EFTA01385955

27 March 2015 US Fixed Income Weekly dynamics, as investors and dealers reduce risk. More crucially it is likely to be related to the increased supply of duration from peripheral issuers. We had highlighted over the last few weeks that peripheral countries were likely to increase the duration of their new issuance to raise the average maturity of their outstanding debt back to pre-crisis levels. We expected the increase in duration to be a headwind to the spread tightening trend, but not to lead to a spread widening. On closer inspection, the duration supply could actually be quite meaningful. Indeed, Spain and Italy have increased the maturity of their issuance in 2015 by 2.5-3.0 years relative to 2014. If this increase in maturity is maintained for the duration of the QE programme, Spain and Italy would be issuing significant additional duration to the market relative to last year (see the table below and Euroland Strategy for more details). In fact, for Italy, the duration supply could be comparable to the duration taken out by the ECB. Of course, some maturity extension was likely to have been expected and already priced in by the market. Also, the maturity increase from Italy and Spain may be particularly high at the moment and may decelerate. Nonetheless, this simple calculation suggests that the magnitude of the duration supply could be material. Duration supply in the periphery could be material fll 12) 131= DI • l2)/ 10 Estimated Grose Mai why Incline. Approannare Appro,irnaEe ECB Supply Mar-15 2015 YID vs. ranation Supply in OE in 10V Sep-16 2014 tin y•.e s i ICY Italy 427.5 3.0 135.5 124.1 Spain 142.0 2.4 34.1 86.7 Rance 345.2 -0.7 -21.1 130.1 Germany 254.9 -0.2 -6.6 146.2 Source Doracho e•rn, Ka. *Araby affirm Surrelarg F franc* LP For core countries, there has been no supply response so far. Germany is unlikely to adapt its issuance to market conditions. However, France could prove to be more opportunistic. Net selling could come from non-domestic investors as these are the ones who have increased their ownership of core ates during the crisis. As we discussed last week, there are fewer incentives for Japanese investors to hold EGBs at these relative yield levels. For instance, he France-Japan 10Y spread has tightened from over 200bp in 2011 to less han 15bp today. Japanese investors may thus reduce their current holdings (which consists mostly of France) once the new fiscal year starts next week. Vol adjusted carry is more attractive in the belly of the Eonia is proving to be relatively sticky given the increase Italian curve Ilquidiry 9.0 9.0 7.0 60 5.0 4.0 3.0 2.0 1.0 0.0 -♦- 3M carry and roll down ILHS) --a— 3M realised vollF11-151 120% 70.0 100% 60.0 a • 93% • 50.0 40.0 8 60% a 30.0 40% I 20.0 20% • 10.0 0% 0.0 BTPS 43/4 BTPS 1.05 BTPS 2.16 BTPS 21/2 BTPS 43/4 05/01/17 12/01/19 12/15/21 12/01/24 09/01/44 San* Dented Belt. Bleeeterg &We* LP • y•28 936x" ti Ws 07619 • Jan.10 to Deo 12 I Jana] canards ■ Curtem maint•norc• pined Pons uani3 ems*/ ♦ •A -S1 Ir e " 0 100 200 300 400 600 BOO 700 800 Excess liqualy n EUR ion Sewn Doilthe Bee era. Broornan Shane• LP Page 42 Deutsche Sank Securities Inc. CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0087423 CONFIDENTIAL SDNY_GM_00233607 EFTA01385955