Trade Recommendation EUR rates: Pay 15Y15Y, Receive 2Y2Y EUR

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1 Investment Research 9 July 2013 Trade Recommendation EUR rates: Pay 15Y15Y, Receive 2Y2Y EUR Pay 15Y15Y, Receive 2Y2Y EUR spread (vs 6M Euribor) Open ½ 152bp with an option to open next ½ 118bp Potential 210bp, 97bp, Roll-down: 15bp in 3M, 54bp in 12M Curve steepener to benefit from ECB forward guidance The ECB guidance faced its first test on Friday after the NFP release and passed it. While US fixed income markets sold off briskly, European markets were more shielded and rates were stable relative to US markets especially in the short end of the curve. Down the road the ECB will need to clarify its new way of communication especially if data gradually improves from here. We are less certain that the ECB will introduce a more rules-based approach like the Fed and Bank of Japan but there are other ways to maintain the downward bias in rates. The ECB could cut the refi rate and possibly combine it with long LTROs. These measures are currently being considered within the ECB, which seems more determined to anchor the short end as a Fed exit draws nearer. Key levels 250 Bp Y2Y/15Y15Y EUR Usually beta is between 0 and Bp Target Entry#1 Entry#2 Stop 1Y2Y/14Y15Y EUR Main view: short end anchored We prefer a steepener trade to an outright receiver since the short end has come down significantly following the peak of the sell-off two weeks ago. The beta to outright is lowered somewhat and the roll-down is slightly better. Hence a steepener is likely to perform slightly better than a short-end receiver a scenario where rates move higher. Alternatives Overall there are several alternatives with similar characteristics for expressing the short end of the EUR curve being anchored. Below we show a few of the alternatives i.e. 2/10, 5/30 and 10/30, 1Y1Y/15Y15Y, or 2Y2Y/10Y10Y. Besides the 2/10 spot spread all variations have negative correlation to outright 5Y and 10Y EUR swap levels: 2/10 variations are in general less correlated to outright, but roll-down and valuation is less attractive. 5/30 variations are slightly worse in the range, while outright sensitivity similar. Rolldown is less attractive. 10/30 variations are better in terms of valuation, whereas beta to outright is similar to the 2Y2Y/15Y15Y idea roll-down is less attractive. A 2Y2Y/10Y10Y variation is in general slightly less sensitive to outright levels compared to 2Y2Y/15Y15Y and roll-down is similar. Valuation is slightly worse. A final alternative for those concerned about upside risks to 2Y2Y would be to enter a 1Y1Y/15Y15Y steepener, where a reduced roll-down is almost perfectly compensated by less outright risks. From a valuation perspective it looks slightly less attractive though. See table for alternatives overleaf Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Valuation vs 5Y/30Y 180bp 160bp 140bp 120bp 100bp 80bp 60bp 40bp 20bp Beta: 2Y2Y/15Y15Y vs 5Y EUR Senior Analyst Lars Tranberg Rasmussen laras@danskebank.dk Analyst Anders Vestergård Fischer afis@danskebank.dk Senior Analyst Peter Possing Andersen pa@danskebank.dk R^2 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 5Y/30Y EUR 2Y2Y/15Y15Y EUR 180bp 160bp 140bp 120bp 100bp 80bp 60bp 40bp 20bp Important disclosures and certifications are contained from page 4 of this report.

2 Alternatives EUR strategies Measured over 2 years Correlation Beta Correlation Beta 3M horizon Current, bp Min Max Zscore 5Y EUR swap 10Y EUR swap Carry & roll, bp 2Y2Y / 15Y15Y Y1Y / 15Y15Y Y2Y / 10Y10Y Y/30Y, spot Y/30Y, 1Y forward Y/30Y, 2Y forward Y/10Y Y/10Y, 1Y forward Y/10Y, 2Y forward Y/30Y Y/30Y, 1Y forward Y/30Y, 2Y forward July 2013

3 3 9 July 2013 Current and closed strategies in 2013: performance of all trades in 2013 batting average 73%, ROE 4.7%, see rules of engagements below Current strategies P/L Instrument, currency and position Risk Key levels for position Simple Type Ccy Scaling Trade Idea Not. Dv01 Open date Entry Now Add risk Loss Profit Horizon Bp EUR, k 2 Vol USD ½ Sell 6m 10y straddle, ATM Elevated vol USD 5.1m EUR 0.2k* 28-Jun ticks 544ticks 3-6M -33.9ticks Vol EUR ½ Sell 6m 5y payer, ATM Fade sell-off - elevated vol EUR 16.8m EUR 3.6k* 25-Jun ticks 56ticks 3-6M 62.6ticks Instrument Risk measures Key dates Key levels P/L Simple Type Ccy Scaling Trade Idea Notional Dv01 Open date Close date # Days Entry lvl Close lvl Bp EUR, k - Swap EUR ½ Rec 2y 1y EUR Adding to position EUR 45.4m EUR 4.5k 13-Jun Jun % 1.210% Swap EUR ½ Rec 2y 1y EUR Attractive roll-down EUR 45.4m EUR 4.5k 04-Jun Jun % 1.210% Swap EUR ½ Pay 2/5/10 Fly, 6m fwd Steeper EUR currve EUR 34.5m/28m/7.5m EUR6.9k 08-Mar Jun bp -17bp Swap EUR ½ Pay 1y1y vs Rec 1y Adding to position EUR 121.9m/120.9m EUR12.3k 02-May May bp 18.5bp Swap EUR ½ Pay 1y1y vs Rec 1y Steeper EONIA curve EUR 121.9m/120.9m EUR12.3k 10-Apr May bp 17.8bp Swap EUR ½ Pay 5/15/30 Fly, 10Y tails Long end steepener EUR 4m/10.7m/8m EUR3.4k 11-Jan Mar bp -3.5bp Swap EUR ½ Pay 5y5y/10y10y spread Long end steepener EUR22.8m/14.1m EUR10.1k 08-Feb Feb bp 49bp ASW DEU-EUR ½ Buy Bund ASW Risk-off hedge EUR6.8k 07-Jan Jan bp 25.4bp Swap EUR ½ Rec 3y1y Attractive roll-down EUR40.1m EUR4.0k 10-Jan Jan % 1.535% Swap EUR ½ Rec 3y1y, pay 2y1y Carry with protection EUR67.2m/66.9m EUR6.7k 07-Dec Jan bp 33.5bp Swap USD ½ Pay 10y10y Adding to position USD5.1m EUR2.7k 25-Sep Feb % 3.95% Swap USD ½ Pay 10y10y New Fed regime USD5.1m EUR2.7k 14-Sep Jan % 3.745% # Rules of Engagement 1 A basis capital of EUR10m is assumed. Max drawdown on one position is 2% of capital, or EUR200k 2 We open either ½ position (max loss EUR100k), or full position (max loss EUR200k) in each strategy 3 Max potential drawdown for the sum of all positions open should be 6% of capital (EUR600k) 4 Volatility in the strategi is implicitly expressed in how wide the stop-loss/take-profit range is 5 Notional is derived from 1) the loss occured (Bp) if the stop reached and 2) the BPV -> nominal loss should not exceed 2% 6 How we measure performance. 1) batting average and 2) return on equity (ROE) 7 All trades are entered taking the bid/offer spread into account 8 If no stop is assumed on a trade, DV01 is set to EUR20k on a full position 9 Vol trades with limited downside is opened as a full position. Un-limited downside is opened as ½ position. Initial DV01 is marked with (*)

4 Disclosure This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S ( Danske Bank ). The authors of this research report are Lars Tranberg Rasmussen, Senior Analyst, Anders Vestergård Fischer, Analyst and Peter Possing Andersen, Senior Analyst. Analyst certification Each research analyst responsible for the content of this research report certifies that the views expressed in the research report accurately reflect the research analyst s personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report. Regulation Danske Bank is authorised and subject to regulation by the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske Bank is subject to limited regulation by the Financial Services Authority (UK). Details on the extent of the regulation by the Financial Services Authority are available from Danske Bank on request. The research reports of Danske Bank are prepared in accordance with the Danish Society of Financial Analysts rules of ethics and the recommendations of the Danish Securities Dealers Association. Conflicts of interest Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of highquality research based on research objectivity and independence. These procedures are documented in Danske Bank s research policies. Employees within Danske Bank s Research Departments have been instructed that any request that might impair the objectivity and independence of research shall be referred to Research Management and the Compliance Department. Danske Bank s Research Departments are organised independently from and do not report to other business areas within Danske Bank. Research analysts are remunerated in part based on the overall profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate finance or debt capital transactions. Financial models and/or methodology used in this research report Calculations and presentations in this research report are based on standard econometric tools and methodology as well as publicly available statistics for each individual security, issuer and/or country. Documentation can be obtained from the authors upon request. Risk warning Major risks connected with recommendations or opinions in this research report, including a sensitivity analysis of relevant assumptions, are stated throughout the text. Date of first publication See the front page of this research report for the date of first publication. General disclaimer This research has been prepared by Danske Bank Markets (a division of Danske Bank A/S). It is provided for informational purposes only. It does not constitute or form part of, and shall under no circumstances be considered as, an offer to sell or a solicitation of an offer to purchase or sell any relevant financial instruments (i.e. financial instruments mentioned herein or other financial instruments of any issuer mentioned herein and/or options, warrants, rights or other interests with respect to any such financial instruments) ( Relevant Financial Instruments ). The research report has been prepared independently and solely on the basis of publicly available information that Danske Bank considers to be reliable. While reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and Danske Bank, its affiliates and subsidiaries accept no liability whatsoever for any direct or consequential loss, including without limitation any loss of profits, arising from reliance on this research report. The opinions expressed herein are the opinions of the research analysts responsible for the research report and reflect their judgement as of the date hereof. These opinions are subject to change, and Danske Bank does not undertake to notify any recipient of this research report of any such change nor of any other changes related to the information provided in this research report. This research report is not intended for retail customers in the United Kingdom or the United States. 4 9 July 2013

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