Market Outlook - BNP PARIBAS - Investment Services India

Market Economics | Interest Rate Strategy | Forex Strategy 20 October 2011Market MoverMarket Outlook 2-3Fundamentals 4-19• Eurozone: The Long and Winding4Road• EFSF: Capacity Utilisation 5-6• Eurozone: Capital Repatriation 7• Germany: On the Hook 8-9• UK: Top Of The Hill 10• Norway: Increased Uncertainty 11• US Beige Book: When in Doubt … 12-13• US: Core Relief Comes Early 14-15• Japan: Real Reason for ‘Turning 16-19Japanese’Interest Rate Strategy 20-50• US: Unemployment Targeting – What 20-21It Means for Rates• Agencies Best Value in Rates, Swaps 22-23Lag• MBS: Refi Flashback 24-25• EUR: Firm Demand at the 12mth 26LTRO• EUR: AAA Contagion Risk and Bond 27-29Demand• EUR: EFSF Leverage in Focus 30-32• EMU Debt Monitor: CDS, RV Charts, 33-37Redemptions, Trade Ideas• EUR: Forward Vol is Cheap 38• JGBs: Buy 2y2y Payers 39• Global Inflation Watch 40-43• Inflation: CPI and OAT/Bund 44• TIPS: Expect It When You Least 45-47Expect It• Technical Analysis 48-49• Trade Reviews 50FX Strategy 51-52• AUD: Moving On Up 51-52Forecasts & Calendars• 1 Week Economic Calendar53-6953-55• Key Data Preview 56-63• 4 Week Calendar 64• Treasury & SAS Issuance 65-66• Central Bank Watch 67• Economic & Interest Rate Forecasts 68• FX Forecasts 69Contacts70www.GlobalMarkets.bnpparibas.com• The rebound in risk appetite seen earlier this month haspaused, with markets now on hold ahead of the EUSummit.• Conflicting headlines about what could be agreed at theSummit mean the market is probably more exposed topositive surprises.• But progress on the political front in the eurozone willbe needed if we are to see any normalisation tradesdevelop (sell-off in core markets, tighter spreads…). Wemaintain a negative bias on core EGBs for the comingweeks.• The Treasury market remains mostly driven by EMUnews as economic data continue to surprise positively.Both the US and EMU curves will remain directionallydriven.• JGBs have been stuck in a narrow range. However, theyare likely to be affected by any post-EU Summit move inoverseas markets. The main risk lies to the downside.• The US dollar has continued to trade inversely to riskappetite, mostly driven by headlines ahead of the EUSummit and US data releases.• We continue to remain cautiously positive on EURUSD,though concede that 1.3900 to 1.4100 could be difficult tocrack given the reduction already seen in short positioning.Market ViewsUST 10y T-note Yield (%)2y/10y Spread (bp)EGB 10y Bund Yield (%)2y/10y Spread (bp)JGB 10y JGB Yield (%)2y/10y Spread (bp)Forex EUR/USDUSD/JPYCurrent 1 Week 1 Month2.15 ↔ ↑188 ↔ ↑2.01 ↔↑ ↑141 ↔↑ ↑1.01 ↔↑ ↑86 ↔↑ ↑1.3696 ↔↑ ↑76.88 ↔ ↓IMPORTANT NOTICE. Please refer to important disclosures found at the end ofthis report. Some sections of this report have been written by our strategy teams.Such reports do not purport to be an exhaustive analysis and may be subject toconflicts of interest resulting from their interaction with sales and trading whichcould affect the objectivity of this report.

Market OutlookMarkets remain on holdahead of the EU SummitThe rally in risky assets seen during the first half of October has paused dueto a barrage of contradictory headlines about exactly what has been and willbe agreed ahead of the European Summit this weekend. Talk of a possibledelay to the European Summit is indicative of the difficulties in securing acomprehensive agreement.According to German government officials, talks on leveraging the EFSFwere making 'good progress'. But the French finance minister was quotedsubsequently saying that France favours the involvement of the ECB in theprocess. Germany, and apparently the ECB, judging by the comments at thepress conference earlier this month, are opposed this involvement.A delay would not be a good signal short term. However, if it increased thelikelihood of a comprehensive deal being struck ahead of the G20 meeting inearly November, that could ultimately be a positive development. On thepositive side, progress is being made on other elements of the discussion,including the bank capital issue.EMU Major Upcoming Events21 October Extraordinary Eurogroup meeting21 October EUR 1.6bn T-Bill redemption in Greece22 October EUR 1.1bn coupon payment in Greece23 October EU Summit3 November ECB policy decision3-4 November G20 Summit7-8 November Eurogroup/EcoFin meeting in Luxembourg11 November EUR 2.0bn T-Bill redemption in Greece18 November EUR 1.3bn T-Bill redemption in Greece20 November General elections in Spain29-30 November Eurogroup/EcoFin meeting in Luxembourg8 December ECB policy decision9 December EU SummitWe expect somenormalisation afterupcoming summitsSource: BNP ParibasData-wise, the upcoming bundle of surveys will continue to show morefallout on the eurozone economy from the stress in markets and the highlevel of uncertainty. The composite PMI is already consistent with a fall inoutput, and prior weakness in the forward-looking components (new ordersetc) suggests it will continue to slide. In addition, the Eurocoin indicator islikely to go below zero for the first time since 2009. UK sentiment surveysare also likely to show more evidence of contagion.Given recent price action and conflicting signals, the market now looks moreexposed to positive surprises at the upcoming meetings. We maintain anegative bias on core EGBs for the coming weeks although, once again,political developments will set the tone. The benchmark curve will remaindirectionally driven, with further flattening/steepening pressuresaccompanied by bullish/bearish tones by the end of the week.Intra-EMU spreads have been rising again. French government bondspreads in particular are under sharp widening pressure following a reportfrom Moody’s indicating it will monitor and assess France’s stable outlookover the next three months by considering how much progress has beenmade in the plan to curb the deficit and any adverse developments. Contraryto previous episodes of sovereign stress, speculation is now being directedtoward economies where the fundamental fiscal picture is relatively positive.These recent developments highlight the need for decisive action fromgovernments at the upcoming EU and G20 summits.Cyril Beuzit 20 October 2011Market Mover2www.GlobalMarkets.bnpparibas.com

Germany: On the Hook• German data releases signal risks to growthare increasing.• The labour market seems strong butaggregate figures hide some crucial shifts in itsstructure, which could weaken domesticdemand.• This week, the Ministry of Economicspublished its new forecasts of 2.9% GDP growthin 2011 and 1.0% in 2012. It does not expect arecession.• Neither do we currently forecast a recession,expecting GDP growth of 2.7% in 2011 and 1.0%in 2012. However, we recognise that risks of aweak start to 2012 are rising.Source: Reuters EcoWin ProChart 1: Trade Balance (EUR bn)Chart 2: Industrial Production vs. Orders (Levels)In general, German data releases over the pastmonth have sent conflicting signals about theeconomy’s growth outlook. Although only one quarterof a q/q fall in GDP is currently expected by BNPParibas, arguments that the domestic economy willremain resilient in the face of the slowdown in globalactivity look vulnerable.Official forecasts: no recessionThis week, the German Ministry of Economicsofficially presented its new growth forecasts. Itforecasts that in 2011 GDP will grow by 2.9%,representing only a slight downward revision to itsprevious forecast of 0.1 of a percentage point. Aslowdown in activity in Q4 is expected, but not a fall.2012 growth is forecast at only 1.0%, down from1.8% forecast previously. Domestic demand will, inthis scenario, replace the external sector as the maindriver of growth.In our October Global Outlook, we expected “normal”growth in Q3 to be followed by a fall in activity in Q4and a return to trend growth thereafter. For the fullyear, this results in 2.7% growth for 2011, comingfrom the strong carryover from Q1. We then expect aweakening in growth to 1.0% in 2012.Both Ministry of Economics and our forecasts see areturn to trend growth as early as Q1 2012, butrecent data suggest that the economy could prove tobe less resilient than anticipated and may start 2012below expectations.Expectations declineSurveys of current economic conditions show aSource: Reuters EcoWin Prodeterioration in sentiment, but levels indicate thatconditions remain well above long-term averages.Expectations for activity over the next six months,however, declined earlier and more sharply in boththe ZEW and the Ifo. In October, the ZEWexpectations index fell further than expected to thelowest level since the post-Lehman crisis. However,due to the composition of the survey, the index ismore vulnerable to financial than to real economydata and hence tends to overshoot. The Ifoexpectation index is following the ZEW’s downwardtrend. Comparable falls in the Ifo in the past weretypically followed by a recession, but theserecessions were neither steep nor longer than twoquarters.The PMIs lie between confidence and hard data asthey rely on a qualitative statement based oncompany accounts. Currently, it is the labour marketthat is keeping the PMI, now at 50.5, in expansionterritory. Sub-indices, such as new orders, declinedKen Wattret 20 October 2011Market Mover8www.GlobalMarkets.bnpparibas.com

elow 50 in August, indicating a further weakening inactivity is likely. And, whenever the German PMI fallsbelow the 50-point benchmark, it remains there fornine months on average, accompanied by twoquarters of falls in GDP on average.August data were weakThe latest hard data are available for August – themonth when soft (survey) indicators took theirhardest hit. Better than expected data came from theexternal sector, where exports increased again by3.5% m/m while imports were unchanged, driving thetrade balance upwards again. However, thecumulative trade balance until August of EUR 98.9bnwas EUR 7bn below its average in the same periodof 2004-2010. And this decline is due to intraeurozonetrade, which accounted for 60% ofGermany’s surplus over 2004-2010. The tradebalance with eurozone members in the year toAugust was down EUR 8bn compared to previousyears. A slowdown in activity in the global economyis likely to cut net trade’s valuable contribution toGDP growth further.Industrial production weakened less than expected inAugust: growth slowed to 7.9% y/y compared to10.4% in July (sa). However, this weakening is likelyto persist as new orders declined for the secondmonth in a row in August, slowing growth to 3.6% y/yfrom 8.9%. The moderation in the growth in exportorders has been sharper in recent months than fordomestic orders, once more underlining the highexposure of the economy to global growth. Inaddition, industrial production seems to be high inrelation to the level of orders, increasing the risk andscope for a downward adjustment (Chart 2).Labour market is the brightest spot – but becautiousThe German labour market outperformedexpectations again in September, with the number ofunemployed down by a further 27,000, lowering theunemployment rate to 6.9%. Lower unemploymenthas not been registered in the series’ records sincereunification.Typically, such a strong labour market should boostconsumer confidence and eventually also domesticdemand growth. But so far, this spillover has notmaterialised. Consumer confidence has remainedalmost stable, but consumption itself decreased inQ2 and more recently, retail sales (although not themost reliable indicator for total consumption) fell at itsfastest rate in four years.Labour hoarding in 2008/2009 was facilitated bymassive subsidy programmes for short-time labour.Chart 3: Labour Market, Share of Part-timeSource: Reuters EcoWin ProNearly 1.5 million employed fell into this category atits peak in mid-2009, but these figures have comeback down to 66,000 in July 2011 (latest available).Firms currently seem to be struggling to fill positionswith qualified staff, as indicated by a lengthening inthe time required to fill a vacant post from 55 to 65days a year. This increases the cost related to hiring,and in a context of a potential shortage in highlyqualified labour, hoarding could be less expensive forcompanies than firing.But labour market conditions are not as bright asthey seem: employment shifted from full- to part-timeemployment on all qualification levels over the pasttwo decades, according to the findings of a recentstudy conducted at the DIW institute. Indeed,although unemployment decreased, the total numberof hours has only returned to pre-crisis levels. As aresult, total hours worked returned to its long-termaverage and pre-2008 levels only in Q1 2011,although employment has risen by nearly 1 millionsince then. This structural shift in the labour marketaffects the potential for domestic demand, ashousehold revenues do not necessarily increase,especially when part-time employment is only thesecond best solution because full-time employmentoffers are rare.Growth outlook built on slippery groundAll of the above makes us think that the economy ismuch more vulnerable than generally perceived.Should the problems in the external environmentaffecting Germany not be sorted out rapidly, wesuspect the labour market may not be sufficientlystrong to support domestic demand growth, in whichcase, the period of expected decline in GDP couldeasily expand into 2012. Currently, we see anincreased risk of this happening, but a rapid politicalsolution could easily invert the risk balance again.Ken Wattret 20 October 2011Market Mover9www.GlobalMarkets.bnpparibas.com

UK: Top Of The Hill• The September reading of UK consumerprice inflation showed it surging to 5.2%, upfrom 4.5% in August.• But we and the MPC expect it to fall sharplynext year.• Indeed, the risks are on the downside andthe MPC will need to consider more QE byFebruary.The September reading of UK consumer priceinflation showed it surging to 5.2% y/y, up from 4.5%in August. That represents the highest annual rate ofCPI inflation since September 2008.Of the 0.7pp rise in inflation, 0.45pp was accountedfor by higher utility bills. That was in line with our ownexpectations. But on top of this effect, transportprices also contributed to a higher reading. Betweenthis August and September transport prices declinedby 2.1%, compared with 3.4% a year ago. That wasdue to a smaller fall in air fares this September thanlast year, as well as in sea fares. Overall, transportadded 0.2pp to the annual CPI inflation rate. Thesmaller jump in the RPI annual rate, from 5.2% to5.6%, partly reflects lower weights for air and seafares in the index.We expect inflation to remain above 5% in October,though declining to 5.1%. RPI inflation should movedown to 5.5% next month. Despite the high currentrate, the Bank of England’s Monetary PolicyCommittee remains quite convinced that inflation willdrop sharply next year and we would broadly agreewith that.There are a number of reasons why we can beconfident of a sharp fall back. For one, the rate ofVAT rose by 2.5pp in January 2011 and this will dropout of the twelve-month inflation calculation over thefirst quarter of 2012 (assuming some gradual passthroughof the rise). That alone should see at least1pp off the annual inflation rate. But on top of thisimpact, many of the upside commodity induced risesin inflation look to have peaked. For example, globalfood prices appear to have flattened off, while UKwholesale energy prices have done likewise.In the bigger picture, since 2008 UK consumer priceshave increased by around 7.5% more than in theeurozone and the US. As the Bank of England isfond of pointing out, virtually all of that difference canbe accounted for by the impact of the fall in the valueof sterling and the subsequent rise in import prices.13012512011511010510095908580Chart 1: UK, US and Eurozone CPI Since 2008Jan 2008 Jul 2008 Jan 2009 Jul 2009 Jan 2010 Jul 2010 Jan 2011 Jul 2011Source BloombergUK CPIUS CPIEurozone CPIUK Import pricesSince 2008 import prices excluding energy haverisen by around 25%. Once allowance is also madefor the rise in VAT, that can account for thedifference in CPI performance.In the medium term, as these effects wash out thedata, UK consumer price inflation should begin tobetter reflect underlining domestically generatedinflation. And here evidence suggests inflationarypressure is very restrained, with annualised unitlabour growth in the second quarter of 1.1%.This week’s MPC minutes to the October meetingunderlined the Committee’s belief that inflation willfall sharply next year. Indeed, the growing downsiderisks facing UK demand growth were described ashaving increased “significantly” since the AugustInflation Report. That reflects the Committee’sconcern about the weakening in the UK’s mainexport markets, as well as the impact that financialmarket tensions may have on credit conditions. Infact, the MPC now think it is more likely that inflationwill undershoot the 2% target in the medium term,and the available indicators suggested that growth inQ4 would be “close to zero”. The Committee,therefore, found the case for an extension of QE“compelling”.We believe the risks are to the downside of theCommittee’s view that GDP will be flat in Q4, withrecent surveys suggesting a contraction is morelikely. Moreover the shock to household incomesfrom higher utility bills will also knock spendingvolumes in due course. It therefore remains likelythat the macroeconomic backdrop to theCommittee’s meetings early in the new year will notbe auspicious, and we look for it to agree anotherextension to quantitative easing by February.David Tinsley 20 October 2011Market Mover10www.GlobalMarkets.bnpparibas.com

Norway: Increased Uncertainty• The Norges Bank left the policy rateunchanged at 2.25%, in line with marketexpectations.• Downward revisions to inflation forecastsand increased uncertainty regarding theeconomic outlook led to a lowering of the policyrate profile.• The Bank now intends to deliver the nextrate hike in Q3 2012. We believe it will comeearlier in Q1 2012.Rates on holdIn line with our and market expectations, the NorgesBank kept its policy rate unchanged at 2.25% at itsOctober meeting. The accompanying policystatement was dovish. The biggest change was thatthe Bank now intends to deliver the next rate hike “ina year’s time”. Although “growth in the Norwegianeconomy remains robust”, the Bank noted that“turbulence and weaker prospects abroad are alsoaffecting the outlook for the Norwegian economy”.So, if tensions in the financial markets intensify andthe outlook for growth and inflation weakens further,the Bank left the door open for policy rate cuts.Norges Bank’s latest forecastsLooking at the forecasts in the new Monetary PolicyReport, the Norges Bank now expects mainland GDPto grow by 2.75% in 2011, down from its previousprojection of 3.00%. Meanwhile, the 2012 and 2013mainland GDP growth forecasts were left unchanged(Table 1).CPI forecasts were revised down for the period 2011-2013. For CPI-ATE, the Bank kept its 2011 forecastof 1.00% unchanged, but revised 2012 and 2013forecasts 0.25pp lower to 1.75% and 2.25%. This isin line with our forecast that a stronger domesticcurrency and moderation in external price pressuresshould lead to some downward revisions to CPI andCPI-ATE forecasts. But, as we highlighted before,this did not change the Bank’s profile that CPI-ATEinflation is to reach a trough this year and annualCPI-ATE inflation is to print higher next year,compared with this year.Policy outlookIn terms of policy going forward, these downwardrevisions to inflation forecasts and an “unusually highlevel of uncertainty surrounding developmentsahead” led to a downward revision to the Bank’spolicy rate profile. The new quarterly policy rateprojections suggest the Bank intends to deliver thenext rate hike in Q3 2012, in August at the earliest.Table 1: Norges Bank’s Forecasts (% y/y)*CPICPI-ATEGDPMainlandGDP2011 2012 2013 20141½(1¾)1(1)1½(1¾)2¾(3)1½(1¾)1¾(2)3(2¾)3¾(3¾)2(2½)2¼(2½)2½(2¼)3¼(3¼)2¼(2½)2¼(2½)2¼(2)3(2¾)Key Policy 2.25 2.41 3.23 4.01Rate (avg.for Q4) (2.65) (3.87) (4.68) (4.79)Source: The Norges Bank, Monetary Policy Report, 3/11, OctoberNote: *Forecasts in Monetary Policy Report, 2/11, June in parenthesisClearly the Bank is giving weight to uncertaintyregarding the developments ahead, in particular inEurope. The adverse external developmentsstemming from the eurozone are having spillovereffects on the Norwegian export sector and leadingto higher money market spreads.We agree with the Bank’s assessment that the policyrate should be left unchanged for some time to come,given broad expectations that the major advancedcountry central banks are to keep their policy rateslow for a while. From the Bank’s assessment, it isclear that a stronger krone is a source of concern forthe Bank. In particular, it noted that “an appreciablyfaster rise in the interest rate at home than abroadwould increase the risk of a krone appreciation,resulting in inflation that is too low”.But we believe the next rate hike is to come earlier inQ1 2012, in March. As we highlighted before,although there are some signs that economic growthis to moderate over the period ahead, mainly due tothe impact of external developments on Norway,domestic economic conditions are to remainrelatively robust. Consumer spending is stillsupported by high house prices, robust growth incredit to households, high real personal disposableincomes and a tight labour market. Furthermore, oiland housing investment are to provide a boost to theeconomy overall. In particular on housing, therelatively low level of interest rates and high demandcontinues to push housing starts higher.The risk to this forecast is that the Bank will keep thepolicy rate unchanged for longer than we assume, ifthe negative spillover effects of externaldevelopments on Norway are larger than we expect,inflation surprises the Bank to the downside and thekrone appreciates significantly.Gizem Kara 20 October 2011Market Mover11www.GlobalMarkets.bnpparibas.com

we believe that contractions in private payrolls willfollow (Chart 2). The latest Beige Book showedcompanies reported more doubt about the strengthof the recovery, noting “restraint in hiring and capitalspending plans”. When in doubt - you don’t expand.Nonetheless, in line with better economic data inSeptember, our in-house Beige Book WeaknessIndicator, which tallies all instances of the wordscontaining the root “weak” and, thus, provides uswith a quantitative measure for this qualitative report,improved to 63 counts from 86 in the previous report.However, the reading remains at recessionary levelsand suggests a double-dip recession is probably stillin the cards (Chart 3).Foreigners support domestic regional economiesIn the details, the latest Beige Book suggested thatconsumer spending was up slightly in most Districts,with auto sales and tourism leading the way. Themajority of Districts reported increases in auto salesas several Districts noted a greater availability of newvehicles as the supply disruptions that had plaguedauto dealerships in the aftermath of the Japanesedisaster subsided. Thus, as the supply chaindisruption unwound, we saw a recent jump in autosales.The pick up in tourism activity throughout this yearhas shown a somewhat more persistent nature.Indeed, a weaker dollar continues to attract moretourists each year. The Beige Book noted that“tourism was generally higher in those Districtsreporting on the sector”. For example, contacts inNew York noted that, “despite the negative impact ofHurricane Irene, Broadway and hotel revenuescontinued to rise”. Regional data are reported with asignificant lag, however, the data available throughthe summer months of this year indicated a higherlevel of New York JFK airport traffic in 2011compared to the previous years (Chart 4), and asignificant pick up in tourism-related industries’payrolls (Chart 5). As such, external demand forcheaper dollar-denominated goods helps supportdomestic retail sales but might not necessarily reflectthe underlying strength of domestic consumerspending. In that respect, the Beige Book noted that“a large flow of Canadian shoppers has contributedsignificantly to strong overall sales” in the New Yorkregion.Going into a holiday season…Business spending increased somewhat from theprevious report. However, a number of Districtsreported that a weaker and more uncertain economicoutlook had increased caution and was weighing onfuture spending plans. Several districts indicated that“many retailers were reluctant to build inventoriesChart 4: New York JFK Airport TrafficSource: Haver AnalyticsChart 5: Amusement, Gambling, and RecreationIndustries – New York StateSource: Reuters EcoWin ProSource: Reuters EcoWin ProChart 6: Container TrafficTeus: 20-foot equivalent units or 20-foot-long cargo containerahead of the holiday season, pointing to recentdeclines in consumer confidence”. The recent dataon container traffic suggest the shipping volumes inAugust and September were the worst since therecession in 2009 (Chart 6). While the incomingspending data have pointed to resiliency, sentimentremains fragile and threatens to lead to a selffulfillingcontraction in activity. Political developmentsout of Europe will be key to which way the tide turns.Yelena Shulyatyeva 20 October 2011Market Mover13www.GlobalMarkets.bnpparibas.com

weakness in clothing sales in July and August as wellas weaker import price growth in September.Vehicle prices also exerted downward pressure oncore goods price inflation in September. New vehicleprices have been broadly flat for the past threemonths as the market has been returning to normalafter the disruption of the Japanese earthquake inMarch. Meanwhile, used car prices fell 0.6% m/m inSeptember, after surging 6.5% in the six months toAugust. Together, the fall in apparel and vehicleprices contributed to a 0.25% m/m decline in coregoods prices, which was the largest fall sinceDecember 2008. Core services price inflation wasalso weak in September, rising just 0.05% m/m aseducation and health-care inflation both softened inthe month.One month is not a trendThe moderation of core inflation in September is apositive development. Most forecasters, includingourselves, had been anticipating a weakening in coreinflation through the second half of 2011 as theimpulse from the earlier rise in commodity prices andother supply shocks waned (Chart 3). But untilSeptember, this expectation had been confoundedby the data. However, it is important to rememberthat September is just one month; we will have towait and see if the moderation in core inflationcontinues into the final months of 2011. To that end,the 0.2% m/m increase in the Cleveland Fed’sweighted median and trimmed mean measures ofunderlying inflation in September was less positivenews.Headline, core inflation to moderate in 2012Despite the downside surprise to core prices inSeptember, we have made only marginaladjustments to our core inflation forecasts fromOctober onwards. This is largely because we hadalready projected monthly core outturns to average alittle over 0.1% over the next 12 months due both tothe pass through of lower commodity prices and anincrease in labour market slack. RollingWednesday’s data into our forecast, we now expecty/y core inflation to peak at 2.1% in December 2011and, then, fall to 1.5% by the end of 2012.On the other hand, we have made more substantialadjustments to our headline CPI forecast in light ofthe continued divergence between WTI and retailgasoline prices. Historically, we have seen a verytight relationship between the West TexasIntermediate (WTI) crude oil and gasoline prices.However, since March, they have followed differentChart 3: Lower oil prices = lower core inflation160140120100806040200BrentCore Goods Inflation (3m/3m ar) (RHS)Jan 00 Jan 03 Jan 06 Jan 09Source: Reuters EcoWin ProChart 4: Gasoline prices are now tracking Brent1101009080706050Retail GasolineJan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11Source: Reuters EcoWin ProBrentpaths, and instead, gas prices have had a tightercorrelation with Brent crude oil prices (which havefallen much more moderately than WTI).Differences in supply fundamentals explain the largeincrease in Brent/WTI spreads in recent months, aswell as the breakdown of the relationship betweenWTI prices and retail gas prices. Higher quality WTIhas been pouring into Cushing, Oklahoma from theNorth, but high transport costs and supplybottlenecks have prevented this increased supplyfrom quickly reaching the coastline. The result hasbeen a stockpiling of WTI inventories and lower WTIprices.Meanwhile, supply disruptions have resulted in atight Brent oil market, pushing prices up relative toWTI. The upshot of these two forces is that a greatmany US refineries have had to rely on moreexpensive Brent oil to produce gasoline for the USmarket. In our forecasts, we assume that thesesupply imbalances unwind only slowly and that retailgas prices continue to follow Brent prices moreclosely. This implies a more gradual reduction inheadline CPI inflation from 3.9% y/y in September to3.2% in December 2011 and 1.6% at the end of2012.WTI864209080706050-2-4-6110100Jeremy Lawson and Bricklin Dwyer 20 October 2011Market Mover15www.GlobalMarkets.bnpparibas.com

Japan: Real Reason for ‘Turning Japanese’• Putting off needed structural reforms for lackof political (and popular) will to tolerate shorttermpain for the sake of long-term gain is arecipe for continued crises.• As in Europe today, after its bubble burstJapan relied for a long time on (1) forbearancepolicies to grow out of its balance-sheet woesand (2) aggressive fiscal spending to maintainthe spending structure and to shore up slumpinggrowth, but the result has been prolonged subpargrowth and biggest public debt of anydeveloped nation.• Japanese policymakers had thoughtproblems could be solved by economic growth,but trend growth cannot recover as long asbalance-sheet troubles are left unresolved. Thisrequires strict asset assessments, adequateloan-loss reserves and public fund bailouts.4.54.03.53.02.52.01.51.00.50.0Chart 1: Japan’s Per Capita Trend Growth Rate(= natural rate of interest, %)Potential grow th rate per w orker(five-year moving average)-0.585 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11Source: Cabinet office, MIC, BNP ParibasChart 2: Eurozone’s Per Capita Trend Growth Rate(= natural rate of interest, %)3.0• It seems that the sovereign debt crisis inEurope today is being aggravated becausepolicymakers are doing the same thing Japandid earlier.2.52.01.5Potential grow th rate per labor force(five-year moving average)• While Japan was the frontrunner in problemslike balance-sheet woes, banking crises, longtermeconomic stagnation, public debt anddeflation, the eurozone has surpassed Japan insovereign debt issues destabilising the financialsystem. But if Japan continues to put off fiscalreforms, it could end up like the ailing nations ofsouthern Europe today, but without a Germanyto bail it out.1.00.50.0-0.598 99 00 01 02 03 04 05 06 07 08 09 10 11Source: Eurostat, BNP ParibasThere are numerous reasons why the sovereign debtwoes in the eurozone have been aggravated. Onereason is the adoption of forbearance policies, whichJapan also did after the bursting of its real estatebubble of the 1980s. Rather than quickly moving toresolve the balance-sheet troubles afflictingEuropean banks, something that requires stricterasset assessments, adequate loan-loss reserves,and then plugging any capital shortfalls with publicmoney (if funds cannot be procured from the market),policymakers in the eurozone have opted forforbearance policies in the hope that revivedeconomic activity will enable their economies to growout of these problems. Unfortunately, as Japandiscovered, the failure to resolve balance-sheettroubles actually weighs on economic activity. Thetrend growth rate (i.e., potential growth rate) declinesbecause both real and human capital accumulation,is thwarted by impaired financial intermediation andfalling growth expectations.But as in Japan in the 1990s, various pressures workagainst the imposition of strict asset assessments.For one thing, banks themselves are wary becauseof the inevitable damage to earnings. Second,instead of cracking down on banks to ensure thatassets are stringently evaluated, authorities tend toallow lax assessments out of concern that banksmight cut back on credit to the detriment of themacroeconomy. Third, since strict assetassessments usually necessitate the injection oftaxpayer money to shore up undercapitalised banks,the authorities prefer to avoid doing this becausesuch bailouts are not only unpopular but they alsoRyutaro Kono 20 October 2011Market Mover16www.GlobalMarkets.bnpparibas.com

exacerbate fiscal deficits. Thus, as long as theauthorities can act at their own discretion, they tendto gravitate toward forbearance policy.Forbearance policy and fiscal stimulus: twosides of same coinAnother reason for Europe’s worsening sovereigndebt woes is the aggressive fiscal stimulus to propup growth rates, which is really just the flip side offorbearance policy. First, budget deficits are run upto maintain spending structures that areunsustainable because they are predicated on taxrevenue levels of the bubble’s heyday (this isparticularly true in Greece, Portugal and Italy). Then,to shore up floundering growth when a boom ends,policymakers irrationally undertake additional fiscalspending. The result is the massive fiscal deficits thatcurrently afflict some eurozone states.0-2-4-6-8-10-12Chart 3: Fiscal Conditions in Eurozone(2011 forecasts)Public debt (% of GDP)0 20 40 60 80 100 120 140 160 180 200 220Budget deficit (% of GDP)SpainGermanyFranceUKUSEuro areaPortugalIrelandItalySource: European Commission, OECD, BNP ParibasGreeceChart 4: Current Account in OECD Nations(% of GDP, 2010)JapanEconomic growth during a bubble is inherentlyunsustainableEconomic expansion during a bubble is inherentlyunsustainable, so some degree of reduced growthmust be tolerated while the bubble’s excesses areundone. Although Japan’s lesson of the 1990sshows that, no matter how aggressivemonetary/fiscal policy might be, trend growth will notrevive as long as balance-sheets are not cleaned up.The authorities in many European nations still spentmassive amounts of tax money to prop up growthafter the “once-in-a-century crisis.”20151050-5-10-15NorwayLuxembourgSwitzerlandGermanyIcelandSwedenNetherlandsDenmarkJapanFinlandSource: OECD, BNP ParibasAustriaKoreaIrelandHungaryBelgiumMexicoUnited KingdomCzech RepublicSlovak RepublicFranceCanadaPolandItalyUnited StatesAustraliaTurkeyNew ZealandSpainPortugalGreeceSovereign debt woes trigger financial systemturmoilProblems in the eurozone are, as we have pointedout, basically the same as those experienced byJapan in the 1990s, and by the US today. Followingthe collapse of its credit bubble, America also optedfor a forbearance approach to its balance-sheettroubles, but the discretionary macro stabilisationfailed to prop up US growth and only saddled thenation with a higher level of public debt. Theeurozone, however, is facing an even moretroublesome issue: problems in the financial systemare aggravating the sovereign debt woes, which, inturn, are giving rise to further financial system turmoil.In Greece, for example, it is blatantly clear that futuretaxes cannot pay down the nation’s overwhelmingpublic debt. Consequently, prices on Greekgovernment bonds have collapsed, making itessentially impossible to finance budget deficits. Thegovernments of Ireland and Portugal also are havingdifficulty in resolving fiscal problems on their own,though the conditions are not as severe as in Greece.As for Spain and Italy, default is very unlikely but thefinancial markets are still concerned because the risksurrounding the repayment of their public debt is notas low as it used to be.Abnormal condition of being unable to raisecapital to bail out ailing banksThe upshot of all this is that cleaning up the bankingsector in the southern eurozone states, with strictasset assessments and the injection of public moneyto shore up undercapitalised banks, is made difficultby the crisis of confidence in the debt that thesegovernments issue. Consequently, what actuallyneeds shoring up is the government debt itself, whichnormally ought to be the safest domestic asset. Andbecause the leading banks in Europe are so heavilyexposed to this problem sovereign debt, theirsoundness is also being questioned. As pointed outin the Weekly Economic Report of 9 August 2011(What might happen if Japan defaults? Financialinnovations stemming from the Glorious Revolution),the smooth undertaking of financial transactions, thelifeblood of an economy, is impaired when thefinancial system is shaken by a plunge in value ofgovernment bonds, the foundation of a country’scredibility. Thus, despite being developed economies,the states of southern Europe are in the abnormalsituation of being unable to raise capital to bail outtheir ailing banks.Ryutaro Kono 20 October 2011Market Mover17www.GlobalMarkets.bnpparibas.com

Political question of whether people in Germanyand France want to bail out their neighboursThat said, the budget deficit as a share of GDP forthe eurozone as a whole is not that great. It is lowerthan that of the US and Japan, so the scale ismanageable. Because of this, it could be argued thatthe eurozone’s financial/fiscal troubles boil down tothe political question of whether the citizens inGermany and France will agree to bail out theirsouthern neighbours. In other words, will integrationon the fiscal front proceed or not? A fundamentaldefect of the eurozone is that there has never been amechanism for ensuring that member states maintainfiscal discipline. There are no established rules forhow the entire eurozone should share the fiscal costof a shock that any member cannot handle on itsown, so the authorities first put off taking anyresolute action and then only started adoptingpolicies piecemeal once a crisis began to take shape.While it could be argued that there has been no needfor such a rule, as fiscal support between states wasprohibited in the Lisbon Treaty, such excuses nolonger hold when problems trigger financial turmoilthat engulfs the global economy.Will Japan end up like ailing eurozone states?While Japan was the frontrunner with respect to sucheconomic problems as NPL woes (balance-sheettroubles), banking crises, long-term economicstagnation, surging public debt and deflation, wehave been surpassed by the eurozone with respectto sovereign debt issues destabilising the financialsystem. But if Japan continues to put off fiscalreforms, it will eventually end up like the nations ofsouthern Europe today. Japan could, in fact, be inworse shape because it won’t have a Germany or aFrance to bail it out. (The IMF, of course, could stepin, but that would entail severe conditions like thoseimposed on emerging economies). The US, with itshuge budget deficit and soaring public debt, mayavoid succumbing to such a fate thanks to thegreenback being the global standard. But then again,it may not, as difficulty in financing budget deficitsand the external account could cause the dollarstandard to collapse. At the very least, if thegreenback is no longer the only global standard,easy adjustments via dollar depreciation shouldbecome difficult owing to the loss of seigniorage asthe sole key currency.Needed structural policies are put off out ofconcern over near-term painWhy have the US and Europe failed to heed Japan’slesson and put off needed structural reforms untilcrises emerge in the financial market? The reason isthat politicians, and the people that elect them, tendto be myopic with regard to policymaking, focusingonly on the immediate level of consumption. But, as2520151050Oct-09Nov-09Dec-09Jan-10Chart 5: EU Bond Spreads(%pp, 10-y spread to German bund)GreecePortugalSpainItalyFeb-10Mar-10Apr-10May-10Jun-10Jul-10Source: Bloomberg, BNP Paribas30025020015010050Aug-10Sep-10Oct-10Nov-10Dec-10Jan-11Feb-11Mar-11Apr-11May-11Jun-11Jul-11Chart 6: Japan’s Public Debt(central & local, % of GDP, FY)Aug-11Sep-11Oct-11080 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 22Source: MOF, Cabinet office, BNP ParibasForecastpointed out in earlier reports, the ultimate aim ofeconomic policy should be to raise the level of percapita real consumption sustainably, bolstering percapita trend growth being an interim objective. Thecrucial point is that the improvement in theconsumption level (trend growth) must continue intothe future and not be just a momentary short-term jolt.For the US and Europe to raise the level ofconsumption sustainably, they must first resolve theirstructural problems (balance-sheet troubles,sovereign debt issues), something that requirespainful burdens over the near term. But becausepeople are loathe to see any reduction in immediateconsumption, needed structural policies are put offuntil problems reach crisis stage.Macro stabilisation does not serve its primaryroleWhile the authorities put off needed structuralpolicies out of concern for near-term pain, theyaggressively resort to discretionary macrostabilisation. Macro stabilisation, however, cannotresolve structural problems like balance-sheettroubles and sovereign debt woes; it can only easeRyutaro Kono 20 October 2011Market Mover18www.GlobalMarkets.bnpparibas.com

some of the pain arising from structural reforms. Butall too often macro stabilisation becomes a means ofdeferring structural problems, with the result thatpublic debt continues to grow and the financialsystem becomes destabilised by sovereign debtissues. Even monetary policy that lowers the cost ofcapital acts to put off the resolution of structuralproblems. The continuation of super-low interest rateregimes has made it possible for public debt in manynations to swell to current proportions. Given thedamage the real economy could sustain, if long-terminterest rates were to surge because of public debtproblems, central banks have come to pay closeattention to keeping term rates stable. In this respect,G3 monetary policy is already incorporated into debtmanagement.Fiscal policy only redistributes incomePlease note that the economy’s momentaryimprovement (or what seems like improvement) frommacro stabilisation comes at the price of borrowingincome from the future. There is no lastingimprovement in the economy’s level or the level ofconsumption. Fiscal policy basically redistributesincome; it does not create any new added value. Lowinterest rates also do not create added value; theyjust facilitate the front-loading of spending byhouseholds and businesses (zero-rates don’t evenhave this effect if the policy is prolonged).Marginal reforms only make headway whencrises occurWhether it was the balance-sheet troubles of the1990s, the exploding public debt in the 2000s or thecontinued deferral of structural reforms, Japan hasalways been criticised by the global community.Excluding comments that Japan’s discretionarypolicies were not robust enough, most of the criticismhas been on the mark. It is not that we could notidentify policies that would resolve our problems, wesimply lacked the political will to make the toughdecisions that would entail short-term pain (lowerlevel for immediate consumption), even though weknew there would be lasting long-term gains (ahigher permanent consumption level). It is not justthe lack of leadership on this issue by politicians –we, the public, are equally responsible for electingthem. As a result, it is only when crises occur thatstructural policies are marginally adopted. Thecurrent situation in the US and EU fits this pattern,with structural reforms being put off until crises (as inthe eurozone today) make some reforms feasible.Japan was first to face problems that economicgrowth could not cureOver the past ten years or so, we have been askedrepeatedly why reform does not make headway inJapan. Out of desperation, we always say thatdemocracy – government by majority – has gone toextremes in Japan. For a body politic that valuesgroup harmony, it is hard for us to impose increasedburdens on any members of our group (currentgenerations), so we end up foisting our problems onto future generations. But taking democracy toextreme does not seemed limited to Japan. How elsecan we explain the sudden drop in politicalleadership in the US and Europe? Until recently,problems faced by policymakers in the US andEurope could be overcome so long as modestgrowth continued. That was also true for Japan priorto the 1990s. But since the 1990s, Japan hasbecome the first to confront problems that cannot besolved without imposing burdens on the currentgeneration.Financial technology allows big government toborrow ever more moneyAt a time when financial technology has,unfortunately, made it possible for big government toborrow ever more money (deferring problems everlonger), unless we are aware of this shortcoming ingovernment by majority, the constant deferral of ourproblems could lead to a crisis that cannot beovercome.Ryutaro Kono 20 October 2011Market Mover19www.GlobalMarkets.bnpparibas.com

This section is classified as non-objective researchUS: Unemployment Targeting – What ItMeans for Rates• Fed officials started hinting that goingforward the policy outlook may be linked to theunemployment rate (UER), possibly inconjunction with an inflation target, as a prerequisitefor monetary tightening.• Given the anaemic pace of improvement inthe jobs market, if the FOMC did indeedannounce, say, 7% UER as its target, then itcould take anywhere from 2.5 to 5 years to getthere. With the Fed on hold for that long,Treasuries in the front end would rallymassively.• STRATEGY: If/as UER targeting becomesmore likely, position for the new policy with thefollowing trades: i) outright longs in the frontend up to 5yrs; ii) sell the fly (buy the belly) inTreasury 2s5s10s; iii) put on a 5s30s steepener.What’s all the hoopla about setting targets?The growing chatter from Fed officials about forwardguidance, in the form of unemployment and/orinflation targeting, begs the following questions. If theunemployment rate (UER) does, indeed, have toreach say 7% (the level identified by the Fed'sEvans) as a necessary condition for the Fed totighten monetary policy, what does it mean forTreasury rates? And what does it mean,not when itreaches that level but rather if/when the FOMCannounces its decision to move ahead with this newapproach, possibly as early as at the NovemberFOMC meeting?This may be obvious, but we will state it nonetheless:Treasuries in the front end would rally and do so in abig way. Why? Because at the current anaemic paceof declines we saw since UER reached its peak, itwould take about 3-3.5 years for it to drop to 7%. Ifwe use other periods (see Chart 1), the pace ofimprovement is different, but even in the mostoptimistic scenario similar to the 1992-94 period, itwill likely take close to 2.5 years to get there (seeTable 1). Recall that the Fed pointed out at theirAugust meeting that they envision an environmentthat warrants "exceptionally low levels for the federalfunds rate at least through mid-2013". Now comparethat with the explicit UER target: No matter whichepisode we use from the past for comparison, wecould safely say that it will be well past mid-2013Chart 1: The Employment Story – Always aSlow Turning Ship12108642090 92 94 96 98 00 02 04 06 08 10Table 1: How Many Months Would It Take toBring UER down by 2%?1992-1994 1996-2000 2003-207 2009 to dateNo ofmonths 28 60 49 3812108642Chart 2: UER and Inflation – Not EntirelyDivorced from Each OtherCore Inflation YoY (%, RHS, Inverted)096 98 00 02 04 06 08 10ource: Bloomberg, BNP ParibasUnemployment Rate (%)before the UER dips to the 7% area. So, whateverthe market fancied as the horizon for rate hikes in thewake of the August FOMC statement, that's going topale in comparison with the re-pricing that UERtargeting will cause.How much would rates rally?Let us get a bit more specific. Tsy rates in the 2-5yarea should drop precipitously in response, with thecurve flattening in this sector. If you were comfortable0123456Bulent Baygun 20 October 2011Market Mover20www.GlobalMarkets.bnpparibas.com

This section is classified as non-objective researchwith a 2y in the 15-20bp area in anticipation of a Fedon hold for two years, then you would surely becomfortable with a two-year rate below that if youknew that the first rate hike would be pushed backeven further. But the back end of the curve, now,that's another story. It will not follow suit, especially ifany attendant inflation target (say upwards of 2.5%,and worse yet 3% in core) is viewed as too lax.Granted, core inflation will be kept in check as longas there is slack in the economy. In other words, theunemployment rate and inflation are not completelydivorced from each other (see Chart 2), and it isunlikely for core inflation to become rampant absenta material improvement in the jobs market. Be thatas it may, market participants will likely shoot firstand ask questions later. The victim? We wouldcontend that the back end will suffer - if not outright,at least relative to short and intermediate maturities.This suggests positioning for a steepening of thecurve, from 5s to 30s.Now let us dig even deeper (yes, you have thatsinking feeling, we know, we know!). For those of youwho are running short on time and patience, here isthe bottom line: the 3y Treasury rate could drop byabout 25bp, while the 5y could rally by about 50bp.On to the detailsLet's say that, whenever the market views the firstrate hike as being about two years away, the "fair"value for the 2y Tsy rate is around 20bp – as was thecase in August. So, if in one year's time, the UER isstill some two years away from reaching 7%, then the2y Tsy at that time should be trading at 20bp. If that'sthe base case looking one year into the future now,then the 1y forward 2y rate should be 20bp. Tomatch that forward rate, no matter how you look at it,the yield of the 3y Treasury should be sub-20bp.Where is it now? It's trading at 46bp.Now, let’s do the same analysis for the 5y: supposethat the "fair" value of the current 5y Treasury in oneyear's time is around 60bp (somewhere mid-waybetween the lows of the 3y and the 5y rates in 2011).To get to that level in the forwards, roughly speaking,you are looking at a current 5y rate in the 50bp area.That's a whopping 50bp+ drop from the current levelof the 5y, below the September low. Just as anaside, that's not too far from the current level of the5y JGB rate (38bp). Just sayin'.And if your eyes did not glaze over yet, here ismoreSo far, we have been using the recent lows in ratesas a guideline to assess where the forward ratesshould be. Let’s try another approach, just for asanity check. The spread between the prevailing FedFunds target rate and the 3y Treasury rate widenswhen the market expects rate hikes. In the past 20Chart 3: The 3y Yield over Fed Funds Target –Another Useful Yardstick97.564.53-1001.5FF Target Rate (%)3y Tsy/FF Spread (bp, RHS)0-200Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11Source: Bloomberg, BNP Paribasyears, when the market suspected imminent ratehikes, the spread traded in the 100 to 200bp range(see Chart 3). So, let’s assume that UER is notprojected to reach 7% for another two years. At thathorizon, the market should be pricing a 100-200bpspread between the Fed Funds target (still virtuallyzero at that time) and the 3y Treasury. In otherwords, the 2y forward 3y Treasury rate should besomewhere between 1 and 2% if the market expectsrate hikes to start in two years’ time. A 2y forward 3yTreasury rate of 1% requires a 5y Treasury rate of65bp, and 2% requires 1.25%. The current 5yTreasury rate of 1.04%, in turn, translates to aforward Fed funds to 3y spread of around 160bp. Inother words, the current level of 1.04% alreadyprovides a very good cushion against marketexpectations of rate hikes in two years’ time, on thedot, and very aggressive hikes at that.What’s the trade?So, you see the front end of the curve has a long wayto go if the FOMC members set their sights on UER.For our money, we would play it in the followingways:• outright longs in the front end up to 5yrs• sell the fly (buy the belly) in Treasury 2s5s10s• put on a 5s30s steepenercurrent spread:165bp300200100And surely, this is just the Fed story. If the marketgets spooked about Europe again, for whateverreason, then it only exacerbates the case forTreasuries to rally, making new lows. However, keepin mind that, in this scenario, the 5s30s dynamic mayplay out differently.0Bulent Baygun 20 October 2011Market Mover21www.GlobalMarkets.bnpparibas.com

This section is classified as non-objective researchUS: Agencies Best Value in Rates, Swaps Lag• There has been a migration of both realmoney and fast money investors into theagency space in recent weeks. Real moneyinvestors who were already active in theproduct have increased their allocations. Thelow yields in Treasuries hurt total return.Agency bullets and callables can easily doubleTreasury yields, particularly in the short end.• Some fast money investors looking to pickup yield and improve performance havereturned to callable agencies. They offer amongthe highest yields for AA+ rated products, thespread risk is minimal - particularly comparedto mortgages in recent weeks, Furthermore,agency haircuts and repo are quite competitivewith Treasuries, meaning investors so inclinedcan take advantage of up to 20x leverage.Steeper Curve, Better Roll DownAlthough projected performance can be evaluated inmultiple ways, the most straightforward method is tocompare carry and roll down. In Table 1, we compareTreasury, swap and agency benchmarks across thecurve and evaluate the carry and roll down.The best roll down (we used a 6m time horizon) isclearly in agencies, which benefit from a steepercurve compared to Treasuries and swaps (shown inChart 1). The best sector on the curve for roll down isin the belly - in the 5- to-7y sector for Treasuries andagencies, where the curve is worth 12.4 to 15.1bp,and in the 5y-sector for swaps where 6m roll downpicks up 14.6bp.Competitive Repo, Better CarryCarry was calculated using 6m term repo for bothTreasuries and agencies. In evaluating the Treasurycurve, we used the special term repo for the on-theruns(ranges from a high of 9bp for the 3yT to a lowof -7bp for the 5yT), and general collateral agencyterm repo for the agency bullets (21 bp). Notsurprisingly, the 6m carry in both Treasuries andagencies is uniformly better than in swaps, where thefinancing is effectively 3m Libor – which is about42bp.Yield (%)2.502.252.001.751.501.251.000.750.500.250.00Source: BNP ParibasChart 1: Rates CurvesSwap CurveAgency CurveTreasury Curve0 1 2 3 4 5 6 7 8 9 10Maturity (years)Given the negative repo in the 5yT its carry is bestamong the Treasury group with 13.2bp over 6m. Theflat agency term repo means the carry favours thehighest yielding bonds (since they are mostly on-therunbenchmarks and fairly close to par), making thebest carry in the longest bonds – 14.7bp in the 8yFreddie Mac and 15bp in the 6y Fannie Mae.The final column in the table calculates thecombination of 6m carry + roll down. This shows thatthe agencies offer 21 to 30bp of potential returnversus the 17 to 26bp for Treasuries and 9 to 25bpfor swaps.Be Careful with Projected ReturnsNormally we evaluate agency callables usingprojected returns in Yield Book. For completenessand to provide another basis for comparison, the 6mprojected total return and dollar returns for theTreasuries, agency bullets and swaps are included inthe Table. These projected returns show a slightlydifferent pattern – that Treasuries, not agencies, areexpected to be the best performers. Swaps appear tolag Treasuries rather badly but outperform agenciesin some sectors.Why the difference? This is actually a quirk of YieldBook and emphasises the need to know what theassumptions and methods are when analysingprojected performance data. First, Yield Book doesnot incorporate financing costs (repo), so there is nocalculation of carry. This helps the projectedperformance of the bonds but hurts the performanceof the swaps, which explicitly includes a financingcost. Also, Yield Book does not have an agencycurve, so the bonds have to be priced relative to theswap curve, and the default is to assume that theOAS does not change. Therefore, the actual agencyroll down is underestimated, hurting the relativeperformance.Mary-Beth Fisher 20 October 2011Market Mover22www.GlobalMarkets.bnpparibas.com

This section is classified as non-objective researchTable 1: Cross Rates Comparison of Carry and Roll DownTreasuries Price Yield Duration DV01Assetswap6m TotalROR (%)6m DollarReturn6m RollDownCarry +6m Carry Roll Down2yT 99.72 0.27 1.94 194 -36 0.25 0.25 10.0 6.9 16.93yT 100.12 0.46 2.97 297 -35 0.47 0.47 11.2 7.5 18.75yT 99.83 1.04 4.86 485 -33 1.15 1.15 12.4 13.2 25.67yT 98.52 1.60 6.73 664 -27 1.69 1.67 12.4 12.6 25.010yT 99.75 2.15 9.08 909 -18 1.87 1.87 10.9 12.3 23.2Swaps2yr swap NA 0.64 1.72 172 0 NA 0.17 3.6 4.8 8.53y swap NA 0.82 2.70 270 0 NA 0.47 10.3 6.4 16.75y swap NA 1.38 4.60 460 0 NA 1.14 14.6 10.2 24.87y swap NA 1.88 6.40 640 0 NA 1.44 10.9 11.3 22.210y swap NA 2.35 8.87 887 0 NA 1.52 6.0 10.7 16.7Agency BenchmarksFHLMC 0 3/8 10/30/13 99.79 0.48 2.02 201 -17 0.30 0.30 13.3 9.0 22.3FHLMC 0 3/4 11/25/14 100.00 0.75 3.06 306 -10 0.67 0.67 14.4 10.6 25.1FHLMC 1 3/4 09/10/15 102.74 1.03 3.77 388 -3 0.97 1.00 14.9 12.4 27.3FHLMC 2 08/25/16 103.04 1.35 4.65 480 1 1.27 1.31 15.1 13.6 28.6FHLMC 3 3/4 03/27/19 112.18 1.98 6.67 750 5 1.59 1.79 13.9 14.7 28.5FNMA 0 1/2 08/09/13 100.11 0.44 1.79 179 -19 0.26 0.26 13.0 8.3 21.3FNMA 0 5/8 10/30/14 99.70 0.73 3.00 299 -10 0.64 0.63 14.4 10.4 24.8FNMA 2 3/8 07/28/15 105.12 0.99 3.61 382 -3 0.91 0.96 14.8 12.3 27.1FNMA 1 1/4 09/28/16 99.45 1.37 4.82 479 0 1.31 1.30 15.1 13.3 28.4FNMA 5 02/13/17 117.76 1.51 4.76 565 8 1.32 1.57 15.0 15.0 30.1Source: BNP ParibasMary-Beth Fisher 20 October 2011Market Mover23www.GlobalMarkets.bnpparibas.com

This section is classified as non-objective researchMBS: Refi Flashback• Historical Conventional and early 2009 GNS-curves suggest that under normal conditions,the current Conventional S-curve has a lot tocatch up.• But even in an extended period of low ratesunder normal refi conditions, burnout is severe.Fees too are expected to increase over time andshould dampen long term CPRs.• Recent bank earnings discussed that GSEshave taken a more aggressive stance onputbacks. Fundamental changes to reps andwarrants would therefore not be consistent withthat policy. Capacity constraints should limitrefinancing as well.A Walk Through TimeWith enhancements to HARP around the corner, itmakes sense to look at prepays from a historicalperspective. In Chart 1, we show the history of FNprepays since 1994. Setting aside the peaks inrefinancing around late 2002-mid 2003, aggregateCPRs have generally peaked around the 30 CPRlevel. Towards the end of 2002, new lows inmortgage rates led to aggregate CPRs picking up tomid-40s and reached close to 60 CPR during thepeak of the 2003 refi’s.In Chart 2, we show the S-curves relating to some ofthese key periods. Clearly, not just in terms ofaggregate speeds, but also in terms of the S-curve,2003 was an outlier. But the current prepay situationis also a significant outlier, albeit on the oppositeside. If all HARP inefficiencies are eliminated,historical data suggest prepays should mimic the ex-2003 cluster of S-curves in Chart 2 with highercoupons approaching 50-60 CPR.Ginnie Prepays a Benchmark for HARP?Ginnie Mae’s streamlined refinancing could also beused as a benchmark for high HARP efficiency. InChart 3, we show the voluntary CPR history for 2008GNI 6s vs the FHA mortgage rate. The chartindicates that prepays peaked in May 2009 at 46.6CPR. In chart 4, we show the S-curves of voluntaryCPRs for GNIs for May-09. The S-curve tops off at aCPR lower than those seen in the historicalconventional S-curves in Chart 2. This isunderstandable given that higher GN delinquencies,reduce the refiable population to a larger extent.CPR706050403020100Chart 1: FN Fixed Rate Aggregate CPR vsMortgage RateRateJan-94Jan-95Jan-96Jan-97Jan-98Jan-99Jan-00Jan-01Jan-02Jan-03Jan-04Jan-05Jan-06Jan-07Jan-08Jan-09Jan-10Jan-11Source: eMBS, BloombergCPRChart 2: Prepay S-curves During Various RefiWaves80706050403020100-50 -25 0 25 50 75 100 125 150 175 200 225 250Source: BNP ParibasDec-98 Nov-01 Oct-02 Jul-03 Apr-04 Sep-11Chart 3: Average FHA Mortgage Rate vs 2008 30yGN I 6% PrepaysCPR50403020102008 GNI 6s04.0Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11Source: BNP Paribas, BloombergFHA Mortgage RateChart 3 also shows that even though FHA mortgagerates continued to decline steadily over time, prepaysactually declined. Burnout was therefore quite strong.6.56.05.55.04.59.508.507.506.505.504.503.50Mortgage RateMortgage RateAnish Lohokare / Timi Ajibola /Bo Peng 20 October 2011Market Mover24www.GlobalMarkets.bnpparibas.com

This section is classified as non-objective researchIn Chart 5, we show the S-curves for GNIs over thewhole year 2009 and from January 2009 - August2009. The speed at which the S-curve topped off was30.5 CPR for 2009 vs 37.1 for just May 2009 (chart4), an 18% difference. In 2009 there were nochanges to FHA fees, so the slowdown is chiefly dueto burnout. The top speed for the S-curve for GNIsover January 2009 – August 2011, was 21.1 CPR,just 57% of the peak speed in May 2009. Grantedmortgage insurance premium (MIP) went up in 2010and 2011, influencing this decline, but burnout wasthe principal contributor.Enhancements to HARP are expected to betemporary, perhaps for 18 or 24 months. Also, G-fees are expected to increase over time as discussedextensively by GSEs and their regulator. Thus even ifMIP and not just burnout contributed to the GNIJanuary 2009 – August 2011 S-curve being muchflatter, it’s still a good benchmark for conventionallong-term CPRs under an extreme case of HARPefficiency where almost no barriers to refi exist.HARP enhancements however are expected to befairly incremental. Recent bank earnings havediscussed a more aggressive stance taken by theGSEs regarding putbacks; putback requestsincreasingly include seasoned vintages. Afundamental waiver-like change to reps and warrantswould thus be inconsistent with this policy. Needlessto say, capacity cannot be built overnight and shouldbe a limiting factor as well. Thus, CPRs should stillfall well short of benchmarks. Low rates have lastedover 2.5 years and even if more extremeenhancements to HARP are introduced, burnoutshould be a dampener. Table 1 shows aconsiderable buffer for prepays built into currentpricing.Origination volume seems to have come off the highsas the sustained selloff seems to have lost itsmomentum. Fed purchases have recently been ableto offset origination. We maintain our positive outlookon MBS with a preference for 3.5s, 4s and 5s on thecoupon stack. From a near-term technicalperspective, higher coupons could benefit as concernaround HARP diminishes, as seen in price action onWednesday and early Thursday.Chart 4: GNI Voluntary CPR S-curves in May-094035302520151050CRR-50 0 50 100 150 200 250Source: BNP ParibasChart 5: GNI Voluntary CPR S-curves for WholeYr 2009 and Jan 09-Current353025201510502009Jan 09 - Curr-50 0 50 100 150 200 250Source: BNP ParibasTable 1: Breakeven CPRs (@ 0% YT Spread to theI-curve) by Coupon30Y FN0% YT Spread/IPrepay SpeedFastest Vintage PrepaySpeed - Sep Ratio Diff4.5 56.7 33.8 168% 22.95 48.4 29.9 162% 18.55.5 46.0 26.8 172% 19.26 43.5 23.8 183% 19.7Source: Bloomberg, BNP ParibasAnish Lohokare / Timi Ajibola /Bo Peng 20 October 2011Market Mover25www.GlobalMarkets.bnpparibas.com

This section is classified as non-objective researchEUR: Firm Demand at the 12mth LTRO• In addition to its regular 3mth LTRO, theECB will conduct a 12mth LTRO on the sameday next week (26 October). Another ultra-longtender (13mth) will be conducted in December.• There are good reasons to expect demandwill be strong at the operation, although not asmassive as it was in June 2009.• STRATEGY: receive OIS/BOR spreads. Onthe Mar12, target 45bp (versus 56.8 currently).Chart 1: No Possibility for ArbitrageSignificant impact on liquidity’s durationThe average duration of EUR liquidity provided bythe ECB through open market operations (MRO,LTRO and STRO) is currently around 35 days, andhalf of the liquidity has a maturity just below 7 days.The two ultra-long SLTROs the ECB will conductnext week (12mth) and on 21 December (13mth) willraise the average duration of liquidity significantly. Allother things being equal (i.e., the exact roll of MROand STRO), we expect that, after next week’s 12mthtender, the average duration of liquidity provided bythe ECB will rise to longer than 91 days (beyond 3months). Furthermore, after the December 13mthtender, the average duration may extend beyond 200days, or more than six months, with more than half ofthe liquidity having a maturity longer than 300 days.The two upcoming SLTROs will therefore have asignificant impact on liquidity conditions.Firm demand expectedAs far as this month’s operation is concerned, the12mth tender will take place at the same time as theregular 3mth LTRO. EUR 85bn will expire at that timeand a large roll of the 3mth onto the 12mth should beexpected. When the ECB conducted ultra-longtenders in 2009, demand at 3mth regular LTROsremained subdued, in the range EUR 1.1-12.2bn. Ifonly EUR 5bn is rolled onto the new 3mth and therest onto the 12mth, this would imply a EUR 80bnfloor for demand at the SLTRO. In addition, we canreasonably expect demand to be stronger than anexact roll of the EUR 85bn expiry. Indeed, theopportunity offered to banks to acquire 12mthliquidity will attract additional demand.One cannot expect demand to be as strong as it wasat the first 12mth tender the ECB conducted in June2009. Indeed, carry trades are not currently favouredas they were at that time, when the 12mth OIS wasabove the ECB’s refi rate. But note that when theECB conducted the second 1y tender in October2009 the operation attracted more than EUR 75bn inSource: BNP ParibasChart 2: Pressure on Liquidity will EaseSource: BNP Paribasdemand, despite no possibility for arbitrage, notender expiring, and already more than ampleliquidity conditions. Against this backdrop, demandwell above EUR 100bn at next week’s 12mth LTROwould be no surprise. EUR 100bn of demand wouldlengthen average maturity beyond 90 days and everyadditional EUR 10bn in demand will add around9 days of duration.Tighter OIS/BOR spreadsThe absolute level of liquidity, especially the level ofexcess liquidity in the market, has a significantimpact on OIS rates. The duration of existing liquidityhas a very significant impact on BOR rates and thuson OIS/BOR spreads. An extension of duration afternext week’s tender will drag OIS/BOR spreads down.Strategy: receive OIS/BOR spreads. On the Mar12,target 45bp (versus 56.8 currently).Patrick Jacq 20 October 2011Market Mover26www.GlobalMarkets.bnpparibas.com

This section is classified as non-objective researchEUR: AAA Contagion Risk and Bond Demand• French government bond spreads haverecently come under widening pressure.• Contrary to previous episodes of sovereignstress, a relatively positive fiscal fundamentaloutlook is being questioned by ratherspeculative arguments.• Combined equity and bond market priceaction is a reason for concern.• More globally, the increase in AAAcontagion risk opens important questions ofmedium-term demand stabilisation.• We look at the issue of leveraging the EFSFvia the ECB from a pure monetary policyperspective, concluding that outright full scaleQE is a better option.OAT under pressureOAT have underperformed Bunds by 55bp sinceearly August. Currently, OAT Oct-21 is @54 z-spread(Bund Sep-21+108bp). More recently, OAT have alsostarted to underperform vs BTP (-35bp over the pastmonth in 10Y). What are the drivers? Wildspeculation about France's Aaa/AAA/AAA rating(heard on the street for at least two years; all ratingagencies have so far confirmed highest rating &stable outlook), the performance of Europeanfinancials, the exposure to eurozone periphery (EBAdata), the performance of non-AAA… In a nutshellthe usual array of risk-off variables.France’s recent underperformance does not reflectfundamental or structural weakness, though. Asstressed by our economics team (‘French 2012Deficit: In Control’, Market Mover, 29 September2011), “the French government has managed toachieve a smaller deficit than targeted for each yearsince April 2009, and this will again be the case in2011”. Moreover, “we share the government’s implicitexpectation that the primary budget will be balancedby 2013”.In the near term, the supply schedule poses nothreats to OAT. France has already issuedEUR 175.4bn of bonds in 2011, which is 95% of theEUR 184bn target. However, bear in mind that theEUR 184bn target is net of buybacks and thus weneed to factor this into our estimates. France hasconducted EUR 19bn of buybacks up to August2011, where EUR 17.4bn are for bonds maturingafter the end of 2011 and thus have to be added in to250200150100500Germany80%Chart 1: French Bond SupplyFrance87%Source: BNP ParibasNetherlands93%Est. 2011 IssuanceFinland82%Austria88%Belgium91%82%Italy% Issuance Completed (RHS)Spain78%Chart 2: Stylised Facts of the Eurocrisis4.03.0BTP/Bund 10YMIB2.01.00.0Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-111.2OAT/Bund 10Y1.00.8CAC0.60.40.20.0Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11Source: BNP ParibasChart 3: AAA Contagion Stats120100 OAT/Bund 10Y80 BTP/Bund 10Y (RHS)60402002006 2007 2008 2009 2010 20111.00.5100%90%80%70%60%50%40%120001400016000180002000022000240000.0OAT/Bund correlation-0.5OAT/BTP correlation-1.02006 2007 2008 2009 2010 2011Source: BNP Paribas2000250030003500400045005004003002001000Alessandro Tentori / Ioannis Sokos / Camille de Courcel 20 October 2011Market Mover27www.GlobalMarkets.bnpparibas.com

This section is classified as non-objective researchthis year's funding needs. This means there is aremaining EUR 26bn of issuance until year-end(excluding buybacks for the last four months of theyear for which we have no data yet). With threeauctions remaining (one in October and two inNovember) and one optional auction in December,France can issue an average of EUR 8.7bn perauction and skip the December one. Once weinclude the buybacks to the gross issuance figure weget that France has completed almost 87% of its2011 funding, which is slightly above the 84%eurozone average (Chart 1).For next year the supply picture improves furtherrelative to 2011. We expect gross issuance of Frenchbonds of around EUR 179bn from EUR 184bn in2011. In net issuance terms we expect a fall fromEUR 89bn in 2011 to EUR 80bn in 2012. Frenchbond redemptions are expected to be aroundEUR 99bn in 2012, while the projected deficitestimate is EUR 82bn according to AFT.From a less constructive point of view, the commonstylised fact of this euro crisis is a simultaneousweakness in domestic equity and government bondmarkets, followed by a significant increase involatility, absence of domestic buyers and theeventual ECB decision to purchase bonds (Chart 2).We’ve seen this happening in relatively small as wellas very large markets and economies (e.g. Italy).Pockets of weakness in the architecture of the euroas well as the absence of proactive decisions fromeurozone officials are the main reason for bondmarkets’ underperformance. The dangerous conceptof “Who’s Next?” has crept into investors’ mind.Contagion statsIn terms of total return (iBoxx Sovereign), France isdown 2.8% in October with only Belgium (-4.5%) andIreland (-3.2%) doing worse. Year-to-date, theperformance is around +3%, which puts it at the lowend of the AAA distribution (Germany +6.8%).In terms of price action, we’ve performed acorrelation analysis (Chart 3). Yield correlation toBunds is still around 80%, while spreads remain verycorrelated (e.g. BTP/Bund and OAT/Bund). Onenegative aspect is the increased correlation between10Y BTP yield and OAT (now into positive around20% from as low as -70% before the ECB reactivatedthe SMP). From this analysis, we concludethat contagion risk has recently increased in the AAAsector excluding Germany.Demand stabilisation neededFrom a broader EMU perspective, 10Y Italy is tradingaround 5.90% (Sep-21), i.e. just 20/25bp below thetop despite an estimate 55/60bn purchased by theECB. Market confidence in stabilising forces is quitelow at this stage.706050403020ASWChart 4: EFSF vs EUEU Jun-21EFSF Jul-2110Jun-11 Jul-11 Aug-11 Sep-11 Oct-11Source: BNP ParibasChart 5: Global Demand for EGB at Risk0.20.1Basis points0.0-0.1-0.2-0.3EMU3 vs EMU ALL index yield-0.4-0.52007 2008 2009 2010 201114%12%10%8%6%4%2%Daily iBoxx price returnvolatility (63 days)FranceGermanyItaly2005 2006 2007 2008 2009 2010 2011Source: BNP Paribas400000300000200000100000-100000Chart 6: Excess liquidity and Eonia/Refi0-2000002005 2006 2007 2008 2009 2010 2011Source: BNP ParibasEUR mlnExcess cashSpread ECB/Eonia (RHS)ECB/Eonia (21D avg)In that context, price dynamics of EFSF bonds (Jul-21 @62 z-spread and Bund Jul-21 +120bp, seeChart 4) is worrying as the street is questioning notonly investors' appetite for 440bn of EFSF bonds, butalso the impact that further weakness in OAT andBTP will have on the EFSF's AAA rating (the CDOargument has been already officially denied by Mr.Regling himself in a letter to the FT dated 28February 2011 entitled “No grounds to compare theEFSF with a CDO”).-1.0-0.8-0.6-0.4-0.20.00.20.40.6Alessandro Tentori / Ioannis Sokos / Camille de Courcel 20 October 2011Market Mover28www.GlobalMarkets.bnpparibas.com

This section is classified as non-objective researchWe’ve mentioned the lack of confidence in eurozonestabilisation mechanisms. The recent discussion hasfocused mainly on the role of the EFSF and possibleways to leverage its intervention power. Why?Because the demand component of the EURgovernment bond pricing equation is becomingincreasingly significant now that we’ve had contagioninto Italy and the risk of further contagion into AAAhas increased.One way to analyse global demand trends is toreplicate the performance of customised portfolios vsglobal benchmarks. According to our investorintelligence, global EUR investors (especially centralbanks) have shifted from a EMU all-index tocustomised benchmarks (e.g. EMU3) in 2010, on theback of the severe underperformance in peripherycountries.In this context, Germany has been used as a proxyfor AAA EUR rates, France has been used as AAAwith some additional yield pick-up and Italy has beenused as a liquid, low volatility proxy for non-coreEMU. The performance of this custom benchmarksince July 2011 is impressively poor (Chart 5). At thesame time, volatility in Italy has picked upsignificantly, thus reducing its once excellent Sharperatio. Similarly, increased volatility is likely to limit theappetite even for AAA sovereign paper. Volatility hasrecently increased also in France and Germany.We’re looking for EUR 230bn of net supply fromeurozone governments in 2012, which is some 60bnless than our estimate of long-term trend demand.However, the benchmark argument exposed aboveis likely to further limit global demand and create theneed for external stabilisation (i.e. ECB).ECB to the rescue?We feel compelled to add to this discussion from thestandpoint of pure monetary policy. Using the ECBas a leveraging vehicle for EFSF operationsdemands several questions:1) Assume full EFSF lending capacity is needed,then the amount of outstanding OMO would jump toaround 880/890bn from current 480bn (assuming7.5% haircut on Liquidity 2 collateral with maturity>10Y).2) Even if the full amount is not needed at once, theEFSF's size is such that Eonia fixings would sufferfrom augmented volatility around open market ops.The money market is already a stressed market andadding further pricing uncertainty conflicts with theidea of smoothly functioning markets.3) Since EFSF funding is needed on a long-termbasis, we should expect significant excess liquidityconditions to prevail long-term. The ECB hasrepeatedly stressed that unconventional policymeasures are only "of temporary nature".4) A more or less permanent level of excess liquidityin the system has a permanent bias on theEonia/Refi spread (Eonia fixing closer to the depositfacility rather than to the policy rate, see Chart 6).Again, the ECB has repeatedly made clear that thismoney market distortion is not satisfying.5) Providing funds against EFSF collateral (directly)has limited impact on the transmission mechanismand the ability of the eurosystem to financeproductive businesses, as the EFSF would not belending to corporates directly.6) As described in 6.4.1. ("General risk controlprinciples"), the eurosystem may exclude specificcounterparties from monetary policy operations, "inparticular if the credit quality of the counterpartyappears to exhibit a high correlation with the creditquality of the collateral submitted by thecounterparty". The practice of cross-issuing eligiblecollateral has been criticised by the ECB. Thepractice of issuing 92% of currently outstanding OMOand shipping it into the ECB is highly questionable,especially if the collateral is 100% correlated with thecounterparty's credit risk.From a pure monetary policy perspective, buyinggovernment (and corporate) bonds directly is a betteroption for the ECB than adding a new layer betweendebtors and creditors. It would improve banks'balance sheet and sovereigns' primary financingability, while at the same time increasing the chanceof transmission to the productive private sector.Furthermore, increasing the SMP's size would alsoimprove market's confidence in the product (in thiscase the EUR government bond). But again, thereare several issues around a full scale QEprogramme, e.g. sterilisation, price stability, balancesheet guarantee, and so on. We’re not saying thatleveraging the EFSF via ECB cannot be done intheory; rather it is just not an optimal choice in thecontext of ECB's loss function.Alessandro Tentori / Ioannis Sokos / Camille de Courcel 20 October 2011Market Mover29www.GlobalMarkets.bnpparibas.com

This section is classified as non-objective researchEUR: EFSF Leverage in Focus• The idea of leveraging the EFSF throughguarantees on first losses of newly issuedsovereign debt is gaining ground. We explainand illustrate such a proposal.• On the positive side, this type of leveragewould ease the funding needs of the EFSF,thereby decreasing issuance expectations.• Together with the planned use of short-termfunding and upcoming details on the financingof the aid to Greece and financing of thedefeasance assets, issuance expectations haveroom to fall significantly in the short term.• We therefore see a non-negligible chance ofa tightening in spreads that we recommendpositioning for through a protected RV trade:sell CADES 10y, buy EFSF 10y.As discussions on a leverage of the EFSF throughguarantees of newly issued sovereign debt havegained momentum over the past few days (andtherefore looks increasingly likely), we explain such aproposal and look at potential effects.Leverage through guarantees on first losses of aportion of newly issued sovereign bondsUnder that proposal, the EFSF would insure the firstportion of losses (a given percentage of the bondissued) in the event of a sovereign default. Accordingto the headlines, the EFSF would guarantee between20% and 30% of the bonds newly issued bystruggling euro area governments, for example Spainand Italy. The smaller the percentage of guarantee,the higher the leverage, as the amount of debtcovered is more significant. For instance, numerousreports have stated that, by guaranteeing the first20% to 30% of any losses, the EFSF could leverage3 to 5 times its original size. Indeed, EUR 780bnguarantee commitments used to insure the first 20%or 30% losses would cover, respectively, EUR 3.9trnor EUR 2.6trn debt (780/0.2 or 780/0.3) therebystretching the original size of the EFSF by 3 to 5times (3900/780 or 2600/780).This idea was originally brought up by Sony Kapoor(advisor to governments and internationalorganisations) in September 2010 in Euro AreaGovernance – Ideas for Crisis Management Reform,when he suggested “the EFSM/EFSF should provideguarantees not loans”. In January 2011, he reiteratedhis view in Building a Comprehensive CrisisTable 1: EFSF – Remaining Lending Capacity vs.Remaining Guarantee CommitmentsEFSFLending CapacityGuaranteeCommitmentsAnnounced EUR 440bn EUR 780bnActual EUR 440bn EUR 726.2bnAlready Committed EUR 185.6bn EUR 306.2bnRemaining (still atdisposal)FinancingProgrammesEUR 254.4bnGuarantee Amounts(to be) CommittedEUR 420bnLoans AlreadyDisbursedIreland EUR 17.7bn EUR 29.2bn EUR 3.6bnPortugal EUR 26bn EUR 42.8bn EUR 5.9bnGreeceEUR 141.9 (incl. EUR32.9bn from bilateralloans)EUR 234.1bn -Total EUR 185.6bn EUR 306.2bn EUR 9.5bnSource: BNP ParibasTable 2: EFSF – Expected IssuancePROGRAMMES TOTAL ISSUANCE Q4 2011 AFTER 2011IRE/PORGREECEEUR 47.2bn(BNPP estimate)Up to EUR 141.9bnEUR 3bnEUR 44.2bn(BNPP estimate)> Existing facility [0; EUR 32.9bn] [0; EUR 9.4bn] [0; EUR 23.5bn]> Second program Up to EUR 109bn [0; EUR 65bn]Source: BNP ParibasQ4: [EUR 3bn;EUR 77.4bn]Remaining of EUR109bnManagement Framework for the EU andExtinguishing the Raging Fire: “a much more efficientuse of the balance sheet of the EFSF would havebeen to guarantee new bond issues by troubledMember States … this would have the instantaneouseffect of 1) restoring capital market access fortroubled Member States, 2) significantly lowering theborrowing costs they face, and 3) more than doublingthe effective size of the EFSF to more than EUR500bn" (at that time, the EFSF lending capacity wascapped at EUR 250bn). At that moment, SonyKapoor recommended guarantees against the first40% of losses, based on expected losses factored inby the market on Greek and Irish debt.Note that this recommendation was consideredtogether with other options for expanding the EFSF’sCamille de Courcel 20 October 2011Market Mover30www.GlobalMarkets.bnpparibas.com

This section is classified as non-objective researchcapacity, such as targeting a lower AA rating,seeking preferred creditor status, and shifting to apercentage-of-GDP formula, more equitable acrossmember states.Kapoor’s proposal emerged from the 2009 EU bondguarantee program for banks, stressing that “morethan EUR 600bn of bonds were successfully issuedby EU banks under Member State guarantees, andthese were very effective in stemming the crisis. Thisconcept should be translated to sovereign bonds”.He further hinted that such use of the EFSF wouldallow better debt statistics in the eurozone asguarantees are contingent liabilities, and wouldtherefore lower the costs to euro area memberstates.The idea of leveraging the EFSF through guaranteesof a portion of sovereign bonds was later reworkedby Allianz and other market participants. Allianzmentioned, in particular, a leverage of 3.7 inguaranteeing new Greek, Portuguese and Irishbonds by 40%, and Italian and Spanish bonds by25%.A concrete illustrationFirst, while the figures (leverage and size enhanced)communicated in the press are all based on the initialEUR 440bn lending capacity and EUR 780bn overallguarantees, recall that the remaining lendingcapacity of the EFSF amounts to EUR 254.4bn (ofEUR 440bn), after the committed loans to Ireland,Portugal and Greece have been taken into account(Table 1) and EUR 254.4bn if we assume that theEFSF will finance the full EUR 109bn of the secondprogramme to Greece as well as the full EUR 32.9bnof the remaining existing loan facility to Greece (itcould actually be more than 254.4bn but we still needmore details). In terms of remaining guaranteecommitments at disposal, this translates into EUR420bn. Indeed, the EUR 13bn EFSF bonds issued sofar are overguaranteed by 120% and therefore useEUR 15.6bn of the EUR 726.2bn guaranteecommitments (EUR 726.2bn is the total amount ofguarantees left from the announced EUR 780bnsince Greece, Ireland and Portugal have steppedout). EUR 13bn allowed the EFSF to provide EUR9.5bn loans to Ireland and Portugal in total (becauseof the credit enhancements). Thus, the remainingloans to be provided to Ireland, Portugal and Greeceamount to EUR 176.1bn. Such an amount will exploitEUR 290.6bn guarantees as the new framework isnow in effect and therefore future EFSF debtissuance will be backed by up to a 165%overguarantee, unlike the 120% overguarantee onthe bonds previously issued.How could this EUR 254.4bn lending/EUR 420bnguarantees at disposal be used?Table 3: Refinancing Needs in Spain and ItalyOutstanding Debt(EUR bn)Expiring by End- Expiring by End-20142015Italy 1,358 468.77 601.16Spain 485 183.30 219.17Total 1,843 652.07 820.33Source: BNP Paribas80706050403020Chart 1: CADES 10y vs EFSF 10yASWEFSF 3.375 05/07/21 REGSCADES 3.375 25/04/21CADES 4.375 25/10/2110Jun Jul Aug Sep OctSource: BNP Paribas1. Bank recapitalisation needs (officiallyestimated at EUR 100bn): the EFSF couldfinance banks’ recapitalisation needs by (a)100%, which would exploit EUR 165bnguarantees, or by (b) 50%, which would useEUR 82.5bn guarantees. This requires theEFSF to raise the funds in the market.2. Provision for further lending or debtpurchases: the EFSF could keep a targetedbuffer of cash in mind, that would bededicated to sovereign debt purchasesand/or credit lines of, for instance, (a)EUR 100bn (which would use EUR 165bnguarantees) or (b) EUR 50bn (i.e.EUR 82.5bn guarantees). This also requiresthe EFSF to raise the funds in the market.3. The remaining guarantee commitmentscould be used to guarantee, for instance, thefirst 30% loss on new debt issued by Italyand Spain. This does not require new fundsto be raised.1(a) and 2(a) leave EUR 90bn guarantees atdisposal for sovereign debt insurance. If 30% is thetargeted portion of the bond to be guaranteed, thenthe amount covers EUR 300bn of debt (A). In thecase of 1(a) and 2(b), EUR 172.5bn is left forinsuring sovereign debt. With a 30% guarantee, thiscovers EUR 575bn of debt (B). 1(b) and 2(a) leaveEUR 172.5bn again at disposal for bond insurance,Camille de Courcel 20 October 2011Market Mover31www.GlobalMarkets.bnpparibas.com

This section is classified as non-objective researchand 1(b) and 2(b) EUR 255bn, which coversEUR 850bn of debt (C).Compared to the refinancing needs of Spain and Italy(Table 3), (A) covers 46% of the refinancing needsover the next three years, (B) covers 88% of therefinancing needs over the next three years, and (C)covers all the refinancing needs up to the end of2015.In the (A) case, the EFSF would be leveraged by 1.3as it would be stretched in size to EUR 936bn fromthe initial EUR 726bn (not from the announcedEUR 780bn). In the (B) case, it would be leveragedby 1.6 as it would be enhanced to EUR 1.13trn, andin the (C) case it would be leveraged by 1.8 beingenhanced to EUR 1.3trn (all compared to theEUR 726bn guarantee commitments).What are the potential effects?We are rather sceptical on the effects of this type ofleverage in such an environment: psychology withregard to sovereign debt has changed since the ideaof sovereign bond insurance was first introduced.While it might have been efficient in restoringconfidence back in Q4 2010, systemic risk has risenconsiderably since then, and contagion to solideurozone governments has spread.However, on the positive side, we recognise thatproviding guarantees instead of loans would have thenon-negligible effect of easing the funding needs ofthe EFSF, and therefore decreasing issuanceexpectations. Depending on the portion of guaranteecommitments that would be used for sovereign debtinsurance, should this type of leverage materialise,EFSF debt issuance could be much lower than themarket expects. In addition, considering the recentofficial communication on plans to use short-termfunding, together with upcoming details on thefinancing of the aid to Greece (notably the financingof the defeasance assets), and the final amount to befinanced by the EFSF (likely to be smaller than theEUR 142bn taken into account in the aboveanalysis), issuance expectations have room todecline significantly from what is currently factored inmarket prices.Therefore, should a leverage of the EFSF throughthe use of sovereign bond insurance materialise, atightening of the EFSF from the current historicalhighs should be expected, based on lower issuanceexpectations. One way to play this possibility isthrough the following relative value trade: SellCADES 10y / Buy EFSF 10y. EFSF widened sharplyin September/October with uncertainty peaking withregard to the use of its balance sheet, the potentialleverage of the structure, future issuance, and themanagement of the aid to Greece. EFSF widened tothe extent of exceeding ASW levels of CADES, eventhough the French agency cheapened at the sametime: EFSF Jul-21 is currently 12bp cheaper thanCADES Apr-21 in mid-ASW and 15bp cheaper inmid-yield. Compared to CADES Oct-21, EFSF is 7bpcheaper is mid-ASW and 13bp cheaper in mid-yield.The advantage of this trade is that we don’t seefundamental reasons supporting a furthercheapening of the EFSF, relative to CADES, fromcurrent relative levels, while a richening of the EFSFis likely to come with a re-widening of theCADES/EFSF differential. Therefore, the trade isalso a protected way of playing a richening of theEFSF.Should the EFSF become a bank instead, we believethat this would be very much welcomed by themarket, thereby contributing to a turnaround inmarket sentiment. An improvement in marketsentiment is also likely to trigger a tightening of theEFSF, with a re-widening of the CADES/EFSFspreaddifferential.Camille de Courcel 20 October 2011Market Mover32www.GlobalMarkets.bnpparibas.com

This publication is classified as non-objective researchEMU Debt Monitor: CDS AnalysisChart 1: Belg/France CDS & Olo/OAT Spreads DivergingChart 2: Tighter Spain/Italy CDS, Stable Bono/BTP Spread1605Y CDS and cash spreads905Y CDS and cash spreads1200110014010001201008040-109008007006006040200Apr-11 May-11BEL/FRAJun-11BEL/FRAJun-11cashJul-11 Aug-11FRA/NETHAug-11 Sep-11FRA/NETHOct-11cash500-60400300-110200Apr-11 May-11 May-11 Jun-11 Jul-11 Aug-11 Aug-11 Sep-11 Oct-11 Oct-11SPA/ITA SPA/ITA cash POR/SPA POR/SPA cashWith the exception of France CDS, most AAA CDS have been fairly stable over the past week. What is even more surprising isthat the sell-off on France has been more pronounced on cash than CDS, with France CDS basis tightening by 8bp and byalmost 16bp versus the Germany CDS basis. According to our model, almost 100% of the rise in France CDS comes from therise in the liquidity and risk premium, which is now around 65bp. Regarding AAA CDS spreads, the expected outperformanceof Austria versus France occurred and was more significant than expected (up to 25bp on 5y ATS/OAT versus 15bpexpected). Among AAA/AA CDS differentials, Finland remains the cheapest bond versus CDS both in absolute and relativeterms (we like 15y Fin versus DSL, see next section). As Chart 1 illustrates, France/Belgium CDS has tightened back while theBTAN/Olo spread widened back close to September’s highs. In terms of trades, the safest way to play a recovery ofBelgium seems to be through 2y/5y flatteners on the Olo curve. Finally, as Chart 2 shows, Italy/Spain CDS spread hasalso decoupled from cash over the past couple of weeks, with the former tightening by 30bp while the 5y cash spread widened10bp.Buying Italy CDS basis in the low 100s is one way to exploit the current cash/CDS decoupling. The trade would also benefitfrom a likely renewal of SMP activity next week (buying has been very subdued for two weeks, at below EUR 2.3bn). A returnto 130-140bp is expected.All charts source: BNP ParibasCDS Table and Stats*5y FIN NETH FRA AUS BEL ITA SPA POR IRECDS 74 100 187 155 299 446 375 1185 803CDS Weekly change 1 13 23 -1 11 21 17 -33 56cash -41 -43 20 8 167 343 255 1327 541Basis 115 143 168 147 132 103 120 -143 262Basis Box vs Gy -60.0 -32.5 -7.8 -28.5 -43.8 -72.5 -55.5 -318.0 86.8Average -40.9 -37.3 7.4 -18.9 -17.5 -51.7 -22.0 -202.7 -127.8Max -25.6 -22.2 36.7 3.1 11.9 3.2 12.5 -51.9 165.1Min -74.7 -55.4 -10.3 -40.8 -57.8 -113.6 -66.3 -378.3 -417.4Z score** 1.59 -0.69 1.33 1.12 1.47 0.83 1.72 1.88 -1.21Change to 31/12/2010 CDS Cash2y 5y 10y Current Min/Max z-score Current z-scoreFIN 35 43 46 AUS/BEL -144 -152/-66 -1.9 -159 -1.7NETH 40 45 50 BEL/FRA 112 56/131 2.0 148 1.2FRA 63 85 84 FRA/NETH 87 35/104 1.0 62 4.4AUS 49 59 64 FRA/FIN 114 37/114 1.8 61 4.7BEL 83 89 84 ITA/B EL 147 5/249 0.8 176 0.9ITA 249 210 184 AUS/FRA -32 -58/-4 -1.0 -12 -4.1SPA 57 28 17 SPA/IT -71 -104/118 -1.5 -88 -1.6POR 1021 686 525 POR/SPA 810 361/927 1.1 1072 1.5IR E 343 195 106 IR E /PO R -382 -524/35 -1.5 -787 -1.8GRE 7531 4754 3661 GRE/IRE 4968 523/5427 2.1 2166 2.0All charts source: BNP Paribas * using Wednesday 19 October closing** z score measures the deviation from six-month rolling average CDS/cash basis of the country versus Germany, expressed in numbers of standard deviations. Anumber above 1.50 means that the cash is trading historically cheap compared with its average basis level.Eric Oynoyan / Ioannis Sokos 20 October 2011Market Mover33www.GlobalMarkets.bnpparibas.com

EMU Debt Monitor: Key RV ChartsThis publication is classified as non-objective researchChart 3: Observed vs. Fitted Eur 1y Fwd2y/5y/10y Swap Fly: Normalisation StartedChart 4: 2y/10y OAT/Bund Box: Back toPre-SMP 2.00 Extremes2015Hedged Eur 1y fwd 2/5/10 swapLEH collapseUS QE 25040Obl Oct 13 / OAT Apr 20 cheapSMP2010305200102y BTANalmost fully-5recovered0-10Obl Oct 13 / OAT Apr 20 expensiveECB July 2008 hike -10-15May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11Jan-02 Dec-02 Dec-03 Nov-04 Nov-05 Oct-06 Oct-07 Sep-08 Sep-09 Aug-10 Aug-11Hedged fly FV + 2.5 st dev FV - 2.5 st devOAT/Bund Oct 13/Apr 20With the rebound of the schatz future on its long-run support,the 1y fwd swap fly has normalised slightly over the pastweek. The observed vs. fitted value has narrowed from 13 to9.5bp. Keep rec 1y fly either outright or vs. payer 1y GBP fly.Chart 5: July 13/July 14 BTAN/Bund Box:BTAN July 14 Very CheapMoody’s warning about France’s rating led to a morepronounced OAT/Bund spread widening on the 10y maturity.The stronger move on the 10y pushed the 2y/10y OAT/Bundbox back to pre-SMP 2.00 levels.Chart 6: Fin/DSL 10y/15y Box:15y Fin Too Cheap251415FIN July 25 expensive20121010158510604-552-10FIN July 25 cheap0Aug-11 Sep-11 Oct-11BTNS 3 12/07/14 ASW-BTNS 4.50 12/7/13 ASWDBR 4.25 7/14 ASW-DBR 3.75 7/13 ASWBTNS 3 07/14 ASW-BTNS 4.50 7/13 ASW-DBR 4.25 7/14 SER 04 ASW-DBR 3.75 7/13 ASW (RHS)Like the 2y/10y OAT/Bund box, the 2y/3y one using July13/July 14 spiked back to August-September’s highs. WithBTAN July 13/July 14 above 40bp while the Bund segment is23/24bp, we recommend selling BTAN July 13 into July 14.Chart 7: 10y/30y Olo Observed vs. Fitted:30y Olo is Too Expensive0-15Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11Fin Apr 20/July 20/July 25/ DSL Jan 28While the Fin/DSL 2020 spread has tightened back, the 15yspread using (July 25 vs. Jan 28) continued to widen,reaching 14bp. After such a decoupling the 10y/15y Fin/DSLbox is now back to 2010’s extremes i.e. Fin July 15 too cheap.Chart 8: 2y/10y Olo/OAT box:the 2y Olo Will Soon be Back to a Very Cheap Level3050OLO 2013 too cheap204030Historical Average + 2.0 st dev2013 Olocheapening10201000-10-10-20-20-30May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11-30-40Historical Average - 2.0 st devOLO 2013 expensive-50Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11Olo Sep 20/Mar 41In contrast to the OAT 10y/30y sector, the Olo one is tradingaround 10bp too low (i.e. Olo 2041 is too expensive) and waseven 14bp too low a few days ago. We still recommendselling Olo 31 (Mar 28) into Olo 61 (Mar 21) targeting 38/40bp.All charts source: BNP ParibasOlo Sep 13/Oct 13/Sep 20/July 20The 2y Olo’s value has more than normalised since lateSeptember. The 2y/10y Olo/OAT box is now only 10bp fromlevels that would indicate the 2y Olo is back to a very cheaplevel. Keep Olo Sep 13/Sep 16 flatteners for 20bp move.Eric Oynoyan / Ioannis Sokos 20 October 2011Market Mover34www.GlobalMarkets.bnpparibas.com

EMU Debt Monitor: Trade IdeasThis section is classified as non-objective research• Update on recent OAT/BTAN recommendedtrades.• Keep OAT Apr 21/Apr 26 flatteners as the10y/30y is still too steep and is a cheap put onfurther upheaval.• Sell BTAN July 13 into BTAN Sep 13 orJuly 14.• Sell BTAN Jan 14 versus OAT Apr 20 in the163-165bp area.Chart 1: Sharp Recovery of 2y BTAN vs. Finlandand DSL Within 2y/10y Boxes20151050-5-10July 13 FIN / OAT Apr 20 cheapJuly 13 FIN / OAT Apr 20 expensiveRecommended 2y/10y OATsteepeners-15May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11SMP 2.0Fin/BTAN July 13/Apr 20AAA world and opportunities on the FrenchcurveIn the wake of the massive move seen on OATspreads to other AAA curves over the past couple ofweeks, and especially the most recent one, weupdate our recommendations on OATs and focusthis week on potential relative-value opportunities.Updates on past trade recommendationsOur main trade recommendations over recent weekswere 2y/10y steepeners on OATs through BTANSep 13/OAT Apr 21, Olo/BTAN Sep 13 wideningtrades, and being long the 5y ATS versus short 5yOATs.AAA steepeners through 2y BTAN /10y OATThis trade, recommended more than three weeksago, worked quite well (+30bp) as the 2y/10y OATboxes to other AAA curves disinverted sharply(Chart 1). Even versus Germany (Chart 2), the2y/10y box is back to its pre-SMP 2.0 extremes (i.e.,the 10y OAT too cheap). With the schatz futurehaving rebounded to the key long-term 109.35/40area, there is no point keeping 2y/10y steepeners.Source: BNP ParibasChart 2: Oct 13/10y OAT/Bund Box: Massive 10yOAT Underperformance50403020100Obl Oct 13 / OAT Apr 20 cheapObl Oct 13 / OAT Apr 20 expensive-10May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11Source: BNP Paribas0.20.150.10.05OAT/Bund Oct 13/Apr 20SM P2y BTANalmost fullyrecoveredChart 3: Austria/France CDS, 2y, 5y ATS/OATSpreads: 5y ATS NormalisedLong 5y ATS vs OATrecommendation20100-10Long BTAN Sep 13 versus Olo Sep 13The main argument for this trade, which werecommended in late September, was the excessivevaluation reached by the 2y Olo within the 2y/10yOlo/BTAN box. After a 50bp outperformance of the2y BTAN versus Olo, we recommended bookingprofits (the spread widened to 70bp).Short OAT Apr 17 versus ATS Feb 17The very attractive level reached by the 5y ATSwithin the 2y/5y ATS/OAT box led us to recommendselling OAT Apr 17 into ATS Feb 17, targeting a15bp spread compression. As Chart 3 shows, the0-0.05-0.1-0.15-0.2Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11RAGB 3.2 20/02/17 YLD-FRTR 3.75 25/4/17 YLD RAGB 3.8 10/13 -FRTR 4.25 10/13CDS Austria 5Y MAG-CDS France 5Y MAG (RHS)Source: BNP Paribas-20-30-40-50-60-70Eric Oynoyan / Ioannis Sokos 20 October 2011Market Mover35www.GlobalMarkets.bnpparibas.com

This section is classified as non-objective researchrichening of the 5y ATS has been greater thanforecast (25bp).Sell OAT Apr 21 into Apr 26This trade, recommended two weeks ago, was a wayto exploit the excessive steepeness of the 10y/30yOAT segment. The spread has already flattened byroughly 8bp but, as Chart 4 shows, it still has somepotential as the observed 10y/30y OAT segment istrading 11/12bp too steep. Moreover, if the past isany guide, the example of the BTP and Bonosegments last July, when the 10y/30y segmentscollapsed 25 to 35bp below their fair value, showsthat OAT flatteners on that segment can be a cheapput on further eurozone upheaval.New trade recommendationsIn terms of relative value, we see a few tradingopportunities on the OAT curve.2y/4y area: July 13/July 14 BTAN switchAs stressed in the RV charts section, BTAN July 13has outperformed both BTAN July 14 and versusSep 13. Versus Sep 13 the yield pick-up spiked from7 to 16bp while BTAN July 13 repo conditions are notspecial. Versus BTAN July 14, the BTANJuly 13/July 14 spread steepened by almost 20bp(Chart 5), while the Bund one has remained stable.Strategy: we recommend selling BTAN July 13either into BTAN Sep 13, enjoying a 15/16bp pick-up,or for the more aggressive, into BTAN July 14. Thespread around 41-42bp should tighten back to thelow 30s.7y/10y areaThe Jan 14/Jan 20 Bund segment’s steepening hasstopped with the test of the critical long-term supporton schatz (around 109.35/40 on the Z1 contract).Moreover, as stressed on the previous page and inthe RV charts section, most 2y/10y OAT boxes toAAA are back to pre-SMP 2.0 levels – i.e., the 10yOAT too cheap. Versus Bunds, the box is in the mid40s, depending on the bonds used. If the past is anyguide, 2y/10y BTP and Bono ASW boxes to Bundstopped in 2011 in the high 30s and 40s, respectively– close to the current box level for OAT/Bund. Thismeans that, although unlikely, any additionalwidening pressures on OAT/Bund spreads shouldstart to focus at the short end of the French curve asseen earlier this year for BTP and Bonos. Thealternative scenario – our preferred one – is thatmajor announcements after the EU summit on 23October will allow the box to adjust lower withstronger 10y OATs.Chart 4: OAT 10y/30y Segment Normalisation isWell Entrenched3020100-10-2030y OAT expensive-30Feb-10 Aug-10 Feb-11 Aug-11Source: BNP Paribas10y/30y OAT spread vs Euribor slopeSpec on AAAstatus lossAvr 20/Avr 41 OAT spd30y OAT toocheapChart 5: BTAN July 13/July 14 ASW & ASW Boxto Bunds: BTAN July 14 Too Cheap2520151050Aug-11 Sep-11 Oct-11BTNS 3 12/07/14 ASW-BTNS 4.50 12/7/13 ASWDBR 4.25 7/14 ASW-DBR 3.75 7/13 ASWBTNS 3 07/14 ASW-BTNS 4.50 7/13 ASW-DBR 4.25 7/14 SER 04 ASW-DBR 3.75 7/13 ASW (RHS)Source: BNP Paribas0.450.40.350.30.250.20.150.10.05Chart 6: BTAN Jan 14/OAT Apr 20 Spread andOAT/Bund 2014/2020 BoxAug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11Source: BNP ParibasFRTR 3.5 04/20 YLD-BTAN 2.50 01/14 YLD-DBR 3.25 01/20 YLD-DBR 4.25 1/14 YLDFRTR 3.5 04/20 YLD-BTAN 2.50 01/14 YLD (RHS)2141210864201.91.81.71.61.51.41.31.2Strategy: Sell BTAN Jan 14 vs. OAT Apr 20 in the163/165bp area, targeting a move below 150bp.Eric Oynoyan / Ioannis Sokos 20 October 2011Market Mover36www.GlobalMarkets.bnpparibas.com

EMU Debt Monitor: RedemptionsThis publication is classified as non-objective researchEGB Monthly RedemptionsBonds Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2011ITA 0.0 18.7 30.5 0.0 14.6 12.2 0.0 20.2 46.0 0.0 15.5 0.0 157.6FRA 17.8 0.0 0.0 18.4 0.0 0.0 29.3 0.0 13.8 15.7 0.0 0.0 95.0GER 23.3 0.0 15.0 19.0 0.0 15.0 24.0 0.0 16.0 17.0 0.0 18.0 147.3SPA 0.0 0.0 0.0 15.5 0.0 0.0 15.5 0.0 0.0 14.1 0.0 0.0 45.1GRE 0.0 0.0 8.7 1.0 7.0 0.0 0.0 6.8 0.0 0.0 0.0 5.8 29.4BEL 0.0 0.0 11.3 0.0 0.0 3.4 0.0 0.0 12.7 0.0 0.0 0.5 27.9NET 13.9 0.0 0.0 0.0 0.0 0.0 14.1 0.0 0.0 0.0 0.0 0.0 27.9AUS 8.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 8.4POR 0.0 0.0 0.0 4.5 0.0 5.0 0.0 0.0 0.0 0.0 0.0 0.0 9.5IRE 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 4.5 0.0 4.5FIN 0.0 5.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 5.7Total 63 24 66 58 22 35 83 27 89 47 20 24 558EGB Monthly RedemptionsT-Bill Monthly RedemptionsT-Bills Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2011ITA 17.4 17.3 17.3 17.3 14.6 19.3 16.3 16.2 15.7 15.7 14.9 20.0 201.8FRA 33.3 35.9 38.3 31.9 32.1 32.7 30.9 28.7 36.4 36.1 34.8 37.1 408.2GER 11.0 11.0 11.0 11.0 11.0 11.0 9.0 9.0 9.0 10.0 10.0 9.0 122.0SPA 8.7 7.9 10.2 7.3 7.9 6.3 7.3 11.9 7.3 10.0 6.2 9.3 100.3GRE 4.2 0.4 1.4 3.2 1.0 4.4 2.5 4.0 3.6 3.3 3.6 31.6BEL 5.5 6.2 6.4 6.7 7.4 6.8 5.4 5.4 5.0 6.4 6.4 6.8 74.4NET 9.7 8.3 17.4 7.0 6.9 10.9 7.7 6.2 7.8 12.7 7.1 10.1 111.6AUS 0.1 2.2 0.9 3.4 0.5 1.9 2.4 2.0 0.2 0.7 1.2 0.3 15.8POR 3.4 3.5 3.8 0.0 4.0 3.1 3.5 3.3 3.6 2.3 30.4IRE 2.1 1.2 1.6 1.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 6.2FIN 3.5 2.3 2.6 1.5 2.2 0.7 0.6 1.1 0.1 0.0 0.0 14.6Total 98.9 96.2 110.9 90.6 83.6 89.6 87.4 85.3 90.0 98.5 87.5 98.3 1116.8T-Bill Monthly Redemptions1009080706050403020100Monthly EGBs RedemptionsJan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec120100806040200Monthly T-Bills RedemptionsJan Feb Mar Apr May Jun Jul Aug Sep Oct Nov DecThis Month’s EGB RedemptionsCountry Bond Maturity Issued EURs (bn) CRNCYFRANCE FRTR 5 10/25/11 25/10/2011 11/09/2001 15.65 EURGERMANY OBL 3 1/2 10/14/11 14/10/2011 29/09/2006 17.00 EURSPAIN SPGB 5.35 10/31/11 31/10/2011 12/06/2001 14.09 EURThis Month’s T-Bill RedemptionsCountry T-Bill Maturity CRNCY EURsAUSTRIA Various small T-bills1.31BELGIUM BGTB 0 10/20/11 20/10/2011 EUR 6.41FINLAND RFTB 0 10/11/11 11/10/2011 EUR 0.07FRANCE BTF 0 10/06/11 06/10/2011 EUR 9.56FRANCE BTF 0 10/13/11 13/10/2011 EUR 8.09FRANCE BTF 0 10/20/11 20/10/2011 EUR 8.60FRANCE BTF 0 10/27/11 27/10/2011 EUR 9.86GERMANY BUBILL 0 10/12/1112/10/2011 EUR 5.00GERMANY BUBILL 0 10/26/1126/10/2011 EUR 5.00GREECE GTB 0 10/14/11 14/10/2011 EUR 2.00GREECE GTB 0 10/21/11 21/10/2011 EUR 1.63ITALY BOTS 0 10/14/11 14/10/2011 EUR 7.15ITALY BOTS 0 10/31/11 31/10/2011 EUR 8.53NETHERLANDS DTB 0 10/31/11 31/10/2011 EUR 12.66PORTUGAL PORTB 0 10/21/1121/10/2011 EUR 3.27SPAIN SGLT 0 10/21/11 21/10/2011 EUR 10.04All charts sources: BNP ParibasEric Oynoyan / Ioannis Sokos 20 October 2011Market Mover37www.GlobalMarkets.bnpparibas.com

This section is classified as non-objective researchEUR: Forward Vol is Cheap• Risk aversion is supporting implied volatilityand exerting downward pressure on the slopeof spot implied volatility term structures. In turn,inverted spot volatility term structures havepushed forward volatilities to attractive buyinglevels.• Strategy: Buy 1y10y5y via a swaptiontriangle.Chart 1: 5y Swap Forward Vol Term StructuresCharts 1 and 2 show forward implied volatility termstructures modelled using a Hull-White basedmodelling approach. Indeed, forward volatility ismodel dependent with price being a function of futureATMF dynamics and smile rolling effect on thehedged forward straddle. In the charts the forwardlag is on the x-axis and implied volatility is on they-axis. The starting points of the curves ("spot" labelon x-axis) show standard (spot) implied volatilities.Source: BNP ParibasChart 2: 20y Swap Forward Vol Term StructuresThe charts illustrate the curves that are the mostinteresting currently, limiting the analysis to 1yforward volatilities’ attractive cheap forward points,which can be sensibly replicated (purchased) viaswaption triangles.On the 5y underlying, the sweet spot is the 1y10y5y(i.e., 10y5y implied volatility 1 year forward): the pointis 39bp cheaper than 10y5y implied volatility! Thisspread is clearly an accurate measure for the carry ofthe position. Analogously, on the 20y underlying, thesweet spot is the 1y6y20y point, which is 39bpcheaper than spot.Source: BNP ParibasChart 3: Breakdown of Forward Straddle intoThree Spot StraddlesForward swaption straddles as an asset class arecurrently not liquid/traded. However, they can bereplicated via swaption triangles (for more details,see “Forward Volatility for the Practical Man”,released in October). The basic idea is depicted inChart 3. For instance, the 1y10y5y straddle can bebroken down into the following three vanillastraddles:L: 1y15yS: 1y10y0Source: BNP ParibasLT Ts TeSUU: 11y5yAssuming the implied correlation between 1y10y and1y15y rate equals 1, it can be shown that therequired weights to replicate 100m notional on1y10y5y are w(L) = -63.4m, w(S) = 63.1m and w(U) =117.3m.Matteo Regesta 20 October 2011Market Mover38www.GlobalMarkets.bnpparibas.com

This section is classified as non-objective researchJGBs: Buy 2y2y Payers• JGBs have been trading robustly despite therecent moves in the EGB market. With JPY volsin short tails suffering from the collapse inrealised vols, buying OTM payers looksattractive.• STRATEGY: Investors looking for a sell-offin JPY rates should buy OTM 2y2y payers.30025020015010050Chart 1:5y Sov CDS (bp)Italy France JapanGermany UK USASell Japan?JGBs and JPY IRS have been trading in a relativelytight range compared with moves in overseasmarkets. Recently, the European sovereign debtcrisis has pushed yields higher for AAA countriessuch as France, but Japan’s credit seems to beconsidered a safe haven even though the 5y CDShas traded above 100bp.A common ‘sell Japan trade’ has been to buy payerson 10y tails. However, comparing EGB yields againstEUR IRS as a proxy of an average EUR rate revealsa massive bear-flattening trend given the rise in riskpremiums. This means there is more leverage inforward short rates as the change in the forward rateis roughly calculated from the change in the outrightlevel and the change in slope.Chart 3 shows the relative richness of 10y tailsversus 2y tails. This uses eight years of historicaldata of the ATM fwd rate (x-axis) versus the ATMnormal volatility observed relative to each ATM fwdrate. The orange square represents the current level.The red triangle illustrates the breakeven level with a1% strike. Thus 2y2y vol is relatively inexpensive,and in line with the current trend (in the green cloud).If you do the same exercise for the 2y10y, the graphlooks totally different (shown underneath),highlighting the richness of 10y tails.Moreover, the JPY vol curve is still flat in this lowyieldenvironment as the short tails are suffering fromthe sell-off in realised vol.Trade ideaOur central scenario does not include a crash ofJGBs. However, investors looking for a ‘sell Japantrade’ should look to buy OTM 2y2y payers at currentlevels as a cheap way of expressing this view. If youset the strike at 1%, our indicative offer is at 14.02008 2009 2010 2011 2012Source: BNP Paribas20181614121086420Chart 2: EGB Yields and Swap Rates (%)EUR Swap France SpainItaly Ireland PortugalGreece (RHS)1 2 3 4 5 6 7 8 9 10 (Year)Source: BNP Paribas908070605040302010090807060504030Chart 3: ATM Fwd versus Implied VolNorm. Vol, bp2y2yATMF, %0.0 0.5 1.0 1.5 2.0 2.5 3.0Norm. Vol, bp2y10yATMF, %1.0 1.5 2.0 2.5 3.01009080706050403020100Source: BNP ParibasTomohisa Fujiki 20 October 2011Market Mover39www.GlobalMarkets.bnpparibas.com

Global Inflation WatchInflation seen fairly stable in OctoberThe final reading of eurozone inflation forSeptember confirmed the flash estimate, at 3% y/yup from 2.5% in August. The main contributor tohigher inflation in the eurozone was Italy, where theharmonised inflation rate jumped 1.3pp to 3.6% y/y.This was largely due to the new technical processintroduced in January, which changed theseasonality of Italian harmonised inflation. The VAThike also played a role, but its effect was muchsmaller as the domestic inflation rate – up a muchsmaller 0.2pp – showed. But this is already history.Attention will focus on the October CPIs, with therelease of preliminary estimates on Thursday 27October in Germany and Belgium and, on the nextday, in Spain.We do not expect German inflation to change inOctober. We forecast the monthly gain at 0.1% andannual inflation rates stable at 2.6% for the CPI and2.9% for the HICP.Spanish preliminary HICP inflation is forecast to fallslightly in October to 2.9% y/y from September’s3.0%. This is consistent with our global economicinflation outlook, which is that inflation should start toease in developed markets in October or November,because of a less adverse base effect on energy anddue to the global economic slowdown. Exceptionsremain possible, especially where tax hikes hitconsumers.Belgian inflation is forecast stable at 3.6% y/y forOctober. However, Belgian inflation is highlysensitive to energy prices and much more volatilethan the eurozone average, so it is not a good guideto inflation in the entire monetary union.The US CPI was in line with forecasts, up 0.3% m/min September, which pushed the annual inflation rateup again to 3.9% y/y. This should be the peak of thecycle: we forecast the inflation rate will decline by asmuch as 0.4pp in October.On Friday we forecast Japanese inflation as stable:no CPI change on the month of September and thesame 0.2% y/y inflation rate as in August. However,the Tokyo price index for October should print asharp decline, down 0.5% m/m lowering the inflationrate by 0.3pp to -0.4% y/y.Chart 1: HICP Main Eurozone Countries (% y/y)6543210-1GermanySpainEurozoneItalyFrance-2Jan May Sep Jan May Sep Jan May Sep Jan May Sep08 09 10 11Source: Reuters EcoWin Pro653210-1-2Chart 2: Belgian HICP Inflation (% y/y)4 HICP EurozoneHICP Belgium02 03 04 05 06 07 08 09 10 11Source: Reuters EcoWin ProChart 3: Inflation Rates Compared in Japan2.521.5% y/yNationwide CPI10.50-0.5-1-1.5TokyoCPI-2GDP Deflator-2.5-302 03 04 05 06 07 08 09 10 11Source: Reuters EcoWin ProLuigi Speranza/Gizem Kara/Dominique Barbet 20 October 2011Market Mover40www.GlobalMarkets.bnpparibas.com

Table 1: BNP Paribas' Inflation ForecastsEurozoneFranceUSHeadline HICPEx-tobacco HICPHeadline CPIEx-tobacco CPICPI Urban SA CPI Urban NSAIndex % m/m % y/y Index % m/m % y/y Index % m/m % y/y index % m/m % y/y Index % m/m % y/y Index % m/m % y/y2010 109.8 - 1.6 109.5 - 1.5 121.1 - 1.5 119.8 - 1.5 218.1 - 1.6 218.1 - 1.62011 (1) 112.8 - 2.7 112.4 - 2.6 123.6 - 2.1 122.1 - 2.0 225.0 - 3.2 225.0 - 3.22012 (1) 114.8 - 1.8 114.3 - 1.7 125.7 - 1.6 124.0 - 1.6 229.0 - 1.8 229.0 - 1.8Q1 2011 111.3 - 2.5 110.9 - 2.4 122.5 - 1.8 121.0 - 1.7 222.3 - 2.2 221.7 - 2.1Q2 2011 113.1 - 2.8 112.8 - 2.7 123.9 - 2.1 122.4 - 2.0 224.5 - 3.3 225.5 - 3.4Q3 2011 (1) 112.8 - 2.7 112.4 - 2.6 123.8 - 2.1 122.3 - 2.1 226.2 - 3.8 226.5 - 3.8Q4 2011 (1) 113.9 - 2.8 113.5 - 2.7 124.3 - 2.2 122.8 - 2.1 226.9 - 3.4 226.4 - 3.4Q1 2012 (1) 113.8 - 2.3 113.3 - 2.2 124.6 - 1.7 123.0 - 1.6 227.5 - 2.3 226.9 - 2.3Q2 2012 (1) 115.1 - 1.7 114.6 - 1.6 125.5 - 1.3 123.9 - 1.3 228.5 - 1.8 229.5 - 1.8Q3 2012 (1) 114.7 - 1.7 114.2 - 1.6 126.0 - 1.8 124.3 - 1.6 229.6 - 1.5 229.8 - 1.5Q4 2012 (1) 115.7 - 1.5 115.1 - 1.4 126.5 - 1.8 124.9 - 1.7 230.6 - 1.6 230.0 - 1.6Jan 11 110.5 -0.7 2.3 110.11 -0.7 2.2 121.8 -0.2 1.8 120.32 -0.2 1.7 221.1 0.4 1.7 220.22 0.5 1.6Feb 11 111.0 0.4 2.4 110.58 0.4 2.4 122.4 0.5 1.7 120.90 0.5 1.6 222.3 0.5 2.2 221.31 0.5 2.1Mar 11 112.5 1.4 2.7 112.11 1.4 2.6 123.4 0.8 2.0 121.90 0.8 1.9 223.5 0.5 2.7 223.47 1.0 2.7Apr 11 113.1 0.6 2.8 112.75 0.6 2.8 123.8 0.3 2.1 122.32 0.3 2.0 224.4 0.4 3.1 224.91 0.6 3.2May 11 113.1 0.0 2.7 112.75 0.0 2.7 123.9 0.1 2.0 122.40 0.1 2.0 224.8 0.2 3.4 225.96 0.5 3.6Jun 11 113.1 0.0 2.7 112.75 0.0 2.7 124.0 0.1 2.1 122.49 0.1 2.1 224.3 -0.2 3.4 225.72 -0.1 3.6Jul 11 112.4 -0.6 2.5 112.03 -0.6 2.5 123.4 -0.4 1.9 121.94 -0.4 1.9 225.4 0.5 3.6 225.92 0.1 3.6Aug 11 112.6 0.2 2.5 112.23 0.2 2.5 124.0 0.5 2.2 122.59 0.5 2.2 226.3 0.4 3.8 226.55 0.3 3.8Sep 11 113.5 0.8 3.0 113.08 0.8 2.9 124.0 -0.1 2.2 122.49 -0.1 2.2 227.0 0.3 3.9 226.89 0.2 3.9Oct 11 (1) 113.7 0.2 2.9 113.34 0.2 2.9 124.2 0.2 2.3 122.64 0.1 2.2 226.7 -0.1 3.5 226.42 -0.2 3.5Nov 11 (1) 113.8 0.1 2.9 113.38 0.0 2.8 124.3 0.0 2.3 122.68 0.0 2.2 227.0 0.1 3.5 226.52 0.0 3.5Dec 11 (1) 114.2 0.3 2.6 113.73 0.3 2.5 124.6 0.2 2.0 122.97 0.2 2.0 227.2 0.1 3.2 226.13 -0.2 3.2Jan 12 (1) 113.1 -0.9 2.4 112.65 -0.9 2.3 124.3 -0.2 2.0 122.67 -0.2 1.9 227.2 0.0 2.8 226.35 0.1 2.8Feb 12 (1) 113.5 0.4 2.3 113.07 0.4 2.2 124.5 0.2 1.8 122.91 0.2 1.7 227.4 0.1 2.3 226.45 0.0 2.3Mar 12 (1) 114.8 1.1 2.0 114.30 1.1 2.0 125.1 0.5 1.4 123.50 0.5 1.3 227.8 0.2 1.9 227.79 0.6 1.9Apr 12 (1) 114.9 0.1 1.6 114.41 0.1 1.5 125.3 0.2 1.3 123.74 0.2 1.2 228.1 0.1 1.6 228.60 0.4 1.6May 12 (1) 115.1 0.2 1.8 114.66 0.2 1.7 125.6 0.2 1.4 123.98 0.2 1.3 228.5 0.2 1.7 229.70 0.5 1.7Jun 12 (1) 115.2 0.0 1.8 114.68 0.0 1.7 125.7 0.1 1.4 124.10 0.1 1.3 228.9 0.1 2.0 230.31 0.3 2.0UpdatedNextReleaseOct 14Oct Flash HICP (Oct 31)Oct 14Oct CPI (Nov 10)Oct 19Oct CPI (Nov 16)Source: BNP Paribas, (1) ForecastsChart 4: Eurozone HICP (% y/y)654321Chart 5: US CPICPI % y/y - Contribution to GrowthEnergyFood0-1Core (ex-food & energy)-2Source: Reuters EcoWin ProSeptember’s sharp rebound in inflation was mainly due tomethodological factors. The contribution of energy to headlineinflation was 1.3pp in September. However, this should declinesharply from October onwards.-3Jan May Sep Jan May Sep Jan May Sep Jan May08 09 10 11Source: Reuters EcoWin ProThe core CPI gained only 0.05% m/m in September thanks to pricefalls on car and apparel. However, core inflation has risen to2.0% y/y, and should continue to rise until the year-end, thuscontributing more to headline inflation. However, the expecteddecline in the energy contribution should outweigh thisdevelopment.Luigi Speranza/Gizem Kara/Dominique Barbet 20 October 2011Market Mover41www.GlobalMarkets.bnpparibas.com

Table 2: BNP Paribas' Inflation ForecastsJapanUKSwedenCore CPI SACore CPI NSAHeadline CPIRPICPICPIFIndex % m/m % y/y Index % m/m % y/y Index % m/m % y/y Index % m/m % y/y Index % m/m % y/y Index % m/m % y/y2010 100.0 - -1.0 100.0 - -1.0 114.5 - 3.3 223.6 - 4.6 302.5 - 1.2 194.6 - 2.02011 (1) 99.8 - -0.2 99.8 - -0.2 119.6 - 4.5 235.3 - 5.3 311.5 - 3.0 197.4 - 1.52012 (1) 99.5 - -0.3 99.5 - -0.3 122.7 - 2.4 243.7 - 3.6 316.0 - 1.4 200.0 - 1.3Q1 2011 99.8 - -0.8 99.5 - -0.8 117.6 - 4.1 230.9 - 5.3 308.1 - 2.6 196.1 - 1.4Q2 2011 99.9 - -0.3 100.0 - -0.3 119.4 - 4.4 234.9 - 5.1 311.6 - 3.3 197.5 - 1.7Q3 2011 (1) 99.7 - 0.2 99.9 - 0.2 120.1 - 4.7 236.2 - 5.2 311.9 - 3.3 197.2 - 1.6Q4 2011 (1) 99.6 - -0.1 99.7 - -0.1 121.4 - 4.8 239.1 - 5.3 314.6 - 2.8 198.9 - 1.3Q1 2012 (1) 99.4 - -0.4 99.1 - -0.4 121.6 - 3.4 240.3 - 4.1 0.0 - 0.0 0.0 - 0.0Q2 2012 (1) 99.5 - -0.4 99.5 - -0.4 122.7 - 2.8 243.7 - 3.7 0.0 - 0.0 0.0 - 0.0Q3 2012 (1) 99.4 - -0.3 99.5 - -0.3 122.8 - 2.3 244.3 - 3.4 0.0 - 0.0 0.0 - 0.0Q4 2012 (1) 99.5 - -0.1 99.6 - -0.1 123.8 - 2.0 246.4 - 3.1 0.0 - 0.0 0.0 - 0.0Jul 10 99.7 -0.3 -1.0 99.7 -0.4 -1.1 114.3 -0.2 3.1 223.6 -0.2 4.8 302.0 -0.3 1.1 193.7 -0.3 1.7Aug 10 99.5 -0.2 -1.1 99.7 0.0 -1.1 114.9 0.5 3.1 224.5 0.4 4.7 302.1 0.0 0.9 193.7 0.0 1.5Sep 10 99.4 -0.1 -1.2 99.7 0.0 -1.2 114.9 0.0 3.1 225.3 0.4 4.6 304.6 0.8 1.4 195.1 0.7 1.8Oct 10 99.7 0.3 -0.8 100.0 0.3 -0.8 115.2 0.3 3.2 225.8 0.2 4.5 305.6 0.3 1.5 195.7 0.3 1.8Nov 10 99.7 0.0 -0.8 99.8 -0.2 -0.8 115.6 0.4 3.3 226.8 0.4 4.7 306.6 0.3 1.8 196.2 0.2 1.9Dec 10 99.8 0.1 -0.8 99.7 -0.1 -0.8 116.8 1.0 3.7 228.4 0.7 4.8 308.7 0.7 2.3 197.3 0.6 2.3Jan 11 99.8 0.0 -0.8 99.4 -0.3 -0.8 116.9 0.1 4.0 229.0 0.3 5.1 306.2 -0.5 2.5 195.2 -1.1 1.4Feb 11 99.8 0.0 -0.9 99.4 0.0 -0.8 117.8 0.7 4.4 231.3 1.0 5.5 308.0 0.6 2.5 196.2 0.5 1.3Mar 11 99.8 0.0 -0.7 99.7 0.3 -0.7 118.1 0.3 4.0 232.5 0.5 5.3 310.1 0.7 2.9 196.9 0.4 1.5Apr 11 100.0 0.2 -0.3 100.0 0.3 -0.3 119.3 1.0 4.5 234.4 0.8 5.2 311.4 0.4 3.3 197.6 0.4 1.8May 11 100.0 0.0 -0.2 100.1 0.1 -0.2 119.5 0.2 4.5 235.2 0.3 5.2 312.0 0.2 3.3 197.8 0.1 1.7Jun 11 99.7 -0.3 -0.3 99.8 -0.3 -0.3 119.4 -0.1 4.2 235.2 0.0 5.0 311.3 -0.2 3.1 197.2 -0.3 1.5Jul 11 99.8 0.1 0.1 99.8 0.0 0.1 119.4 0.0 4.4 234.7 -0.2 5.0 311.1 0.0 3.3 196.8 -0.2 1.6Aug 11 99.8 0.0 0.3 99.9 0.1 0.2 120.1 0.6 4.5 236.1 0.6 5.2 311.2 0.0 3.4 196.8 0.0 1.6Sep 11 (1) 99.6 -0.2 0.2 99.9 0.0 0.2 120.9 0.6 5.2 237.9 0.8 5.6 313.4 0.7 3.2 198.1 0.7 1.5Oct 11 (1) 99.6 0.0 -0.1 99.9 0.0 -0.1 121.0 0.1 5.1 238.3 0.2 5.5 314.6 0.4 3.3 198.9 0.4 1.6Nov 11 (1) 99.6 0.0 -0.1 99.7 -0.2 -0.1 121.3 0.2 4.9 239.1 0.3 5.4 314.6 0.0 3.0 198.9 0.0 1.4Dec 11 (1) 99.6 0.0 -0.2 99.5 -0.2 -0.2 121.9 0.5 4.4 240.0 0.4 5.1 314.6 0.0 2.2 199.0 0.0 0.8UpdatedNextReleaseSep 30Sep CPI (Oct 28)Oct 19Oct CPI (Nov 15)Oct 11Oct CPI (Nov 10)Source: BNP Paribas, (1) ForecastsChart 6: Japanese CPI (% y/y)Chart 7: UK CPI (% y/y)Source: Reuters EcoWin ProWe expect CPI inflation to return to negative territory as early asOctober, as two special factors that are boosting the annual changeby a combined 0.3pp – a tobacco tax hike and higher non-lifeinsurance premiums – will fall out of the annual comparison.Source: Reuters EcoWin Pro, BNP ParibasCPI inflation reached its highest level in three years at 5.2% y/y inSeptember, exceeding expectations. We forecast inflation will starteasing in October, with the decline gaining pace over the followingmonths, when the energy contribution diminishes and the baseeffect due to VAT disappears. This will change the inflation pictureand explains why the BoE unanimously approved quantitativeeasing.Luigi Speranza/Gizem Kara/Dominique Barbet 20 October 2011Market Mover42www.GlobalMarkets.bnpparibas.com

Table 3: BNP Paribas' Inflation ForecastsCanada Norway AustraliaCPI Core CPI Headline CPI CoreCPICoreIndex % q/q % y/y Index % q/q % y/y Index % q/q % y/y Index % q/q % y/y Index % q/q % y/y Index % q/q % y/y2010 116.5 1.8 115.6 1.7 128.8 2.4 120.1 1.4 172.6 2.8 - 2.82011 (1) 119.9 2.9 117.5 1.7 130.5 1.3 121.4 1.1 178.8 3.6 - 2.62012 (1) 123.0 2.6 120.0 2.1 132.4 1.5 123.6 1.8 183.9 2.9 - 2.9Q1 2011 119.4 3.3 2.0 117.0 0.7 1.6 130.2 0.6 1.4 120.3 -0.2 0.8 176.7 1.6 3.3 - - 2.3Q2 2011 119.8 5.6 2.5 117.1 3.4 1.5 130.9 0.6 1.4 121.5 1.0 1.0 178.3 0.9 3.6 - - 2.6Q3 2011 (1) 120.5 0.7 2.8 118.3 1.5 1.6 130.1 -0.7 1.5 121.2 -0.3 1.1 179.7 0.8 3.7 - - 2.7Q4 2011 (1) 120.9 1.7 2.9 118.6 2.6 1.7 130.7 0.5 1.0 122.6 1.1 1.7 180.4 0.4 3.7 - - 2.8Q1 2012 (1) 122.2 3.0 3.0 119.4 1.7 1.9 131.2 0.4 0.8 122.6 0.0 1.9 181.8 0.8 2.9 - - 2.7Q2 2012 (1) 123.4 4.8 2.8 119.9 2.4 2.1 132.5 1.0 1.2 123.8 1.0 1.9 182.7 0.5 2.5 - - 2.9Q3 2012 (1) 123.4 1.3 2.7 120.6 2.3 2.1 132.5 0.0 1.9 123.6 -0.2 2.0 185.0 1.3 3.0 - - 2.9Q4 2012 (1) 123.9 0.7 2.6 121.0 1.6 2.1 133.4 0.7 2.1 124.5 0.7 1.6 186.2 0.7 3.2 - - 2.9UpdatedNextReleaseSep 29Sep CPI (Oct 21)Oct 10Oct CPI (Nov 10)Oct 20Q3 CPI (Oct 26)Source: BNP Paribas, (1) ForecastsChart 8: Canadian Headline vs. Core CPI (% y/y)Chart 9: Australian CPI (% y/y)4.03.53.02.52.01.51.00.50.0-0.5-1.0BoC Mid-Point Inflation TargetBoC CPI Core (% y/y)CPI Total (% y/y)04 05 06 07 08 09 10 117.0(% y/y)6.05.0Headline CPIUnderlying CPI4.03.02.01.00.0-1.0Q193 Q195 Q197 Q199 Q101 Q103 Q105 Q107 Q109 Q111 Q113Source: Reuters EcoWin Pro, BNP ParibasWe forecast September inflation, due on Friday 21 October, will bea little above the market consensus. However, wage pressuresappear subdued, suggesting that underlying inflation will remainwithin the BoC's target range.Source: Reuters EcoWin Pro, BNP ParibasUnderlying inflation is forecast to remain strong, up 0.7% q/q and2.7% y/y in Q3. This should push headline inflation, which will bepublished on Wednesday 26, up to 3.7% y/y.CPI Data Calendar for the Coming WeekDay GMT Economy Indicator Previous BNPP F’cast ConsensusFri 21/10 11:00 Canada CPI m/m : Sep 0.3% 0.2% 0.2%11:00 CPI y/y : Sep 3.1% 3.2% 3.1%Wed 26/10 00:30 Australia CPI y/y : Q3 3.6% 3.7% n/a00:30 Underlying CPI q/q : Q3 0.6% 0.7% n/a00:30 Underlying CPI y/y : Q3 2.5% 2.7% n/aThu 27/10 12:30 Germany CPI (Prel) m/m : Oct 0.1% 0.1% 0.1%12:30 CPI (Prel) y/y : Oct 2.6% 2.6% 2.6%12:30 HICP (Prel) m/m : Oct 0.2% 0.1% 0.1%12:30 HICP (Prel) y/y : Oct 2.9% 2.9% 2.8%09:15 Belgium CPI m/m : Oct 0.3% 0.2% n/a09:15 CPI y/y : Oct 3.6% 3.6% n/a23:30 Japan CPI National y/y : Sep 0.2% 0.0% 0.2%23:30 Core CPI National y/y : Sep 0.2% 0.2% 0.2%23:30 CPI Tokyo y/y : Oct -0.2% -0.5% -0.4%23:30 Core CPI Tokyo y/y : Oct -0.1% -0.4% -0.4%Fri 28/10 07:00 Spain HICP Flash y/y : Oct 3.0% 2.9% n/aRelease dates and forecasts as at c.o.b. prior to the date of publication: See Daily Economic Spotlight for any revisionSource: BNP ParibasLuigi Speranza/Gizem Kara/Dominique Barbet 20 October 2011Market Mover43www.GlobalMarkets.bnpparibas.com

This section is classified as non-objective researchInflation: CPI and OAT/Bund• Mixed CPI and carry profile from November.• OATei BE cheap but OAT/Bund has totighten back.• UKTI 2062 next week. Value in BE and ASW.101.6101.2Chart 1: Daily Reference Indicesfrom 1 NovemberDaily Reference IndexUKInflation data surprised on the upside in the UK andthe eurozone this week and to the downside in theUS and France. Chart 1 shows the profile for theDaily Reference Indices (rebased at 100 on 1November) for each market. Unsurprisingly, carry willbe strong for EUR and GBP, especially in November,and lacklustre in France and the US. Chart 2 showsthe moves in short-end breakevens in recent weeks.OBLei13 and OATi13 BE have risen higher inconcert, which is not justified by the levels offorwards, hence our recommendation to sell OATi13BE versus OBLei13 BE. The UKTI13 breakeven fellrecently and looks cheap in our view. We would bemore neutral as far as the TIPS Apr13 is concerned.See focus on the US inflation market regarding theFed’s selling back operation.Another event this week was the widening of the 10yOAT/Bund spread above 100bp for the first timesince 1995 when nominal yields were running ataround 8%. As we noted last week, the widening hasless impact than usual on risky assets such asequities, commodities and, more surprisingly,EURUSD. The current level of the currency makesOBLei18 look fair to rich versus TIPS while OATeireal yields look attractive versus both of them. Stresson EGBs remains the main risk for EUR breakevens.Next week’s index extensions (around +0.35y in theUK, +0.17y in the US) should bring some support forthe long end. The US/EUR 10/30y BE box hasmoved by 20bp but there is still potential for flatteningin the eurozone and steepening in the US.In the UK, the strong RPI will maintain flatteningpressure on the inflation curve. Liquidity is low in UKlinkers whilst volatility remains high – UKTi-55 tradedin a 6 figure range (compared to 15 big figures+ lastweek!). The market is looking ahead to the UKDMO’s launch of a new 50y UKTi benchmark. Thebond will have a coupon of 0.375% and maturity22-March-2062. The UKTi-55 has been the weakestperformer in real yield and breakeven since 31August when Q4’s syndicated issuance calendar wasannounced (Chart 3). A potential size of GBP 3.5bnwould be worth +0.4y in terms of index extension atthe end of October. We expect strong extension andLDI activity with breakevens, real ASW and ASW100.8100.4100.099.601-Nov 01-Dec 01-Jan 31-JanSource: BNP ParibasSource: BNP Paribas6040200-20-40-60-80discounts offering strong value, and real yieldsbacking up towards 40bp at the ultra-long end at thetime of writing. We favour 10/50y real yield flattenersand 20/50y breakeven steepeners although long 50ybreakeven (at close to 3%) or receiving UKTi-62ASW at potentially Libor + 60bp, also look attractive.FRFChart 2: 2013 Inflation BreakevensUSEURChart 3: Carry Adjusted Changes in UKTIsince 31 AugustRY Move since 31-Aug (carry-adj)NY Move since 31-Aug (carry-adj)BE Move since 31-Aug (carry-adj)U13 U16 U17 U20 U22 U24 U27 U30 U32 U34 U35 U37 U40 U42 U47 U50 U55Source: BNP ParibasHerve Cros / Shahid Ladha / Aaron Kohli 20 October 2011Market Mover44www.GlobalMarkets.bnpparibas.com

This section is classified as non-objective researchTIPS: Expect It When You Least Expect It• CPI coming in at 226.889 NSA failed to liveup to the heightened expectations (226.95 NSA)of the markets, but we wonder if that mayperversely encourage breakevens to improve inthe coming weeks. In short, lowered core CPIprints may provide fodder for the dovish Fedmembers who favour further easing.• Europe remains the single key factor whichcould unsettle risk markets.• The schedule for the next sellback shouldprovide some food for thought. It’ll beinteresting to see whether the Fed once againuses CPI or an auction as an anchor givenrecent sellback performance.• The breakeven curve looks a bit too flat atthe long end, especially given the current levelof nominal and TIPS rates.$3,500$3,000$2,500$2,000$1,500$1,000$500$0TIPSApr-12Source: BNP ParibasChart 1: SOMA HoldingsTIPSJul-12SOMA holding (mm)SOMA as % of Outstanding (RHS)TIPSApr-13TIPSJul-13TIPS TIPSJan-14 Apr-14TIPSJul-1425%20%15%10%Chart 2: Oil at Channel and 50d Moving AverageSupport, Risk at the Tipping Point….EuropeHolds the Answer955%0%With 1 November kicking off another Fed meeting,we wonder if the drumbeat of headline targeting ofunemployment and inflation may gain furthercurrency. Not that the chatter surrounding such acommunications strategy hasn’t increased…itcertainly has. Rather, it is important to note that theCPI print was “just right” in that it may havedisappointed short-run market expectations, but thecooling in core CPI could provide greater fodder forthe dovish members of the FOMC to speak a littlelouder at the coming meeting. Also, the CPI releasewasn’t so mild that it did a great deal of damage tothe carry profile of TIPS. Overall, 1yr breakevensretraced the performance of the prior day but werestill roughly 50bp better than the lows of earlyOctober. We still like our long front-end breakevenstrade versus a hedge in oil with the obvious caveatthat European news in the next few days could movethe needle in either direction by a significant amount.One of the facts that did not go unnoticed by TIPSmarkets participants was the confluence of asellback, a CPI print, and an auction in the sameweek. For the often indolent TIPS market, this was averitable marathon of activity. It’ll be interesting tosee whether the Fed continues to schedule sellbacksin event-heavy weeks for TIPS because each ofthese opportunities (CPIs, auctions, sellbacks, etc)provides a liquidity event for TIPS. Therefore, itwould, prima facie, make sense to spread them outas much as possible to aid liquidity in the market.The issue, of course, is that a sellback that fails to908580759/1/11 9/11/11 9/21/11 10/1/11 10/11/11Source: BNP ParibasChart 3: 10-30 Breakevens Curve45352515501/11 02/1103/11 04/11 05/11 06/11 07/11 08/11 09/11 10/11Source: BNP ParibasShahid Ladha / Herve Cros / Aaron Kohli 20 October 2011Market Mover45www.GlobalMarkets.bnpparibas.com

This section is classified as non-objective researcharouse sufficient interest could present a problem.Perhaps the triple-booking was the Fed’s way ofensuring better investor demand and liquidity at thesellback.If the results of the first event are any indicationthough, they have little to worry about. Demand atthe event was impressive with April 12s performingvery well along with July 12s as the Fed ownssignificant amounts of both but actually sold neitherissue. The Fed will eventually sell these as theyrichen, but that may not occur for some time. Thelarge size of the purchases at the last sellback alsoindicates the strength of the demand and perhapspoints to a small number of very aggressivebuyer(s).We have stated at several points past thatthe long end of the breakevens curve appears tooflat. The 10-30 breakevens curve has already startedto correct and could move further in the month aheadwith our target of 35 at the 1 year average. Thecatalysing factors here would be an index extension(+0.18) that favors 30s, a lacklustre extension for 10sin November (+0.01), a greater float for the 30yr, andFed buying in the 30yr at the expense of 10s. Forfurther details, please see our earlier trade note on19 October titled "Post-CPI Trade Idea - Long-endBE Steepener or Fly.Shahid Ladha / Herve Cros / Aaron Kohli 20 October 2011Market Mover46www.GlobalMarkets.bnpparibas.com

This section is classified as non-objective researchTable 1: Carry TableBenchmark CarryPricing Date20-Oct-11Term 1Term 23m6m12mRepo Rate#REF! #REF! #REF! #REF! #REF!Sett. Date21-Oct-11 01-Nov-11 01-Dec-1123-Jan-1223-Apr-1222-Oct-12Yield BE Real BE Real BE Real BE Real BE Real BEShort-endOATei Jul-12 -1.95% 2.68% -2.2 -1.2 75.5 79.9 63.3 74.4 -330.3 -293.7OATI Jul-13 -0.49% 1.66% 5.3 4.9 -7.0 -8.4 -11.6 -16.1 -27.7 -40.2 22.8 22.8TIPS Jul-12 -1.14% 1.29% 8.6 8.4 17.6 17.2 -53.5 -54.1 -269.7 -268.4UKTi Aug-13 -2.10% 2.67% 0.4 0.5 -3.1 -3.1 12.7 13.2 9.4 11.5 37.6 50.65yBUNDEI Apr-16 -0.28% 1.42% 0.4 0.3 15.7 15.3 18.2 16.9 -0.2 -3.7 18.0 10.7BTANI Jul-16 0.69% 1.50% 2.4 1.9 0.1 -2.9 2.8 -5.3 6.0 -11.8 36.7 36.7TIPS Apr-16 -0.70% 1.64% 1.7 1.1 3.6 1.4 -3.3 -8.4 -9.8 -20.1 17.7 -4.3UKTi Nov-17 -1.01% 2.75% 2.8 2.2 13.7 11.3 17.1 11.5 19.7 8.3 38.3 14.1JGBI-4 June-15 0.61% -0.34% 0.6 0.4 -5.4 -6.0 0.7 -0.4 -17.9 -20.3 3.0 -2.210yOATEI Jul-22 1.45% 1.67% 0.5 0.0 8.5 5.7 12.1 4.9 9.0 -6.0 25.9 -5.3OATI Jul-19 1.06% 1.79% 1.6 1.1 0.6 -2.4 3.1 -4.8 6.3 -10.3 27.0 27.0TIPS Jan-21 0.19% 1.87% 1.1 0.4 3.0 0.2 1.0 -5.3 0.7 -12.0 19.2 -6.8UKTi Nov-22 -0.14% 2.64% 1.9 1.2 8.9 6.3 12.0 6.1 15.6 3.8 30.0 5.6JGBI-16 June-18 0.93% -0.38% 0.6 0.3 -9.3 -10.1 1.7 -0.1 -7.0 -10.6 7.3 -0.530yOATei Jul-40 1.81% 2.10% 0.3 -0.1 4.0 2.2 5.8 1.3 4.8 -4.5 12.7 -5.9OATI Jul-29 1.69% 2.09% 1.0 0.5 0.8 -1.7 2.7 -3.5 5.6 -7.2 18.1 18.1TIPS Feb-41 1.06% 2.13% 0.5 0.0 1.6 -0.4 1.4 -3.2 2.2 -6.7 10.8 -7.1UKTI Mar-40 0.37% 3.02% 0.8 0.3 3.6 1.8 5.1 1.0 6.9 -1.3 13.0 -3.5Short-endTerm 1 -> Term 2 Term 2 -> 3m3m -> 6m6m -> 12mOATei Jul-12 77.7 81.1 -18.5 -14.9 -393.6 -368.2 330.3 293.7OATI Jul-13 -12.3 -13.4 -4.7 -6.5 -16.1 -24.1 50.5 62.9TIPS Jul-12 9.0 8.7 -36.6 -36.6 -216.2 -214.3 269.7 268.4UKTi Aug-13 -3.5 -3.5 9.0 9.5 -3.2 -1.7 28.2 39.15yBUNDEI Apr-16 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0BTANI Jul-16 15.4 15.1 -0.3 -0.8 -18.4 -20.5 18.2 14.4TIPS Apr-16 -2.3 -4.8 0.7 -2.1 3.1 -6.6 30.7 48.5UKTi Nov-17 1.9 0.3 -2.8 -4.6 -6.4 -11.7 27.5 15.8JGBI-4 June-15 -6.0 -6.4 -1.7 -2.1 -18.6 -19.9 20.9 18.110yOATEI Jul-22 8.0 5.8 1.2 -1.1 -3.1 -10.9 17.0 0.7OATI Jul-19 -1.1 -3.5 0.9 -1.7 3.3 -5.5 20.7 37.3TIPS Jan-21 1.8 -0.2 -0.4 -2.7 -0.3 -6.7 18.5 5.2UKTi Nov-22 7.0 5.1 2.4 0.4 3.6 -2.3 14.4 1.8JGBI-16 June-18 -9.8 -10.4 -0.6 -1.1 -8.7 -10.5 14.2 10.130yOATei Jul-40 3.7 2.3 0.7 -0.8 -1.0 -5.8 8.0 -1.4OATI Jul-29 -0.2 -2.2 0.8 -1.2 2.8 -3.8 12.5 25.3TIPS Feb-41 1.0 -0.4 0.2 -1.4 0.9 -3.6 8.6 -0.3UKTI Mar-40 2.9 1.5 1.1 -0.3 1.8 -2.3 6.1 -2.2Source: BNP ParibasHerve Cros / Shahid Ladha / Aaron Kohli 20 October 2011Market Mover47www.GlobalMarkets.bnpparibas.com

This section is classified as non-objective researchTechnical Analysis – Interest Rates & CommoditiesBond & Short-Term Contracts• Europe 10y: Still a ST bottoming/up bias given sustained break above 2.05 (H&S neckline) for 2.41 target• US 10y: Still a ST bottoming/up bias & a possible rising wave “5” scenario to develop towards 2.40/47 target• Short-term contracts h2: Toppish/weak bias on Euribor (2-top) and weak one on ED within MT falling channelEquities & Commodities• WTI (Cl1): Still bottoming/up ST but must break above key 86.24 first and then 90.52 (2-dip neckline) to turn up• Equity markets: Remain weak MT but still with a ST bottoming/up bias developing following ST pattern’s breakUS 10y: ST falling channel and 61.8% still breaking call for 2.40/47 target area MT Trend: Down Range: 2.06/2.30MT SCENARIO remains downThe breaks below 2.50 (LT triangle support),2.33 (2010 low) and then 2.03 (2008 low)strengthened the MT falling bias to reach MT138.2% extension of 2010/2011 rise at 1.78.Main risk if fall resumes below 1.93 (61.8%) isto extend fall beyond 1.67 low printed towards1.50 (LT falling channel support).1.67/1.71 2.47/2.50 => 2.72ALTERNATIVE SCENARIO…Rise extendsA ST bottoming/up bias is now under way,sustained by rising divergences on weeklyRSI, breaking above ST falling channel for amove towards 2.31 (mid-August top) initiallyand then 2.40 (channel breakout target). Notealso on daily chart the risk of a rising wave “5”scenario developing towards 2.47 target.STRATEGYKeep short if you are above 2.06 for2.40/2.47.WTI: Still weak MT but trying to break ST falling channel MT Trend: Weak Range: 83.0/95.0MT SCENARIO is still down74.95 99.89MT bias has turned down oriented followingthe decisive break below the LT risingchannel (98.52/125.12). Indeed, this break isstill targeting the 61.90 area, slightly belowcritical LT support area at 63.89/64.24 (LT61.8% & 2010 low). This move is still slightlydeveloping within a ST falling channel(60.84/86.24), within which the MT bias willremain rather weak but a renewed break nowbelow MT 61.8% (83.57) & 80.51 (61.8%) isneeded to rekindle the latest falling pressure.ALTERNATIVE SCENARIO…ST reboundThe last two months’ bottoming/up biaspersists but it needs now to break decisivelyabove 86.24 (ST falling channel res) and thenespecially 90.52 (2-dip neckline?) to reopenMT way up for at least a pullback towards98.52 (LT rising channel support) andperhaps then 99.89 (ST 61.8%).STRATEGYLong on 87.35 (ST falling channel res) S/L83.00. Add on 2-dip neckline (90.52) break.Christian Sené 20 October 2011Market Mover48www.GlobalMarkets.bnpparibas.com

This section is classified as non-objective researchGermany 10y: Bottoming/up ST above 2.05 (H&S neckline) for 2.41 target MT Trend: Down Range: 2.00/2.25MT SCENARIO is still slightly down1.64 2.45The sharp fall seen from the 3.50 top sent itsharply below 2.09 (2010 low), close to MTfalling support line (1.57) and LT 138.2extension (1.55). Despite current STbottoming bias and return around 2.09 (2010low), MT bias is still slightly down oriented butwould be rekindled by a move below 2.05(H&S neckline) first & then 1.87 (61.8%).ALTERNATIVE SCENARIO...ST rise extendsST bottoming/up bias since the break aboveST falling channel and 2.05 (inverted head &shoulders neckline) persists with risk ofdeveloping a further ST rising bias towards2.41 target, although ST risk is to extend lastST pullback below 2.02/05 (38.2%+neckline).STRATEGYShort 2.01 profit stopped 2.05 with ½ coveredat 2.20. Re-enter short on 2.00/2.05 S/L 1.95.UK 10y: Down oriented MT but still with a ST bottoming/up bias MT Trend: Down Range: 2.43/2.65MT SCENARIO is still down orientedLarge down move below 2009 and 2010 lows2.18 2.80/85 => 2.94turned MT study positive within LT fallingchannel (2.16/4.63 now) and within LT fallingwedge (2.15/3.59). It reached the 150%extension area (2.22), from which it is nowbottoming slightly, next down target being the161.8% extension at 2.09 if fall resumes.ALTERNATIVE SCENARIO… ST riseA ST bottoming bias was developing,sustained by rising divergences on RS but stillfailed to sustain a break above 2.50 (STfalling flag res). A renewed break is needed toregain a ST rising bias towards 2.65 (ST38.2%) & then 2.80/85 (50%+MT 38.2%) &2.94 (61.8%+flag breakout target).STRATEGYShort 2.53 stopped 2.50. Re-enter short onlyon a break above 2.50 for 2.75/90 S/L 2.42.S&P: ST bottoming/up bias given ST falling channel break MT Trend: Down Range: 1165/1250MT SCENARIO is still slightly down1010/1019

This section classified as non-objective researchTrade ReviewsOptions, Money Market and Bond Trades – Tactical & Strategic TradesThis page summarises our main tactical (T) and strategic (S) trades. The former focus on short-term horizons (a few weeks),allowing one to play any near-term corrections within a defined trend, while the latter rely on a medium-term assumed trend.For each trade we provide the expected target and the recommended stop loss.Current StrategiesYield CurvesEUR Fly Pay EUR 1Y2Y Rec EUR 1Y5Y Pay EUR 1Y10Y50% entered at 16.1 we would add the rest at 20bp. Observed fwd fly is still trading13.5bp above its fair value and the spot/fwd differential is very high.Current* Targets Stop Entry12.5(T)2.0 23.0 16.1(26-Sep)Carry/ mthRisk**10KP/L(ccy/Bp)EUR+3.6bp+36kUSD Box Spread Buy 6M-fwd 2s10s Sell 1Y-fwd 2s10sFlattening implied from 6m- to 1y-fwd is too little compared to history, and positionhas little negative roll. Will tend to work in a sell-off, and risk-reward looks betterthan for other bearish trades.0.0(S)30.0 -8.0 10.0(19-Jul)15k/01 USD -150k-10bpLinkersUSD TIPS Swap BE Long 10y Inflation swap Short TIPS BE 0.625 Jul-21Market is long TIPS and TIPS BE look rich vs. swap, especially taking into accountthe level of stress on libor and upcoming 10y TIPS supply.33(S)47.0 33.0 38.25(09-Sep)+1.0 40k/01 USD -160k-4.0bpMoney MarketsEurodollar Fly Sell ED M5Z5M6Z5 looks quite cheap on the curve vs. surrounding contracts (same goes for 4y1yswaps). On a fly, these points look almost at all-time cheap levels, and an addedfeature of the trade is its lack of directionality.7(T)-3.0 16.0 9.5(19-Jul)30k/01 USD +75k+2.5bpOptionsEuribor Call Buy Euribor Z1 9950 C1.0 10.0 0.0 1.0Option on ECB cutting rates aggressively.(S)(10-Aug)USD Payer Fly Buy 1Y7Y Payer Sell 1Y10Y Payer Buy 1Y15Y Payer-25k 300k -150k 0k7s10s15s (either spot or 1y-fwd) has rarely gone above the current level of 11bp in (S)(14-Jun)its entire history, but using payers one can sell the fly at 17bp (due to vol advantage)if the trade is in the money at expiry.*Tactical (T) and strategic (S) trades. **Risk: vega, gamma for options, or ΔDV01 for futures, bonds and swaps.12.5k/01 EUR 0kflat1k/01 USD-25kInterest Rate Strategy 20 October 2011Market Mover50www.GlobalMarkets.bnpparibas.com

This section is classified as non-objective researchAUD: Moving On Up• AUD’s high beta characteristicsdominated as of late.• Our AUDUSD forecast is predicated onQE3 from the Fed and above 8% growth inChina in 2012.• Despite moderation in China importgrowth, our calculations suggest thatAUDUSD should remain above parityChart 1 : AUDUSD vs. S&P 500AUDUSD suffered a near-15% decline between Augustand early October due to increased market volatility inother asset classes. Concerns over Europe coupledwith weak economic data and the repricing of globalgrowth took a toll on sentiment. With Chinese datasignalling slower growth and concerns over a hardlanding becoming even more ubiquitous, AUD’svulnerabilities were exposed. However, we reiterateour bullish AUD view, which is contingent on anotherround of QE from the Fed that weakens the USD andon growth holding above 8% at least in China. Thelatter in isolation may be enough to keep the AUD TWIstrong, but the former is required if our forecast ofAUDUSD trading above 1.15 next year is to bevalidated. Perhaps the biggest tail-risk to our AUDforecast is that China halts currency appreciationagainst the USD.In essence, AUDUSD has been trading in lockstep withUS and global equities (Chart 1). As such, the recentstabilisation/rebound in stocks coincided with arenewed rally in the currency. With headline risk stilldominant, AUD will remain vulnerable to sentiment andthe volatility that results. AUD, the favoured carry tradein G10, only looks able to recover on a sustained basisif volatility abates.Even though market sentiment has governed themoves of AUD as of late, there remains a strongfundamental story behind the AUD that can transcendcurrent ‘headline’ volatility and justify our 1.12 year-endforecast for AUDUSD. China’s insatiable appetite forcommodities remains the key driver of AUD. Chinaaccounted for almost 60% of global iron ore importsand has kept Australian miners in clover. As shown inChart 2, the price of iron ore and scrap steel correlateswell with Australia’s terms of trade (ToT). The physicalmarket for iron-ore is much more a function ofunderlying supply-demand dynamics than speculativetrading (the latter arguably the case for someexchange-traded industrial commodities). This hasSource: Reuters EcoWin Pro, BNP ParibasChart 2 : AUD ToT vs. Iron Ore and Scrap SteelIndexSource: Reuters EcoWin Pro, BNP ParibasChart 3 : AUDUSD v. USDCNY fixingSource: Reuters EcoWin Pro, BNP Paribaskept iron-ore prices resilient in the face of wild swingsMary Nicola 20 October 2011Market Mover51www.GlobalMarkets.bnpparibas.com

This section is classified as non-objective researchin the likes of copper. However, fears of a slowdown inChina coupled with new sources of iron-ore supplycoming on tap raises concerns that iron-ore prices mayplay catch up to price declines in some othercommodities. However with significant new productionsources slow to come on stream and any interveningfall in prices likely to take out some marginal high-costproducers, we do not expect any significant near-termfall in prices. This view is contingent on there being nosharp decline in Chinese growth.We expect China’s growth to remain above 8% in2012, marking a slowdown but not a hard landing. Theslowdown in money supply growth raises concernabout the strength of investment, currently the keyengine of growth in China. We expect investmentgrowth to moderate somewhat in 2012. But if, as wealso expect, Chinese inflation continues to ease, theauthorities will likely become more aggressive in someof the selective easing measures already taking place.These will be directed primarily at improving financingconditions for firms, keeping investment elevated andwith that commodity demand.A simple model of the AUD using China’s overallimports as the dependent variable does a good job ofexplaining moves in the AUD ToT and with thatAUDUSD (see Chart 4). If Chinese imports hold firm in2012, as we expect, then AUDUSD should remain at orabove parity. QE3 from the Fed could then get uscomfortably above 1.10.A key risk to our medium-term outlook is if China wereto halt USDCNY depreciation in an effort to mitigatethe impact of a slowdown in exports to Europe, China’s1.21.00.80.60.4Chart 4 : AUDUSD actual vs. fittedActualFittedJun-99 Jun-02 Jun-05 Jun-08 Jun-11Source: Reuters EcoWin Pro, BNP Paribaslargest trading partner, which looks to be re-enteringrecession. In July 2008, when the global financial crisiswas worsening, China repegged the CNY to the USDin the context of a falling EURCNY exchange rate.From the time of the repeg in mid-July to just beforethe Lehman debacle, AUDUSD collapsed by nearly18% (Chart 3). The CNY re-peg was not the only factorpressuring AUD, but it was symptomatic of thebroader global conditions under which AUD suffered.Providing a eurozone calamity is avoided, we expectUSDCNY depreciation to continue in the context ofChina pursuing a broadly stable (trade weighted) FXpolicy. Should this view prove wrong, all bets onAUDUSD making new highs in 2012 are off.Mary Nicola 20 October 2011Market Mover52www.GlobalMarkets.bnpparibas.com

Economic Calendar: 21 - 28 OctoberGMT Local Previous Forecast ConsensusFri 21/10 06:45 08:45 France Industry Survey : Oct 99 97 9806:45 08:45 Services Survey : Oct 95 95 n/a08:00 10:00 Germany IFO Business Climate : Oct 107.5 106.0 106.208:00 10:00 IFO Current Conditions : Oct 117.9 116.9 116.508:00 10:00 IFO Expectations : Oct 98.0 96.0 97.008:30 09:30 UK PSNB : Sep GBP13.2bn08:30 09:30 PSNB Ex-Interventions : Sep GBP15.9bn GBP14.0bn GBP15.0bnEurozone ECB’s Trichet, Praet & Stark Speak in Warsaw10:30 12:30 ECB’s Costa Speaks at Conference in Lisbon11:00 07:00 Canada CPI m/m : Sep 0.3% 0.2% 0.2%11:00 07:00 CPI y/y : Sep 3.1% 3.2% 3.1%17:00 13:00 US Fed’s Kocherlakota Speaks in Minneapolis17:20 13:20 Fed’s Fisher Speaks on the Economy in Dallas19:00 15:00 Fed’s Yellen Speaks on US Economic Outlook & Policy in DenverSat 22/10 08:00 10:00 EU Finance Ministers Meet on Debt Crisis14:00 10:00 US Fed’s Duke Speaks on Financial Planning in VirginiaSun 23/10 EU Leaders Hold Summit in BrusselsMon 24/10 23:50 08:50 Japan Trade Balance (nsa) : Sep JPY-777.2bn JPY145.9bn JPY200.4bn(23/10)00:30 11:30 Australia PPI q/q : Q3 0.8% 0.6% n/a00:30 11:30 PPI y/y : Q3 3.4% 2.7% n/a07:30 09:30 Neths Producer Confidence : Oct -0.5 -3.0 n/a08:00 10:00 Eurozone PMI Manufacturing (Flash) : Oct 48.5 48.0 48.208:00 10:00 PMI Services (Flash) : Oct 48.8 48.5 48.508:00 10:00 PMI Composite (Flash) : Oct 49.1 48.8 n/a09:00 11:00 Industrial Orders m/m : Aug -2.0% 0.6% -0.1%12:45 08:45 US Fed’s Dudley Speaks on the Economy in the Bronx17:00 13:00 Fed’s Dudley Speaks to the Bronx Chamber of CommerceTue 25/10 06:00 08:00 Germany GfK Consumer Confidence : Nov 5.2 5.1 5.106:45 08:45 France Consumer Confidence : Oct 80 80 n/a06:45 08:45 Housing Starts (3-mths) y/y : Sep 7.4% 9.0% n/a07:00 09:00 Spain PPI m/m : Sep -0.3% 0.1% n/a07:00 09:00 PPI y/y : Sep 7.1% 7.2% n/a07:30 09:30 Sweden PPI m/m : Sep 0.3% 0.5% n/a07:30 09:30 PPI y/y : Sep 0.9% 1.0% n/a08:00 10:00 Italy Retail Sales m/m : Aug -0.1%08:00 10:00 Retail Sales y/y : Aug -2.4%09:00 11:00 ISAE Consumer Confidence : Oct 98.5 n/a13:00 15:00 Belgium Business Confidence : Oct -9.4 -10.0 -9.513:00 09:00 Canada BoC Rate Announcement13:00 09:00 US S&P/Case-Shiller Home Price Index : Aug 142.7714:00 10:00 Consumer Confidence : Oct 45.4 46.0 46.514:00 10:00 FHFA HPI : Aug 0.8%Market Economics 20 October 2011Market Mover53www.GlobalMarkets.bnpparibas.com

Economic Calendar: 21 - 28 October (cont)GMT Local Previous Forecast ConsensusWed 26/10 00:30 11:30 Australia CPI y/y : Q3 3.6% 3.7% n/a00:30 11:30 Underlying CPI q/q : Q3 0.6% 0.7% n/a00:30 11:30 Underlying CPI y/y : Q3 2.5% 2.7% n/a08:00 10:00 Italy ISAE Business Confidence : Oct 94.510:00 11:00 UK CBI Monthly Industrial Trends : Oct -9 -18 -712:30 08:30 US Durable Goods Orders m/m : Sep -0.1% -0.9% -0.6%14:00 10:00 New Home Sales : Sep 295k 300k 300k13:30 15:30 Eurozone ECB’s Coene Speaks at Belgian Parliament on Dexia14:30 10:30 Canada BoC Monetary Policy Announcement16:00 18:00 France Jobseekers (ILO def) m/m : Sep -2k +20kThu 27/10 23:50 08:50 Japan Retail Sales y/y : Sep -2.6% 0.2% 0.1%(26/10)BoJ Rate Announcement07:00 09:00 Spain Retail Sales (Adjusted) y/y : Sep -4.4% 4.6% n/a07:30 09:30 Sweden Riksbank Rate Announcement & Monetary Policy Report08:00 10:00 Eurozone M3 y/y : Sep 2.8% 3.0% 2.8%08:00 10:00 M3 3m y/y : Sep 2.3% 2.6% 2.6%09:00 11:00 Economic Sentiment : Oct 95.0 92.5 94.109:00 11:00 Industrial Sentiment : Oct -6 -9 -709:00 11:00 Consumer Sentiment : Oct -19 -21 n/a09:15 11:15 Belgium CPI m/m : Oct 0.3% 0.2% n/a09:15 11:15 CPI y/y : Oct 3.6% 3.6% n/a10:00 11:00 UK CBI Distributive Trades Survey : Oct -1512:30 14:30 Germany CPI (Prel) m/m : Oct 0.1% 0.1% 0.1%12:30 14:30 CPI (Prel) y/y : Oct 2.6% 2.6% 2.6%12:30 14:30 HICP (Prel) m/m : Oct 0.2% 0.1% 0.1%12:30 14:30 HICP (Prel) y/y : Oct 2.9% 2.9% 2.8%12:30 08:30 US GDP (Adv, saar) q/q : Q3 1.3% 2.3% 2.3%12:30 08:30 GDP Deflator (Adv, saar) q/q : Q3 2.5% 2.3% 2.4%12:30 08:30 Initial Claims 403k 405k n/a14:00 10:00 Pending Home Sales : SepIreland Presidential Election & ReferendumFri 28/10 23:01 00:01 UK Gfk Consumer Confidence : Oct -3023:30 08:30 Japan CPI National y/y : Sep 0.2% 0.0% 0.2%23:30 08:30 Core CPI National y/y : Sep 0.2% 0.2% 0.2%23:30 08:30 CPI Tokyo y/y : Oct -0.2% -0.5% -0.4%23:30 08:30 Core CPI Tokyo y/y : Oct -0.1% -0.4% -0.4%23:30 08:30 Household Consumption y/y : Sep -4.1% -4.0% -3.7%23:30 08:30 Unemployment Rate (sa) : Sep 4.3% 4.4% 4.5%23:50 08:50 Industrial Production (Prel, sa) m/m : Sep 0.6% -2.0% -2.8%(27/10)06:45 08:45 France Retail Sales m/m : Sep 0.2% -0.7% n/a06:45 08:45 Retail Sales y/y : Sep 0.3% -1.3% n/a07:00 09:00 Norway Unemployment Rate (nsa) : Oct 2.8% 2.7% n/a07:00 09:00 Spain HICP (Flash) y/y : Oct 3.0% 2.9% n/a07:00 09:00 Unemployment q/q : Q3 20.9% 20.8% n/a07:30 09:30 Eurozone Eurocoin : Oct 0.0 -0.108:10 09:10 Retail PMI : Oct 49.6 49.3Market Economics 20 October 2011Market Mover54www.GlobalMarkets.bnpparibas.com

Economic Calendar: 21 - 28 October (cont)GMT Local Previous Forecast ConsensusFri 28/10 07:30 09:30 Sweden Retail Sales (sa) m/m : Sep -0.3% 0.3% n/a(cont) 07:30 09:30 Retail Sales (nsa) y/y : Sep 0.2% 0.3% n/a07:30 09:30 Consumer Confidence : Oct -5.8 -6.4 n/a08:00 10:00 Italy Wages m/m : Sep 0.0%08:00 10:00 Wages y/y : Sep 1.7%09:30 11:30 Switzerland KoF Leading Indicator : Oct 1.2 0.9 1.012:30 08:30 US Personal Income m/m : Sep -0.1% 0.5% 0.3%12:30 08:30 Personal Spending m/m : Sep 0.2% 0.4% 0.6%12:30 08:30 Employment Cost Index q/q : Q3 0.7% 0.6% 0.6%12:30 08:30 Employment Cost Index y/y : Q3 2.2% 2.3% n/a14:00 10:00 Michigan Sentiment (Final) : Oct 59.4 58.5 58.013:00 15:00 Belgium GDP (Flash) q/q : Q3 0.5% 0.2% n/a13:00 15:00 GDP (Flash) y/y : Q3 2.3% 2.1% n/aSun 30/10 Europe Clocks Go Back by One HourDuring 26/10-2/11 Germany Retail Sales (BBK, Real, sa) m/m : Sep -2.7% 0.2% 1.0%Week 27/10-11/4 Import Prices m/m : Sep -0.7% 0.6% 0.8%Import Prices y/y : Sep 6.6% 6.9% 7.0%Release dates and forecasts as at c.o.b. prior to the date of publication: See Daily Economic Spotlight for any revisionSource: BNP ParibasMarket Economics 20 October 2011Market Mover55www.GlobalMarkets.bnpparibas.com

Key Data PreviewChart 1: UK Public Sector Net Borrowing (GBP bn) BNP Paribas Forecast: Small Improvement1801601401201008060402002010 20092008 2011April May June July Aug Sept Oct Nov Dec Jan Feb MarSources: Reuters EcoWin ProSep (f) Aug Jul JunPSNB ex interventions 14.0 15.9 -2.4 13.6Key Point:Borrowing should improve on last September’s data,but there are risks of slippage further out.UK: Public Sector Finances (September)Release Date: Friday 21 OctoberThe public sector net borrowing requirement wasGBP 15.9bn in September, around GBP 2bn higher than lastyear. The increase over last year mainly reflected a GBP3.5bn rise in central government spending, compared with aGBP 2.2bn rise in revenue.For the cumulative year April to August, net borrowingcurrently stands around GBP 3.9bn below where it was lastyear. That is smaller than the decline would need to be tomatch the OBR forecasts set out in March, thoughcomparisons are complicated by the bank payroll tax thatwas in place last year. Revenue is also expected to be higherin the second half of 2011/12 for a number of reasons.Spending over the first five months of the year seems broadlyon track with the budget forecasts.The September data is a large month for governmentborrowing, constituting over 10% of total borrowing last year.On current trends we should see a deficit of aroundGBP 14bn, reflecting a further small improvement in thedeficit.More broadly, with the economy slipping it will not be terriblysurprising to see the overall net borrowing figures disappointin the months to come.40200-20-60Chart 2: French Industrial Survey vs. OutputManufacturing Output (% y/y, RHS)Survey: Own Production Outlook-40 Survey: General Production Outlook-8004 05 06 07 08 09 10 11Source: INSEE, Reuters EcoWin ProNNormalised Indices (sa) Oct (f) Sep Aug Oct 10Industry 97 99 102 102Services 95 95 99 100Key Point:Industry should ease further in October with the outlookfor own production converging toward the weak generalproduction outlook.100-10-20-30-40BNP Paribas Forecast: Continued DeclineFrance: INSEE Business Survey (October)Release Date: Friday 21 OctoberThe INSEE industrial business survey showed a massivedivergence in the last two months between the generalproduction outlook and the own production outlook, whichhas, traditionally been a better indicator of actual industrialproduction. However, in certain situations, like the previousdepression, the general outlook was a good leading indicatorof the recession to come. The general outlook diffusion indexstood at -29 in September, i.e. 1.0 standard deviation belowaverage, while the own production outlook print was +4, oronly 0.2 standard deviations below average.Actual manufacturing output was strong in both July andAugust, up 1.8% and 0.7% m/m respectively, which shouldresult in a 1.5% q/q gain in Q3, if we assume production wasunchanged in September. However, we fear there may be acontraction in the production figures in Q4.It will be interesting to watch the divergence between theown and the general production outlook in October. Weforecast a much greater contraction between the own outputthis month, with no recovery in general outlook. This wouldbe consistent with the continued decline of the headlineindex for industry.In the services sector, we have already seen a massive dropin September, and we do not expect a further decline thismonth.Market Economics 20 October 2011Market Mover56www.GlobalMarkets.bnpparibas.com

Key Data Preview125115105958575151050-5-10-15Chart 3: German Ifo Business ClimateExpectations less Current ConditionsCurrentConditionsExpectations-2091 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11Sources: Reuters EcoWin ProOct (f) Sep Aug JulHeadline 106.0 107.5 108.7 112.8Expectations 96.0 98.0 100.0 104.9Current Conditions 116.9 117.9 118.1 121.3Key Point:Sentiment will continue to weaken.BNP Paribas Forecast: Losing GroundGermany: Ifo Business Climate (October)Release Date: Friday 21 OctoberIfo’s business climate index has been losing ground since thestart of the year. The slide in the index has gainedmomentum since July against a backdrop of turbulence inmarkets and uncertainty over the economic outlook.The weakness to date has been concentrated in the subindexof expectations, which declined in each of the sevenmonths to September. At 98.0, the expectations index fell toits lowest level since July 2009, when the economy wasemerging from the post-financial crisis recession.The assessment of current business conditions has started todecline but the deterioration to date has been modest. InSeptember, the index stood at 117.9, down from the recordlevel of 123.3 in June but still very high.As the expectations index typically leads current conditionsby three to six months, a further deterioration in the latter islikely going forward. The weakness in some recent activitydata, including incoming orders, points the same way.We forecast another fall in the ‘headline’ business climateindex in October, though it will remain consistent with theGerman economy expanding, albeit at a slower rate.Sources: Reuters EcoWin ProChart 4: Canadian Inflationm/m % Sep (f) Aug Jul JunHeadline CPI 0.2 0.3 0.2 -0.7Bank of Canada Core 0.3 0.4 0.2 -0.6Key Point:Food and energy price declines will probably keepheadline inflation in check, while underlying seasonalfactors will push up core inflation closer to 2.0% y/y inSeptember.BNP Paribas Forecast: Seasonal But SteadyCanada: CPI (September)Release Date: Friday 21 OctoberWe expect Canadian headline CPI to be driven by anotherdecline in gasoline and food prices. Headline inflation isexpected at 0.2% m/m for the month while core inflation islikely to be closer to 0.3% m/m. On a year-on-year basis,headline inflation is seen as rising from 3.1% y/y to 3.2% –just outside the 1-3% inflation target of the BoC. Note thatfood, shelter, and transportation prices make up 63.5% of theheadline inflation index. Shelter prices are expected tomoderate somewhat as utility prices slow from their spike inJuly. September is typically a month with high apparel pricesand some education price increases. We expect this year tobe typical in this regard so core inflation is expected to gainsome ground, moving from 1.9% y/y to 2.0% y/y for themonth, reflecting some near-term seasonality and a generallysteady outlook for inflation.Looking ahead, the main upside risks to our inflation outlookinclude a larger commodity pass-through. However, thedownside risks include the strengthening of the currency, adeceleration in the growth of unit labour costs and a largercorrection in the housing market. On balance, underlyinginflation still looks well-contained, with some temporary andseasonal factors likely to reverse.Market Economics 20 October 2011Market Mover57www.GlobalMarkets.bnpparibas.com

Key Data Preview140012001000800600400200-200-400-600-800Chart 5: Japanese Trade Balance (JPY bn, sa)005 06 07 08 09 10 11Sources: MOF, BNP paribasJPY bn Sep (f) Aug Jul JunTrade balance (nsa) 145.9 -777.2 67.9 67.3Trade balance (sa) -166.0 -294.4 -160.2 -223.9Key Point:Led by surging shipments of passenger cars, thanks tothe restoration of supply chains, exports in Septembershould expand and slightly reduce the trade account’sdeficit.BNP Paribas Forecast: Slightly Reduced TradeAccount DeficitJapan: Trade data (September)Release Date: Monday 24 OctoberBased on data through mid-month, we expect real exports tohave expanded by roughly 2% m/m in September, led byrobust shipments of transport equipment (passenger cars,etc.). Real exports have been on the mend since May, thanksto production recovering alongside the restoration of supplychains. Even so, with the exception of transport equipment(where output is being ramped up), production growth andexports have moderated of late, as things have largelyreturned to normal (pre-disaster levels of February).Consequently, the main determinant of export growth goingforward will be foreign demand, not domestic supplycapability. With both developed and emerging economiesshow signs of losing momentum, Japan’s exports could shiftinto a lower gear. Real imports, meanwhile, are expected toexpand a modest 0.4% m/m rise, as demand remains firm formineral fuels (LNG, petroleum products), reflecting increaseddependence on thermal power generation amid the shuttingdown of nuclear reactors, and companies continue to importa wide range of products to make up for domestic supplyshortages. But because imports on a nominal basis areexpected to contract slightly, reflecting falling prices for crudeoil, we expect the seasonally adjusted trade account’s deficitto have shrunk slightly in September.Chart 6: Eurozone PMI and Sub-ComponentsSources: Reuters EcoWin ProOct (f) Sept Aug JulManufacturing 48.0 48.5 49.0 50.4Services 48.5 48.8 51.5 51.6Composite 48.8 49.1 50.7 51.1Key Point:Further weakening in orders will generate furtherweakening in overall index.BNP Paribas Forecast: Further WeakeningEurozone: ‘Flash’ PMI (October)Release Date: Monday, 24 OctoberWeaknesses in the manufacturing PMI spilled over to theservice sector in September. Both indices are now below theexpansion threshold of 50.Most of the decline relates to deteriorating order books.Since April, new orders have been below 50. Export relatedorders have declined less than total new orders, indicatingthat the weakness essentially stems from domesticeconomies.Employment figures started to trend downwards, butconsiderably slower than other components. On a eurozoneaverage, the sub-component remains 1.5 points above theexpansion threshold. However, this might be biased by apersistently outperforming German labour market. Equivalentmeasures in France dropped below 50 for the first time inSeptember, indicating that companies are starting to evaluatethe downturn as more persistent.The slowdown is therefore likely to continue over the nextfew months, with another relatively sharp decline in October,due to a generally deteriorating climate and to a downwardadjustment of the still relatively high-level German economy.Weakening output PMIs also spilled over to prices. Inparticular, manufacturing prices components of PMIs havedeclined and with weakening demand, are likely to continueto do so in October.Market Economics 20 October 2011Market Mover58www.GlobalMarkets.bnpparibas.com

Key Data PreviewChart 7: US Consumer ConfidenceSources: Reuters EcoWin ProOct (f) Oct 2H Oct p SepConference Board 46.0 - - 45.4Michigan Sentiment 58.5 59.5 57.5 59.4Key Point:We expect the Conference Board index to reboundslightly and reach 46.0 in October on the back of betterthan-expectedeconomic news in October.BNP Paribas Forecast: DownUS: Consumer Confidence (October)Release Date: Tuesday 25 OctoberIn the beginning of October, the University of Michiganconsumer confidence remained deep in recessionary territoryat 57.5 declining 3.2pp against expectations for a smallincrease. Coming on the heels of a robust retail sales reportfor September, the persistently low readings on confidencethrow cold water on the optimism about the strength of retailsales going into the holiday season. Both the presentsituation and future expectations declined relative to theprevious month. In fact, the future index fell below its recenttrough, reached in August, to levels last seen back in 1980.The Conference Board index is more closely related to thedevelopments in the labour market than the Michiganindicator, and the recent better-than-expected employmentreports will likely prevent consumer optimism from furtherdeterioration. In addition, economic data have been betterthan expected in the last couple of weeks. On the otherhand, stocks continued to be volatile and declines inpersonal income will limit any significant increases inconsumer confidence. As such, we expect the ConferenceBoard index to rebound slightly and reach 46.0 in October.Chart 8: US E&S Investment vs Core Capital Goods BNP Paribas Forecast: ResilienceUS: Durable Goods (September)Release Date: Wednesday 26 OctoberDurable goods orders are expected to fall 0.9% m/m inSeptember. We expect orders ex transportation to increase0.3% in the month, consistent with the small improvement inthe ISM index in September and the resilience ofmanufacturing production in September. We are looking forthe increase in orders ex-transport to be more than offset bya large fall in Boeing aircraft orders in the month. Corecapital goods shipments (ex defense and aircraft) areexpected to post a small positive increase of 0.2% m/m inSeptember, reflecting solid durable goods production.Sources: Reuters EcoWin Pro% m/m Sep (f) Aug Jul JunDurable Goods -0.9 -0.1 4.2 -1.1Ex-Transport 0.3 -0.1 0.8 0.7Key Point:A fall in Boeing orders should more than offset amoderate increase in non-transport orders inSeptember.Market Economics 20 October 2011Market Mover59www.GlobalMarkets.bnpparibas.com

Key Data Preview12.510.07.55.02.50.0-2.5Chart 9: Eurozone M3 & Bank Lending (% y/y)(% y/y)Bank Lending toPrivate SectorM392 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11Sources: Reuters EcoWin Pro% y/y Sep (f) Aug Jul JunM3 3.0 2.8 2.1 1.9M3 (3-mth Avg.) 2.6 2.3 2.1 2.1Private Sector Loans 2.6 2.6 2.4 2.5Key Point:M3 growth is being distorted by financial marketturbulence. Growth in private sector bank lendingremains subdued.BNP Paribas Forecast: Still SubduedEurozone: Monetary Developments (September)Release Date: Thursday 27 OctoberThe ‘headline’ y/y growth rate in M3 jumped in August, to2.8% from 2.1%, the highest rate since July 2009. The m/mrise in M3 was 1.2%, the third largest since the inception ofEMU in 1999 and the biggest since October 2008 during aperiod of exceptional financial market turbulence.Renewed turbulence contributed to the jump in M3 growth inAugust, with the ECB citing portfolio adjustments out ofriskier assets and into M3 as a key factor.The growth rate in private sector bank lending also came inslightly higher than expected in August, rising from 2.4% to2.6% y/y, the first acceleration in three months.Still, the underlying trend remains subdued and based on thedeterioration in the economic outlook and the signals oftighter credit conditions in the ECB’s Bank Lending Surveyfor Q3, a slowdown is likely going forward.Mortgage loans to households had been the main driver ofthe acceleration in lending growth but the growth rate hasbeen slowing since the spring. Consumer credit has beendeclining in y/y terms since early 2009, with the contractiongathering momentum in recent months.Lending growth to the non-financial corporate sector hasrisen, reaching its highest rate in two years (1.6%). But thissector tends to lag the trends in household data.Chart 10: Eurozone: Economic Sentimentin the Big FourSources: Reuters EcoWin ProOct (f) Sept Aug JulEconomic Sentiment 92.6 95.0 98.4 103.0Industry -9 -6 -3 1Services -2 0 4 8Consumer -20 -19 -17 -12Key Point:Still declining.BNP Paribas Forecast: Further DeteriorationEurozone: Economic Sentiment (October)Release Date: Thursday 27 OctoberEconomic sentiment in the eurozone has been falling fastersince February. The pace slowed in September, but on acumulative basis, only the Lehman crisis provokedcomparable falls in sentiment. Economic sentiment inSeptember reached 95.4 points, nearly 6 points below itslong-term average and 13.4 points below its peak in March.The four largest eurozone economies were all affected by thesharpest decreases. Only German sentiment remains abovethe long-term average.The downturn was particularly noticeable in the services andindustry sectors due to declines in order books anddeteriorating expectations. Only industry sentiment remainedabove its average in September.October’s flash estimates for consumer confidence,published this week, show a further weakening of confidence,although the decline is less pronounced than in the pastcouple of months. Consumer confidence is not a very strongleading indicator for overall consumption, but it reflectsoverall sentiment in the economy.October sentiment is likely to show further declines. Industryand services employment will be particularly interesting asthey will reflect whether or not industrial respondents see thecoming downturn as temporary.Market Economics 20 October 2011Market Mover60www.GlobalMarkets.bnpparibas.com

Key Data PreviewChart 11: US: Auto sales rebounded in Q3Sources: Reuters EcoWin ProQ3 (a) Q2 Q1 Q4GDP % q/q AR 2.3 1.3 0.4 2.3GDP Deflator % q/q AR 2.3 2.5 2.5 1.9Key Point:GDP should improve in Q3 on better auto and servicesspending, as well as solid private investment growth.BNP Paribas Forecast: Temporary ImprovementUS: GDP (Q3a 2011)Release Date: Thursday 27 OctoberGDP is forecast to grow 2.3% q/q saar in Q3, afterregistering only 1.3% growth in Q2. Driving the pick-up ingrowth in the quarter is an expected 6.0% increase indurable goods consumption as auto spending reboundedfrom the disruptions stemming from the Japaneseearthquake, as well as a solid improvement in spending onservices. Growth will also be supported by an anticipated11% increase in equipment and software investment in thequarter; investment is still being supported by the earlierstrength in global manufacturing conditions. While residentialinvestment should show only moderate growth in the thirdquarter, non-residential construction spending is likely togrow 12%. We expect government spending to contract forthe fourth quarter in a row in Q3, albeit at a slightly slowerpace than in Q2, as state and local governments shed lesslabour. Trade is forecast to make a small contribution togrowth as a 7% rise in exports outpaces imports. Overall, thereport would represent a more positive outcome than manyhad feared earlier in the quarter, though many of the factorssupporting growth are likely to prove temporary. The GDPdeflator is expected to remain elevated at 2.3% in Q3,leaving nominal GDP 4.6% higher in the quarter.3210-1-2-3Chart 12: Japanese Core CPI (% y/y)CPI excluding energy andfood, but not alcoholCore CPI05 06 07 08 09 10 11Sources: MIC, BNP paribas% y/y Sep (f) Aug Jul JunCore CPI 0.2 0.2 0.1 -0.2CPI 0.0 0.2 0.2 -0.4BNP Paribas Forecast: Slight Positive Price GrowthJapan: CPI (National, September)Release Date: 28 OctoberBased on the Tokyo CPI numbers for September (whichprecede the nationwide figures by one month), we expect thenational core CPI to rise 0.2% y/y in September, the samerate of increase as in August. If so, the index will register athird straight advance, due largely to surging energy prices(in August, energy prices rose 7.1% and elevated the coreCPI by 0.5pp). Were it not for energy prices, the core CPIwould still be falling, as evident from the US-style core-coreCPI (which excludes energy and food but not alcohol), whoseprices fell 0.5% y/y in August, marking 32 straight monthsbelow zero. In any event, positive CPI growth is likely to endin October, when two special factors that are elevating thecore index by a combined 0.3 pct point – tobacco tax hike,higher non-life insurance premiums – will be stripped away,returning price growth to negative territory.Key Point:The national core CPI should remain slightly positive inSeptember, but prices are expected to turn negativeagain from October when special factors (tobacco taxhike, higher non-life insurance premiums) are strippedfrom the index.Market Economics 20 October 2011Market Mover61www.GlobalMarkets.bnpparibas.com

Key Data PreviewChart 13: Japanese Unemployment Rate (% sa)6.05.55.04.54.03.500 01 02 03 04 05 06 07 08 09 10 11Sources: MIC, BNP parobas% sa Sep (f) Aug Jul JunUnemployment rate 4.4 4.3 4.7 4.6Key Point:We expect the jobless rate will deteriorate slightly to4.4% in September owing to fallout from the slowingglobal economy and a statistical reaction to August’sbig improvement.BNP Paribas Forecast: Higher Jobless RateJapan: Unemployment rate (September)Release Date: Friday 28 OctoberWe expect the jobless rate will deteriorate slightly to 4.4% inSeptember. In August, the unemployment rate improved bythe largest margin ever, falling 0.4 pct point to 4.3%. But withthe jobless ranks and employed total both dropping sharply inAugust, the improvement in the jobless rate is said to largelyreflect a plunge in the labour force itself, as immigrationstatistics show foreign labourers (largely second or thirdgenerationJapanese from Latin America) have left Japan indroves after losing their jobs in the wake of the 11 Marchearthquake. It isn’t enough to suggest employment conditionsimproved to the point of reducing the jobless rate, though thejob offer ratio rose. In September, we expect the jobless ratewill resume its deterioration because of fallout from theslowing global economy and a statistical reaction to the bigimprovement in August. Even so, deterioration will be limitedbecause the graying of society continues to steadily reducethe labour force as retirees and those not looking for workenter the non-labour force.Chart 14: Japanese Production and Exports120(2005=100, seasonally adjusted)150115140110Production1301051201001109510090859080Exports (RHS)8075707060655000 01 02 03 04 05 06 07 08 09 10 11Sources: METI. MOF, BNP ParibasSep (f) Aug Jul Jun% m/m -2.0 0.6 0.4 3.8BNP Paribas Forecast: First Decline in Six MonthsJapan: Industrial Production (September)Release Date: Friday 28 OctoberWe expect industrial production in September to fall by 2.0%m/m, marking the first setback in six months. Productionlevels in July have largely returned to normal (i.e., predisasterlevel of February), but if distortions in the seasonaladjustments are excluded, the pace of production growth hasbeen moderating of late. On this score, the productionforecast index also projects a pause in the recovery inSeptember (–2.5%) followed by resumed growth (3.8%) inOctober. While factory activity continues to be underpinnedby reconstruction and ramped-up production by car makers(making up for lost production after the disaster), the outlookis not entirely bright, as downside risks for the globaleconomy have increased, with both developed and emergingeconomies losing momentum. We expect slowing exports tocause factory recovery to stall around year-end.Key Point:Output should decline in September and then resumerecovery on reconstruction demand and catch-upproduction by carmakers. But the slowing globaleconomy will be likely to cause the factory recovery tostall around year-end.Market Economics 20 October 2011Market Mover62www.GlobalMarkets.bnpparibas.com

Key Data Preview543210-1-2-3Chart 15: French Retail Sales vs. ConfidenceRetail Sales (% y/y, volume)Household Confid.(EU Survey, RHS)04 05 06 07 08 09 10 11Source: INSEE, Reuters EcoWin ProVolume (sa-wda) Sep (f) Aug Jul Sep 10% m/m -0.7 0.2 -0.2 0.9% y/y -1.3 0.3 -1.4 1.9Key Point:Poor household confidence points towards a drop insales after the holiday period.50-5-10-15-20-25-30-35-40BNP Paribas Forecast: DecliningFrance: Retail Sales (September)Release Date: Friday 28 OctoberReal retail sales were fairly stable in July and August afterthe June 0.9% m/m gain. The sharp decline of householdconfidence, when the fears of economic downturn werespreading, and the financial crisis intensified apparently failedto hit consumption.The breakdown shows a slightly different picture. Sales ofdurable goods diminished as consumers restrainedexpenditure. This was compensated during the summer byrelatively strong activity in tourism, despite adverse weather.Sales of miscellaneous goods, energy (petrol and diesel)were up and we believe activity in services was robust. Thismay change in September. Sales of energy should declinefrom their previous peak. Because of poor confidence, we donot expect any rebound in sales of manufactured goods,especially durable goods. The exception may be car saleswhere manufacturers’ discounts probably helped, but the y/ychange will surely decline rapidly over the coming monthsbecause of a strong base effect.The only sector where there is potential for a recovery is foodsales. These should rebound from an abnormally low level.However, the German experience where retail sales in realterms continuously declined for years after reunification,shows a rebound is not warranted. The poor economicsituation may result in a similar evolution in France, wherepeople abandon traditional brands, shops and supermarketsin favour of hard discounters, which shows up in the data inthe form of a continuous sales decline in real terms.Chart 16: US Confidence vs. ConsumptionSources: Reuters EcoWin Pro% m/m Sep (f) Aug Jul JunPersonal Income 0.5 -0.1 0.3 0.2Consumption 0.4 0.2 0.8 -0.1Core PCE Prices 0.0 0.1 0.2 0.2BNP Paribas Forecast: Flat to DownUS: Personal Income & Spending (September)Release Date: Friday 28 OctoberPersonal consumption is forecast to rise 0.4% in August aftera 0.2% gain in July. Nominal core retail sales rose a robust0.6%, and auto sales jumped 4.9%. However, a decline inutility spending should weigh on service spending, whichcomprises 2/3 of all personal spending. Overall, the gainwould be consistent with a moderate rebound in consumptiongrowth in Q3.Meanwhile, personal income is forecast to rise a solid 0.5%after a decline of 0.1% reflecting the rise in both aggregatehours worked and average hourly earnings. Income appearsto have grown notably more slowly in Q3 than spending,suggesting a decline in the personal saving rate.The core PCE price index is expected to be flat inSeptember, down from a 0.1% m/m rise in September. Themoderation in core inflation momentum should come fromlower OER and core goods price inflation. This would leavethe annual pace of core PCE inflation at 1.6%.Key Point:A jump in auto sales is expected to lead to robustpersonal spending in September.Market Economics 20 October 2011Market Mover63www.GlobalMarkets.bnpparibas.com

Economic Calendar: 31 Oct – 25 Nov31 Oct 1 Nov 2 Nov 3 Nov 4 NovJapan: Housing Starts SepEurozone: HICP (Flash)Oct, Labour SepUK: Net Consumer CreditSep, Mortgage ApprovalsSepFrance: PPI SepItaly: PPI Sep, CPI (Prel)OctNorway: Retail Sales SepUS: Chicago PMI OctCanada: GDP AugAustralia: RBA RateAnnouncementJapan: BoJ MonetaryPolicy Meeting MinutesUK: CIPS ManufacturingOct, GDP (Adv) Q3Switz: PMI ManufacturingOctUS: ISM ManufacturingOct, Construction SepEurozone: ManufacturingPMI (Final) OctGermany: Labour SepNorway: Labour AugUS: FOMC RateAnnouncement,Challenger Layoffs Oct,ADP Labour OctAustralia: Retail SalesSepJapan: HolidayEurozone: ECB RateAnnouncement & PressConferenceUK: CIPS Services OctUS: Productivity andCosts (Prel) Q3, FactoryOrders Sep, ISM ServicesOctAustralia: RBA MonetaryPolicy StatementEurozone: PPI Sep,Services PMI (Final) OctGermany: Factory OrdersSepSpain: Industrial ProductionSepUS: Labour OctCanada: Labour OctDuring Week: UK Nationwide House Prices Oct, Halifax House Prices OctNorth America Clocks Go Back 1 Hour7 Nov 8 Nov 9 Nov 10 Nov 11 NovJapan: Leading IndicatorSepEurozone: Retail SalesSepGermany: IndustrialProduction SepNorway: IndustrialProduction SepSwitz: CPI OctUS: Consumer CreditSepAustralia: NAB BusinessSurvey OctUK: BRC Retail SalesMonitor Oct, RICS HousePrices Oct, IndustrialProduction SepGermany: Trade BalanceSepFrance: Trade BalanceSepNeths: IndustrialProduction SepUS: NFIB Small BusinessOptimism OctAustralia: WestpacConsumer ConfidenceNovJapan: Current AccountSepUK: Trade Balance SepFrance: BoF Survey Oct,Investment Survey Oct,Budget Balance SepSweden: IndustrialProduction Sep, RiksbankMonetary Policy MinutesUS: Wholesale Trade SepAustralia: Labour OctJapan: M2 Oct,Machinery Orders SepEurozone: ECB BulletinUK: BoE RateAnnouncementGermany: CPI OctFrance: CPI Oct, IP SepItaly: IP SepNeths: CPI OctSweden: CPI OctNorway: CPI Oct, PPI OctUS: Trade Balance Sep,Import Prices Oct, UoMSentiment (Prel) Nov,Treasury Statement OctDuring Week: Germany WPI Oct14 Nov 15 Nov 16 Nov 17 Nov 18 NovJapan: GDP (Prel) Q3Eurozone: IndustrialProduction SepFrance: Current AccountSepAustralia: RBA MPCMinutesEurozone: Trade BalanceSep, GDP (Flash) Q3UK: CPI OctGermany: GDP (Prel)Q3, ZEW Survey NovFrance: GDP (Prel) Q3,Non-Farm Payrolls (Prel)Q3, Wages (Prel) Q3Spain: CPI OctItaly: EU Trade Bal SepNeths: GDP Q3, RetailSales SepUS: Empire State SurveyNov, Retail Sales Oct,PPI Oct, Bus Inv SepJapan: BoJ RateAnnouncementEurozone: HICP Oct,EU15 New CarRegistrations OctUK: BoE Inflation Report,Labour OctSpain: GDP (Final) Q3Italy: CPI OctUS: CPI Oct, IndustrialProduction Oct, TICSData Sep, NAHB HMI NovEurozone: GoverningCouncil Meeting (No RateAnnouncement)UK: Retail Sales OctSweden: Labour OctNeths: Labour OctUS: New Home StartsOct, Philly Fed SurveyNov21 Nov 22 Nov 23 Nov 24 Nov 25 NovJapan: BoJ MonetaryPolicy Meeting Minutes,Trade Balance OctEurozone: CurrentAccount SepItaly: Non-EU TradeBalance OctUS: Existing Home SalesOctUK: PPI Oct, PSNB Oct,PSNCR OctNorway: GDP Q3US: GDP (Final) Q3,Corporate Profits Q3Japan: HolidayEurozone: IndustrialOrders Sep, PMIs (Flash)NovUK: BoE MPC MinutesFrance: Industry SurveyNovNorway: Labour SepUS: Durable GoodsOrders Oct, PersonalIncome & Spending Oct,UoM Sentiment (Final)Nov, FOMC MinutesUK: GDP (Prel) Q3Germany: GDP (Final)Q3, Ifo Survey NovItaly: ConsumerConfidence NovSweden: ConsumerConfidence Nov, PPI OctNeths: ProducerConfidence NovBelgium: BusinessConfidence NovUS: HolidayJapan: CGPI Oct, TertiaryIndex SepUK: PPI OctSpain: GDP (Flash) Q3Sweden: PES Labour OctHoliday: France, USGermany: PPI OctItaly: Industrial Orders SepNeths: ConsumerConfidence NovBelgium: ConsumerConfidence NovUS: Leading Indicators OctCanada: CPI OctJapan: CPI Tokyo Nov, CPINational OctFrance: ConsumerConfidence NovItaly: Retail Sales SepSpain: PPI OctDuring Week: Germany GfK Consumer Confidence Survey Dec, Retail Sales Oct, Import Price Index OctSource: BNP ParibasRelease dates as at c.o.b. prior to the date of this publication. See our Daily Spotlight for any revisionsMarket Economics 20 October 2011Market Mover64www.GlobalMarkets.bnpparibas.com

Treasury and SAS Issuance CalendarThis section is classified as non-objective researchIn the pipeline - Treasuries:Japan: 15y Floating-rate JGB buy-backs for JPY 0.6trn and 10y Inflation-Indexed JGB buy-backs for JPY 0.15trn in Q4Italy: BTP Nov 2014 (new) to be issued in Q4Germany: In Q4, intends to issue inflation-linked federal securities (EUR 2-3bn) and reserves the right to issue foreign currency bondsUK: Index-Linked Gilt Mar 2062 0.375% (new, syndicated) in the week commencing 24 OctoberUK: Gilt Purchase Programme has resumed; to be conducted for a 4mth period; the size of the programme will be kept under review; dates orfrequency may change depending on hols and market conditionsUK: Mini-tenders in the week commencing 28 November and in the week commencing 12 December (choice of gilt on Fri 18 Nov & on Fri 2Dec respectively)UK: Plans to offer, via syndication, a new index-linked gilt (12-20y area) in H2 of NovemberFinland: Plans to arrange a EUR benchmark bond auction in Q4 (details one week prior to the auction)Czech Rep.: A syndicated euro benchmark still highly probable by the end of this yearHungary: May sell foreign-currency denominated bonds this year to prefinance 2012, depending on the international situationSlovak Rep.: No plan to issue T-bills in OctoberIn the pipeline - Agencies:EFSF: Issues initially scheduled in Q4 2011 in support of Portugal could now be issued in early 2012EFSF: Plans to issue one benchmark bond for Ireland (EUR 3bn) before year endDuring the week:UK: Index-Linked Gilt 0.375% Mar 2062 (new, syndicated)FHLMC: Second syndicated auction in October, details announced on Thursday 27 OctoberDate Day Closing Country Issues Details BNPP forecastsLocal GMT21/10 Fri 11:00 15:00 US Outright Treasury Coupon Purchase (2019 - 2021) USD 4.25-5bn24/10 Mon 12:00 03:00 Japan JGBs 10-year Enhanced-liquidity issue 286-314(*8 issues excl.)JGBs 20-year Auction for Enhanced-liquidity issueJPY 0.3tn53-93 (54 & 77 excl.)14:45 13:45 UK Gilt Purchase (12 Gilts 2015-2021) GBP 1.7bn11:00 15:00 US Outright Treasury Coupon Purchase (2036 - 2041) USD 2.25-2.75bn25/10 Tue 14:45 13:45 UK Gilt Purchase (9 Gilts 2038-2060) GBP 1.7bnNeths DSL 3.25% 15 Jul 2015 (Off-the-run facility)DSL 4% 15 Jul 2019 (Off-the-run facility)EUR 2-3bn12:00 16:00 Canada Repurchase of 7 Cash Mgt Bonds (Dec11 to Dec12) CAD 1bn11:00 15:00 US Outright Treasury Coupon Purchase (2017 - 2019) USD 4.25-5bn13:00 17:00 US Notes 0.25% 31 Oct 2013 (new) USD 35bn26/10 Wed 12:00 03:00 Japan JGB 15 Nov 2013 JPY 2.6tn10:55 08:55 Italy CTZ 21 Oct EUR 2.5bn14:45 13:45 UK Gilt Purchase (8 Gilts 2022-2036) GBP 1.7bn13:00 17:00 US Notes 1% 31 Oct 2016 (new) USD 35bnOutright T. Coupon Sales (Mar 2014 - Oct 2014)USD 8-9bn27/10 Thu 10:55 08:55 Italy BTPeis 21 Oct EUR 1-2bn11:00 09:00 Sweden ILB 3.5% 1 Dec 2015 (# 3105) SEK 0.75bn11:00 15:00 US Outright Treasury Coupon Purchase (2036 - 2041) USD 2.25-2.75bn13:00 17:00 US Notes 1.5% 31 Oct 2018 (new) USD 29bn28/10 Fri 10:55 08:55 Italy 3 & 10y BTPs and CCT 21 Oct EUR 6-9bn13:00 17:00 US Outright T. Coupon Sales (Oct 2013 - Feb 2014) USD 8-9bn31/10 Mon 14:45 14:45 UK Gilt Purchase12:00 11:00 Belgium OLOs 24 Oct EUR 1-2bnSlovak Rep. SLOVGB 3.5% 24 Feb 2016 (#213)EUR 0.1bn01/11 Tue 12:00 03:00 Japan JGB 10-year 25 Oct JPY 2.2tn14:45 14:45 UK Gilt PurchaseDenmark DGBs 27 Oct02/11 Wed 11:00 10:00 Germany OBL 1.25% 14 Oct 2016 (Series 161) EUR 5bn14:45 14:45 UK Gilt Purchase12:00 16:00 Canada CAN 3-year 27 Oct03/11 Thu 10:30 09:30 Spain Bono 4.25% 31 Oct 2016 31 Oct EUR 3-4bn10:50 09:50 France OATs 28 Oct EUR 7-9bn10:30 10:30 UK Gilt 4.25% 7 Jun 2032 25 Oct07/11 Mon 14:45 14:45 UK Gilt Purchase08/11 Tue 12:00 03:00 Japan Auction for Enhanced-liquidity 1 Nov JPY 0.3tn11:00 10:00 Austria RAGBs 1 Nov10:30 10:30 UK Index-Linked Gilt 0.625% 22 Mar 2040 1 Nov14:45 14:45 UK Gilt PurchaseNeths DSL 3.25% 15 Jul 2021 EUR 1.5-2.5bn13:00 18:00 US Notes 3-year (new) 2 Nov USD 32bn09/11 Wed 14:45 14:45 UK Gilt Purchase12:00 17:00 Canada CAN 2-year 3 Nov13:00 18:00 US Notes 10-year (new) 2 Nov USD 24bn10/11 Thu 12:00 03:00 Japan JGB 40-year 3 Nov JPY 0.4tn13:00 18:00 US Bond 30-year (new) 2 Nov USD 16bnSources: Treasuries, BNP ParibasInterest Rate Strategy 20 October 2011Market Mover65www.GlobalMarkets.bnpparibas.com

This section is classified as non-objective researchNext week's T-Bills SupplyDate Country Issues Details21/10 UK T-Bills Nov 2011 GBP 0.5bnT-Bills Jan 2012GBP 1bnT-Bills Apr 2012GBP 1.5bn24/10 France BTF Jan 2012 EUR 4bnBTF Apr 2012EUR 1bnBTF May 2012EUR 1bnBTF Sep 2012EUR 1bnNorway T-Bills Sep 2012 (NST 16) NOK 3bnUS T-Bills Jan 2012 USD 29bnT-Bills Apr 2012 (new) USD 27bnFHLMC Bills 3-month & 6-month 21 Oct25/10 Spain Letras Jan 2012 24 OctLetras Apr 201224 OctCanada T-Bill Feb 2012 CAD 7.7bnT-Bill Apr 2012 (new) CAD 2.9bnT-Bill Oct 2012 (new) CAD 2.9bnUS T-Bills 4-week 24 OctFHLB Discount Notes26/10 Japan T-Bills Feb 2012 JPY 5.1tnItaly BOT Apr 2012 21 OctSweden T-Bills Jan 2012 SEK 5bnFNMA Bills 3-month & 6-month 24 Oct27/10 FHLB Discount Notes28/10 UK T-Bills 21 OctDenmark T-Bills 26 OctSources: Treasuries, BNP ParibasComments and charts• EGB gross supply is expected to ease fromEUR 19.8bn this week to EUR 14.5bn in the weekahead (including Italian CTZ). In 10y duration-adjustedterms, this would be equivalent to EUR 7.5bn supply. Innet terms, EGB supply would decrease substantially(negative territory) as almost EUR 16bn of French OATwill expire (on top of EUR 13bn coupon payments inFrance).• EGB gross supply will only come from theNetherlands and Italy. The Netherlands will kick off onTuesday with the reopening of off-the-run DSL Jul-15and Jul-19 for EUR 2-3bn. Italy will then follow onWednesday, Thursday and Friday. On Wednesday, weexpect EUR 2.5bn (estimated) supply through CTZ. OnThursday, Italy is likely to issue EUR 1-2bn (estimated)through BTPeis and on Friday EUR 6-9bn (estimated) in3y and 10y BTPs and CCT.• Elsewhere in Europe, Sweden will issueSEK 0.75bn. Outside of Europe, the week will beparticularly busy in the US, as USD 99bn will be raisedthrough new 2y, 5y and 7y notes. In Japan, JPY 2.6trnwill be issued in 2y JGB.Next week's Eurozone RedemptionsDate Country Details Amount25/10 France OAT 5% EUR 15.6bnTotal Eurozone Long-term Redemption EUR 15.6bn25/10 Austria ATB (EU87) EUR 0.1bn26/10 Germany Bubills EUR 5.0bn27/10 France BTF EUR 9.9bnTotal Eurozone Short-term RedemptionEUR 15bnNext week's Eurozone CouponsCountryFranceItalyAustriaGreecePortugalTotal Long-term Coupon Payments302520151050-5-10-15161412101210886420Chart 1: Investors’ Net Cash Flows(EUR bn, 10y equivalent)Net Investors' Cash Flows(EUR bn , 10y equivalent)Week of Oct 24th Week of Oct 31st Week of Nov 7th Week of Nov 14thChart 2: EGB Gross Supply Breakdown byCountry (EUR bn, 10y equivalent)Germany Italy Portugal BelgiumFrance Spain Netherlands AustriaFinland Greece IrelandWeek of Oct 24th Week of Oct 31st Week of Nov 7th Week of Nov 14thChart 3: EGB Gross Supply Breakdown byMaturity (EUR bn, 10y equivalent)EGBs Gross Supply (EUR bn, 10y equivalent)2-3-YR10-YRAmountEUR 13.1bnEUR 3.8bnEUR 0.0bnEUR 1.4bnEUR 0.4bnEUR 18.7bn5-7-YR>10-YR6420Week of Oct 24th Week of Oct 31st Week of Nov 7th Week of Nov 14thAll Charts Source: BNP ParibasInterest Rate Strategy 20 October 2011Market Mover66www.GlobalMarkets.bnpparibas.com

Central Bank WatchInterest RateEUROZONECurrentRate (%)Minimum Bid Rate 1.50USFed Funds Rate 0 to 0.25Discount Rate 0.75JAPANCall Rate 0 to 0.10Basic Loan Rate 0.30UKBank Rate 0.5DENMARKLending Rate 1.55SWEDENRepo Rate 2.00NORWAYSight Deposit Rate 2.25SWITZERLAND3 Mth LIBOR TargetRangeCANADA0 to 0.25Overnight Rate 1.00Bank Rate 1.25AUSTRALIACash Rate 4.75CHINA1Y Bank LendingRateBRAZIL6.56Selic Overnight Rate 11.50Date ofLastChange+25bp(7/7/11)-75bp(16/12/08)+25bp(18/2/10)-10bp(5/10/10)-20bp(19/12/08)-50bp(5/3/09)+25bp(7/7/11)+25bp(5/7/11)+25bp(12/5/11)-50bp(3/8/11)+25bp(8/9/10)+25bp(8/9/10)+25bp(2/11/10)+25bp(6/7/11)-50bp(19/10/11)Next Change inComing 6 Months-50bp (8/12/11)No ChangeNo ChangeNo ChangeNo ChangeNo Change-50bp (8/12/11)-25bp (16/2/12)+25bp(14/3/12)No Change-25bp (8/12/11)-25bp (8/12/11)-25bp (6/12/11)No Change-50bp(30/11/11)Source: BNP ParibasFor the full EM Central Bank Watch, please see our Local Markets Mover.CommentsThe ECB focused on unconventional measures at its Octobermeeting but left the door open to a future reduction in policy rates.We forecast a 50bp rate cut in December in tandem with the nextround of staff projections.The FOMC is expected to keep the Fed funds rate at 0-0.25%for at least the next couple of years and the Fed launchedOperation Twist in September. In light of the deterioration in thegrowth outlook and financial market conditions, we expect athird round of quantitative easing to be announced at or beforethe end of the year.Economic activity has been picking up steadily on an easing ofthe supply-side constraints caused by the 11 March earthquake.However, should the yen appreciate sharply again, the BoJ mayonce more be forced to ease policy.QE was increased by GBP 75bn in October. We look for anotherGBP 50bn by February.We expect the central bank to deliver a rate cut in line with theECB. But if the krone continues to appreciate, further cuts in theinterest rate on certificates of deposit are likely.We expect the Riksbank to remain on hold this year and delivera rate cut in February, as growth slows and inflation moderates.Due to increased uncertainty regarding the economic outlookand low inflation, the next rate hike is to come in Q1 next year inour view, with a risk of it coming later than Q1.The SNB has implemented a peg to the euro. A minimumexchange rate of 1.20 against the euro will be enforced. The pegis the response to the appreciation of the franc and its risks toprice stability and growth outlook.Although the Bank of Canada risks fuelling house prices further,it is expected to provide 25bp of further accommodation as aninsurance measure in the face of significant global risks.With global growth conditions set to deteriorate through to theend of the year and Australian business confidence alreadybelow trend, the RBA is likely to take out some insuranceagainst building downside risks by easing policy in Q4.The deterioration in the global growth outlook has reduced theodds of further rate hikes in China. However, because CPIinflation remains high, the authorities still have an incentive tonarrow the negative gap between the deposit rate and inflationto address a source of social discontent. The impact oneconomic growth should be limited.The central bank is cutting rates, aiming to mitigate the impact ofthe global slowdown on the domestic economy. We foresee afull cutting cycle of 300bp (if not more), with rates down to 9.5%by mid-2012, at a pace of (at least) 50bp per meeting.Change since our last weekly in bold and italicsMarket Economics 20 October 2011Market Mover67www.GlobalMarkets.bnpparibas.com

Economic ForecastsGDPYear 20112012(% y/y) ’11 (1) ’12 (1) ’13 (1) Q1 Q2 Q3 Q4 Q1 Q2 (1) Q3 (1) Q4 (1)US 1.5 0.7 2.3 2.2 1.6 1.6 0.7 0.4 0.4 0.5 1.4Eurozone 1.5 0.7 1.2 2.4 1.6 1.3 0.9 0.3 0.5 0.7 1.3Japan -0.6 1.3 1.1 -1.0 -1.1 -1.0 -0.1 1.0 1.9 1.1 1.1World (2) 3.9 3.3 4.1 4.4 3.9 3.8 3.4 3.1 3.1 3.2 3.7Industrial ProductionYear20112012(% y/y) ’11 (1) ’12 (1) ’13 (1) Q1 Q2 Q3 Q4 Q1 Q2 (1) Q3 (1) Q4 (1)US 3.6 0.7 2.9 5.4 3.7 3.3 1.9 0.2 0.6 0.3 1.7Eurozone 3.0 -0.7 1.6 6.6 4.1 3.0 -0.4 -1.1 -0.9 -0.3 1.8Japan -2.1 3.8 2.5 -2.6 -6.8 -0.4 1.0 3.1 8.0 2.6 1.9Unemployment RateYear2011 2012(%) ’11 (1) ’12 (1) ’13 (1) Q1 Q2 Q3 Q4 Q1 Q2 (1) Q3 (1) Q4 (1)US 9.1 9.2 8.6 8.9 9.1 9.1 9.2 9.2 9.3 9.2 9.2Eurozone 10.1 10.3 10.0 10.0 10.0 10.1 10.2 10.4 10.3 10.3 10.2Japan 4.7 4.6 4.3 4.7 4.6 4.7 4.7 4.7 4.6 4.5 4.5CPIYear20112012(% y/y) ’11 (1) ’12 (1) ’13 (1) Q1 Q2 Q3 Q4 Q1 Q2 (1) Q3 (1) Q4 (1)US 3.2 1.8 1.8 2.1 3.4 3.8 3.4 2.3 1.8 1.5 1.6Eurozone 2.7 1.8 1.7 2.5 2.8 2.7 2.8 2.3 1.7 1.7 1.5Japan (Core) -0.2 -0.3 0.1 -0.8 -0.3 0.2 -0.1 -0.4 -0.4 -0.3 -0.1Current Account(% GDP) ’11 (1) Year’12 (1) ’13 (1) General Government(% GDP)’11 (1) Year’12 (1) ’13 (1)US -3.1 -2.9 -2.5 US (4) -3.1 -2.9 -2.5Eurozone -0.8 -0.6 -0.6 Eurozone -0.8 -0.6 -0.6Japan 2.1 1.3 1.0 Japan 2.1 1.3 1.0Interest Rate ForecastsYear20112012(%) ’11 (1) ’12 (1) ’13 (1) Q1 Q2 Q3 (1) Q4 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1)USFed Funds Rate 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.253-month Rate 0.35 0.30 0.25 0.30 0.25 0.36 0.35 0.30 0.30 0.30 0.302-year yield 0.20 0.35 0.75 0.83 0.47 0.20 0.20 0.20 0.25 0.30 0.3510-year yield 2.20 3.00 3.25 3.47 3.16 1.72 2.20 2.50 2.60 2.75 3.002y/10y Spread (bp) 200 265 250 264 269 152 200 230 235 245 265EurozoneRefinancing Rate 1.00 1.00 1.00 1.00 1.25 1.50 1.00 1.00 1.00 1.00 1.003-month Rate 1.00 1.10 1.30 1.24 1.55 1.54 1.00 1.00 1.00 1.05 1.102-year yield (5) 0.40 1.00 1.75 1.80 1.61 0.41 0.40 0.50 0.70 0.85 1.0010-year yield (5) 2.00 3.00 3.25 3.35 3.01 1.67 2.00 2.25 2.50 2.75 3.002y/10y Spread (bp) (5) 160 200 150 156 140 127 160 175 180 190 200JapanO/N Call Rate 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.103-month Rate 0.35 0.35 0.35 0.34 0.33 0.33 0.35 0.35 0.35 0.35 0.352-year yield 0.15 0.20 0.25 0.22 0.17 0.13 0.15 0.15 0.15 0.15 0.2010-year yield 0.90 1.15 1.30 1.26 1.14 0.99 0.90 1.00 1.10 1.10 1.152y/10y Spread (bp) 75 95 105 104 96 85 75 85 95 95 95Footnotes: (1) Forecast (2) BNPP estimates based on country weights in the IMF World Economic Outlook UpdateApril 2011 (3) End Period (4) Fiscal year Figures are y/y percentage change unless otherwise indicated (5) German benchmarkSource: BNP ParibasMarket Economics 20 October 2011Market Mover68www.GlobalMarkets.bnpparibas.com

This publication is classified as non-objective researchFX Forecasts*USD Bloc Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14 Q2 '14EUR/USD 1.45 1.48 1.50 1.50 1.48 1.45 1.40 1.40 1.40 1.34 1.31USD/JPY 75 73 70 70 75 80 90 90 90 88 90USD/CHF 0.83 0.84 0.83 0.87 0.88 0.90 0.93 0.93 0.93 0.97 0.99GBP/USD 1.58 1.61 1.60 1.60 1.61 1.61 1.57 1.59 1.59 1.70 1.60USD/CAD 0.94 0.91 0.90 0.90 0.90 0.91 0.94 0.96 0.98 1.00 1.00AUD/USD 1.12 1.15 1.18 1.18 1.15 1.10 1.05 1.02 1.00 0.95 0.95NZD/USD 0.86 0.87 0.87 0.91 0.92 0.90 0.88 0.85 0.83 0.76 0.76USD/SEK 6.34 6.22 6.07 6.07 6.08 6.14 6.29 6.29 6.29 6.94 7.02USD/NOK 5.20 5.05 4.85 4.85 4.86 5.03 5.33 5.46 5.46 5.07 5.34EUR Bloc Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14 Q2 '14EUR/JPY 109 108 105 105 111 116 126 126 126 118 118EUR/GBP 0.92 0.92 0.94 0.94 0.92 0.90 0.89 0.88 0.88 0.79 0.82EUR/CHF 1.20 1.25 1.25 1.30 1.30 1.30 1.30 1.30 1.30 1.30 1.30EUR/SEK 9.20 9.20 9.10 9.10 9.00 8.90 8.80 8.80 8.80 9.30 9.20EUR/NOK 7.54 7.48 7.28 7.28 7.20 7.30 7.46 7.65 7.65 6.80 7.00EUR/DKK 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46Central Europe Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14 Q2 '14USD/PLN 2.93 2.84 2.73 2.67 2.57 2.55 2.57 2.64 2.64 2.65 2.67EUR/CZK 25.0 24.3 24.1 23.8 23.5 23.7 24.0 23.5 23.3 23.1 23.0EUR/HUF 292 290 285 280 280 270 265 260 260 250 245USD/ZAR 7.60 7.25 7.00 6.80 6.70 7.20 7.10 7.00 6.90 7.21 7.37USD/TRY 1.78 1.75 1.68 1.72 1.73 1.72 1.70 1.69 1.69 1.54 1.55EUR/RON 4.29 4.25 4.20 4.05 4.10 4.20 4.20 4.10 3.95 3.90 3.80USD/RUB 30.27 29.61 28.98 27.76 27.14 27.44 28.39 27.97 28.81 28.19 28.96EUR/PLN 4.25 4.20 4.10 4.00 3.80 3.70 3.60 3.70 3.70 3.55 3.50USD/UAH 8.0 8.0 8.0 8.0 8.0 7.8 7.7 7.5 7.3 7.4 7.4EUR/RSD 100 98 97 96 95 93 92 91 90 85 84Asia Bloc Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14 Q2 '14USD/SGD 1.20 1.18 1.17 1.16 1.15 1.14 1.13 1.12 1.11 ----- -----USD/MYR 2.96 2.93 2.87 2.83 2.80 2.77 2.75 2.73 2.70 ----- -----USD/IDR 8500 8300 8100 8000 7900 7800 7700 7600 7500 ----- -----USD/THB 29.70 29.30 28.70 28.50 28.30 28.00 27.70 27.50 27.50 ----- -----USD/PHP 42.50 41.80 41.00 40.50 40.00 39.50 39.00 38.50 38.00 ----- -----USD/HKD 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 ----- -----USD/RMB 6.31 6.28 6.24 6.18 6.12 6.05 5.98 5.93 5.89 ----- -----USD/TWD 29.30 28.70 28.30 27.80 27.30 27.00 26.70 26.50 26.00 ----- -----USD/KRW 1080 1040 1010 1000 990 980 970 960 950 ----- -----USD/INR 46.00 45.50 45.00 44.50 44.00 43.50 43.00 42.50 42.00 ----- -----USD/VND 20800 20700 20600 20500 20400 20300 20200 20100 20000 ----- -----LATAM Bloc Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14 Q2 '14USD/ARS 4.45 4.54 4.68 4.79 4.95 5.10 5.20 5.35 5.55 5.70 5.85USD/BRL 1.85 1.80 1.75 1.72 1.67 1.68 1.69 1.70 1.71 1.72 1.73USD/CLP 470 460 440 450 455 458 462 466 470 473 475USD/MXN 12.70 12.40 12.10 11.70 11.40 11.43 11.48 11.55 11.60 11.61 11.63USD/COP 1780 1760 1735 1729 1720 1700 1715 1725 1735 1740 1745USD/VEF 4.29 4.29 4.29 4.29 4.29 8.80 8.80 8.80 8.80 8.80 8.80USD/PEN 2.68 2.66 2.65 2.63 2.62 2.62 2.63 2.64 2.64 2.65 2.66Others Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14 Q2 '14USD Index 73.63 72.10 71.03 71.13 72.33 73.98 77.33 77.37 77.52 79.25 81.22*End QuarterForeign Exchange Strategy 20 October 2011Market Moverwww.GlobalMarkets.bnpparibas.com69

Market CoverageMarket EconomicsPaul Mortimer-Lee Global Head of Market Economics London 44 20 7595 8551 paul.mortimer-lee@uk.bnpparibas.comKen Wattret Chief Eurozone Market Economist London 44 20 7595 8657 kenneth.wattret@uk.bnpparibas.comLuigi Speranza Head of Inflation & Fiscal Economics, London 44 20 7595 8322 luigi.speranza@uk.bnpparibas.comEurozone, ItalyDavid Tinsley UK, Ireland London 4420 7595 8150 david.tinsley@uk.bnpparibas.comGizem Kara Scandinavia London 44 20 7595 8783 gizem.kara@uk.bnpparibas.comDominique Barbet Eurozone, France Paris 33 1 4298 1567 dominique.barbet@bnpparibas.comJulia Coronado Chief Economist North America New York 1 212 841 2281 julia.l.coronado@americas.bnpparibas.comJeremy Lawson US New York 1 212 471-8180 Jeremy.lawson@ americas.bnpparibas.comYelena Shulyatyeva US New York 1 212 841 2258 yelena.shulyatyeva@americas.bnpparibas.comBricklin Dwyer US, Canada New York 1 212 471-7996 bricklin.dwyer@americas.bnpparibas.comRyutaro Kono Chief Economist Japan Tokyo 81 3 6377 1601 ryutaro.kono@japan.bnpparibas.comHiroshi Shiraishi Japan Tokyo 81 3 6377 1602 hiroshi.shiraishi@japan.bnpparibas.comAzusa Kato Japan Tokyo 81 3 6377 1603 azusa.kato@japan.bnpparibas.comMakiko Fukuda Japan Tokyo 81 3 6377 1605 makiko.fukuda@japan.bnpparibas.comRichard Iley Head of Asia Economics Hong Kong 852 2108 5104 richard.iley@asia.bnpparibas.comDominic Bryant Asia, Australia Hong Kong 852 2108 5105 dominic.bryant@asia.bnpparibas.comMole Hau Asia Hong Kong 852 2108 5620 mole.hau@asia.bnpparibas.comXingdong Chen Chief China Economist Beijing 86 10 6535 3327 xd.chen@asia.bnpparibas.comKen Peng Senior Economist , China China 86 10 6535 3380 ken.peng@asia.bnpparibas.comChan Kok Peng Chief Economist South East Asia Singapore 65 6210 1946 kokpeng.chan@asia.bnpparibas.comMarcelo Carvalho Head of Latin American Economics São Paulo 55 11 3841 3418 marcelo.carvalho@br.bnpparibas.comGustavo Aruda Latin American Economist São Paulo +1-212-471-6599 gustavo.arruda@amecias.bnpparibas.comNader Nazmi Latin America New York 1 212 471 8216 nader.nazmi@us.bnpparibas.comFlorencia Vazquez Latin American Economist Buenos Aires 54 11 4875 4363 florencia.vazquez@ar.bnpparibas.comMichal Dybula Central & Eastern Europe Warsaw 48 22 697 2354 michal.dybula@pl.bnpparibas.comJulia Tsepliaeva Russia & CIS Moscow 74 95 785 6022 julia.tsepliaeva@ru.bnpparibas.comSelim Cakir Chief Economist Turkey, GCC, South Africa Istanbul 90 216 635 2972 selim.cakir@teb.com.trEmre Tekmen Economist Turkey, GCC and South Africa Istanbul 90 216 635 2975 emre.tekmen@teb.com.trNazli Toragan Economist Turkey, GCC and South Africa IIstanbul 90 216 635 2986 lnazli.toraganli@teb.com.trInterest Rate StrategyCyril Beuzit Global Head of Interest Rate Strategy London 44 20 7595 8639 cyril.beuzit@uk.bnpparibas.comPatrick Jacq Europe Strategist Paris 33 1 4316 9718 patrick.jacq@bnpparibas.comHervé Cros Chief Inflation Strategist London 44 20 7595 8419 herve.cros@uk.bnpparibas.comShahid Ladha Inflation & UK Strategist London 44 20 7 595 8573 shahid.ladha@uk.bnpparibas.comAlessandro Tentori Chief Alpha Strategy Europe London 44 20 7595 8238 alessandro.tentori@uk.bnpparibas.comEric Oynoyan Europe Strategist London 44 20 7595 8613 eric.oynoyan@uk.bnpparibas.comMatteo Regesta Europe Strategist London 44 20 7595 8607 matteo.regesta@uk.bnpparibas.comIoannis Sokos Europe Strategist London 44 20 7595 8671 ioannis.sokos@uk.bnpparibas.comCamille de Courcel Europe Strategist London 44 20 7595 8295 camille.decourcel@uk.bnpparibas.comBülent Baygün Head of Interest Rate Strategy US New York 1 212 471 8043 bulent.baygun@americas.bnpparibas.comMary-Beth Fisher US Strategist New York 1 212 841 2912 mary-beth.fisher@us.bnpparibas.comAaron Kohli US Strategist New York 1 212 841 2026 aaron.kohli@americas.bnpparibas.comSuvrat Prakash US Strategist New York 1 917 472 4374 suvrat.prakash@americas.bnpparibas.comAnish Lohokare MBS Strategist New York 1 212 841 2867 anish.lohokare@americas.bnpparibas.comOlurotimi Ajibola MBS Strategist New York 1 212 8413831 olurotimi.ajibola@americas.bnpparibas.comBo Peng US Strategist New York 1 212 8412241 bo.peng@americas.bnpparibas.comTomohisa Fujiki Japan Strategist Tokyo 81 3 6377 1703 Tomohisa.fujiki@japan.bnpparibas.comHidehiko Maejima Japan Strategist Tokyo 81 3 6377 1701 Hidehiko.maejima@japan.bnpparibas.comChristian Séné Technical Analyst Paris 33 1 4316 9717 christian.séné@bnpparibas.comFX StrategyRay Attrill Head of FX Strategy – North America New York 1 212 841 2492 raymond.attrill@us.bnpparibas.comMary Nicola FX Strategist New York 1 212 841 2492 mary.nicola@americas.bnpparibas.comSteven Saywell Head of FX Strategy - Europe London 44 20 7595 8487 steven.saywell@uk.bnpparibas.comKiran Kowshik FX Strategist London 44 20 7595 1495 kiran.kowshik@bnpparibas.comJames Hellawell Quantitative Strategist London 44 20 7595 8485 james.hellawell@uk.bnpparibas.comLocal Markets FX & Interest Rate StrategyDrew Brick Head of FX & IR Strategy Asia Singapore 65 6210 3262 Drew.brick@asia.bnpparibas.comChin Loo Thio FX & IR Asia Strategist Singapore 65 6210 3263 chin.thio@asia.bnpparibas.comRobert Ryan FX & IR Asia Strategist Singapore 65 6210 3314 robert.ryan@asia.bnpparibas.comJasmine Poh FX & IR Asia Strategist Singapore 65 6210 3418 jasmine.j.poh@asia.bnpparibas.comGao Qi FX & IR Asia Strategist Shanghai 86 21 2896 2876 gao.qi@asia.bnpparibas.comBartosz Pawlowski Head of FX & IR Strategy CEEMEA London 44 20 7595 8195 Bartosz.pawlowski@uk.bnpparibas.comDina Ahmad FX & IR CEEMEA Strategist London 44 20 7 595 8620 dina.ahmad@uk.bnpparibas.comErkin Isik FX & IR CEEMEA Strategist Istanbul 90 (216) 635 29 87 erkin.isik@teb.com.trDiego Donadio FX & IR Latin America Strategist São Paulo 55 11 3841 3421 diego.donadio@@br.bnpparibas.com70

For Production and Distribution, please contact:Ann Aston, Market Economics, London. Tel: 44 20 7595 8503 Email: ann.aston@uk.bnpparibas.com,Jessica.Bakkioui, Market Economics, London. Tel: 44 20 7595 8478 Email: jessica.bakkioui@uk.bnpparibas.com,Danielle Catananzi, Interest Rate Strategy, London. Tel: 44 20 7595 4418 Email: danielle.catananzi@uk.bnpparibas.com,Roshan Kholil, FX Strategy, London. Tel: 44 20 7595 8486 Email:roshan.kholil@uk.bnpparibas.com,Martine Borde, Market Economics/Interest Rate Strategy, Paris. Tel: 33 1 4298 4144 Email martine.borde@bnpparibas.comEditors: Amanda Grantham-Hill, Interest Rate Strategy/Market Economics, London. Tel: 44 20 7595 4107 Email: amanda.grantham-hill@bnpparibas.com;Jeffrey Myhre, Interest Rate Strategy/Market Economics, New York. 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