EFTA Document EFTA01377496

1"*. r*PP0P7 Tho 6.9 p.--tran Instnensav to rffic hoot P6rtfghp H.311<;pwcPpri Idt‘o Joe Benevento and Joem Wasmund, Globa Ha„ tdS of Fixed tnoarnafCash Stu Fixed-income market perspectives Moving back to risk-on? Beware the law of unintended consequences. The first halt of 2015 was a turbulent ono. In the first few months, Russia, the Ukraine and Brazil were in the headlines, as were commodity prices and the abandonment of the EUR/CHF peg. The second quarter was then dominated by the Greek crisis and China. U.S. Treasury and Bund yields hit new lows in April before increasing significantly and causing negative absolute returns. Credit spreads widened. Volatility increased. As we move into the second half of the year, some of those geopolitical issues seem to be almost miraculously resolved. Greece appears willing to accept the tough conditions required by its creditors. China has halted the sell-off in its equity markets. An unexpected bonus has been a sanctions-lifting deal with Iran. This leaves the timing of the first Fed hike as the key source of near-term uncertainty But, with most agreeing that it will be, in September or December and that the pace of hiking will be slow, the possibility for upset appears limited. In this environment, we believe that it may be appropriate' to start re-entering into some riskier positions in high-yield (excluding energy), euro investment-grade and emerging-market sovereigns. We are not overly concerned about an immediate sharp sell-off in rates as lower commodity prices should keep inflation expectations contained. But any sense of calm could be deceptive. Big differences of opinion between Eurozone member states about the nature of monetary union remain. As their market intervention reminded us, the Chinese authorities also still do not really trust free markets, which may have implications on foreign investment. Another topic which needs to be closely monitored relates to the unintended consequences of regulatory restrictions. Note, for example. Value-at-Risk (VaR) limits. These have to be followed by trading desks and various institutional investors. Rising VaR Not suitable for all investors. Potential investors should seek professional financial advice before investing. therefore leads to lower level of risk appetite and can turn into lower trading activity and exacerbate price movements — not what was intended. The chart shows the German sovereign-bond VaR since 2000. Note the recent sharp increase in VaR to a multi-decade high. Rising VaR may have led to a lack of demand for German sovereign bonds in late April and early May, perhaps contributing to a sharp rise in Bund yields. As this shows, a decent risk- management approach which considers the possible impact of such factors remains highly important. German sovereien-bondValue at Risk (Vail)* rs O6 ea 02 1.9 Alp >1. 3 nit tic O In late April and early May German sovereign-bond VaR rose to a multi-decade. Rising VaR may have been linked to a lack of demand and a sharp Increase In yields. ' Mmiit 8o,. as, ;near:icy. Boni Otirtypw lit, total rgurn. 1110Yo Ono-day ti..Ire,1 PAO PPP. PM caolsOeUto Saran. Sc FirlarC4 i. P. Nole1/4 . Awl 8, WPoirti k‘rtvcrn..-ce. Invenntot GmtPl. al If 7f7e.)I Past performance is not indicative of future returns. No assurance can be given that any forecast, investment objectives and/or expected returns will be achieved. Allocations are subject to change without notice. Forecasts are based on assumptions, estimates, opinions and hypothetical models that may prove to be incorrect. Investments come with risk. The value of an investment can fall as well as rise and your capital may be at risk. You might not get back the amount originally invested at any point in time. 1,7. M* tr.opipt ‘X) Von amtPG:a. E..1:NP I A:LatiF 701 CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0074381 CONFIDENTIAL SDNY_GM_00220565 EFTA01377496