Plenty of room for bear flattening in the US

Transcription

1 24 July 215 FI/FX Research Curves & Crosses Rates UniCredit Weekly FI Strategy Economics, FI/FX & Commodities Research 24 July 215 Credit Research Equity Research Cross Asset Research Plenty of room for bear flattening in the US Theme of the week: Curve bull-flattening was the major theme in the fixed income universe recently. Looking at the US Treasury curve, bull-flattening is at odds with a bear-flattening tendency that one would expect in the run-up to a rate-hike cycle. We compare today s shape of the UST curve with that at similar points in time ahead of earlier tightening cycles. We see some risk that the market is underpricing the Fed outlook, particularly at the front end of the curve. Next week s FOMC meeting might be the trigger for investors to start pricing in the anticipated rate hike cycle more aggressively. Depending on the assumptions, the increase in 2Y UST yields over the next eight weeks might be between 2 and 9 basis points with the curve (2Y-3Y) to bear-flatten up to 3 basis points. Next week: With Greece (at least temporarily) off the radar screen, investor focus has moved back to the Fed and the global growth and inflation picture. Mixed signals in this respect have supported bonds, leading to some curve-flattening. We recommend to stay long sovereign-credit spreads to benefit from a favorable redemption/supply imbalance, long EMU BE after the recent decline, and short 2Y US to position for an earlier lift-off than currently priced. We expect EUR 7-1bn of gross supply next week from Italy (mostly) and the Netherlands, both Italy and the Netherlands will tap the 5Y. Abundant redemptions from Spain (EUR 2bn) and France (EUR 14bn from a linker), as well as coupons (EUR 12bn from Spain) will support the market. There will also be EUR 24bn in redemptions and EUR 7bn in coupons from Italy on 1 August, which will support the Italian auctions. Italy canceled the end-of- July CTZ auction, the mid-august BTP auction (in line with last years) and the end-of-august ILB auction. See: Theme of the week FI Outlook Supply Yields&Curves Cross country spread Rolldown & Carry Supply Stat Inflation Auction Calendar Events& Data Forecasts Editor: Luca Cazzulani, Deputy Head FI Strategy (UniCredit Bank Milan)

2 Favorite Trades Type Trade Rationale Entry date Entry level Inflation Buy EUR 1Y ZC inflation swap 2Y forward Inflation expectations are very subdued. ECB rhetoric and measures should ultimately support a recovery. Act. Stop Target P&L (bp.) 5-Jan Cross country Long 1Y IE vs BE Ireland scores better than Belgium in terms of macroeconomic fundamentals in 215. Moreover, it is more advanced in terms of progress of funding than Belgium and it has already repaid almost 4% of its IMF loan. We see the case for more convergence of IGBs vs. semi-core countries. 9-Jan Relative value Cross country RV Trade Cross country 1-3Y Box SP-IE Relative value trade 6-Feb CTZ-Obl tightener Obl Feb17 trades below the depo rate. We expect investors to progressively move to riskier instruments, offering an attractive yield pick-up vs. Obls 24-Apr BTP 232 vs. 231/33 Stopped 22-May Buy BGB Jun25 vs. RFGB Jul25 We prefer Belgium to Finland based on fundamentals and see the pick-up offered by BGB as particularly attractive at the 1Y. 26-Jun Cross country Buy RAGB Oct24 vs. OAT Nov24 Austria has underperformed the rest of core recently, but our scorecard signals it as a very solid country. We see room for outperformance vs. France. 26-Jun Relative value 1-3Y Box IT-GE Supply has weighed on the extra-long end of the Italian curve. We see room for more similar 1-3Y spreads across the Italian and German curves. 17-Jul US directio nal trade Short 2Y US (T 5/8 Jun17) The market is under-pricing the effect of the upcoming Fed rate hike 24-Jul SUMMARY TABLE FI Open Trades 46.1 FI Closed Trades 87.8 FI Total Trades Update 24-Jul-15 UniCredit Research page 2 See last pages for disclaimer.

3 Theme of the week Plenty of room for the UST curve to bear-flatten Kornelius Purps, FI Strategist (UniCredit Bank) Bull-flattening across the G3 yield curves Bull-flattening at odds with US rate hike expectations Bull-flattening of the yield curves has been the major theme in the FI universe recently. Looking at the US Treasury curve, bull-flattening is at odds with a bear-flattening tendency that one would expect in the run-up to a rate-hike cycle. We compare today s shape of the UST curve with that at similar points in time ahead of earlier rate-hike cycles. Depending on the assumptions, the increase in 2Y UST yields over the next eight weeks might add up to almost 9bp with the curve (2Y-3Y) to bear-flatten by about 3bp. Curve flattening has been the most pronounced tendency in the G3 fixed income universe over the past two weeks. Measured as the yield difference between 2Y and 3Y government bonds, the British Gilt curve flattened by 21bp, the Bund curve by 24bp and the US Treasury curve by 29bp. The flattening of the Bund curve was solely due to a yield drop at the long end of the curve. With the European Central Bank on hold for several quarters to come, the front end of the Bund curve appears to be nailed within the -.25%/-.2% range. In the UK, the 2-3Y flattening was supported by both an increase in the 2Y yield and a decline in the 3Y yield. The latter accounted for about four-fifths of the 21bp flattening since 13 July. During this period, several comments by officials from the Bank of England suggested that a first rate hike is drawing closer. We have been expecting the first rate hike in November for some time and appreciate that the market view is gradually converging to ours. With respect to the USD market, the probability of a first rate hike in the near future has also increased as of late. In contrast to the UK, however, the flattening of the US Treasury curve over the past two weeks occurred almost exclusively on the back of a decline in the 3Y yield. Out of the 29bp tightening in the 2Y-3Y yield spread, only about 2.5bp can be attributed to an increase in the 2Y yield, the rest is due to a noticeable yield drop at the long end of the curve. The recent yield decline in long maturities is a global phenomenon. Apparently, the bond market is reacting to the plunge in commodity prices. Consequently, the decline in long maturity yields probably reflects a combination of lessened inflation expectations and lower (real) growth expectations. Given that the first rate hike by the Fed might by less than two months away, one would assume that there is plenty of room for the short end of the UST curve to rise and the curve to bear-flatten. In an effort to estimate the potential increase in the 2Y yield during the coming weeks, we take a closer look at the shape of the UST curve in earlier pre-rate-hike periods. CHART 1: WAITING FOR THE BEGINNING OF THE FOURTH RATE-HIKE CYCLE IN 25 YEARS CHART 2: TODAY S UST CURVE LOOKS SIMILAR TO THAT OBSERVED BEFORE THE 1994 RATE-HIKE CYCLE FDTR 5.% 4.% Yield curves relative to the FDTR 39 days before the first rate hike % 4.% % 3.% 3. 2.% 2.% % 1.%. '92 '94 '96 '98 ' '2 '4 '6 '8 '1 '12 '14.% 2Y 5Y 1Y 3Y.% UniCredit Research page 3 See last pages for disclaimer.

4 In this note, we assume that the Fed will start its rate-hike cycle in September UST curve in 1993 shows the closest similarity to today s curve shape The front end of the UST curve appears to be too flat There have been only three rate-hike cycles in the US during the past quarter century (see chart 1). The first one started in early 1994, the second one in mid-1999 and the third one in mid-24. For the purpose of our analysis, we assume that the Fed will announce the first rate hike since the Lehman debacle at the FOMC meeting on 17 September 215, which is about eight weeks away. We compare the UST curve today with the UST curve eight weeks before the beginning of the previous three rate hike cycles. We focus on yield level, shape and curvature of the UST curve. Looking at a wide range of shape and curvature measures, it turns out that each rate-hike cycle has its own characteristics. Today s UST curve stands out in terms of the low level of yields. The UST curve in the run-up to the 1999 rate hike cycle stands out as having been abnormally flat. Given all the differences, the yield curve from late 1993, eight weeks before the 1994 rate hike cycle commenced, shows the closest similarities with today s curve (see chart 2). In 1999, the yield curve was substantially flatter, in 24 it was noticeably steeper. In charts 3 and 4, we compare today s UST curve with the one observed eight weeks before the first rate hike in At first glance, the curves appear to be not comparable. At second glance, the two yield curves have extremely similar shapes, while today s yield level is approximately 3-35bp below the level of late A third look reveals the major difference between 1993 and today: The front end of the curve is substantially flatter today than it was in late Chart 4 depicts the spread between the Fed funds target rate and the 2Y Treasury yield: While this spread stood at around 12bp two months before the beginning of the 1994 rate-hike cycle, it hovers around 45bp today. In our view, the market is still underpricing the upcoming rate-hike cycle. The FOMC meeting next week will be the last one before the Fed starts hiking rates in September, as assumed for the sake of this analysis (and as we have been anticipating for some time now). Consequently, the market might adjust its expectations further, which would cause the yield curve to steepen in the 2Y-FDTR spread but to flatten in the 2Y-3Y spread. CHART 3: THE FRONT END OF THE UST CURVE TODAY IS SUBSTANTIALLY FLATTER THAN IN 1993/1994 CHART 4: THE FDTR-2Y SPREAD WAS ABOVE 1BP IN 1994 WHILE IT IS STILL BELOW 5BP TODAY 7.% 6.% UST curve 39 days before the first rate hike % 6.% Y-FDTR, 1st rate hike 4-Feb-94 2Y-FDTR, 1st rate hike 17-Sep % 5.% 4.% 4.% % 3.% % 1.% 2.% UST curve 39 days before the (assumed) first rate hike % 5 5.% FDTR 2Y 5Y 1Y 3Y.% working days before / after first rate hike Mirror movement : UST yields move as they did in 1993/1994 By comparing today s Treasury yield curve with that of 1993/1994, we derive two projections for possible yield changes until 17 September, the date on which we assume the Fed will start hiking rates. Our first approach is called Mirror movement : We assume that between now and the FOMC decision on 17 September, the UST curve will exhibit the same yield changes as it did between end-1993 and the first rate hike on 4 February This would imply a shift UniCredit Research page 4 See last pages for disclaimer.

5 in yields by 1-2bp, accompanied by a very moderate bear flattening (chart 5). If the Fed were to manage the start of the interest rate cycle, causing a yield curve shift by only about 15bp, we should not be too worried. However, the Mirror movement scenario should probably be regarded as a kind of best case scenario. Shape adjustment : UST curve adjusts to reflect the shape of the curve from 1994 Our second approach, labeled Shape adjustment, assumes two developments: first, the 2Y UST yield adjusts to show the same spread to the (new) Fed funds target rate, as it did after the first rate hike in In other words, the part of the yield curve that appears to be too flat today compared to 1994 will adjust. Second, the other maturities adjust to reflect the same curve shape as was the case back in The outcome of this exercise is shown in chart 6: The yield curve changes between today and 17 September would be about five times as large as in the Mirror movement scenario. Today s yield curve itself implies a yield increase of only 1bp in 2Y yields and less than 5bp in 1Y and 3Y maturities. CHART 5: MIRROR MOVEMENT: CHANGES IN THE UST CURVE ASSUMING THE SAME YIELD MOVEMENTS AS IN 1993/1994 CHART 6: SHAPE ADJUSTMENT: CHANGES IN THE UST CURVE ASSUMING AN ADAPTION TO THE 1994 UST CURVE SHAPE 5.% 4.% change in bp (RS) UST curve 24 July 215 UST curve projection 17 Sept 215 "Mirror Movement" % 4.% change in bp (RS) UST curve 24 July 215 UST curve projection 17 Sept 215 "Shape Adjustment" 3.53% % 2.% 1.%.%.36%.13% 23.88%.7% % 1.64% 2.39% 2.28% 3.1% 2.97% FDTR 2Y 5Y 1Y 3Y % 2.% 1.%.%.36%.13% %.7% 2.47% 1.64% 3.4% 2.28% % FDTR 2Y 5Y 1Y 3Y Summary As stated before, every rate hike cycle in the United States has its own characteristics. And this is likely to be especially true for the upcoming cycle (which we, for the sake of this analysis, we assume will begin on 17 September 215). Never before have rates been so low. Never before have rates been kept unchanged for such a long period. And never before have rates been raised after the central bank, through various quantitative easing programs, had pumped more than three trillion US dollar into the financial system. Fully aware of all these special factors, we nevertheless try to identify similarities with earlier rate hike episodes. We find the closest similarity of today s pre-rate-hike curve with the one in late 1993/early We extrapolate the curve movements in the 1993/1994 pre-rate-hike period to today s situation. If the UST curve were to only mirror the movements of the UST curve in late 1993/early 1994, we would see yield increases by no more than 1-2bp until mid- September. However, if today s UST curve would adjust to reflect the shape of the 1994 yield curve, the yield increases over the coming weeks would be quite substantial. We see a certain risk that the market is underpricing the Fed outlook, particularly at the front end of the curve. Next week s FOMC meeting might be the trigger for investors to start pricing in the anticipated rate-hike cycle more aggressively. In any case, there is substantial room left for the UST curve to bear-flatten over the coming weeks. In this respect, the bull-flattening of the UST curve experienced over the past two weeks is somewhat at odds with what one would expect in the run-up to the next rate-hike cycle. UniCredit Research page 5 See last pages for disclaimer.

6 FI Outlook Europe, UK & US Luca Cazzulani FI Strategy (UniCredit Bank Milan) luca.cazzulani@unicredit.eu With Greece off the radar, the focus is back on fundamentals Entering the summer lull: stay long credit spreads, long EMU BE, and short 2Y UST Bund yield direction is trickier Stay long periphery spreads Stay long periphery and short 2Y US this summer With Greece (at least temporarily) off the radar screen, investor focus has moved back to monetary policy in the US and the global growth and inflation picture. Mixed signals have offered support to bonds, leading to some curve-flattening. Our favorite positioning for the coming months is to stay long sovereign-credit spreads to benefit from a favorable redemption/supply imbalance, long EMU BE after the recent decline, and short 2Y US to position for a rate hike earlier than what the market is expecting. With Greece (at least temporarily) off the radar screen, investor focus has moved back to monetary policy in the US and the global growth and inflation picture. While the data calendar has been extremely light this week, offering no reasons for directionality in yields, yields have ed lower with some curve-flattening (the 2/1Y has flattened 4bp on the German curve and 7bp on the US). The decline in yields has extended to the periphery which, however, has not tightened relative to core. We attribute the decline in yields to a mix of ample liquidity, weak oil prices and to some extent concerns on growth.. As July enters the final week and the summer lull is approaching, market activity is likely to slow down. Our favorite positioning for the coming months is to stay long sovereign-credit spreads to benefit from a favorable redemption/supply imbalance. In addition, the recent weakness in oil prices has pushed EMU 1Y BE to attractive levels. Finally, as we expect the Fed to start hiking in September, we regard the short end of the US curve as expensive. Positioning for 1Y Bund yields is a bit trickier. Support from liquidity is fading and in August Germany will sell EUR 13bn of bonds. Moreover the ECB has stepped up its purchases in the last few months to prepare for slower activity in August. This means support from QE should also be lower in the coming weeks. Support for Bunds may come from negative surprises in the global growth and inflation picture. A key element for yields will be the dynamics of commodity prices: oil prices have dropped about 15% since the end of May and this is a variable that usually correlates positively with yields (see chart below). In the short term, the periphery should remain supported by abundant redemptions and supply scarcity. In the next two weeks Italy and Spain will pay back EUR 24bn and EUR 2bn respectively. Coupon payments will also be high (EUR 7bn from Italy and EUR 8bn from Spain). Liquidity will have to be reinvested and, with short-term rates trading close to %, we expect it to support longer maturities. At the same time we expect Italy and Spain to cancel their mid-august auctions so supply scarcity should further contribute to supporting bonds. CORRELATION BETWEEN OIL AND YIELDS 1. Bund UST Gilts.8 1Y BE INFLATION 3. US FR Jan-99 Jan-1 Jan-3 Jan-5 Jan-7 Jan-9 Jan-11 Jan-13 Jan-15.5 Jan-11 Jan-12 Jan-13 Jan-14 Jan week rolling correlation between yield changes and oil price returns UniCredit Research page 6 See last pages for disclaimer.

7 EMU BEs are moderately cheap Stay short US 2Y We pointed out last week that the 1/3Y BTP was too steep, mainly because of supply pressure. Some normalization has indeed occurred this week, and we expect more to come not least because there will be no supply at the extra-long end until mid-september. The short end is likely to receive less support as it already trades at very low yield levels: about.12% for Italy and.15% for Spain. The decline in the oil price has led to some cheapening of BEs. The 1Y swap inflation trades at around 1.4%, which is low both relative to the 2% ECB target and relative to our fair-value model (156bp). The 1Y swap inflation traded as low as 137bp in late May but to find lower levels you have to go all the way back to QE trades in 1Q, a scenario we do not think is likely to be repeated. EUR 13bn of redemptions from OATei Jul15 on Monday should provide some support to this asset class. Downside risks to BE inflation come mainly from oil prices. BEs are cheap also for BTPs. For example, the BTPei Sep24 now trades at less than 1bp (a level that we regard as attractive on a medium-term perspective) and has cheapened relative to OATei Jul24 (the spread is now 15bp). While BTPeis trade at an attractive BE, an important caveat is that we expect issuance to be relatively heavy to year-end (EUR 16bn) with the launch of a new 5Y BTPei, a new BTP-Italy and, possibly, a 15Y BTPei. As a result, we would prefer to play inflation trades with French of German bonds. After a week with an almost empty data calendar, next week will be very busy, especially in the US. The key event of the week is going to be the FOMC meeting, at which there may be further hints about the timing of the liftoff of rates. Markets are positioned for a hike in December: the Sep15 fed funds future trades at.18% and Dec15 fed funds future trades at about.35%. Eurodollar futures, also discount with 5/6% probability one rate hike (the December contract trades at.55%. This is too low considering our economists expect two rate hikes by year-end. By a similar reasoning, 2Y US yields at.7% are too low What is priced in by the market? On a six-month horizon, the carry for a 2Y UST is 14bp. This is too low: if there were to be two hikes by year end (fed funds at.75%) investors would most likely require better compensation than 25/3bp to hold a 2Y. The day after the FOMC, US advance 2Q GDP will be published. After a weak 1Q, expectations are for a rebound to 2.5% (qoq annualized). The market impact of this release is likely to be contained, given the proximity with the Fed meeting. On Monday, the ECB will publish M3 data. We are interested in monitoring the evolution of Spanish banks behavior. As the chart on the right shows, Spanish banks have been heavy sellers of domestic debt in recent months, more or less alternating one month of selling with one month of pause. Spanish yields rose in June (mainly due to tensions on Greece). It will be interesting to see what strategy adopted domestic banks during this phase of risk-off. US CURVE BEHAVIOUR IN PAST TIGTHENING CYCLES Spread 2/1Y SPANISH BANKS: HEAVY SELLERS OF DOMESTIC BONDS Spanish banks, net flows (EUR bn) 1. Domestic Non domestic Months to lift-off -2. Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Source: ECB, Bloomberg, UniCredit Research UniCredit Research page 7 See last pages for disclaimer.

8 Supply corner: heavy redemptions and scarce supply Chiara Cremonesi FI Strategy (UniCredit Bank London) Next week in a nutshell: We expect EUR 7-1bn of gross supply next week; almost 8% will come from Italy, which will be holding its end-of-month BTP/CCT and ILB auctions and the rest will come from the Netherlands. Redemptions will amount to EUR 34bn and coupons to EUR 12bn and will come from France (an ILB expiring) and Spain. There will also be EUR 24bn in redemptions and EUR 7bn in coupons from Italy on 1 August, which will support the Italian auctions (a portion of this is likely held by the ECB through its Securities Markets Programme, but even when taking this into account the total amount flowing back to investors is quite high). Given abundant redemptions, especially from the periphery, and limited supply, the periphery should be supported next week and during August. Italy: The Italian Treasury canceled the end-of-july CTZ auction (it will only issue ILBs), the mid-august BTP auction (in line with last years) and the end-of-august ILB auction. On 28 th July, Italy will issue EUR 5-75mn of BTPei Sep26. Today, Italy will make the announcement for its 6M BOT auction. Redemptions will amount to EUR 7.7bn; we expect an auction amount in the EUR 6.5-7bn range. On Monday, Italy will announce the BTP and CCT auction. We expect EUR 1-1.5bn of BTP May2, EUR 2-3bn of BTP Jun25 and EUR 2-2.5bn of CCTeu Jun22, overall EUR 5-7bn, in line with last month s auction. This will be the last re-opening of BTP Jun25, as a new 1Y benchmark (BTP Dec25) will be issued at the end-of-august auction (with settlement in September). There will be EUR 24bn in redemptions and EUR 7bn in coupons from Italy on 1 August, which will support the Italian auctions (a portion of this is likely held by the ECB through its Securities Markets Programme, but even when taking this into account the total amount flowing back to investors is quite high). Moreover, some of the Spanish redemptions may also be re-invested in Italy. Spain: This week, Spain announced that net issuance will be moderately lower than announced at the beginning of the year, at EUR 53bn vs. EUR 55bn. We expect this to translate into a very small EUR 2bn reduction in gross domestic M/L supply for this year, which will decline from EUR 139bn to EUR 137bn, according to our projections. With this small change, Spain has completed 67% of its M/L target YTD vs. 75% at the same time last year. The next four weeks in a nutshell: Scheduled supply will amount to EUR 2-26bn, which is quite low, especially when considering the amount of redemptions at the end of July and the first two weeks of August. Indeed, next week, there will be EUR 14bn of redemptions from France (from an ILB) and EUR 19.5bn from Spain. In the first week of August, there will be EUR 24bn of redemptions from Italy. A portion of the Italian bond is likely held by the ECB through its Securities Markets Programme. Overall, in the next four weeks, redemptions will amount to EUR 57bn and coupons to EUR 2bn, which will result in sharply negative net supply. We do not expect any issuers to come to market with new benchmarks via syndication at this stage, as liquidity is getting thinner ahead of the summer recess. Therefore, with a high amount of redemptions at the end of July and the first two weeks of August, and lower-thanusual issuance, EGBs, and especially the periphery, should be well supported. Bunds may experience some pressure, given that Germany will continue to hold auctions in August. After the summer, we expect a new 7/1Y benchmark from Finland. Traditionally, Finland issues a new benchmark at the end of August. Other potential candidates are France, with a new 15-2Y benchmark, and Ireland, with a new 1Y benchmark. We also expect a new 15Y and a new 5Y ILB from Italy and a new 3Y from Spain. UniCredit Research page 8 See last pages for disclaimer.

9 Yields in the EMU 2Y last 5Y last DE * NL * ** FI * FR * * AT ** * BE ** * IT * * * SP * PT IE * * Trend is a momentum indicator; the number of arrows denotes its intensity. The Z-score is not displayed when Trend is significant. means cheap, * means ri 1Y last 3Y last 3. DE NL FI FR AT BE 1 BE IT SP PT IE Y yields Jan-12Apr-12Jul-12 Oct-12Jan-13Apr-13Jul-13 Oct-13Jan-14Apr-14Jul-14 Oct-14Jan-15Apr-15Jul-15-2 Jan-12Apr-12 Jul-12 Oct-12 Jan-13Apr-13 Jul-13 Oct-13 Jan-14Apr-14 Jul-14 Oct-14 Jan-15Apr-15 Jul-15 DE NL FI FR AT BE Jan-12Apr-12 Jul-12 Oct-12Jan-13Apr-13 Jul-13 Oct-13Jan-14Apr-14 Jul-14 Oct-14Jan-15Apr-15 Jul-15 1Y yields BE IT SP PT Jan-12Apr-12 Jul-12 Oct-12Jan-13Apr-13 Jul-13 Oct-13Jan-14Apr-14 Jul-14 Oct-14Jan-15Apr-15 Jul-15 DE NL FI FR AT BE Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 3Y yields 7.5 BE IT SP Jan-12Apr-12 Jul-12 Oct-12Jan-13Apr-13 Jul-13 Oct-13Jan-14Apr-14 Jul-14 Oct-14Jan-15Apr-15 Jul-15 UniCredit Research page 9 See last pages for disclaimer.

10 Curve spreads across the EMU 2/5Y last 2/1Y last DE ** NL * FI * FR * AT * BE /1Y last 1/3Y last IT * SP PT ** IE * The Z-score is displayed when the Trend is not significant. Trend is a momentum indicator signaling a statistically significant linear. cheap, * rich 2/5Y yields 2/1Y yields Last ago ago Last ago ago PT SP IT IE BE FR AT FI NL DE 25 PT SP IT IE BE FR NL AT FI DE 5/1Y yields 1/3Y yields 14 Last ago ago 12 Last ago ago PT IT SP IE NL BE FR AT DE FI SP IT FR BE AT DE FI NL UniCredit Research page 1 See last pages for disclaimer.

11 Cross Country spreads in the EMU REFERENCE BONDS X-COUNTRY 1Y YIELD SPREADS IN BP 2Y Bond 5Y Bond 1Y Bond 3Y Bond DE NL FI FR AT BE IT SP PT IE DE 3/17 4/2.5 2/ /46 DE NL.5 4/ /2.25 7/ /47 NL 21 FI / /2 2 4/ /42 FI 4-16 FR /17 5/2.5 5/ /45 FR AT 4.3 9/ / / /44 AT BE 3.5 6/ /2.8 6/ /45 BE IT / / / /46 IT SP 5.5 7/ / / /44 SP PT / / /25 PT IE 5.5 1/ / /25 IE YIELD SPREADS VS. GERMANY (IN BP) 2Y 5Y NL ** * FI * 3 FR AT *** BE * IT * * ** SP * * PT IE * * The Z-score is displayed when the Trend is not significant. Trend is a momentum indicator signaling a statistically significant linear. cheap, * rich 1Y 3 Y UniCredit Research page 11 See last pages for disclaimer.

12 Yield Spreads vs. Germany (bp) 1 NL FI FR AT BE 8 BE IT SP PT IE Y spreads Jan-12Apr-12 Jul-12 Oct-12 Jan-13Apr-13 Jul-13 Oct-13 Jan-14Apr-14 Jul-14 Oct-14 Jan-15Apr-15 Jul-15 1 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul NL FI FR AT BE 8 BE IT SP PT IE Y spreads Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Jan-12Apr-12 Jul-12 Oct-12 Jan-13Apr-13 Jul-13 Oct-13 Jan-14Apr-14 Jul-14 Oct-14 Jan-15Apr-15 Jul-15 2 BE IT SP PT 18 NL FI FR AT BE Jan-12Apr-12 Jul-12 Oct-12 Jan-13Apr-13 Jul-13 Oct-13 Jan-14Apr-14 Jul-14 Oct-14 Jan-15Apr-15 Jul-15 1Y spreads Jan-12Apr-12 Jul-12 Oct-12 Jan-13Apr-13 Jul-13 Oct-13 Jan-14Apr-14 Jul-14 Oct-14 Jan-15Apr-15 Jul NL FI FR AT BE IT SP BE Y spreads Jan-12Apr-12 Jul-12 Oct-12 Jan-13Apr-13 Jul-13 Oct-13 Jan-14Apr-14 Jul-14 Oct-14 Jan-15Apr-15 Jul-15 Jan-12Apr-12 Jul-12 Oct-12 Jan-13Apr-13 Jul-13 Oct-13 Jan-14Apr-14 Jul-14 Oct-14 Jan-15Apr-15 Jul-15 UniCredit Research page 12 See last pages for disclaimer.

13 Rolldown & Carry 6M ROLLDOWN AND CARRY AT A GLANCE 6M ROLLDOWN AND CARRY: MAIN TENORS/COUNTRIES (BP) Yield/spread TTM (yrs) 6M fwd yld/spd 6M Rolldown 6M Carry 2Y GE NL AT FR IT SP Y GE NL AT FR IT SP Y GE NL AT FR IT SP Y GE NL AT FR IT SP Spread (bp) Fwd spread Rolldown Carry 2/5Y GE NL AT FR IT SP /1Y GE NL AT FR IT SP Barbell (2x) Fwd level Rolldown Carry 2/5/1Y GE NL AT FR IT SP Rolldown Carry Y 5Y 7Y 1Y 2Y 5Y 7Y 1Y 2Y 5Y 7Y 1Y 2Y 5Y 7Y 1Y 2Y 5Y 7Y 1Y 2Y 5Y 7Y 1Y GE NL AT FR IT SP 2/5Y AND 5/1Y: LEVEL AND 6M CARRY (FLATTENER, BP) Carry Level (rs) /5Y 5/1Y 2/5Y 5/1Y 2/5Y 5/1Y 2/5Y 5/1Y 2/5Y 5/1Y 2/5Y 5/1Y GE NL AT FR IT SP 2/5/1Y: LEVEL AND 6M CARRY (LONG BULLET VS FLY, BP) Carry Level (rs) GE NL AT FR IT SP The roll-down of a given bond is calculated as the difference between its current yield to maturity and the interpolated yield at a 6 months shorter maturity (cheapeness/richness vs. fitted curve is maintained). The carry of a given bond is the difference between the current yield to maturity and the 6M forward yield at the residual maturity (for example: the relevant 6M forward yield of a 5Y bond is calculated over a 4.5 years horizon). The cost of funding for the forward yield calculation is the relevant GC, sourced from Bloomberg repo pricing portal UniCredit Research page 13 See last pages for disclaimer.

14 Inflation Monitor Real yield curve (%) Apr16 Mar16 Jun16 Sep16 Oct16 Sep17 Apr17 Nov17 Jul18 Sep18 Sep19 Apr2 Nov19 Oct2 Apr18 BTPei BTPi FRei DEei SPGBei Real Swap rate Apr2 Sep21 Jul2 Apr23 Sep23 Sep24 Jul22 Jul24 Apr23 Nov24 Sep26 Jul27 Apr26 Apr3-1.5 Nov-14 Oct-19 Oct-24 Oct-29 Oct-34 Oct-39 Oct-44 Nov3 Jul3 Jul32 Sep35 Jul4 Sep41 Apr46 Breakeven curve (bp) Jul2 Jul22 Jun16 Sep16 Apr18 Sep17 Nov17 Sep18 Jul18 Sep19 Nov19 Apr2 Oct2 Apr2 Sep21 Apr23 Apr23 Sep23 Jul24 Sep24 Nov24 Apr26 Jul27 Sep26 Jul3 Apr3 Nov3-25 Jun-14 Jun-19 Jun-24 Jun-29 Jun-34 May-39 May-44 Jul32 BTPei FRei SPGBei Sep35 Jul4 BTPi DEei Sep41 Swap Inflation Apr46 5Y5Y forward inflation and inflation 1Y BE EU, UK, US (%) EMU Ex-Tobacco infl. Core infl. 5y5y Swap (r.s.) -1. Jan-11 Jan-12 Dec-12 Dec-13 Dec-14 EURO ZONE ILBS AT A GLANCE US UK EU. May-6 May-7 May-8 May-9 May-1 May-11 May-12 May-13 May-14 May-15 Real Yield BreakEven Current 1w 1m 3m Current 1w 1m 3m BTP 2.1 Sep BTP 1.7 Sep BTP 2.35 Sep BTP 2.1 Sep BTP 2.6 Sep BTP 2.35 Sep BTP 3.1 Sep BTP 2.35 Sep BTP 2.55 Sep Bund.1 Apr SPGBei.55 Nov SPGBei 1.8 Nov OAT i 1.6 Jul OAT i 2.25 Jul OAT i 1,1 Jul OAT i.25 Jul OAT i 1.85 Jul OAT i.7 Jul OAT i 3.15 Jul OAT i 1.8 Jul Bund 2.5 Apr Bund 1.75 Apr Bund.1 Apr Bund.1 Apr Bund.5 Apr Bund.1 Apr UniCredit Research page 14 See last pages for disclaimer.

15 Primary Market Monitor M/L TERM DOMESTIC INSTRUMENTS: PROGRESS OF FUNDING BY MATURITY & BY COUNTRY AT BE FI FR GE GR IE IT* NL PT SP TOT Country YTD Exp YTD Exp YTD Exp YTD Exp YTD Exp YTD Exp YTD Exp YTD Exp YTD Exp YTD Exp YTD Exp YTD Exp 3y y Y y y y IL Floater Gross Total ' Exchanges & Buybacks Total ex ex & Buyb Red.' Net supply ' Progress of funding 68% 68% 33% 7% 63% - 73% 64% 69% 75% 68% 66% Total ' Red.' Net supply ' *For Italy the category IL contains also the BTP-Italy and the 3Y includes also supply of CTZ. Progress of funding is calculated as gross total YTD/ gross total 215 NET LIQUIDITY HEATMAP: REMAINING ISSUANCE & LIQUIDITY BY COUNTRY AND BY MONTH Austria Belgium France* Germany Italy* Netherlands Red. Cpn. Supply ECB Net Red. Cpn. Supply ECB Net Red. Cpn. Supply ECB Net Red. Cpn. Supply ECB Net Red. Cpn. Supply ECB Net Red. Cpn. Supply ECB Net Red. Cpn. Supply ECB Net Red. Cpn. Supply ECB Net Jul Aug Sep Oct Nov Dec Tot Spain Total The table shows the remaining domestic bond redemptions, coupons and domestic bond issuance ( supply ) by month among the main EMU issuers. The column Supply contains estimates of monthly issuance amounts. The column ECB shows estimates for the monthly nominal buying by the Central Bank in each EMU country. The column net is net liquidity (Red. + cpn.+ecb buying issuance). Green denotes positive net liquidity. Pink denotes mildly-negative net liquidity (between EUR bn and -EUR 1bn). Red denotes negative net liquidity that is lower than EUR -1bn, a situation in which pressure on yields is more likely. Issuance is listed according to settlement date, while redemptions are listed according to their actual date. *For Italy and France total gross issuance figures are gross of buybacks (EUR 2bn for France) and exchange auctions (EUR 5bn for Italy). MONEY MARKET INSTRUMENTS: STOCK (NOW, AT 31 ST DECEMBER 213, 214 & 215 (E)), NET CHANGE & 1/ REDEMPTIONS Outstanding Net Change Redemptions Dec-13 Dec-14 Dec-15 (e) Current (current/end 214) (end 215 (e) /end 214) Next Next AT BE FI FR GE GR IE IT* NL PT SP Total *To calculate net supply for Italian BOTs, we also include the last 6M BOT auction in December, which settles in January and which is not matched by any redemption flow (in line with the calculation method of the Treasury). This means that estimates of YTD net supply of BOTs contains EUR 7.7bn of a 6M BOT auction which are not matched by any redemption and lift the net supply figure for 215 by this amount. The mismatch will only be reconciled at the end of 215 when the 6M BOT redemptions is not matched by any supply flow. (all tables and charts in this page) UniCredit Research page 15 See last pages for disclaimer.

16 Supply & Redemptions Calendar ISSUANCE REDEMPTIONS & COUPONS Date Country Bonds Amount Maturity Country Bonds Amount Coupons 27-Jul Mon GE 12M Bubill 1.5 MM FR OATei 1.6% 25Jul15 28-Jul Tue NL DSL Jan2 1.5 / 2.5 5Y 28-Jul Tue IT CTZ auction: cancelled CTZ 28-Jul Tue IT BTPei Sep26.5 /.8 ILB 29-Jul Wed IT 6M BOT 6.5 / 7. MM Jul Thu IT BTP May2 1 / 1.5 5Y SP SPGB 4% 3Jul15 3-Jul Thu IT BTP Jun25 2 / 3 1Y 3-Jul Thu IT CCTeu Jun22 2 / 2.5 CCT Tot. Bonds / Aug Mon IT BTP 3.75% 1Aug15 4-Aug Tue AT Reserve date 5-Aug Wed GE Obl Oct2 4. 5Y 6-Aug Thu FR we expect cancellation 6-Aug Thu SP 3Y, 5Y & 1Y 2.5 / 3.5 3Y, 5Y & 1Y Tot. Bonds 1-Aug Mon GE 6M Bubills 2. MM 12-Aug Wed IT 12M BOT 6.5 / 7. MM 12-Aug Wed GE Bund Aug Y 13-Aug Thu IT BTP auction: cancelled Tot. Bonds 18-Aug Tue SP 6M & 12M Letras 19-Aug Wed GE New Schatz Sep17 5 2Y 2-Aug Thu SP we expect cancellation Tot. Bonds / / / 5. In the weekly and monthly recap rows we calculate total issuance and redemptions flows for BONDS. For Italy we include in this category BTPs, BTPei, CCTS and CTZs. Bond redemptions are indicated according to the actual date in which the bond is redeemed. Bonds expiring on Saturday and Sunday are indicated the following Monday. Auctions and amounts that have already been announced are in black. Auctions and amounts in grey denotes our expectations Source: EMU Debt Agencies, UniCredit Research UniCredit Research page 16 See last pages for disclaimer.

17 Major Data Releases & Economic Events To Look At Next Week Date Time UniCredit Consensus 27 Jul 1 Aug 215 (CET) Country Indicator/Event Period estimates (Bloomberg) Previous Mon, 27 Jul 1: GE Ifo Expectations (Index) Jul : GE Ifo Current Assessment (Index) Jul : GE Ifo Business Climate (index) Jul : EMU M3 Money Supply (% yoy) Jun :3 US Durable Goods Orders (% mom) Jun : FR Total Jobseekers (thousands) Jun Tue, 28 Jul 1: IT Business Confidence (ISTAT, index) Jul : IT Consumer Confidence (ISTAT, index) Jul :3 UK Real GDP (% qoq) 2Q A.4 15: US S&P/Case-Shiller Home Price Index (% yoy) May : US Conference Board Consumer Confidence Jul Wed, 29 Jul 8: GE GfK Consumer Confidence Aug 1.1 1:3 UK Mortgage Approvals (thousands) Jun : US Pending Home Sales (% mom) Jun : US Federal Funds Target Rate (%) Jul Thu, 3 Jul 1:5 JP Industrial Production (% yoy) Jun : SZ KOF Leading Indicator Jul :55 GE Unemployment Rate (%) Jul :55 GE Unemployment Change (thousands, sa) Jul : EMU European Commission Economic Sentiment (index) Jul : GE Harmonized CPI (% yoy) Jul.1 14: GE Consumer Price Index, CPI (national, % yoy) Jul :3 US Real GDP (% qoq annualized) 2Q A Fri, 31 Jul GR Greece Sovereign Debt May Be Published by Moody's PD Poland Sovereign Debt Rating Published by Fitch 1:5 UK Consumer Confidence (GFK, index) Jul 7. 1:3 JP Consumer Price Index, CPI (% yoy) Jun.5 7:25 SZ SNB 2Q Earnings 7:3 SZ Swiss National Bank Releases 2Q 215 Currency Allocation 8:45 FR Household Consumption (% mom) Jun.1 11: IT Consumer Price Index, CPI (% yoy) Jul : EMU Consumer Price Index, CPI (% yoy, flash estimate) Jul : EMU Core CPI (% yoy) Jul : EMU Unemployment Rate (%) Jun : IT Producer price index, PPI (% yoy) Jun :3 US Employment Cost Index (% qoq) 2Q :45 US Chicago Purchasing Managers Index Jul : US University of Michigan Consumer Confidence Jul F Sat, 1 Aug 3: CH PMI Manufacturing Jul 5.2 *Asterisked releases are scheduled on or after the date shown; sa = seasonal adjusted, nsa = not seasonally adjusted, wda = working day adjusted UniCredit Research page 17 See last pages for disclaimer.

18 UniCredit Global FI & FX Forecasts EU Current Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Key rate Y Y Y Y / /5/ / Y SwSp Y SwSp Y SwSp Y BTP/bund US Key rate Y Y Y / /5/ Y SwSp Y SwSp UK Key rate Y FX Current Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 EUR-USD EUR-JPY EUR-GBP EUR-CHF USD-JPY GBP-USD USD-CHF UniCredit Research page 18 See last pages for disclaimer.

19 UniCredit Economic Forecasts Real GDP (%, yoy) Consumer Prices (%, yoy) Budget Balance (% of GDP) Industrialized countries US Euro area Germany * 2.1* France Italy Spain Austria UK Switzerland Japan Developing countries Central & Eastern Europe Russia Poland Czech Republic Hungary Turkey Emerging Asia China Real GDP (% qoq, sa) 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 US (annualized) Euro area Germany France Italy Spain Austria UK Switzerland Russia Poland (% yoy) Czech Republic Hungary Turkey Consumer Prices (% yoy) 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 US Core rate (ex food & energy) Euro area Core rate (ex food & energy) Germany France Italy Spain Austria UK Switzerland Russia Poland Czech Republic Hungary Turkey *non-wda figures. Adjusted for working days: 1.7% (215) and 2.% (216) Source: UniCredit Research UniCredit Research page 19 See last pages for disclaimer.

20 Disclaimer Our recommendations are based on information obtained from, or are based upon public information sources that we consider to be reliable but for the completeness and accuracy of which we assume no liability. All estimates and opinions included in the report represent the independent judgment of the analysts as of the date of the issue. We reserve the right to modify the views expressed herein at any time without notice. Moreover, we reserve the right not to update this information or to discontinue it altogether without notice. 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