16 November 2012 Research http://www.credit-suisse.com/researchandanalytics

European Strategy and Trades

Interest Rate Strategy

Research Analysts Time to go tactically short Bunds Michelle Bradley  Bunds are starting to look rich at current levels based on likely market +44 20 7888 5468 [email protected] developments in coming weeks. We recommend initiating a tactical short position in 10y Germany into year-end. Panos Giannopoulos +44 20 7883 6947  Developments out of Greece should be market positive for the remainder of [email protected] the year, and a positive outcome on the US fiscal cliff should dominate weak Helen Haworth euro area economic data. The timing of a Spanish bailout request remains +44 20 7888 0757 the unknown, but market expectations for progress this year are low. [email protected]

Thushka Maharaj European Governments: +44 20 7883 0211 [email protected]  The 8-year sector on the Italian curve looks rich. We recommend selling the BTP 4.0% September 2020 on the BTP 4.25% February 2019/4.0% Marion Pelata September 2020/5.5% November 2022 fly. +44 20 7883 1333 [email protected] UK Strategy: David Sneddon +44 20 7888 7173  The change in the inflation forecast in the Inflation Report re-inforces our [email protected] bearish view on gilts. We expect gilts to underperform Treasuries and Florian Weber Bunds. +44 20 7888 3779 [email protected]  We find the new 30y bond cheap on the gilt curve. We recommend buying the UKT 3Q 44s versus selling the 4H 42s and 4Q 46s or simply buying 44s Sabine Winkler out of 46s. +44 20 7883 9398 [email protected] Derivatives Strategy:  We find the term structure of EUR 10y tails too steep and recommend buying 1m10y versus 1y10y ones. We also recommend a risk reversal in 30y (buying 1y30y OTM payer versus receiver, delta hedged).

Technicals:  We maintain our 10s30s German steepening recommendation.

ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES ARE IN THE DISCLOSURE APPENDIX. FOR OTHER IMPORTANT DISCLOSURES, PLEASE REFER TO https://firesearchdisclosure.credit-suisse.com. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION™ Client-Driven Solutions, Insights, and Access

16 November 2012

Table of Contents

Summary of views and new trade recommendations 3

Trade Performance 4

Forward supply calendar 5

Time to go tactically short Bunds 6

European Governments 9 Euro area in recession: Holland biggest downside surprise ...... 9 European Governments Relative Value: 8-year sector rich in Italy ...... 9

UK Strategy 11 Dovish Inflation Report ...... 11

Derivatives Strategy 14 EUR vol – Calendar spreads on 10y tails, 1y30y risk reversal ...... 14

Technicals 16 We maintain a 10s30s German cash steepener ...... 16

EUR and UK Supply Analysis 17

Forecasts 21

European Strategy and Trades 2 16 November 2012

Summary of views and new trade recommendations

Exhibit 1: Summary of core views Currency Market View Expression  Sell RXZ2. Outright  Tactically short Bunds.  Still lower for longer out to 5y.  1y1y-4y1y flattener.  Pay 10s30s 1y fwd or pay forwards outright Curve  10s30s continue to steepen. such as EUR 15y15y.  France, Netherlands 10s30s steepener. Curvature  5s10s30s to grind lower.  Term structure of 10y tails too steep Vol  Buy 1m10 straddles versus 1y10y.  Short term gamma is cheap. EUR Core ASW  Long 30-year DBR, Finland ASW.  Buy DBR Finland 30y ASW outright. Core  Buy EFSF Mar 2014 vs. RAGB or ASW.  Trade curves in soft core rather than spreads. Spreads  Pay FRTR, BGB 2s5s10s.  Long outright 1yr Spain.  We expect Spain to need a full sovereign  1s2s steepener in Italy. Periphery bailout.  2s5s steepener in Spain.  Expect Spanish front-end curve to steepen.  Buy negative Spanish CDS basis.  5s10s flatteners in Portugal.

 FSA and FLS relaxation of liquidity  GBP 2s10s steepener. GBP requirements supports lower Libor fixes.  Receive 3y1y Sonia.

 CHF too flat vs. EUR.  Pay CHF 2s10s outright or vs. EUR. CHF / SEK  Expect Riksbank rate cut in December.  Pay CHF 30y outright.  SEK 5s20s too flat  SEK 5s20s steepener.  EUR 2s5s 1y fwd flattener vs CHF. XCY  SEK long end too flat versus UK.  GBP-SEK 5y5y-10y10y box.  Long 30y FRA-Eonia. Money  Buy EUR 1 x 2 wedge.  Libor probe to shift uncertainty from policy to Markets  Pay 30y EUR FRA-OIS. fixings uncertainty.

Source: Credit Suisse

Exhibit 2: New trade recommendations New trades we recommend this week Positions we recommend closing this week  Sell RXZ2 outright.  GBP 1y1y/2y1y/3y1y, L Z3-Z4-Z5 fly.  Buy EUR 1m10y straddles, sell 1y10y straddles.  Short UKT 30y ASW versus Germany.  Buy EUR 1y30y ATMF+60bp payer, Sell ATMF-60bp

receiver, hedged with delta.  Buying UKT 3Q 44s versus 4H 42s and 4Q 46s or buy

44s out of 46s.  Sell BTP September 2020 versus February 2019 and

November 2022.

Source: Credit Suisse

European Strategy and Trades 3 16 November 2012

Trade Performance Exhibit 3: Current trade recommendations Category Idea Name Start Date End Date CCY P&L (EUR) As Of European Governments Shorten DBR 42s into 34s 02-Mar-12 EUR 1,340,768 14-Nov-12 2.5% Nether 2033 vs. 3.75% Nether 2042-ASW box 14-Jun-12 EUR 210,305 14-Nov-12 Sell BTP 5.25% August 2017 vs. 4.75% June 2017 13-Sep-12 EUR 279,923 14-Nov-12 Sell BTP 4.75% November 2023 vs. 5.5% November 2022 13-Sep-12 08-Nov-12 EUR -676,873 08-Nov-12 Netherlands 10s30s steepener 20-Sep-12 EUR 302,543 14-Nov-12 Buy 2Y EFSF on 20-Sep-12 EUR 117,194 14-Nov-12 Buy 2Y EFSF vs 2Y RAGB 20-Sep-12 EUR -165,398 14-Nov-12 Buy DBR 30y ASW 21-Sep-12 EUR 568,633 14-Nov-12 5s10s Flatteners in Portugal 04-Oct-12 EUR 518,631 14-Nov-12 2s5s steepener in Spain 11-Oct-12 EUR 146,749 14-Nov-12 10s30s steepener in France 11-Oct-12 EUR 344,415 14-Nov-12 2s5s steepeners in Netherlands 18-Oct-12 08-Nov-12 EUR -98,026 08-Nov-12 Pay BGB 2s5s10s 18-Oct-12 EUR 147,583 14-Nov-12 Sell 10Y EIB versus 10Y KfW 25-Oct-12 EUR -2,757 14-Nov-12 Short 5s on the FRTR 2s5s10s fly 26-Oct-12 EUR -44,402 14-Nov-12 Buy 30Y Finland on ASW 08-Nov-12 EUR -82,375 14-Nov-12 Buying 5-year Spain on ASW and buying 5-year CDS 08-Nov-12 EUR -72,156 14-Nov-12 GBP Short 30y UKT asw versus Germany 20-Sep-12 EUR 391,553 14-Nov-12 Pay 10y GBP swap vs Bunds 18-Oct-12 08-Nov-12 GBP 759,246 08-Nov-12 Long UKT 1s 17s ASW (tactical) 01-Nov-12 08-Nov-12 GBP 178,834 08-Nov-12 Pay GBP 5s10s30s 29-Mar-12 GBP -2,769,366 14-Nov-12 GBP 30y10y-40y10y steepener 27-Jul-12 GBP 377,816 14-Nov-12 GBP 10y5y-15y5y flattener 07-Sep-12 GBP 113,290 14-Nov-12 GBP 5y30y 1x2 receiver spread 11-Oct-12 GBP 25,393 14-Nov-12 Buy GBP 1m10y and 1m30y straddles 12-Oct-12 12-Nov-12 GBP -1,324,560 12-Nov-12 Receive GBP 1y1y/2y1y/3y1y 01-Nov-12 GBP 285,109 14-Nov-12 Long 1y1y GBP 6s3s basis 02-Nov-12 GBP 102,595 14-Nov-12 EUR Pay EUR 10s30s 2y forward 01-Dec-11 EUR 6,785,802 14-Nov-12 Pay EUR 10y10y-20y10y-30y20y 31-Aug-12 EUR -113,465 14-Nov-12 Pay EUR 10y5y-15y10y-25y5y fly 05-Oct-12 EUR 129,829 14-Nov-12 Receive EUR 5y5y-10y5y-15y15y fly 05-Oct-12 EUR -271,794 14-Nov-12 Receive EUR 10s15s30s 05-Oct-12 EUR -86,210 14-Nov-12 Pay EUR 15y15y 05-Oct-12 EUR -395,959 14-Nov-12 Receive EUR 5s10s30s via 1m receivers 06-Nov-12 EUR 180,988 14-Nov-12 EUR 1y1y-4y1y flattener 09-Nov-12 EUR 96,360 14-Nov-12 CHF / SEK Receive CHF 2s7s15s 3y fwd 18-May-12 CHF 197,533 14-Nov-12 Pay CHF 30y swap 21-Sep-12 CHF -675,014 14-Nov-12 GBP-SEK 5y5y10y10y 27-Sep-12 GBP 1,066,401 14-Nov-12 SEK 5s20s steepener 26-Oct-12 SEK 369,644 14-Nov-12 XCY Pay CHF 2s5s 1y fwd versus EUR 06-Jul-12 EUR -247,910 14-Nov-12 Pay CHF 2s10s vs EUR 14-Sep-12 EUR 640,124 14-Nov-12 Pay 2y2y GBP vs USD 12-Oct-12 08-Nov-12 GBP 431,226 08-Nov-12 Vol Buy EUR 9m30y 2.75%/3.25%/3.75% payer fly 22-Jun-12 EUR -180,894 14-Nov-12 Long EUR 2y5y vega vs 5y5y, short 3m5y 24-Aug-12 EUR 104,417 14-Nov-12 EUR 3m5y receiver ladder 24-Aug-12 EUR 475,141 14-Nov-12 Sell EUR 2y30y vol of vol 07-Sep-12 EUR 287,536 14-Nov-12 Buy 1m10y ATFM , sell 70bp wide 6m10y 26-Oct-12 EUR 286,266 14-Nov-12 Money Markets Buy EUR 1x2 wedge 12-Jul-12 EUR -777,866 14-Nov-12 1s2s steepener in Italy 27-Jul-12 EUR -293,748 14-Nov-12 Long outright 1yr Spain 03-Aug-12 EUR 990,549 14-Nov-12 EUR 6s3s tightener vs 3s1s widener 23-Aug-12 EUR 126,908 14-Nov-12 SPGB 7/13-7/14 steepener 07-Sep-12 08-Nov-12 EUR 605,780 08-Nov-12 Pay 30y EUR FRA-OIS 20-Sep-12 EUR 265,310 14-Nov-12 Sell L Z3-Z4-Z5 fly 25-Sep-12 GBP 93,788 14-Nov-12 L M3-Z3 steepener vs ED flattener 12-Oct-12 EUR 48,830 14-Nov-12 L Z2-H3 flattener 18-Oct-12 08-Nov-12 GBP 62,712 08-Nov-12 Receive ER Z2-M3, pay 10y GBP 18-Oct-12 08-Nov-12 EUR 116,921 08-Nov-12 Receive EUR 1s2s3s 1y fwd, Sell ERU3-U4-U5 22-Oct-12 EUR 149,955 14-Nov-12 Long 2y1y EONIA 25-Oct-12 08-Nov-12 EUR 2,258,464 08-Nov-12 Pay 2y1y EONIA (half exposure) 31-Oct-12 08-Nov-12 EUR -714,069 08-Nov-12 Long 3y1y SONIA 08-Nov-12 GBP 122,096 14-Nov-12 Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at the original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments may be subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. The P&L results shown do not include relevant costs, such as commissions, interest charges, or other applicable expenses. Please see the Structured Securities, Derivatives, and Options Disclaimer. Please note all trades are available and marked daily in Credit Suisse PLUS Analytics Source: Credit Suisse Exhibit 4: Current year-to-date PnL of portfolio (EUR) YTD PnL 57,474,887 WTD PnL 183,839 12m rolling weekly PnL average 1,651,859 Source: Credit Suisse

European Strategy and Trades 4 16 November 2012

Forward supply calendar

Exhibit 5: Forward supply calendar Bonds Week Day Date T-bills Issues Issues 2/3y 5/7y 10y 15/20y >=30y Linkers 47 Mon 19-Nov DTC 3M & 6M 1.7* UK UKTi 44s** 3.5* 47 Mon 19-Nov BTF 7.5* 47 Tue 20-Nov SGLT 5.5* UK UKT 1s 17s 4.5 47 Tue 20-Nov GTB 1.6* 47 Wed 21-Nov PTB 3M,6M,18M 1.87* DE/US Bund 22 4.0 10Y Tips 7.0* 47 Wed 21-Nov SWTB 15 47 Thu 22-Nov ES/SE SPGB 5Y* 1.5 SPGB 10Y* 1.5* SBGi* 0.75* 47 Fri 23-Nov UK 18.17 1.5 5.5 48 Mon 26-Nov Bubill 12M 3.0 BE BGB 3Y* 0.9* BGB 7Y* 0.8* BGB 10Y* 0.7* 48 Mon 26-Nov BTF 7.5* 48 Tue 27-Nov SGLT 3.0* IT CTZ 2Y* 2.9* BTPei10Y* 1.4* 48 Tue 27-Nov BOT 6M 9.0* NL DSL 15 2.5* 48 Tue 27-Nov US 2Y Note 35* 48 Wed 28-Nov DE/SE Bobl 17 3.0 SGB* 3.5 48 Wed 28-Nov US 5Y Note 35* 48 Thu 29-Nov IT BTP 5Y* 2.5* BTP 10Y* 2.0* 48 Thu 29-Nov US 7Y Note 29* 48 Fri 30-Nov UK EUR total 22.5 EUR total 6.3 6.3 2.7 1.4 49 Mon 03-Dec DTC 3M & 6M 1.7* 49 Mon 03-Dec BTF 7.6* 49 Mon 03-Dec Bubill 6M 3.0 49 Tue 04-Dec BTB 3M & 6M 3.0* 49 Wed 05-Dec SWTB 15 ES SPGB 3Y* 1.5* SPGB 5Y* 1.5* UKT 1T 22s 3.5* 49 Wed 05-Dec DE Schatz 14 4.0 49 Thu 06-Dec FR OAT 5Y* 2.5* OAT 10Y* 2.0* OAT 15Y* 1.5* 49 Fri 07-Dec UK EUR total 15.3 EUR total 5.5 4.0 2.0 1.5 50 Mon 10-Dec DTC 3M & 6M 1.7* SK SLOVGB 5Y* 0.2* 50 Mon 10-Dec BTF 7.5* 50 Tue 11-Dec BTB 3M & 12M 3.0* US 3Y Note 32* 50 Tue 11-Dec GTB 1.6* UK 50 Tue 11-Dec SGLT 12M& 5.5* 50 Wed 12-Dec BOT 6M* 9.0* US 10Y Note 24* 50 Wed 12-Dec SE SGB* 3.5 0⅛% UKTi 50 Thu 13-Dec ES/US/UK SPGB 5Y* 1.5* SPGB 10Y* 1.5* 30Y Bond 16* 1.4* 24 50 Thu 13-Dec IT BTP 3Y* 3.5* BTP 8Y* 2.5* 50 Fri 14-Dec UK BE BGB ORI EUR total 28.3 EUR total 3.5 4.2 1.5 51 Mon 17-Dec GTB 1.6* US 2Y Note 35* 51 Mon 17-Dec BTF 7.5* 51 Tue 18-Dec SGLT 3M & 6M 3.0* US 5Y Note 35* 51 Wed 19-Dec SWTB 15 51 Wed 19-Dec PTB 6M & 12M 1.62* US 7Y Note 29* 51 Thu 20-Dec US 5Y Tips 12* 51 Fri 21-Dec UK EUR total 13.72 EUR total

*Estimates/Likely auction dates, **Syndication/Tenders/Mini-Tenders, *** USD denominated; Source: Credit Suisse, National Treasuries

European Strategy and Trades 5 16 November 2012

Time to go tactically short Bunds

Helen Haworth We think the key drivers of core European yields into December are likely to be the fiscal +44 20 7888 0757 cliff in the US, the situations in Greece and Spain and the growth outlook. While there [email protected] remains a lot of uncertainty surrounding each of these, and arguments can be made for Panos Giannopoulos both a further rally and a large sell-off, conditional on the path taken, on balance we +44 20 7883 6947 [email protected] believe a mild sell-off in Germany yields is the most likely outcome in coming weeks. Attractive ways to position for this include going outright short Bunds. Alternatively, given the fact that 1m gamma is very cheap (see the Derivatives section), investors could simply buy an ATM put or a payer. As we wrote in EST: Eyes wide shut, 26 October, we thought that the market had become too sanguine and that it made sense to position defensively for range-bound but choppy markets. We remain cautious, but near term believe that Bunds are now rich following the rally over the last month, with developments in the US the primary driver – of both the rally and likely sell-off.

Euro area growth outlook likely trumped near-term by US fiscal cliff developments The outlook for Europe next year comes down in large part to growth – growth and politics it could be argued are the two most important drivers, with the ECB’s role fitting in part into the latter. This year is far from over, and we continue to expect evolution on the political side in coming weeks, particularly regarding Spain and Greece as discussed below. However, major market-moving political developments, particularly of the negative sort, we think are most likely a 2013 issue. Greece could now be supportive; the unknown remains Spain. Against the challenged and weak euro area economic backdrop, as the core slows, the outlook for Europe is ever more levered to the outlook for global growth. Q3 data has confirmed that the euro area is in recession and expectations are for weakness in the data to continue in Q4, with the risks to the downside. Absent a severe market shock, however, in our opinion this is already priced in, with the market vulnerable to a mild sell-off if data comes in better than expected. Developments on the US fiscal cliff we therefore think could be the dominant economic driver of European yields in coming weeks. While the market has become more concerned about the fiscal cliff in the last week or so, our US rates strategists have increased their year-end 10y UST forecast to 1.75% based on their expectation that a pragmatic resolution will be found, reducing uncertainty and allowing risky assets to stabilize. We would expect Bund yields to sell off in tandem with Treasuries in this scenario – perhaps with the drag of the weak euro area backdrop leading to a mild-outperformance of 10y Germany relative to the US 10s.

Near-term developments in Greece likely to be market positive Another driver of risk sentiment is likely to be Greece. While we remain very cautious on the outlook for Greece medium-term, here we think that newsflow could actually be market-positive in coming weeks. The parliament managed to scrape through the austerity bill (153 votes in favour out of 299; 128 against and 18 “present”), passing the 2013 budget a little more comfortably (167 out of 300 in favour), paving the way for the euro area to agree to a two-year extension to meet its fiscal targets.

European Strategy and Trades 6 16 November 2012

The remaining stumbling block for the disbursement of the next tranche (or tranches) of funding for Greece is the minor question of debt (un)sustainability. The IMF is clearly pushing hard for meaningful cuts in Greece’s debt load – a “real fix” in order to get Greece’s debtload on a sustainable path as quickly as possible, rather than a politically convenient “quick fix” as (presumably) favoured by some euro area countries. These are clearly politically sensitive issues, and the public disagreement between the IMF and Eurogroup we think is important to watch. Both the euro area and the ECB have made the IMF an integral part of all bailout packages to date, and to the (proposed) implementation of the OMT. So however unpalatable they may find the IMF’s prescriptions, it seems unlikely they will be in a position to ignore them completely. Our expectation is that a compromise is reached, with the IMF able to achieve a greater level of debt reduction than would otherwise have been forthcoming, a development that we would see as supportive for risk-sentiment near term, and likely to lead, all things being equal, to a mild sell-off in core yields. A failure to reach an agreement on the other hand would be highly negative in our opinion – the IMF’s role may well be in the process of evolving but we think the credibility of having the IMF involved is important for public opinion in the core to remain behind the support programmes. If the whole €44 billion remaining in the three outstanding 2012 tranches of funding is released, as Germany looks to be proposing, this would also be a short-term positive in our view, avoiding the continued focus on whether and when Greece is on the verge of running out of money. The question is the conditionality that is likely to be associated with this. We think it is most likely that Germany is proposing this in exchange for more stringent conditions to ensure Greek compliance with agreed measures. Slowly but surely Greece is faced with no choice but to give up its sovereignty – and this may be inevitable, but we remain alert to the resultant impact on domestic politics. The stability of the governing coalition we believe is the key risk related to Greece in the near term. The three-vote by which the austerity bill was voted through highlights the fragility of the situation. Regardless of the outcome of a subsequent election, failure of the Greek government we think would bring back euro break-up concerns and would be extremely negative for market sentiment.

The Spanish unknown: market expectations are low; OMT Limbo can persist Which leaves Spain and when Rajoy will ask for the (inevitable) sovereign bailout. We continue to think there is more to this than just the need for the market to force Rajoy into asking, as we outlined last week (EST: OMT Limbo 2 Nov, 2012). The timing needs to be right for all parties, and we think European Commissioner Rehn’s comments that Spain is taking sufficient action to reduce its budget deficit for 2012 and 2013 brings the date a step closer. Outstanding 2014 requirements can be dealt with at a later stage since they will most likely be a function of developments in 2013, and so subject to change anyway. The timing remains extremely hard to forecast. Market consensus from what we can tell is that Rajoy isn’t likely to ask unless he has to (i.e., Spanish yields need to sell off), and that a request will be a Q1 2013 event. The question into year-end is how sensitive the market is likely to be to marginal Spanish newsflow. Broadly speaking, we can see four “bailout- request” market scenarios for the remainder of the 2012: 1. Spain asks for support without the need for market pressure – an agreement is reached by all parties at the euro area level. This would likely lead to an immediate rally in Spanish yields across the curve and a mild sell-off in Bunds. Our expectation at this stage would be to use any resultant flattening of the Spanish curve to add to Spanish steepeners (2s5s, 2s10s etc).

European Strategy and Trades 7 16 November 2012

2. Market sentiment deteriorates further and Spanish spreads widen sufficiently to push Rajoy into requesting assistance before the end of the year. We think that some expectation for further weakness in Spanish spreads is priced into Bunds at current levels and so the sell-off that would result from the bailout request should more than reverse the likely rally into the event. 3. Rajoy doesn’t ask for assistance in 2012 and policymakers continue to successfully massage the markets into remaining range-bound – OMT Limbo persists. We think this is close to the market consensus and could lead to a small rise in Bunds yields. 4. Rajoy doesn’t ask for assistance in 2012 and differences in opinion between policymakers about the best approach for Spain start to bubble to the surface, pushing out expectations for when the OMT is likely to be activated and increasing implementation risk. We don’t think this is priced in and could lead Bunds to rally further. While the political process driving the timing of Rajoy’s request makes it hard to have any conviction regarding likely timing, in our view the probability of a request this year is greater than seems to be expected by the market. And in particular we think that scenario 2 is more likely than scenario 4. If market sentiment starts to deteriorate markedly, we think the probability of Spain asking for assistance sooner increases.

Go tactically short 10y Germany: On aggregate, taking into account the near-term outlook for growth, the US fiscal cliff and likely developments in Spain and Greece, our view is therefore that Bund yields are likely to rise modestly into year-end, and a tactical short position makes sense. We think that moves are likely to be limited by the ongoing challenges faced by euro area policymakers, the challenged growth outlook, the fact that even if Spain asks for a bailout in 2012, the OMT programme is only likely to be operational in 2013, and risks to the global growth outlook from developments in the middle east and Asia. Our year-end target in Bund yields is around 1.45%-1.50%. A menu of trades benefitting from that view includes:  Outright short 10y Germany @ 1.338% or short RXZ2 @ 143.27, target 1.5% or 141.52 respectively.  Buy 1m10y ATMF (1.665%) payer @ 59c  Buy RXF3 145 put (ref 145.06) @ 100c The risk in the latter two cases is limited to the premium paid upfront. The risk in the first case is unlimited (though still somewhat limited given the absolute low level of yields.). Our bias for a trigger to stop out of tactical shorts would be if the worse outcomes materialize (for example fiscal resolution becoming less likely or a decision not to disburse any money towards Greece).

European Strategy and Trades 8 16 November 2012

European Governments Florian Weber Euro area in recession: Holland biggest downside surprise +44 20 7888 3779 [email protected] The euro area GDP numbers were released today and showed that the euro area has

fallen into recession again. The third quarter GDP fell by -0.1% versus the second quarter which fell by -0.2% QoQ. The surprise on the downside was the Netherlands where third quarter GDP fell by 1.1% versus the second quarter. In our 10s30s steepener recommendation (EST: 21 September), we highlighted that the Dutch 10s30s is curve is flatter than the German curve despite the weaker deficit and growth outlook. The Dutch curve still trades approximately 10bp flatter than the German 10s30s curve. We maintain our view that the Dutch curve should be steeper. European Governments Relative Value: 8-year sector rich in Italy Sell BTP 4.0% September 2020 on September 2020 versus February 2019 & November 2022 fly View: The 8-year sector looks rich on the curve, in particular the BTP 4.0% September 2020 is rich on the BTP 4.25% February 2019/4.0% September 2020/5.5% November 2022 fly. The rationale: The BTP 4.0% September 2020 trades 32bp above the BTP 4.25% February 2019 and 64bp below the 5.5% November 2022 (Exhibit 7). This implies that the 50:50 weighted 19/20/22 fly is trading around -34bp. We expect the Italian yield curve to normalize and think the fly should move closer to zero. The view is supported by calculating the fly using our model yield. Exhibit 8 shows that based on the model yields the fly should trade around 0bp instead of -34bp. The February 2019-November 2022 curve also indicates that the belly is rich and suggests selling it against the wings. The fly carries positively 0.12bp and rolls negatively -0.23, implying a mildly negative carry and roll of -0.12bp on a one-month horizon (Exhibit 6). We do not think that the February 2019 and September 2020 are going to be tapped soon as these are old bonds. We expect the November 2022 to be tapped in the next two 10- year auctions but think this is priced in. The risk is that the November 2022 will be tapped again in 2013. This means it would take longer until the fly moves closer to zero.

Exhibit 6: Trade recommendation sell September 2020 on September 2020 versus February 2019 & November 2022 fly Coupon Yield Repo Carry Roll down Issuer Position (%) (%) (bp) (bp) (bp) BTP Feb 2019 Buy 4.50 01/02/2019 3.991 0 4.72 1.93 BTP Sep 2020 Sell 4.00 01/09/2020 4.319 -3 -4.26 -1.77 BTP Nov 2022 Buy 5.50 01/11/2022 4.959 0 4.16 1.29 0.12 -0.29

Source: Credit Suisse, Note: Carry, Roll down are 1 month values

European Strategy and Trades 9 16 November 2012

Exhibit 7: September 2020 appears to be rich Exhibit 8: September 2020 vs. Feb 2019 & November 2022 fly and fly based on model yield

5 0

4 -10 3 fly -20 2

-30 1

31-Dec-19 30-Dec-29 31-Dec-39 30-Aug-12 29-Sep-12 30-Oct-12 Maturity Sep 2020 vs. Feb 2019 & Nov 2022 Fitted Crv Yield Cls Live Yield Sep 2020 vs. Feb 2019 & Nov 2022 model yield curve

Source: Credit Suisse Locus Source: Credit Suisse Locus

Exhibit 9: Fly vs. February 2019-November 2022 curve Exhibit 10: Fly vs. September 2020

-15 -15 5.25 95 -20 -20 5.00 -25 90 -25 fly curve fly 4.75

-30 2020 Sep -30 85 4.50 -35 -35 4.25 30-Aug-12 29-Sep-12 30-Oct-12 Sep 2020 vs. Feb 2019 & Nov 2022 30-Aug-12 29-Sep-12 30-Oct-12 Feb 2019 - Nov 2022, rhs Sep 2020, rhs Sep 2020 vs. Feb 2019 & Nov 2022

Source: Credit Suisse Locus Source: Credit Suisse Locus

European Strategy and Trades 10 16 November 2012

UK Strategy Thushka Maharaj Exhibit 11: Summary of views +44 20 7883 0211 [email protected] Metric View Outright/spread to Bunds Gilt underperformance versus bunds and UST

ASW FLS supports tighter spreads in <3y maturities; neutral on 5y ASW spreads at these levels Curve 10s to underperform in sell off as QE paused Curvature GBP 2s5s10s to remain low GBP-EUR spreads Take profit in short UKT 30y ASW versus Germany Source: Credit Suisse Dovish Inflation Report View: Turning bearish the gilt market as QE support wanes. Use market rallies to enter short positions. We prefer expressing our bearish view on a relative basis versus Europe and the US. Governor King kept to the tradition of a dovish tone in the Inflation Report. The MPC judges that growth is likely to remain below the historic average over the forecast period and the recovery to remain weak for a sustained period. In terms of inflation the short term expectations were shifted higher while over the two year period inflation is expected to be slightly below the 2% target. These forecasts include the (marginal) effects of the £35bn coupon transfer from the BoE to the Treasury (See our piece on this announcement UK: Honey I shrunk the deficit). We keep our view that an extension of QE is unlikely now – the change in the short term inflation projection and yesterday’s strong CPI print further support this view. We also found it interesting that the BoE outlined when it will expect to see the effects of the FLS – we see this as a form of forward guidance on policy. Within the Inflation Report, the BoE state that the FLS will take time to feed through into the real economy and estimated that “it is unlikely that the FLS will begin to affect bank lending data until early 2013.” We expect the BoE to wait and see how the FLS affects the economy before deciding on further policy action. The BoE also very helpfully outlined the key indicators it will be tracking to measure the effects of the FLS (Credit conditions survey, bank agents reports, mortgage approvals data, bank lending data, effective market rates and HMRC housing transaction data). The interesting immediate market reaction was weakening of Sterling and a sell off in the gilt market. We find this combination interesting – currency weakened as the Governor commented on sterling strength hampering the economy while gilts sold off largely following the upward revision to near term inflation expectations. We find the incongruity of these two events interesting. In UK: Honey I shrunk the deficit we highlighted the risks to the currency going forward. We were surprised by the sell off in gilts – we were expecting the market to be more focused on the Governor’s dovish rhetoric. But we keep our view that gilts are gradually losing the support of QE and the market now has to potentially digest over £140bn in gilt issuance next year without the support of QE. This keeps us bearish gilts and we would recommend looking for rallies to re-enter short positions. Gilts – bunds Exhibit 12 shows the relationship between 10y gilt-bund spreads and the UK-EUR economic data surprise index. As shown while UK data outperformed relative to expectations, gilts underperformed bunds. We are still looking for opportunities to add to short gilt positions versus Europe, as we continue to expect European data to remain weak. We had expressed this view via recommending shorts in 30y UK ASW versus Germany but at current levels we recommend taking profits on this position (see below).

European Strategy and Trades 11 16 November 2012

Exhibit 12: Gilt- bunds spread has tracked the data-surprise differentials

50.00 0.1

0.0

25.00

-0.1

0.00 -0.2

01-Jul-11 30-Sep-11 31-Dec-11 31-Mar-12 30-Jun-12 29-Sep-12 UK-EUR data surprise index gilt/bunds

Source: Credit Suisse Locus

Market focus now shifts to the Autumn Statement where we get the revised issuance forecasts for the remainder of this year and the announcement of the next BoE Governor. We think that MPC member Paul Tucker is the most likely replacement and we expect the market would see his appointment as a continuation of the old guard. We believe Sir John Vickers remains an outside contender and we would expect his appointment to be a hawkish signal to the market. His stance on monetary policy is less clear but we would question his support of the Funding-for-Lending scheme.

UKT 3Q 44s cheap versus surroundings The newly issued UKT 3Q 44 is trading 2bp over the UKT 4Q 46s and 9.5bp over the old UKT 4H 42s (Exhibit 13). Therefore the 50:50 42s/44s/46s fly is trading around 11.5bp. We expect the new bond to richen now that the UKT 52s auction is out of the way.

Exhibit 13: On the gilt curve the 3Q 44s are cheap Exhibit 14: 30y UKT ASW on the cheap end of the range

3 15

2 10

1

5

31-Dec-19 30-Dec-29 31-Dec-39 30-Dec-49 31-Dec-59 Maturity 31 Dec 11 31 Mar 12 30 Jun 12 29 Sep 12 Week Cls Yield Fitted Crv Yield Cls Live Yield UKT 4H 42s ASW

Source: Credit Suisse Locus Source: Credit Suisse

We recommend buying the new UKT 3Q 44s versus selling the UKT 4H 42s and the UKT 4Q 46s. 30y ASW spreads have cheapened sharply in the last month (Exhibit 14) – we expect a modest correction post the UKT 52s auction. We recommend entering the fly around 11bp, targetting 6bp.

European Strategy and Trades 12 16 November 2012

Note that as we highlighted in EST, 19 October 2012, the UKT 3Q 44 has very similar modified duration to the UKT 4Q 46 and thus the fair value for it would be flat to the 46s. Therefore the 50:50 weighted 42/44/46 fly has a curve (30s40s) flattening bias. For those investors wishing to explore the cheapness of 44s without taking a curve view, the alternative trade would be to buy 44s versus 46s. Note that in either case, our horizon for the trade is perhaps a few months. We would also suggest scaling in now and adding to the trade if we get better entry levels in the near term. The risk to the trade is further cheapening of 44s in relative-value terms perhaps due to supply.

Close out of GBP 1y1y/2y1y/3y1y, L Z3-Z4-Z5 fly In EST 01-Nov we recommended getting long the front end as we were expecting a dovish Inflation Report. We recommend taking off this position now . In trade note, 25 September 2012, we recommended selling the L Z3-Z4-Z5 fly @ -8bp. The fly is currently trading @ -13bp and this level seems close to fair. We therefore recommend closing the trade. We would look at re-entering such ‘elbow’ trades at better entry levels.

Close out of short UKT 30y ASW versus Germany We recommended selling 30y UK ASW spreads versus Germany in EST 21-Sep. This recommendation was largely based on receiving long-dated GBP swaps on one hand and the regulatory changes in Europe that argued for richer German 30y ASW on the other hand. We now recommend closing out of this position.

European Strategy and Trades 13 16 November 2012

Derivatives Strategy Panos Giannopoulos EUR vol – Calendar spreads on 10y tails, 1y30y risk reversal +44 20 7883 6947 [email protected] Views:

 The term structure of vol is too steep in our view. We recommend fading this via calendar spreads.  Given the current level of 30y swap, we think that the probability distribution of where 30y swap can be in a year’s time ought to be skewed to the upside. The payer/receiver skew is not consistent with our view. We therefore recommend a risk reversal.

Rationale: Exhibit 15 shows the ratio between 1y and 1m expiries in 10y tails. The ratio is close to all- time highs. The high level of this ratio is explained by the recent low level of delivered vol (Exhibit 16). There is a paradox here. The current market environment is far from a “quiet” one. So why is the delivered vol so low? The explanation is that the market has concluded that the current environment of sluggish growth means that central banks will keep rates low for a while and that rates, therefore, do not move much on headline news. The vol ratio suggests that this is likely to change in the not-too-distant future. Or perhaps the headline risk becomes even greater. While both explanations have some merit, on balance we think the vol slope is too steep, and we thus favour roll-down trades or simply buying 1m options and selling 1y ones. Looking at the skew for 1y10y and 1y30y, it is not surprising that 1y10y payer skew is higher than the receiver skew given the low level of rates currently. Exhibit 20 shows the probability distribution for the 10y rate in one year’s time as implied by the market. The distribution is slightly skewed towards payers. Note that 10y spot is at 1.66% while 1y10y is at 1.93%. Therefore, despite the skew, those of the view that rates will remain unchanged and thus the rolldown will be captured are probably better off buying receivers versus payers. Our view is for a modest sell-off over a one-year horizon. Therefore, we do not see a good risk/reward skew trade at current levels. The better risk/reward trade is a risk reversal in 1y30y in our view. 1y30y is only 9bp higher than 30y spot. 30y spot is currently at 2.256%, which is at the lower end of the range. The distribution here is much clearer in our view; it should be more heavily skewed to the upside. The payer skew is, however, not as high as that in 1y10y (Exhibit 19). The reason is that the 30y point has been associated with disorderly rallies. While that risk has not gone away completely, we think the risk is diminishing. We favour buying 1y30y OTM payer versus receivers, hedged with delta, as a risk reversal trade.

Trade expressions:  Buy EUR 1m10y straddles @ 119c, sell 1y10y straddles @ 551c.  Buy 100mm EUR 1y30y ATMF+60bp payer, sell ATMF-60bp receiver @ 7c, hedged with delta (receive 40mm 1y30y).

Risks: The risk in the first trade is very low delivered environment in the next month. While that is possible, we note that the 10y swap only has to move 13bp in the next month for the 1m10y straddle to break even. The risk in the second case is a disorderly rally. While a rally clearly cannot be excluded, we think it is unlikely that 30y aggressively breaks through the lower strike.

European Strategy and Trades 14 16 November 2012

Exhibit 15: 1y10y/1m10y vol ratio close to all-time Exhibit 16: The high vol ratio is explained by the extreme levels currently low delivered vol

1.4 -3

1.25 1.3 -4 1.2

1.1 1.00 -5 1.0

0.9 -6 0.75 0.8 30-Dec-09 30-Dec-10 31-Dec-11 30-Dec-04 01-Jul-07 30-Dec-09 30-Jun-12 EUR 1y10y/1m10y vol ratio EUR 1y10y/1m10y vol ratio EUR 10y delivered vol, rhs inverted (3m window)

Source: Credit Suisse Locus Source: Credit Suisse

Exhibit 17: 1y10y vol skew – payers are richer than Exhibit 18: The payer skew is less pronounced for receivers 1y30y Vol Skew: Swaption-1Y x 10Y Vol Skew: Swaption-1Y x 30Y 20 10

10

0 0

-10 -10

Annualized Implied Vol as Spread to ATM as Valu Vol Spread Implied Annualized -175 -125 -75 -50 -25 ATM 25 50 75 100 125 150 175 200 to ATM as Valu Vol Spread Implied Annualized -200 -150 -100 -75 -50 -25ATM 25 50 75 100 125 150 175 200 BPs OTM BPs OTM Implied Vol Implied Vol

Source: Credit Suisse Locus Source: Credit Suisse

Exhibit 20: Probability distribution of 10y swap in 1y Exhibit 19: 1y30y and 1y10y 100bp OTM payer skew as implied by the options market

15 1y30y 1y10y 0.03

10 0.025 PDF

5 0.02

0.015 0 0.01 -5 0.005

-10 0 Nov-08 Sep-09 Jul-10 May-11 Feb-12 01234

Source: Credit Suisse Locus Source: Credit Suisse

European Strategy and Trades 15 16 November 2012

Technicals David Sneddon We maintain a 10s30s German cash steepener +44 20 7888 7173 [email protected] The sharp rally this week in bonds has seen 10yr German yields move sharply back lower within their range. For the 10s30s German bond curve, a large base was completed in July, and following an initial move steeper, a consolidation phase was seen through to the end of October. This though was contained by key price, “neckline”, 38.2% retracement and 200-day average support at 76.5/74bps, and the subsequent recovery through 85.5bps has brought this phase to an end. We thus maintain our steepening bias for a retest of the 90/91bps July high/78.6% retracement. Although a fresh pause here should be allowed for, a clear break is favoured in due course for a move to 102bps, the key high of 2011. We would then look for signs of stalling in the steepening trend. Support at 86/84bps ideally holds to keep the immediate risk steeper. Below 82bps though is needed to damage the immediate technical structure, for a fresh look at 77/74bps. Following on from our look at the 2s10s30s German cash ‘fly last week, the sharp move lower has seen the anticipated top complete. We thus not only look for 10s30s to steepen, we also look for 10s to stay strong against the wings. For the 2s10s30s German ‘fly itself, we look for a move back towards the 34bps low posted in July.

10s30s German Bond Curve – Daily

Source: CQG, Credit Suisse

European Strategy and Trades 16 16 November 2012

EUR and UK Supply Analysis

Exhibit 21: Cash-flow analysis – Europe Supply Redemptions Coupons Total Net DV01 € bn € bn € bn Total Cash Net (€ mn per Week Date Day Cntry Amt Cntry Amt 0-2 2-5 5-7 7-10 10y+ Cpn Inflow Supply Supply bp) 47 19-Nov Mon ------47 20-Nov Tue ------47 21-Nov Wed DE 4.00 ------4.00 4.00 3.67 47 22-Nov Thu ES 3.00 - - - - 0.18 - 0.18 0.18 3.00 2.82 1.50 47 23-Nov Fri ------48 26-Nov Mon BE 2.40 ------2.40 2.40 1.49 48 27-Nov Tue IT, NL 6.80 ------6.80 6.80 2.29 48 28-Nov Wed DE 3.00 ------3.00 3.00 1.46 48 29-Nov Thu IT 4.50 - - - - - 0.00 0.00 0.00 4.50 4.50 2.67 48 30-Nov Fri ------49 3-Dec Mon - - 0.95 - - - - 0.95 0.95 - -0.95 (0.06) 49 4-Dec Tue - BE 0.14 0.04 0.20 0.01 - - 0.25 0.39 - -0.39 (0.10) 49 5-Dec Wed DE, ES 7.00 ------7.00 7.00 1.87 49 6-Dec Thu FR 6.00 ------6.00 6.00 4.79 49 7-Dec Fri ------50 10-Dec Mon SK 0.20 ------0.20 0.20 - 50 11-Dec Tue ------50 12-Dec Wed ------50 13-Dec Thu ES, IT 9.00 - 0.04 - - - - 0.04 0.04 9.00 8.96 4.17 50 14-Dec Fri BE 0.30 DE 17.00 0.17 - - - - 0.17 17.17 0.30 -16.87 0.47 51 17-Dec Mon - IT 18.69 0.56 0.55 - - - 1.11 19.80 - -19.80 (0.11) 51 18-Dec Tue ------51 19-Dec Wed ------51 20-Dec Thu ------51 21-Dec Fri ------TOTALS 46.20 35.83 1.76 0.75 0.01 0.18 0.00 2.70 38.53 46.20 7.67 24.11 Source: Credit Suisse, National Treasuries

Exhibit 22: Issuance, coupon & redemptions summary (€, bn) Issuance Coupon Redempt. Net Supply 19 Nov-23 Nov 7.00 0.18 0.00 6.82 26 Nov-30 Nov 16.70 0.00 0.00 16.70 03 Dec-07 Dec 13.00 1.20 0.14 11.65 10 Dec-14 Dec 9.50 0.21 17.00 -7.71 17 Dec-21 Dec 0.00 1.11 18.69 -19.80 Total 46.20 2.70 35.83 7.67 Source: Credit Suisse

Exhibit 23: Year-to-date bond issuance (€, bn) Amount issued Expected issuance % completed Amount issued Country YTD in 2012 for 2012 year-to-date in 2011 Austria 21 22 93% 17 Belgium 39 38 101% 41 Finland 14 14 100% 14 France 196 178 110% 208 Germany 172 175 98% 189 Italy* 217 209 104% 223 Netherlands 58 60 96% 53 Spain** 90 86 105% 97 Total 806 782 103% 841 Source: Credit Suisse, National Treasuries, * includes retail bonds, * includes private placement

European Strategy and Trades 17 16 November 2012

Exhibit 25: Euro issuance, coupon & redemptions by Exhibit 24: Nominal supply vs. DV01 week (€, bn)

20 10 25 20 8 15 bp per million € 15 10 6 5 €bn 10 0 4 €bn -5 5 2 -10 -15 0 0 -20 19-Nov- 26-Nov- 3-Dec-7- 10-Dec- 17-Dec- -25 23-Nov 30-Nov Dec 14-Dec 21-Dec 19 Nov-23 Nov 26 Nov-30 Nov 03 Dec-07 Dec 10 Dec-14 Dec 17 Dec-21 Dec

Nominal Supply Europe DV01 Europe Issuance Coupon Redemption Net Supply

Source: Credit Suisse, National Treasuries Source: Credit Suisse, National Treasuries

Exhibit 26: Net supply by country for the next five weeks - from 19-Nov-12 to 21-Dec-12 (€, bn) Exhibit 27: Euro weekly net supply 2012 (€, bn) 40 5 3 2 30 00 0 0 0 20

10 -5 0 0 -10 -10 €bn

-15 -13 -20

-30 -20

-21 -40 -25 AT BE FI FR DE IT NL PT ES 02 Jul-06 Jul Jul-06 02 Jul Jul-13 09 Jul Jul-20 16 Jul Jul-27 23 01 Oct-05Oct 08 Oct-12Oct 15 Oct-19Oct 22 Oct-26Oct 30 Jul-03 Aug Jul-03 30 02 Jan-06Jan 09 Jan-13Jan 16 Jan-20Jan 23 Jan-27Jan 02 Apr-06 Apr Apr-06 02 Apr Apr-13 09 Apr Apr-20 16 Apr Apr-27 23 30 Jan-03 Feb Jan-03 30 06 Feb-10 Feb Feb-10 06 Feb Feb-17 13 Feb Feb-24 20 Mar Feb-02 27 Mar Mar-09 05 Mar Mar-16 12 Mar Mar-23 19 Mar Mar-30 26 04 Jun-08 Jun Jun-08 04 Jun Jun-15 11 Jun Jun-22 18 Jun Jun-29 25 Nov Oct-02 29 30 Apr-04 May Apr-04 30 03 Sep-07 Sep Sep-07 03 Sep Sep-14 10 Sep Sep-21 17 Sep Sep-28 24 03 Dec-07 Dec 10 Dec-14 Dec 17 Dec-21 Dec 24 Dec-28 Dec 28 May-01 Jun May-01 28 05 Nov-09 Nov Nov-09 05 Nov Nov-16 12 Nov Nov-23 19 Nov Nov-30 26 07 May-11 May May-11 07 May May-18 14 May May-25 21 06 Aug-10 Aug Aug-10 06 Aug Aug-17 13 Aug Aug-24 20 Aug Aug-31 27

Source: Credit Suisse, National Treasuries Source: Credit Suisse, National Treasuries

Exhibit 29: UK issuance, coupon & redemptions by Exhibit 28: Issued amount % completed YTD week (₤, bn)

10.0 115%

110% 8.0 110% 6.0 105% 104% 4.0 105% 101% 2.0 100%

100% 98% £ bn 0.0 96% -2.0 95% 93% -4.0

90% -6.0 -8.0 19 Nov-23 Nov 26 Nov-30 Nov 03 Dec-07 Dec 10 Dec-14 Dec 17 Dec-21 Dec 85% FR ES IT BE FI DE NL AT Issuance Coupon Redemption Net Supply

Source: Credit Suisse, National Treasuries Source: Credit Suisse, UK Treasury

European Strategy and Trades 18 16 November 2012

Exhibit 30: Cash-flow analysis – UK Supply Redemptions Coupons Total Net DV01 ₤ bn ₤ bn ₤ bn Total Cash Net (₤ mn per Week Date Day Cntry Amt Cntry Amt 0-2 2-5 5-7 7-10 10y+ Cpn Inflow Supply Supply bp) 47 19-Nov Mon UK* 3.50 ------3.50 3.50 8.08 47 20-Nov Tue UK 4.50 ------4.50 4.50 2.14 47 21-Nov Wed ------47 22-Nov Thu - - - 0.07 - 0.15 0.39 0.62 0.62 - -0.62 (0.20) 47 23-Nov Fri ------48 26-Nov Mon ------48 27-Nov Tue ------48 28-Nov Wed ------48 29-Nov Thu ------48 30-Nov Fri ------49 3-Dec Mon ------49 4-Dec Tue ------49 5-Dec Wed ------49 6-Dec Thu ------49 7-Dec Fri - - - 0.41 - 0.93 5.21 6.55 6.55 - -6.55 - 50 10-Dec Mon ------50 11-Dec Tue UK 3.50 ------3.50 3.50 3.14 50 12-Dec Wed - - - 0.00 - - - 0.00 0.00 - 0.00 - 50 13-Dec Thu UK 1.40 ------1.40 1.40 1.26 50 14-Dec Fri ------51 17-Dec Mon ------51 18-Dec Tue ------51 19-Dec Wed ------51 20-Dec Thu ------51 21-Dec Fri ------TOTAL 12.90 0.00 0.00 0.48 0.00 1.08 5.60 7.16 7.16 12.90 5.74 14.41 Source: Credit Suisse, UK Treasury, *syndication in the week commencing 19-Nov

Exhibit 31: UK weekly issuance, coupon & redemptions (£, bn)

Issuance Coupon Redemption Net Supply 19 Nov-23 Nov 8.00 0.62 0.00 7.38 26 Nov-30 Nov 0.00 0.00 0.00 0.00 03 Dec-07 Dec 0.00 6.55 0.00 -6.55 10 Dec-14 Dec 4.90 0.00 0.00 4.90 17 Dec-21 Dec 0.00 0.00 0.00 0.00 Total 12.90 7.16 0.00 5.74 Source: Credit Suisse, UK Treasury

Exhibit 32: Year-to-date UK bond issuance (fiscal year, £, bn) Amount issued Amount issued Expected issuance % completed Country in 2011-12 YTD in 2012-13 for 2012-13 year-to-date UK 177,587 118,936 164,400 72.35 Source: Credit Suisse, National Treasury

European Strategy and Trades 19 16 November 2012

Exhibit 33: Total issuance fiscal year-to-date (£, mn) Short Term Medium Term Long Term Total Conventional Index Linked YTD Total Sales 38,620 26,496 29,700 94,816 24,120 Target for the Year 50,400 34,500 37,200 122,100* 35,800* % completed 77% 77% 80% 78% 67% % Remaining 23% 23% 20% 22% 33% Source: Credit Suisse, * total conventional and index linked issuance does not include £6.5bn in mini-tender

Exhibit 34: DMO issuance calendar

Operation Date Gilt Name Nominal Amount Issue (₤, mn) 19-Nov-2012* Index-linked syndication UKTi 0.125% 2044 3,500* 20-Nov-2012 1% Treasury Gilt 2017 4,500 11-Dec-2012 1¾% Treasury Gilt 2022 3,500* 13-Dec-2012 0⅛% Index-linked Gilt 2024 1,400* Source: DMO, Credit Suisse, * forecasts,

European Strategy and Trades 20 16 November 2012

Forecasts Exhibit 35: Credit Suisse interest rate forecasts

Euro - German Benchmarks Current 2012 Q4 2013 Q1 2013 Q2 2013 Q3 ECB Repo 0.75 0.5 0.5 0.5 0.5 2-Yr Yield -0.03 0.00 0.00 0.10 0.20 5-Yr Yield 0.36 0.55 0.70 0.80 0.90 10-Yr Yield 1.34 1.40 1.65 1.90 2.10 30-Yr Yield 2.24 2.30 2.45 2.70 2.95

2s5s 39 55 70 70 70 2s10s 137 140 165 180 190 10s30s 90 90 80 80 80 2s5s10s -59 -30 -25 -40 -50 5s10s30s 8 -5 15 30 35

UK Gilts Current 2012 Q4 2013 Q1 2013 Q2 2013 Q3 Base Rate 0.5 0.5 0.5 0.5 0.5 2-Yr Yield 0.24 0.30 0.30 0.35 0.40 5-Yr Yield 0.74 0.80 1.10 1.25 1.30 10-Yr Yield 1.73 1.80 2.00 2.30 2.35 30-Yr Yield 3.04 3.00 3.10 3.50 3.55

2s5s 50 50 80 90 90 2s10s 150 150 170 195 195 10s30s 131 120 110 120 120 2s5s10s -49 -50 -10 -15 -15 5s10s30s -32 -20 -20 -15 -15 Source: Credit Suisse, Note current as of 15/11/12 18:00 GMT

Exhibit 36: European inflation forecasts Euro Area HICP ex-tobacco French CPI ex-tobacco UK RPI Index YoY MoM Index YoY MoM Index YoY MoM Nov-12 116.20 2.35 -0.09 125.02 1.64 0.10 245.70 3.02 0.04 Dec-12 116.50 2.27 0.26 125.47 1.59 0.36 247.20 3.26 0.61 Jan-13 115.40 2.16 -0.94 125.06 1.63 -0.33 246.40 3.53 -0.32 Feb-13 115.70 1.91 0.26 125.32 1.41 0.21 248.20 3.46 0.73 Mar-13 116.80 1.54 0.95 126.04 1.13 0.57 249.20 3.49 0.40 Apr-13 117.20 1.42 0.34 126.24 1.15 0.16 250.70 3.38 0.60 May-13 117.30 1.66 0.09 126.42 1.35 0.14 251.70 3.84 0.40 Jun-13 117.30 1.74 0.00 126.58 1.44 0.13 252.20 4.30 0.20 Jul-13 116.60 1.70 -0.60 125.91 1.36 -0.53 251.80 4.01 -0.16 Aug-13 116.90 1.56 0.26 126.56 1.20 0.52 252.50 3.91 0.28 Sep-13 117.60 1.41 0.60 126.55 1.45 -0.01 253.30 3.73 0.32 Oct-13 117.90 1.38 0.26 126.66 1.42 0.09 253.70 3.30 0.16 Source: Credit Suisse

European Strategy and Trades 21

INTEREST RATE STRATEGY

Eric Miller, Managing Director Global Head of Fixed Income and Economic Research +1 212 538 6480 [email protected]

US RATES EUROPEAN RATES US DERIVATIVES Carl Lantz, Director Helen Haworth, CFA, Director George Oomman, Managing Director US Head European Head Derivatives Head +1 212 538 5081 +44 20 7888 0757 +1 212 325 7361 [email protected] [email protected] [email protected]

Ira Jersey, Director Michelle Bradley, Director TECHNICAL ANALYSIS +1 212 325 4674 +44 20 7888 5468 [email protected] [email protected] David Sneddon, Managing Director +44 20 7888 7173 Scott Sherman, Vice President Sabine Winkler, Director [email protected] +1 212 325 3586 +44 20 7883 9398 [email protected] [email protected] Christopher Hine, Vice President +1 212 538 5727 Michael Chang, Vice President Panos Giannopoulos, Director [email protected] +1 212 325 1962 +44 20 7883 6947 [email protected] [email protected] Pamela McCloskey, Vice President +44 20 7888 7175 Carlos Pro, Associate Thushka Maharaj, Vice President [email protected] +1 212 538 1863 +44 20 7883 0211 [email protected] [email protected] Cilline Bain, Associate +44 20 7888 7174 William Marshall, Analyst Florian Weber, Associate [email protected] +1 212 325 5584 +44 20 7888 3779 [email protected] [email protected] David Robertson, Analyst +44 20 7888 7172 Marion Pelata, Analyst [email protected] +44 20 7883 1333 marion.pelata @credit-suisse.com

PARIS TOKYO

Giovanni Zanni, Director Tomohiro Miyasaka, Director European Economics – Paris Japan Head +33 1 70 39 0132 + 81 3 4550 7171 [email protected] [email protected] Shinji Ebihara, Vice President +81 3 4550 9619 [email protected]

Disclosure Appendix Analyst Certification The analysts identified in this report each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. Important Disclosures Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail, please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and- analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse’s policy is to publish research reports as it deems appropriate, based on developments with the subject issuer, the sector or the market that may have a material impact on the research views or opinions stated herein. The analyst(s) involved in the preparation of this research report received compensation that is based upon various factors, including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's Investment Banking and Fixed Income Divisions. Credit Suisse may trade as principal in the securities or derivatives of the issuers that are the subject of this report. At any point in time, Credit Suisse is likely to have significant holdings in the securities mentioned in this report. As at the date of this report, Credit Suisse acts as a market maker or liquidity provider in the debt securities of the subject issuer(s) mentioned in this report. For important disclosure information on securities recommended in this report, please visit the website at https://firesearchdisclosure.credit-suisse.com or call +1-212-538-7625. For the history of any relative value trade ideas suggested by the Fixed Income research department as well as fundamental recommendations provided by the Emerging Markets Sovereign Strategy Group over the previous 12 months, please view the document at http://research-and- analytics.csfb.com/docpopup.asp?ctbdocid=330703_1_en. Credit Suisse clients with access to the Locus website may refer to http://www.credit- suisse.com/locus. For the history of recommendations provided by Technical Analysis, please visit the website at http://www.credit-suisse.com/techanalysis. Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. Emerging Markets Bond Recommendation Definitions Buy: Indicates a recommended buy on our expectation that the issue will deliver a return higher than the risk-free rate. Sell: Indicates a recommended sell on our expectation that the issue will deliver a return lower than the risk-free rate. Fundamental Recommendation Definitions Buy: Indicates a recommended buy on our expectation that the issue will be a top performer in its sector. Outperform: Indicates an above-average total return performer within its sector. Bonds in this category have stable or improving credit profiles and are undervalued, or they may be weaker credits that, we believe, are cheap relative to the sector and are expected to outperform on a total-return basis. These bonds may possess price risk in a volatile environment. Market Perform: Indicates a bond that is expected to return average performance in its sector. Underperform: Indicates a below-average total-return performer within its sector. Bonds in this category have weak or worsening credit trends, or they may be stable credits that, we believe, are overvalued or rich relative to the sector. Sell: Indicates a recommended sell on the expectation that the issue will be among the poor performers in its sector. Restricted: In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated: Credit Suisse Global Credit Research or Global Leveraged Finance Research covers the issuer but currently does not offer an investment view on the subject issue. Not Covered: Neither Credit Suisse Global Credit Research nor Global Leveraged Finance Research covers the issuer or offers an investment view on the issuer or any securities related to it. Any communication from Research on securities or companies that Credit Suisse does not cover is factual or a reasonable, non-material deduction based on an analysis of publicly available information. Corporate Bond Risk Category Definitions In addition to the recommendation, each issue may have a risk category indicating that it is an appropriate holding for an "average" high yield investor, designated as Market, or that it has a higher or lower risk profile, designated as Speculative and Conservative, respectively. Credit Suisse Credit Rating Definitions Credit Suisse may assign rating opinions to investment-grade and crossover issuers. Ratings are based on our assessment of a company's creditworthiness and are not recommendations to buy or sell a security. The ratings scale (AAA, AA, A, BBB, BB, B) is dependent on our assessment of an issuer's ability to meet its financial commitments in a timely manner. Within each category, creditworthiness is further detailed with a scale of High, Mid, or Low – with High being the strongest sub-category rating: High AAA, Mid AAA, Low AAA – obligor's capacity to meet its financial commitments is extremely strong; High AA, Mid AA, Low AA – obligor's capacity to meet its financial commitments is very strong; High A, Mid A, Low A – obligor's capacity to meet its financial commitments is strong; High BBB, Mid BBB, Low BBB – obligor's capacity to meet its financial commitments is adequate, but adverse economic/operating/financial circumstances are more likely to lead to a weakened capacity to meet its obligations; High BB, Mid BB, Low BB – obligations have speculative characteristics and are subject to substantial credit risk; High B, Mid B, Low B – obligor's capacity to meet its financial commitments is very weak and highly vulnerable to adverse economic, operating, and financial circumstances; High CCC, Mid CCC, Low CCC – obligor's capacity to meet its financial commitments is extremely weak and is dependent on favorable economic, operating, and financial circumstances. Credit Suisse's rating opinions do not necessarily correlate with those of the rating agencies.

Structured Securities, Derivatives, and Options Disclaimer Structured securities, derivatives, and options (including OTC derivatives and options) are complex instruments that are not suitable for every investor, may involve a high degree of risk, and may be appropriate investments only for sophisticated investors who are capable of understanding and assuming the risks involved. Supporting documentation for any claims, comparisons, recommendations, statistics or other technical data will be supplied upon request. Any trade information is preliminary and not intended as an official transaction confirmation. OTC transactions are not highly liquid investments; before entering into any such transaction you should ensure that you fully understand its potential risks and rewards and independently determine that it is appropriate for you given your objectives, experience, financial and operational resources, and other relevant circumstances. You should consult with such tax, accounting, legal or other advisors as you deem necessary to assist you in making these determinations. In discussions of OTC options and other strategies, the results and risks are based solely on the hypothetical examples cited; actual results and risks will vary depending on specific circumstances. Investors are urged to consider carefully whether OTC options or -related products, as well as the products or strategies discussed herein, are suitable to their needs. CS does not offer tax or accounting advice or act as a financial advisor or fiduciary (unless it has agreed specifically in writing to do so). Because of the importance of tax considerations to many option transactions, the investor considering options should consult with his/her tax advisor as to how taxes affect the outcome of contemplated options transactions. Use the following link to read the Options Clearing Corporation's disclosure document: http://www.theocc.com/publications/risks/riskstoc.pdf Transaction costs may be significant in option strategies calling for multiple purchases and sales of options, such as spreads and straddles. Commissions and transaction costs may be a factor in actual returns realized by the investor and should be taken into consideration.

References in this report to Credit Suisse include all of the subsidiaries and affiliates of Credit Suisse operating under its investment banking division. For more information on our structure, please use the following link: https://www.credit-suisse.com/who_we_are/en/. This report may contain material that is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse AG or its affiliates ("CS") to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates. The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. CS does not advise on the tax consequences of investments and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy or completeness. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the of independent judgment. CS may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this report. Those communications reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other communications are brought to the attention of any recipient of this report. CS may, to the extent permitted by law, participate or invest in financing transactions with the issuer(s) of the securities referred to in this report, perform services for or solicit business from such issuers, and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto. In addition, it may make markets in the securities mentioned in the material presented in this report. CS may have, within the last three years, served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the previous 12 months, significant advice or investment services in relation to the investment concerned or a related investment. Additional information is, subject to duties of confidentiality, available on request. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an associate of CS or CS may be the only market maker in such investments. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR's, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS's own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CS's website shall be at your own risk. This report is issued and distributed in Europe (except Switzerland) by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is regulated in the United Kingdom by The Financial Services Authority ("FSA"). This report is being distributed in Germany by Credit Suisse Securities (Europe) Limited Niederlassung Frankfurt am Main regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). This report is being distributed in the United States and Canada by Credit Suisse Securities (USA) LLC; in Switzerland by Credit Suisse AG; in Brazil by Banco de Investimentos Credit Suisse (Brasil) S.A or its affiliates; in Mexico by Banco Credit Suisse (México), S.A. (transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); in Japan by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-General of Kanto Local Finance Bureau (Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Firms Association; elsewhere in Asia/ Pacific by whichever of the following is the appropriately authorised entity in the relevant jurisdiction: Credit Suisse (Hong Kong) Limited, Credit Suisse Equities (Australia) Limited, Credit Suisse Securities (Thailand) Limited, Credit Suisse Securities (Malaysia) Sdn Bhd, Credit Suisse AG, Singapore Branch, Credit Suisse Securities (India) Private Limited regulated by the Securities and Exchange Board of India (registration Nos. INB230970637; INF230970637; INB010970631; INF010970631), having registered address at 9th Floor, Ceejay House,Dr.A.B. Road, Worli, Mumbai - 18, India, T- +91-22 6777 3777, Credit Suisse Securities (Europe) Limited, Seoul Branch, Credit Suisse AG, Taipei Securities Branch, PT Credit Suisse Securities Indonesia, Credit Suisse Securities (Philippines ) Inc., and elsewhere in the world by the relevant authorised affiliate of the above. Research on Taiwanese securities produced by Credit Suisse AG, Taipei Securities Branch has been prepared by a registered Senior Business Person. Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on +603 2723 2020. This research may not conform to Canadian disclosure requirements. In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-U.S. customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. U.S. customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the U.S. Please note that this research was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not regulated by the FSA or in respect of which the protections of the FSA for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Any services CS provides to municipalities are not viewed as "advice" within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related information solely on an arm's length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such services, there is no agreement, direct or indirect, between any municipality (including the officials, management, employees or agents thereof) and CS for CS to provide advice to the municipality. Municipalities should consult with their financial, accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. Copyright © 2012 CREDIT SUISSE AG and/or its affiliates. All rights reserved. Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.