/2014 2.000 12/1/2014 4.500 6/1/2015 2.500 6/1/2015 3.000 12/1/2015 2.000 6/1/2016 4.000 6/1/2016 4.000 6/1/2017 4.250 6/1/2018 3.750 6/1/2019 3.500 6/1/2020 3.250 6/1/2021 8.000 6/1/2023 8.000 6/1/2027 5.750 6/1/2029 5.750 6/1/2033 5.000 6/1/2037 4.000 6/1/2041 Par Asset Swap -14.0 -13.3 -11.6 -12.1 -11.7 -10.3 -9.4 -9.5 -10.5 -11.3 -11.6 -11.6 -12.0 -10.6 -11.2 -12.4 -10.6 -9.8 -15.3 -18.1 -23.7 -37.6 -39.3 -34.6 -27.6 -27.5 Yld/Yld Swap -12.8 -12.5 -11.7 -11.8 -11.3 -9.7 -8.9 -9.5 -11.0 -11.0 -12.6 -11.6 -12.2 -9.9 -12.1 -13.5 -12.2 -10.3 -15.5 -17.7 -30.1 -39.7 -39.2 -32.9 -25.5 -26.3 Chg 1 -0.3 -0.4 -0.5 -0.6 -0.6 -0.1 1.1 -0.1 -0.1 -0.1 0.1 0.1 0.3 0.3 0.4 0.2 0.2 -0.1 0.0 0.1 -0.5 -0.2 -0.4 -0.6 -0.7 -0.8 Chg 5 -1.2 -2.2 -1.4 -2.3 -2.3 -2.3 -1.6 -3.3 -3.3 -3.1 -2.7 -2.7 -2.3 -2.9 -2.5 -2.6 -3.0 -2.5 -3.2 -3.1 -3.7 -5.2 -5.8 -5.4 -6.5 -7.4 Avg 20 -12.4 -11.7 -11.1 -11.1 -10.6 -9.1 -8.8 -8.1 -9.3 -9.9 -12.1 -11.1 -12.2 -9.4 -11.9 -13.3 -11.5 -9.2 -13.9 -15.9 -27.8 -35.5 -34.6 -28.1 -20.8 -20.7 Chg vs 20 MA -0.4 -0.8 -0.6 -0.7 -0.7 -0.6 -0.1 -1.4 -1.7 -1.2 -0.6 -0.6 0.0 -0.5 -0.2 -0.2 -0.7 -1.1 -1.6 -1.8 -2.3 -4.2 -4.6 -4.8 -4.7 -5.6 SD 20 # SD 20* 1.1 -0.4 0.8 -0.9 0.7 -0.9 0.9 -0.8 0.9 -0.8 1.0 -0.6 0.9 -0.1 1.3 -1.1 -1.5 1.2 1.2 -1.0 1.2 -0.5 1.2 -0.5 1.2 0.0 1.2 -0.4 1.2 -0.1 1.3 -0.2 1.1 -0.7 1.1 -1.0 -1.2 1.3 1.4 -1.3 1.7 -1.4 2.4 -1.7 2.6 -1.8 2.2 -2.1 -2.2 2.1 -2.5 2.3 Avg 60 -12.9 -12.6 -11.9 -12.7 -12.2 -10.1 -8.8 -9.4 -10.3 -9.8 -12.1 -11.0 -11.1 -9.3 -10.4 -11.2 -9.3 -7.0 -11.5 -13.0 -23.3 -30.2 -29.3 -24.0 -17.8 -18.4 Chg vs 60 MA 0.2 0.2 0.2 0.9 0.9 0.4 -0.1 -0.1 -0.7 -1.2 -0.5 -0.6 -1.1 -0.6 -1.7 -2.2 -2.8 -3.3 -3.9 -4.7 -6.9 -9.5 -9.9 -8.9 -7.7 -7.9 SD 60 1.2 1.1 0.9 1.6 1.6 1.4 0.9 1.9 1.7 1.4 1.6 1.6 2.0 1.1 2.1 2.3 2.5 2.5 2.3 2.7 4.0 5.1 4.9 3.7 2.8 2.5 # SD 60* 0.1 0.2 0.2 0.6 0.6 0.3 -0.1 -0.1 -0.4 -0.9 -0.3 -0.4 -0.6 -0.5 -0.8 -1.0 -1.1 -1.3 -1.7 -1.8 -1.7 -1.9 -2.0 -2.4 -2.7 -3.1 Carry 1 ($K) 85.2 88.8 69.2 80.2 78.7 65.4 56.8 61.7 64.3 46.8 49.2 42.3 39.7 34.6 42.1 35.6 35.9 32.0 21.6 15.1 33.7 22.3 8.8 10.4 8.1 -0.4 Carry Delta 2 ($K) 55.5 47.8 42.5 39.2 38.6 34.9 29.3 27.4 28.2 23.7 22.1 21.3 19.4 17.4 18.1 15.6 13.8 12.2 11.0 10.1 10.1 8.3 7.2 6.3 5.6 4.9
Carry over 1-mo for 100K of DV01 risk, assuming bond financed at general collateral.
Carry Delta is the change in carry for a 10bp decline in the bond financing rate.
Canada Yield/Yield Asset-Swap Spreads, 2 through 10 Year Bonds

Yld/Yld Swap Avg 20 Prior 5 days prior
4.25 Jun 18 3.75 Jun 19
0
2.5 Jun 15 4 Jun 17
Yield/Yield Spread (bps)
3.5 Jun 20
-5 -10
2.5 Sep 13 2 Mar 14 5 Jun 14
3 Dec 15
4 Jun 16
-15 -20 -25 -30 1.0 2.0
1.75 Mar 13
3.5 Jun 13
3.0
4.0
2 Dec 14
5.0
6.0
Term (Years)
7.0
8.0
9.0
10.0
Canada Yield/Yield Asset-Swap Spreads, all terms

Yld/Yld Swap Avg 20 Prior 5 days prior
10
2.5 Jun 15 3 Dec 15 4 Jun 16 4.25 Jun 18 3.75 Jun 19
5
4 Jun 17
3.5 Jun 20
Yield/Yield Spread (bps)
-5 -10
5 Jun 14
3.25 Jun 21
-30 -35 -40 1 3 5 7 9 11 13 15
8 Jun 27
-25
17
Term (Years)
5.75 Jun 29
-20
19
21
5.75 Jun 33
8 Jun 23
-15
23
25
5 Jun 37
27
29
4 Jun 41
31
17
3.25 Jun 21
33
Scotia Capital Fixed Income Research
Fixed Income Research: Roger Quick, CFA Director, Fixed Income Research (416) 863-7236 roger_quick@scotiacapital.com Graham Chubb Associate Director, Fixed Income Research graham_chubb@scotiacapital.com
Scotia Plaza 40 King Street West 68th Floor Toronto, Ontario M5W 2X6
TM
Trademark of the Bank of Nova Scotia. Scotia Capital Inc. authorized user of mark. The Scotia Capital trademark represents the corporate and investment banking businesses of the Bank of Nova Scotia, Scotia Capital Inc., and Scotia Capital (USA) Inc. - all members of the Scotiabank Group.
This report has been prepared by SCOTIA CAPITAL INC. (SCI), a subsidiary of the Bank of Nova Scotia. Opinions, estimates and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither SCI nor its affiliates accepts any liability whatsoever for any loss arising from any use of this report or its contents. This report is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any securities and/or commodity futures contracts. The securities mentioned in this report may not be suitable for all investors nor eligible for sale in some jurisdictions. This research and all the information, opinions, and conclusions contained in it are protected by copyright. This report may not be reproduced in whole or in part, or referred to in any manner whatsoever, nor may the information, opinions, and conclusions contained in it be referred to without the prior express consent of SCI. SCI is regulated by FSA for conduct of investment business in the UK. U.S. Residents: This report is being distributed by Scotia Capital Inc. directly to U.S. persons who are Major Institutional Investors only. Any U.S. institutional investor wishing further information or to effect transactions in any security discussed in this report should contact Scotia Capital (USA) Inc., a broker-dealer registered with the SEC and FINRA and a member of SPIC, at 1-800-262-5363. Each research analyst named in this report or any subsection of this report certifies that (1) the views expressed in this report in connection with securities or issuers that he or she analyzes accurately reflect his or her personal views; and (2) no part of his or her compensation was, is, or will be directly or indirectly, related to the specific recommendations or views expressed by him or her in this report. The Research Analyst's compensation is based on various performance and market criteria and is charged as an expense to certain departments of Scotia Capital Inc., including investment banking. Scotia Capital Inc. and/or its affiliates: expects to receive or intends to seek compensation for investment banking services from issuers covered in this report within the next three months; and has or seeks a business relationship with the issuers referred to herein which involves providing services, other than securities underwriting or advisory services, for which compensation is or may be received. These may include services relating to lending, cash management, foreign exchange, securities trading, derivatives, structured finance or precious metals. For Scotia Capital Research Analyst standards and disclosure policies, please visit www.scotiacapital.com/disclosures.
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Fixed Income Research

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Friday, December 17, 2010

Fixed Income Research

Fixed Income & Relative-Value Strategy

Friday, December 17, 2010

US 10-Year: Comparison of QE 1 and 2

Nov 25, 2008: Fed announces $500 bn MBS purchase plan.

Business days before/after Fed QE announcement

Fixed Income Research

Fixed Income & Relative-Value Strategy

Friday, December 17, 2010

Fixed Income Research

Fixed Income & Relative-Value Strategy

Friday, December 17, 2010

Fixed Income Research

Fixed Income & Relative-Value Strategy

Friday, December 17, 2010

Canada/US Govt Yield Spreads (Constant-Maturity Theoretical Bonds)

150 CU1 0 CU30

Yield spread (bps)

Source: Scotia Capital constant-maturity par bond series (spline model)

Canada - US 10-Year Spreads & US 10 Year Yields

Can-U S 10s Spread (bp s)

-20 y = -35.21 7x + 120.94 R2 = 0.7833 -40

US 10Y Yield (%)

Can-US 10s Spread (bps)

Fixed Income Research

Fixed Income & Relative-Value Strategy

Friday, December 17, 2010

Canada J14/J19/J23 Butterfly.

3 Jun14 / 3.75 Jun19 / 8 Jun23 Fly and 3 Jun14 / 8 Jun23 Slope

Source: Scotia Capital Fixed Income Research Constant-Maturity Series

3 Jun14 / 3.75 Jun19 / 8 Jun23 Fly [LHS]

3 Jun14 / 8 Jun23 Slope [RHS]

3 Jun14 / 3.75 Jun19 / 8 Jun23 Fly versus 3 Jun14 / 8 Jun23 Slope

20.6 88.28 98.2 8 108.28 118.2 8 128.28 138.28

Source: Scotia Capital

-4.8 84.10 9 4.10 104.10 114.10 12 4.10 134.10

Source: Scotia Capital

Fixed Income Research

Fixed Income & Relative-Value Strategy

Friday, December 17, 2010

Net Global Issuance as % of GDP

Average Yield Spread (bps)

Fixed Income Research

Fixed Income & Relative-Value Strategy

Friday, December 17, 2010

Provincial Spreads and Risk Aversion

Source: VIX, Bloomberg; Ontario Spreads, Scotia Capital

Ontario 10-Year spread and the VIX Index

Fixed Income Research

Fixed Income Relative-Value Strategy:

Friday, December 17, 2010

2s/10s Par Slope vs. BoC Extended Pause (Tightening)

250.0 250.0 200.0 200.0 150.0

0.0 50.0 -50.0 0.0 -100.0

Source: Scotia Capital Constant-Maturity Series

Source: Scotia Capital Constant-Maturity Series

Business days before/after start of extended pause in tightening cycle

Business days before/after start of extended pause in tightening cycle

10s/30s Par Slope vs. BoC Extended Pause (Tightening)

5s/10s/30s Par Fly vs. BoC Extended Pause (Tightening)