Finance 263 Bond Analysis Project July 2007 The real estate boom it s over. What s next?

Transcription

1 Raffaello Curtatone Finance 263 Bond Analysis Project July 2007 The real estate boom it s over. What s next?

2 2 Preface Data collection This report has been made taking the yields from the Wall Street Journal for all the data except the 3-Mo. Treasury Bill which has been taken from Yahoo.com for the month of July period. The historical data has been extracted from Reuters source except for Emerging Markets (EMBI) Global Index which have been extracted from the Bloomberg source, through the trading room. An analysis of the collected data will be done for the historical and actual period with determination of the major changes and a comparison with the month of July will be made. The following data have been collected: A. US Domestic Bond Market 10-yr. Treasury High Yield Merrill Lynch US Corp AA-rated - Lehman Brothers US Corp BBB-rated - Lehman Brothers US Agency years - Lehman Brothers GNMA Benchmark - Lehman Brothers Muni 7-12 years - Merrill Lynch Yankee - Lehman B. International Government Bonds Canada EMU France Germany Japan Netherlands UK Emerging Mks (EMBI) Global Index C. Key Short-Term Interest Rates Federal Funds (offer) 3-Mo. Treasury Bill 3-Mo. Commercial Paper (Dealer) 3-Mo. LIBOR D. Equity Indexs (US) DJIA Nasdaq Composite S&P 500 Russell 2000

3 3 E. International Equities Nikkei Japan DJ Stoxx 50 - Europe F. Foreign Exchange Rates E/US$ Y/US$ Spreads calculation The calculation of the spreads has been made in basis points for points A, B, and C with the formula (actual day day before) * 100. For points D through F in terms of relative change with the formula (actual day day before) / day before. Two sets of graphs have been made for the spreads: one showing the trends and another one for the difference (actual spread) on a day to day basis for the month of July and monthly for the historical data. The following spreads have been calculated: A. Term Structure of Interest Rates 10yr. US Treasury vs. 3-Mo. Bill B. Credit Differentials High Yield 100 vs. 10-Yr. Treas. High Yield 100 vs. AA-rated Corps. High-Yield 1000 vs. BBB-rated Corps. BBB-rated Corps vs. AA-rated Corps C. International Interest Rate Differentials ) (10-Year US Treasury vs. Foreign Government) Canada EMU France Germany Japan Netherlands UK Emerging Markets D. Inter-Market Spread Relationships Yankee vs. AA-rated Corps AA-rated Corps vs. Munis GNMA vs.10-yr. Treasury GNMA vs. AA-rated Corps US Agency vs. 10-yr Treasury

4 4 Market monitoring To help analyze the scenario upon which the yields have been moving, some of the economic indicators have been recorded together with the hypothetical effect on the bond market, following the general rule strong economy = bad news for the bond market; weak economy = good news for the bond market. Below essentially what has been monitored: A. Economic Indicators ISM, Non farm payrolls, Employment reports, Average hourly earnings, etc. B. Treasury Supply Type, amount, auction details. C. Federal Reserve Policy Historical Situation The period has been characterized from the boom of the real estate market. Prior and especially after 9/11 the economy was going down and it performed poorly up to A lot of investors seeing the economy so weak decided to put their money in the real estate market since the brick has been the best investment at least to protect the money from inflation. The Federal Reserve which lowered interest rate to pump up the economy also contributed to the real estate boom attracting a lot of home borrowers. I have my personal view on this point and I think a lot of people made a mistake buying the house just because interest rates were low. In fact our parents bought the house with mortgages even at 15% interest rate, but they were paying it in 10 years. Today we purchase houses with the mortgage at 5% interest rate, but we ll have to pay it for 30 years. Although it doesn t make any difference in terms of interest paid, it does make difference in how many years we have to share the ownership of the house with the bank. There have been therefore a lot of mortgages given to all kind of borrowers of any credit score and that s the reason why today we are still counting the losses of the subprime mortgage baked securities. Actual Situation Through Friday, 133 of the 500 S&P 500 companies have reported. That is, of course, only 26.6% of the total. It is too early to jump to conclusions, but the early data are not as strong as recent quarterly trends. The percentage of firms beating estimates is running below historical averages. About 59% of the companies have reported earnings above the average Wall Street estimates. Last quarter at this time the percentage was close to 65%. In recent years, most quarters have ended up between 62% and 65%.

5 5 The percentage of companies reporting below estimates is a surprisingly large 21%. Normally, that figure finishes the quarter near 15%. The degree of the earnings beats is also not all that impressive. There have been only a small percentage of firms beating estimates by more than 10%. (source Yahoo.com) The actual situation is quite undetermined. Surely the house market is precipitating, that s the reason why mortgage baked securities are still paying the burden of giving away the money to people with bad credit when housing market is going down. The economy is going up, but it is not performing as good as in the previous year same period. The Fed is concerned with inflation and it looks like the interest rates are going to be stable for a while, so the economy will have to growth on its own. Looking foresees, the situation is as usual. The emerging markets are growing with the same risk of before. A portfolio manager wouldn t keep in its bundle more than the necessary of these bonds. Euro a bit overpriced might suggest getting ready to sell Euro-denominated securities, in case the lost of a couple of percent points is seen as a problem. That s why we would say for the bond market lets leave everything as it is or slightly change what is your investment overseas.

6 6 Executive Summary Major changes over Performances over Comparison of July 2007 with historical data... 9 What to buy today What to sell today Conclusions Annexes Annex I Term Structure of Interest Rates - Historical Annex II Credit Differentials 1 - Historical Annex III Credit Differentials 2 - Historical Annex IV Credit Differentials 3 - Historical Annex V Credit Differentials 4 - Historical Annex VI International Interest Rate Differentials 1 - Historical Annex VII International Interest Rate Differentials 2 - Historical Annex VIII International Interest Rate Differentials 3 - Historical Annex IX International Interest Rate Differentials 4 - Historical Annex X International Interest Rate Differentials 5 - Historical Annex XI International Interest Rate Differentials 6 - Historical Annex XII International Interest Rate Differentials 7 - Historical Annex XIII International Interest Rate Differentials 8 - Historical Annex XVI Inter-Market Spread Relationship 2 - Historical Annex XV Inter-Market Spread Relationship 3 - Historical Annex XVI Inter-Market Spread Relationship 4 - Historical Annex XVII Inter-Market Spread Relationship 5 - Historical Annex XVIII Term Structure of Interest Rates July Annex XIX Credit Differentials 1 July Annex XX Credit Differentials 2 July Annex XXI Credit Differentials 3 July Annex XXII Credit Differentials 4 - July Annex XXIII International Interest Rate Differentials 1 - July Annex XXIV International Interest Rate Differentials 2 - July Annex XXV International Interest Rate Differentials 3 - July Annex XXVI International Interest Rate Differentials 4 - July Annex XXVII International Interest Rate Differentials 5 - July Annex XXVIII International Interest Rate Differentials 6 - July 07 39

7 Annex XXIX International Interest Rate Differentials 7 - July Annex XXX International Interest Rate Differentials 8 - July Annex XXXI Inter-Market Spread Relationship 2 - July Annex XXXII Inter-Market Spread Relationship 3 - July Annex XXXIII Inter-Market Spread Relationship 4 - July Annex XXXIV Inter-Market Spread Relationship 5 - July

8 8 Major changes over One of the most important changes over the first part of this period regards the low performance of the short term interest rates set from the government to pump up the economy. After the second part of 2006, the slope of the term structure was downward (see Annex I). Since the inverted yield curve is an unusual shape, economists try to give an explanation for this phenomenon. The optimistic view says that in the past we had a higher demand of short term public debt from foreign investors; therefore according to the offer/demand law, the price went up for short term public debt with respect to the long term one. The pessimistic branch claims that 9 out of 10 times the yield curve has had this shape, predecessor of recession (that s the reason why later interests are lower). What will be the outcome of this event, only time will tell. Credit differentials have confirmed the trend from a weak economy to a moderately strong economy (see annexes II to V). In fact, in a weak economy, an investor would have asked for more over the risk free investment (Treasury securities) for a corporate bond for extra concern. Presently, the same investor is willing to ask for less over the risk free investment, in accordance with the relatively good shape of the economy. The strong US economy has attracted investors from all over the world, especially from Japan who is dealing with a very low government interest rate (see annexes VI to XII). Japan is in fact desperately seeking to bust its economy from a long period of recession. The other international investment, which is no longer seen from the investor as risky as it was until the end of 2002, is the emerging markets. We know that when we talk about emerging markets lately we are mostly referring to Asian countries. Probably investors are seeing these countries, with particular respect to China, as robust economies already, having decreased the extra yield demanded to bear the risk of investing the money on the emerging markets (annex XII). Internally the only one change that needs to be mentioned is the diminishing spread trend between treasury securities and mortgage baked securities until 2004 (the year when the real estate boom stopped), subsequently increased in consideration of the sub-prime mortgage securities problem (annexes XIV to XVI).

9 9 Performances over Until 2004 mortgage baked securities performed as well. During years we heard a lot of funds, normally out of real estate assets, declaring to start or increase their percentages in these collaterals. At the same time, emerging markets were over performing. It is almost useless to say that in year 2000 investing in Asian markets would have given high returns even having put the money in the weirdest asset. In the second part of this period (after 2004) however the spread over the US treasury has been reduced (see annex XII). Treasury note overall has given its yield, the one you are expected to get from a risk free investment. Good to know this, until government securities will be considered risk free. Comparison of July 2007 with historical data The most important elements to be considered are the term structure, and what will be the next move of the Federal Reserve. For now the market has been waiting for the government to lower interest rates to help the economy. However, the Fed seems to be more concerned about inflation. The situation on the credit differentials is approximately the same as January 2004 with the average industry paying basis points more than 10-year treasury. Compared to the corporate bonds (AA and BBB rated lately under revision from the rating companies) the spread over the treasury has increased. This is the effect of the reduced trust of the investors in some of the bundled assets behind certain products, especially in view of a moderate economic performance. Looking at the graph inter-market spread relationship of historical data (annexes XIV and XV) it is possible to see the convergence around 2004 and the divergence after that year, up to today. Presently, the last trend is actually getting wider after the subprime news. Internationally the spread was reflecting the poor economic performance for the historical data and it is now in July 2007 confirming the moderate growth (annexes VI to XII and XXI to XXIX). The 10-year Treasury note was at the end of July decreasing its yield and narrowing the spread with the international securities. This could lead to a disinvestment from the foreigners in the US securities seeing the US market not so profitable (except from Japan which still has a very low yield.

10 10 What to buy today The yield curve is again flat. It would be recommended to buy securities with a higher convexity since the interest rates are expected to be volatile. In fact, as of now, the Fed has assured that it is its intention to keep interest rates at the same level because they are concerned about inflation, but the question is how long it will stand? What about if the economy starts slowing down? Will the Fed be pushed from the need to pump up the economy? In terms of international markets, it would be preferable to buy from the emerging markets. Furthermore the UK is growing and is considered the benchmark of the Euro area. Hence the future would probably see a growth in the securities of these countries, especially if the US securities will keep going down. What to sell today As discussed earlier, the international spreads are getting narrow (annexes XXII to XXVIII except for Japan) and therefore foreign investors might not see anymore profitable purchasing to US securities. The decrease of the 10-year Treasury and the increase of the high yield 100 have increased the spread for mortgage baked securities. Even though 350 basis points look like a lot, keeping these kind of securities (unless the assets of the pool are well known) it is very risky especially considering all the problems related to the sub-prime mortgages. Securities with higher volatility, in view of interest rate fluctuation should be kept. If the economy will slow down, the Fed will no longer keep interest rate as high. In fact, one of the properties of the option-free bonds, related to its convexity, states that if the yield decreases, investors will realize a capital gain greater than the capital loss in case the yield increases (lee likely to happen). For securities with embedded options like callable bonds this might not be true if the option is in the money.

11 11 Conclusions The stock market is not performing as well and the bond market is not doing any better. The overall situation is hold. Maybe is it just a contingency period and seems that the stock and the bond market are converging into a low performance. A general pessimistic view of this situation would lead you to think that the more the securities are baked with risky assets or issued with companies not in outstanding shape, the more the debt market behaves like the stock one. The Fed is still firm on its concern about inflation and for now they will keep the interest rates as they are. Most likely they will have to turn them down if the economy will not catch up soon. In that case the excess of liquidity will not be favored and thus causing more concern.

12 12 Annex I Term Structure of Interest Rates - Historical Term Structure of Interest Rates 7,000 5,000 4,000 3,000 2,000 NOTE BILL 1,000 07/24/98 12/06/99 04/19/01 09/01/02 01/14/04 05/28/05 10/10/06 02/22/08 Term Structure of Interest Rates (5) 00 (10) gen- gen-01 gen-02 gen-03 gen-04 gen-05 gen-06 gen-07 NOTE BILL VARIANCE

13 13 Annex II Credit Differentials 1 - Historical Credit Differentials ,000 12, ,000 4,000 2,000 07/24/98 12/06/99 04/19/01 09/01/02 01/14/04 05/28/05 10/10/06 02/22/08 High Yield 100 vs. 10-Yr. Treas. NOTE Credit Differentials gen-00 lug-00 gen-01 lug-01 gen-02 lug-02 gen-03 lug-03 gen-04 lug-04 gen-05 lug-05 gen-06 lug-06 gen-07 High Yield 100 vs. 10-Yr. Treas. NOTE VARIANCE

14 14 Annex III Credit Differentials 2 - Historical Credit Differentials ,000 12, ,000 4,000 2,000 07/24/98 12/06/99 04/19/01 09/01/02 01/14/04 05/28/05 10/10/06 02/22/08 High Yield 100 vs. AA-rated Corps. AA Credit Differentials gen-00 lug-00 gen-01 lug-01 gen-02 lug-02 gen-03 lug-03 gen-04 lug-04 gen-05 lug-05 gen-06 lug-06 gen-07 High Yield 100 vs. AA-rated Corps. AA VARIANCE

15 15 Annex IV Credit Differentials 3 - Historical Credit Differentials ,000 12, ,000 4,000 2,000 07/24/98 12/06/99 04/19/01 09/01/02 01/14/04 05/28/05 10/10/06 02/22/08 High-Yield 1000 vs. BBB-rated Corps. BBB Credit Differentials gen-00 lug-00 gen-01 lug-01 gen-02 lug-02 gen-03 lug-03 gen-04 lug-04 gen-05 lug-05 gen-06 lug-06 gen-07 High-Yield 1000 vs. BBB-rated Corps. BBB VARIANCE

16 16 Annex V Credit Differentials 4 - Historical Credit Differentials ,000 4,000 2,000 07/24/98 12/06/99 04/19/01 09/01/02 01/14/04 05/28/05 10/10/06 02/22/08 BBB-rated Corps vs. AA-rated Corps AA Credit Differentials - 4 gen-00 lug-00 gen-01 lug-01 gen-02 lug-02 gen-03 lug-03 gen-04 lug-04 gen-05 lug-05 gen-06 lug-06 gen-07 BBB-rated Corps vs. AA-rated Corps AA VARIANCE

17 17 Annex VI International Interest Rate Differentials 1 - Historical International Interest Rate Differentials - 1 7,000 5,000 4,000 3,000 2,000 1,000 07/24/98 12/06/99 04/19/01 09/01/02 01/14/04 05/28/05 10/10/06 02/22/08 (10-Year US Treasury vs. Foreign Government) CANADA 10 5 (5) (10) (15) gen-00 l International Interest Rate Differentials - 1 ug-00 gen-01 lug-01 gen-02 lug-02 gen-03 lug-03 gen-04 lug-04 gen-05 lug-05 gen-06 lug-06 gen-07 (10-Year US Treasury vs. Foreign Government) CANADA VARIANCE

18 18 Annex VII International Interest Rate Differentials 2 - Historical International Interest Rate Differentials - 2 7,000 5,000 4,000 3,000 2,000 1,000 07/24/98 12/06/99 04/19/01 09/01/02 01/14/04 05/28/05 10/10/06 02/22/08 (10-Year US Treasury vs. Foreign Government) EM U (5) ge (10) (15) n-00 International Interest Rate Differentials - 2 lug-00 gen-01 lug-01 gen-02 lug-02 gen-03 lug-03 gen-04 lug-04 gen-05 lug-05 gen-06 (10-Year US Treasury vs. Foreign Government) EM U VARIANCE lug-06 gen-07

19 19 Annex VIII International Interest Rate Differentials 3 - Historical International Interest Rate Differentials - 3 7,000 5,000 4,000 3,000 2,000 1,000 07/24/98 12/06/99 04/19/01 09/01/02 01/14/04 05/28/05 10/10/06 02/22/08 (10-Year US Treasury vs. Foreign Government) FRANCE (5) gen-00 (10) lug- International Interest Rate Differentials gen-01 lug-01 gen-02 lug-02 gen-03 lug-03 gen-04 lug-04 gen-05 lug-05 gen-06 lug-06 gen-07 (10-Year US Treasury vs. Foreign Government) FRANCE VARIANCE

20 20 Annex IX International Interest Rate Differentials 4 - Historical International Interest Rate Differentials - 4 7,000 5,000 4,000 3,000 2,000 1,000 07/24/98 12/06/99 04/19/01 09/01/02 01/14/04 05/28/05 10/10/06 02/22/08 (10-Year US Treasury vs. Foreign Government) GERM ANY (5) gen-00 (10) lug- International Interest Rate Differentials gen-01 lug-01 gen-02 lug-02 gen-03 lug-03 gen-04 lug-04 gen-05 lug-05 gen-06 lug-06 gen-07 (10-Year US Treasury vs. Foreign Government) GERM ANY VARIANCE

21 21 Annex X International Interest Rate Differentials 5 - Historical International Interest Rate Differentials - 5 7,000 5,000 4,000 3,000 2,000 1,000 07/24/98 12/06/99 04/19/01 09/01/02 01/14/04 05/28/05 10/10/06 02/22/08 (10-Year US Treasury vs. Foreign Government) JAPAN International Interest Rate Differentials gen-00 lug-00 gen-01 lug-01 gen-02 lug-02 gen-03 lug-03 gen-04 lug-04 gen-05 lug-05 gen-06 lug-06 gen-07 (10-Year US Treasury vs. Foreign Government) JAPAN VARIANCE

22 22 Annex XI International Interest Rate Differentials 6 - Historical International Interest Rate Differentials - 6 7,000 5,000 4,000 3,000 2,000 1,000 07/24/98 12/06/99 04/19/01 09/01/02 01/14/04 05/28/05 10/10/06 02/22/08 (10-Year US Treasury vs. Foreign Government) NETHERLANDS International Interest Rate Differentials (5) (10) gen-00 lu g-00 gen-01 lug-01 gen-02 lug-02 gen-03 lug-03 gen-04 lug-04 gen-05 lug-05 gen-06 lug-06 gen-07 (10-Year US Treasury vs. Foreign Government) NETHERLANDS VARIANCE

23 23 Annex XII International Interest Rate Differentials 7 - Historical International Interest Rate Differentials - 7 7,000 5,000 4,000 3,000 2,000 1,000 07/24/98 12/06/99 04/19/01 09/01/02 01/14/04 05/28/05 10/10/06 02/22/08 (10-Year US Treasury vs. Foreign Government) UK International Interest Rate Differentials (10) (20) gen-00 lu g-00 gen-01 lug-01 gen-02 lug-02 gen-03 lug-03 gen-04 lug-04 gen-05 lug-05 gen-06 lug-06 (10-Year US Treasury vs. Foreign Government) UK VARIANCE gen-07

24 24 Annex XIII International Interest Rate Differentials 8 - Historical International Interest Rate Differentials ,000 12, ,000 4,000 2,000 07/24/98 12/06/99 04/19/01 09/01/02 01/14/04 05/28/05 10/10/06 02/22/08 (10-Year US Treasury vs. Foreign Government) EM ERGING M ARKETS 20 (20) ge (40) n-00 (60) (80) (100) International Interest Rate Differentials - 8 lug-00 gen-01 lug-01 gen-02 lug-02 gen-03 lug-03 gen-04 lug-04 gen-05 lug-05 gen-06 lug-06 gen-07 (10-Year US Treasury vs. Foreign Government) EM ERGING M ARKETS VARIANCE

25 25 Annex XVI Inter-Market Spread Relationship 2 - Historical Inter-Market Spread Relationships - 2 9,000 8,000 7,000 5,000 4,000 3,000 2,000 07/24/98 12/06/99 04/19/01 09/01/02 01/14/04 05/28/05 10/10/06 02/22/08 5 (5) ge (10) n-00 (15) (20) (25) AA-rated Corps vs. Munis MUNI Inter-Market Spread Relationships - 2 lug-00 gen-01 lug-01 gen-02 lug-02 gen-03 lug-03 gen-04 lug-04 gen-05 lug-05 gen-06 lug-06 gen-07 AA-rated Corps vs. Munis MUNI VARIANCE

26 26 Annex XV Inter-Market Spread Relationship 3 - Historical Inter-Market Spread Relationships - 3 9,000 8,000 7,000 5,000 4,000 3,000 07/24/98 12/06/99 04/19/01 09/01/02 01/14/04 05/28/05 10/10/06 02/22/08 GNMA vs.10-yr. Treasury NOTE Inter-Market Spread Relationships gen-00 lug-00 gen-01 lug-01 gen-02 lug-02 gen-03 lug-03 gen-04 lug-04 gen-05 lug-05 gen-06 lug-06 gen-07 GNMA vs.10-yr. Treasury NOTE VARIANCE

27 27 Annex XVI Inter-Market Spread Relationship 4 - Historical Inter-Market Spread Relationships - 4 9,000 8,000 7,000 5,000 4,000 3,000 2,000 07/24/98 12/06/99 04/19/01 09/01/02 01/14/04 05/28/05 10/10/06 02/22/08 GNMA vs. AA-rated Corps AA Inter-Market Spread Relationships gen-00 lug-00 gen-01 lug-01 gen-02 lug-02 gen-03 lug-03 gen-04 lug-04 gen-05 lug-05 gen-06 lug-06 gen-07 GNMA vs. AA-rated Corps AA VARIANCE

28 28 Annex XVII Inter-Market Spread Relationship 5 - Historical Inter-Market Spread Relationships - 5 7,000 6,500 5,500 5,000 4,500 4,000 3,500 3,000 07/24/98 12/06/99 04/19/01 09/01/02 01/14/04 05/28/05 10/10/06 02/22/08 US Agency vs. 10-yr Treasury NOTE 4 2 (2) (4) (6) (8) (10) (12) (14) gen-00 l Inter-Market Spread Relationships - 5 ug-00 gen-01 lug-01 gen-02 lug-02 gen-03 lug-03 gen-04 lug-04 gen-05 lug-05 gen-06 lug-06 gen-07 US Agency vs. 10-yr Treasury NOTE VARIANCE

29 29 Annex XVIII Term Structure of Interest Rates July 07 Term Structure of Interest Rates NOTE BILL 6/27/07 7/2/07 7/7/07 7/12/07 7/17/07 7/22/07 7/27/07 8/1/07 Term Structure of Interest Rates NOTE BILL VARIANCE (5.000) ( ) 7/2/2007 7/9/2007 7/16/2007 7/23/2007

30 30 Annex XIX Credit Differentials 1 July 07 Credit Differentials - 1 9,000 8,000 7,000 5,000 4,000 6/27/07 7/2/07 7/7/07 7/12/07 7/17/07 7/22/07 7/27/07 8/1/07 High Yield 100 vs. 10-Yr. Treas. NOTE Credit Differentials /07/ /07/ /07/ /07/ /07/ /07/ /07/ /07/ /07/ /07/ /07/ /07/ /07/2007 High Yield 100 vs. 10-Yr. Treas. NOTE VARIANCE

31 31 Annex XX Credit Differentials 2 July 07 Credit Differentials - 2 9,000 8,000 7,000 5,000 4,000 6/27/07 7/2/07 7/7/07 7/12/07 7/17/07 7/22/07 7/27/07 8/1/07 High Yield 100 vs. AA-rated Corps. AA Credit Differentials /07/ /07/ /07/ /07/ /07/ /07/ /07/ /07/ /07/ /07/ /07/ /07/ /07/2007 High Yield 100 vs. AA-rated Corps. AA VARIANCE

32 32 Annex XXI Credit Differentials 3 July 07 Credit Differentials - 3 9,000 8,500 8,000 7,500 7,000 6,500 5,500 6/27/07 7/2/07 7/7/07 7/12/07 7/17/07 7/22/07 7/27/07 8/1/07 High-Yield 1000 vs. BBB-rated Corps. BBB Credit Differentials /07/ /07/ /07/ /07/ /07/ /07/ /07/ /07/ /07/ /07/ /07/ /07/ /07/2007 High-Yield 1000 vs. BBB-rated Corps. BBB VARIANCE

33 33 Annex XXII Credit Differentials 4 - July 07 Credit Differentials - 4 6,500 6,400 6,300 6,200 6,100 5,900 5,800 5,700 5,600 5,500 6/27/07 7/2/07 7/7/07 7/12/07 7/17/07 7/22/07 7/27/07 8/1/07 BBB-rated Corps vs. AA-rated Corps AA Credit Differentials /07/ /07/ /07/ /07/ /07/ /07/ /07/ /07/ /07/ /07/ /07/ /07/ /07/2007 BBB-rated Corps vs. AA-rated Corps AA VARIANCE

34 34 Annex XXIII International Interest Rate Differentials 1 - July 07 International Interest Rate Differentials /27/07 7/2/07 7/7/07 7/12/07 7/17/07 7/22/07 7/27/07 8/1/07 (10-Year US Treasury vs. Foreign Government) CANADA International Interest Rate Differentials /2/2007 7/4/2007 7/6/2007 7/8/2007 7/10/2007 7/12/2007 7/14/2007 7/16/2007 7/18/2007 7/20/2007 7/22/2007 7/24/2007 7/26/2007 (10-Year US Treasury vs. Foreign Government) CANADA VARIANCE

35 35 Annex XXIV International Interest Rate Differentials 2 - July 07 International Interest Rate Differentials /27/07 7/2/07 7/7/07 7/12/07 7/17/07 7/22/07 7/27/07 8/1/07 (10-Year US Treasury vs. Foreign Government) EMU International Interest Rate Differentials /2/2007 7/4/2007 7/6/2007 7/8/2007 7/10/2007 7/12/2007 7/14/2007 7/16/2007 7/18/2007 7/20/2007 7/22/2007 7/24/2007 7/26/2007 (10-Year US Treasury vs. Foreign Government) EMU VARIANCE

36 36 Annex XXV International Interest Rate Differentials 3 - July 07 International Interest Rate Differentials /27/07 7/2/07 7/7/07 7/12/07 7/17/07 7/22/07 7/27/07 8/1/07 (10-Year US Treasury vs. Foreign Government) FRANCE International Interest Rate Differentials /2/2007 7/4/2007 7/6/2007 7/8/2007 7/10/2007 7/12/2007 7/14/2007 7/16/2007 7/18/2007 7/20/2007 7/22/2007 7/24/2007 7/26/2007 (10-Year US Treasury vs. Foreign Government) FRANCE VARIANCE

37 37 Annex XXVI International Interest Rate Differentials 4 - July 07 International Interest Rate Differentials /27/07 7/2/07 7/7/07 7/12/07 7/17/07 7/22/07 7/27/07 8/1/07 (10-Year US Treasury vs. Foreign Government) GERM ANY International Interest Rate Differentials /2/2007 7/4/2007 7/6/2007 7/8/2007 7/10/2007 7/12/2007 7/14/2007 7/16/2007 7/18/2007 7/20/2007 7/22/2007 7/24/2007 7/26/2007 (10-Year US Treasury vs. Foreign Government) GERM ANY VARIANCE

38 38 Annex XXVII International Interest Rate Differentials 5 - July 07 International Interest Rate Differentials - 5 5,000 4,000 3,000 2,000 1,000 6/27/07 7/2/07 7/7/07 7/12/07 7/17/07 7/22/07 7/27/07 8/1/07 (10-Year US Treasury vs. Foreign Government) JAPAN International Interest Rate Differentials /07/ /07/ /07/ /07/ /07/ /07/ /07/ /07/ /07/ /07/ /07/ /07/ /07/2007 (10-Year US Treasury vs. Foreign Government) JAPAN VARIANCE

39 39 Annex XXVIII International Interest Rate Differentials 6 - July 07 International Interest Rate Differentials /27/07 7/2/07 7/7/07 7/12/07 7/17/07 7/22/07 7/27/07 8/1/07 (10-Year US Treasury vs. Foreign Government) NETHERLANDS International Interest Rate Differentials /2/2007 7/4/2007 7/6/2007 7/8/2007 7/10/2007 7/12/2007 7/14/2007 7/16/2007 7/18/2007 7/20/2007 7/22/2007 7/24/2007 7/26/2007 (10-Year US Treasury vs. Foreign Government) NETHERLANDS VARIANCE

40 40 Annex XXIX International Interest Rate Differentials 7 - July 07 International Interest Rate Differentials /27/07 7/2/07 7/7/07 7/12/07 7/17/07 7/22/07 7/27/07 8/1/07 (10-Year US Treasury vs. Foreign Government) UK International Interest Rate Differentials (2.000) (4.000) 7/2/2007 (6.000) (8.000) 7/ 4/2007 7/6/2007 7/8/2007 7/10/2007 7/12/2007 7/14/2007 7/16/2007 7/18/2007 7/20/2007 7/22/2007 7/24/2007 7/26/2007 (10-Year US Treasury vs. Foreign Government) UK VARIANCE

41 41 Annex XXX International Interest Rate Differentials 8 - July 07 International Interest Rate Differentials /27/07 7/2/07 7/7/07 7/12/07 7/17/07 7/22/07 7/27/07 8/1/07 (10-Year US Treasury vs. Foreign Government) EM ERGING M ARKETS International Interest Rate Differentials (50.000) ( ) ( ) ( ) ( ) 7/2/ /4/2007 7/6/2007 7/8/2007 7/10/2007 7/12/2007 7/14/2007 7/16/2007 7/18/2007 7/20/2007 7/22/2007 7/24/2007 7/26/2007 (10-Year US Treasury vs. Foreign Government) EMERGING MARKETS VARIANCE

42 42 Annex XXXI Inter-Market Spread Relationship 2 - July 07 Inter-Market Spread Relationships - 2 6,500 5,500 5,000 4,500 4,000 3,500 3,000 6/27/07 7/2/07 7/7/07 7/12/07 7/17/07 7/22/07 7/27/07 8/1/07 AA-rated Corps vs. Munis MUNI Inter-Market Spread Relationships /07/ /07/ /07/ /07/ /07/ /07/ /07/ /07/ /07/ /07/ /07/ /07/2007 AA-rated Corps vs. Munis MUNI VARIANCE 26/07/2007

43 43 Annex XXXII Inter-Market Spread Relationship 3 - July 07 Inter-Market Spread Relationships /27/07 7/2/07 7/7/07 7/12/07 7/17/07 7/22/07 7/27/07 8/1/07 GNMA vs.10-yr. Treasury NOTE Inter-Market Spread Relationships /2/2007 7/4/2007 7/6/2007 7/8/2007 7/10/2007 7/12/2007 7/14/2007 7/16/2007 7/18/2007 7/20/2007 7/22/2007 7/24/2007 7/26/2007 GNMA vs.10-yr. Treasury NOTE VARIANCE

44 44 Annex XXXIII Inter-Market Spread Relationship 4 - July 07 Inter-Market Spread Relationships /27/07 7/2/07 7/7/07 7/12/07 7/17/07 7/22/07 7/27/07 8/1/07 GNMA vs. AA-rated Corps AA Inter-Market Spread Relationships /2/2007 7/4/2007 7/6/2007 7/8/2007 7/10/2007 7/12/2007 7/14/2007 7/16/2007 7/18/2007 7/20/2007 7/22/2007 7/24/2007 7/26/2007 GNMA vs. AA-rated Corps AA VARIANCE

45 45 Annex XXXIV Inter-Market Spread Relationship 5 - July 07 Inter-Market Spread Relationships /27/07 7/2/07 7/7/07 7/12/07 7/17/07 7/22/07 7/27/07 8/1/07 US Agency vs. 10-yr Treasury NOTE Inter-Market Spread Relationships /2/2007 7/4/2007 7/6/2007 7/8/2007 7/10/2007 7/12/2007 7/14/2007 7/16/2007 7/18/2007 7/20/2007 7/22/2007 7/24/2007 7/26/2007 US Agency vs. 10-yr Treasury NOTE VARIANCE