Deutsche Bank Research

Global Rates Date

Inflation 25 February 2015

Markus Heider Alex Li Strategist Research Analyst (+44) 20 754-52167 (+1) 212 250-5483 DB Inflation Report [email protected] [email protected]

Inflation Volatility Update

The rebound in oil prices since the end of January together with (in EUR) ECB 1. 3M realised 10Y CPI vol support and better economic data has allowed some modest recovery in 1.00% breakevens, which has benefitted caps and weighed on floor premia over the CPXTEMU 3M Realised 10Y CPI swap vol past month or so. As a result, EUR 0% ZC floor implied deflation probabilities 0.90% USCPI UKRPI have retraced from the highs (of over 25% in 5Y, over 10% in 10Y) seen in early 0.80%

January (chart 3). Levels remain above the averages seen in recent years 0.70% however (p. 6). 0.60% The fluctuations in crude oil prices are also an important factor behind the pick- 0.50% up in realized inflation swap volatility (chart 1), and together with central bank 0.40% news behind the rise in FX and nominal rates market . In that 0.30% context, implied inflation vol has stabilized or moved slightly higher since the 0.20% end of last year; implied vol is typically above 3m averages (chart 2). 0.10% Jan-10 Sep-10 May-11 Jan-12 Sep-12 May-13 Jan-14 Sep-14 Trends between cap and floor vol have been diverging in recent months, both in USD and EUR, at least when looking at 4% and 0% strikes (charts 4 & 5). Source: Deutsche Bank Implied vol has risen noticeably for the former, while only recovering marginally for the latter. In USD, as well as for 5Y EUR, this may have been partly offsetting previous relative underperformance of caps, and divergence 2. Implied CPI vol, 3m z-scores seems to have stopped over the past couple of weeks. On the basis of the 3.5 year history shown in charts 4 and 5, RV gaps are largest in 5Y USD and 10Y 1.0 ZC options, implied volatility, 3m z-scores EUR, with in both cases 4% caps looking somewhat rich relative to 0% floors. USD 0.8 EUR 4. USD: cap v floor implied volatility 0.6 0.4

USD 5Y 4% ZC cap implied vol USD 10Y 4% ZC cap implied vol 5.0% 6.5% 0.2 USD 5Y 0% ZC floor implied vol USD 10Y 0% ZC floor implied vol 4.5% 6.0% 0.0

5.5% -0.2 4.0%

5.0% -0.4 3.5% 5Y 0% floor 10Y 0% floor 5Y 4% cap 10Y 4% cap 4.5% 3.0% 4.0% Source: Deutsche Bank 2.5% 3.5%

2.0% 3.0% Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 3. Floor implied deflation probability Source: Deutsche Bank

5Y 10Y 25%

5. EUR: cap v floor implied volatility spot 1M ago 20%

EUR 10Y 4% ZC cap implied vol 5.0% EUR 5Y 4% ZC cap implied vol 4.3% 7.5% 6.0% 15% EUR 10Y 0% ZC floor implied vol EUR 5Y 0% ZC floor implied vol 7.0% 5.5% 3.8% 4.5% 6.5% 10% 5.0% 3.3% 6.0% 4.0% 5.5% 4.5% 5% 2.8% 3.5% 5.0% 4.0% 2.3% 0% 4.5% 3.5% USD EUR GBP USD EUR GBP 3.0% 4.0% 1.8% 3.0% 3.5% 2.5% 1.3% 3.0% 2.5% Source: Deutsche Bank 2.0% 0.8% 2.5% 2.0% Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14

Source: Deutsche Bank

______Deutsche Bank AG/London DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 148/04/2014.

25 February 2015

DB Inflation Volatility Report: Inflation Volatility Update

Covered call strategies, USD

Breakeven1 ZC swap ZC swap plus short ZC cap ZC swap plus short YY cap 1 Tenor 4% ZC 5%ZC 6%ZC 4%YY 5%YY 6%YY

2y 1.28 1.27 1.28 1.28 1.25 1.27 1.28 5y 1.68 1.66 1.67 1.67 1.59 1.63 1.65 10y 1.98 1.95 1.97 1.98 1.86 1.91 1.93 1y z-scores for discount 2 Tenor 4% ZC 5%ZC 6%ZC 4%YY 5%YY 6%YY

2y 0.7 1.3 1.5 0.8 0.2 1.0

5y -1.0 -0.8 -0.6 -0.9 -1.1 -1.3

10y -1.4 -1.3 -1.4 -1.0 -1.0 -1.0

Source: Deutsche Bank

Covered call strategies, EUR

Breakeven ZC swap ZC swap plus short ZC cap ZC swap plus short YY cap 1 Tenor 4% ZC 5%ZC 6%ZC 4%YY 5%YY 6%YY

2y 0.16 0.16 0.16 0.16 0.15 0.16 0.16 5y 0.72 0.71 0.72 0.72 0.66 0.68 0.70 10y 1.15 1.14 1.14 1.15 1.03 1.06 1.10

1y z-scores for discount2 Tenor 4% ZC 5%ZC 6%ZC 4%YY 5%YY 6%YY

2y -0.1 -0.3 -3.3 0.1 0.0 -0.4

5y -0.4 -0.3 -0.3 -0.1 -0.1 -0.1

10y -1.6 -1.6 -1.5 -0.1 0.0 -0.2

Source: Deutsche Bank 1 Breakeven of the strategy if the YY cap is not exercised. 2 1y z-score of the difference between the ZC swap rate and breakeven of the combined strategy. Negative z-score implies that the strategy is less attractive at current levels relative to average and vice-versa

Covered Call Strategies: Covered-call (CC) strategies in inflation markets can be implemented by being long CPI swaps (or ILB breakevens) and selling CPI caps. This strategy gains from the premium provided by selling the cap, while giving up some of the upside if inflation is higher than the strike of the cap (payoff profile shown on p. 2).

The breakeven of the covered call strategy is lower than the B/E on the underlying swap and this ‘discount’ rises with the premium of the cap. CCs allow investors who are long inflation to monetize any potential richness in CPI cap markets.

The tables above show current ZC swap rates for 2Y, 5Y and 10Y tenors as well as the breakeven levels of CC strategies for various cap strikes. While the discount is larger for lower strikes, implied volatility tends to be richer on high strikes. The discount achieved is higher when selling YY caps, but in that case the payoff profile is not aligned with the underlying ZC swap, and the B/E levels shown in the table assume that none of the caplets is exercised.

The tables also show the 1Y z-scores of the discount achieved by the CC strategy, putting valuations into historical context. A positive number indicates an above-average discount, i.e. that the CC strategy is currently more attractive than on average over the past year.

Page 2 Deutsche Bank AG/London

25 February 2015

DB Inflation Volatility Report: Inflation Volatility Update

Covered Call payoff profile Long swap + short payoff profile

25 Covered Call 20 'Collar' strategy upperbound 20 Short ZC cap Short ZC cap 15 15 Long ZC Swap Long ZC Swap

10 10 Long ZC Floor 5 5 0 -2.0% 0.0% 2.0% 4.0% 6.0% -5 0 -2.0% 0.0% 2.0% 4.0% 6.0% -10 -5 -15 breakeven of strategy -20 -10 breakeven of strategy -25 -15 -30

-20

Source: Deutsche Bank Source: Deutsche Bank

Deutsche Bank AG/London Page 3

25 February 2015

DB Inflation Volatility Report: Inflation Volatility Update

Long swap, short collar strategies, USD

Breakeven ZC swap ZC swap, 0% floor, short cap ZC swap, -1%% floor, short cap Tenor 4% ZC 5%ZC 6%ZC 4% ZC 5% ZC 6% ZC 2y 1.28

5y 1.67 1.66

10y 1.98 1.98 1.98 UpperBound 3 Tenor 4% ZC 5%ZC 6%ZC 4% ZC 5% ZC 6% ZC

2y

5y 4.01

10y 4.01 4.02

Source: Deutsche Bank

Long swap, short collar strategies, EUR

Breakeven ZC swap ZC swap, 0% floor, short cap ZC swap, -1%% floor, short cap Tenor 4% ZC 5%ZC 6%ZC 4%ZC 5% ZC 6% ZC

2y 0.16 5y 0.72 10y 1.16 UpperBound 3 Tenor 4% ZC 5%ZC 6%ZC 4% ZC 5% ZC 6% ZC

2y

5y

10y

Source: Deutsche Bank 3 Updu perBound level indicates the annualized inflation until maturity until which the collar strategy provides a better payoff than the simple long swap B/E strategy

‘Collar’ Strategies: Being long CPI swaps (or ILB breakevens) and short a CPI collar (by selling CPI caps and buying CPI floors) is a strategy that includes an additional leg over the covered call strategy to also provide downside protection while giving up some of the upside (payoff profiles for covered call and collar strategies shown on p. 2).

The breakeven of this strategy is lower than the B/E of the underlying swap if the cap premium is higher than the floor premium. ‘Collar’ strategies allow investors to benefit from moderate inflation outcomes, while being protected against low inflation outcomes, and monetize potential richness in CPI cap markets.

The tables above show the breakeven level for ‘long swap, short collar’ strategies which offer lower B/Es than the underlying ZC swap. The strategy would have a positive payoff if annual inflation until maturity is higher than this breakeven level, and outperform the underlying ZC swap for average inflation outcomes below the ‘upperbound’ shown in the second part of the tables.

Page 4 Deutsche Bank AG/London

25 February 2015

DB Inflation Volatility Report: Inflation Volatility Update

Zero-coupon implied volatility: 1M change, USD

5.0% 6.5% Spot Spot 4.5% 6.0% 1M ago 1M ago 4.0% 5.5%

3.5% 5.0%

3.0% 4.5%

2.5% 5Y 4.0% 10Y 2.0% 3.5%

1.5% 3.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0%

Source: Deutsche Bank

Zero-coupon implied volatility: 1M change, EUR

4.5% 6.5% 5Y 10Y Spot Spot 4.0% 6.0% 1M ago 1M ago 5.5% 3.5% 5.0%

3.0% 4.5%

2.5% 4.0%

3.5% 2.0% 3.0%

1.5% 2.5% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0%

Source: Deutsche Bank

Zero-coupon implied volatility: 1M change, GBP

5.5% 8.0%

Spot 7.5% 5.0% Spot 1M ago 7.0% 1M ago 4.5% 6.5%

4.0% 6.0%

3.5% 5.5% 5.0% 3.0% 10Y 4.5% 2.5% 5Y 4.0%

2.0% 3.5% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0%

Source: Deutsche Bank

Deutsche Bank AG/London Page 5

25 February 2015

DB Inflation Volatility Report: Inflation Volatility Update

Zero-coupon 0% Floors: Option premium

90 50 120 GBP 5Y 0% ZC floor GBP 30Y 0% ZC floor EUR 5Y 0% ZC floor EUR 10Y 0% ZC floor USD 5Y 0% ZC floor USD 10Y 0% ZC floor 80 45 Option Premium, bp 100 40 Option premium, bp 70 Option Premium, bp 35 60 80 30 50 25 60 40 20 30 15 40 20 10 20 10 5

0 0 0 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Feb-13 Jul-13 Dec-13 May-14 Oct-14

Source: Deutsche Bank

Zero-coupon 0% Floors: Implied volatility

5.0% 6.0% USD 5Y 0% ZC floor USD 10Y 0% ZC floor 12.0% GBP 5Y 0% ZC floor GBP 30Y 0% ZC floor EUR 5Y 0% ZC floor EUR 10Y 0% ZC floor 5.5% 11.0% 4.5% 5.0% 10.0% 4.0% 9.0% 4.5% 3.5% 8.0% 4.0% 3.0% 7.0% 3.5% 6.0% 2.5% 3.0% Implied Vol 5.0% 2.0% 2.5% Implied vol Implied Vol 4.0% 1.5% 2.0% 3.0% Feb-13 Jul-13 Dec-13 May-14 Oct-14 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Source: Deutsche Bank

Zero-coupon 0% Floors: Implied probability of cumulative deflation

9.0% 5.0% GBP 5Y 0% ZC floor GBP 30Y 0% ZC floor 35.0% USD 5Y 0% ZC floor USD 10Y 0% ZC floor EUR 5Y 0% ZC floor EUR 10Y 0% ZC floor 4.5% 8.0% 30.0% 4.0% Prob cumulative deflation 7.0% Prob cumulative deflation 25.0% 3.5% 6.0% Prrob cumulative deflation 3.0% 20.0% 5.0% 2.5% 4.0% 15.0% 2.0% 3.0% 1.5% 10.0% 2.0% 1.0%

5.0% 1.0% 0.5% 0.0% 0.0% 0.0% Feb-13 Jul-13 Dec-13 May-14 Oct-14 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Feb-13 Jul-13 Dec-13 May-14 Oct-14

Source: Deutsche Bank

Zero-coupon Caps: Option premium

300 200 180 USD 5Y 4% ZC cap USD 10Y 4% ZC cap GBP 5Y 5% ZC cap GBP 10Y 5% ZC cap EUR 5Y 4% ZC cap EUR 10Y 4% ZC cap 180 160 250 Option Premium, bp Option Premium, bp 160 140 Option Premium, bp 140 200 120 120 100 150 100 80 80 100 60 60 40 40 50 20 20 0 0 0 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Feb-13 Jul-13 Dec-13 May-14 Oct-14

Source: Deutsche Bank

Page 6 Deutsche Bank AG/London

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DB Inflation Volatility Report: Inflation Volatility Update

Year-on-year 0% Floors: Option premium

500 350 1200 GBP 5Y 0% YY floor GBP 30Y 0% YY floor EUR 5Y 0% YY floor EUR 10Y 0% YY floor USD 5Y 0% YY floor USD 10Y 0% YY floor 450 300 Option premium, bp 1000 400 Option Premium, bp Option Premium, bp 350 250 800 300 200 250 600 150 200

150 100 400 100 50 200 50 0 0 0 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Source: Deutsche Bank

Year-on-year Caps: Option premium

300 600 1400 EUR 5Y 4% YY cap EUR 10Y 4% YY cap USD 5Y 4% YY cap USD 10Y 4% YY cap GBP 5Y 5% YY cap GBP 30Y 5% YY cap 1200 250 500 Option Premium, bp Option Premium, bp 1000 200 400 800 150 300 600

100 200 400 Option Premium, bp

50 100 200

0 0 0 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Feb-13 Jul-13 Dec-13 May-14 Oct-14

Source: Deutsche Bank

Deutsche Bank AG/London Page 7

25 February 2015

DB Inflation Volatility Report: Inflation Volatility Update

2.5% CPI YY vs ATM Libor straddle, option premium, USD

USD 5Y 2.5% YY straddle 2200 1000 Option Premium, bp Option Premium, bp USD 10Y 2.5% YY straddle USD 5Y ATM Libor straddle USD 10Y ATM Libor straddle 900 2000

800 1800

700 1600 600 1400 500

1200 400

300 1000 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Feb-13 Jul-13 Dec-13 May-14 Oct-14

Source: Deutsche Bank

2% CPI YY straddle vs ATM Libor straddle, option premium, EUR

1050 Option Premium, bp EUR 5Y 2% YY straddle 2100 EUR 10Y 2% YY straddle Option Premium, bp EUR 5Y ATM Libor straddle EUR 10Y ATM Libor straddle 950 1900 850

750 1700

650 1500 550

450 1300

350 1100 250

150 900 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Feb-13 Jul-13 Dec-13 May-14 Oct-14

Source: Deutsche Bank

Page 8 Deutsche Bank AG/London

25 February 2015

DB Inflation Volatility Report: Inflation Volatility Update

TIPS Floor Analysis

T Base Index Cum DfF* Ann DfF* Bond BEI sprd Swap Strike Swap Floor CPI Ratio BEI Fwd Prem USD CPI (bp) TIIApr15 0.1 216.712 1.084 -7.8% -44.7% -4.07% 40.6% -3.36% 0.922 0.995 0.0 TIIJul15 0.4 194.510 1.208 -17.2% -38.7% 1.21% 39.9% 1.34% 0.828 1.005 0.0 TIIJan16 0.9 198.477 1.184 -15.5% -17.3% 0.90% 18.2% 0.85% 0.845 1.008 0.0 TIIApr16 1.1 220.730 1.065 -6.1% -5.3% 0.91% 6.3% 1.00% 0.939 1.011 0.0 TIIJul16 1.4 201.952 1.164 -14.1% -10.3% 1.48% 11.8% 1.52% 0.859 1.021 0.0 TIIJan17 1.9 201.665 1.165 -14.2% -7.8% 1.24% 9.0% 1.39% 0.858 1.026 0.0 TIIApr17 2.1 227.131 1.035 -3.3% -1.6% 1.20% 2.8% 1.40% 0.967 1.030 0.8 TIIJul17 2.4 207.256 1.134 -11.8% -5.1% 1.62% 6.7% 1.74% 0.882 1.042 0.0 TIIJan18 2.9 209.496 1.122 -10.9% -3.9% 1.44% 5.3% 1.59% 0.891 1.047 0.0 TIIApr18 3.1 231.160 1.017 -1.6% -0.5% 1.34% 1.9% 1.55% 0.984 1.050 1.9 TIIJul18 3.4 215.640 1.090 -8.2% -2.5% 1.61% 4.1% 1.78% 0.918 1.062 0.1 TIIJan19 3.9 214.700 1.095 -8.6% -2.3% 1.54% 3.8% 1.66% 0.914 1.066 0.3 TIIApr19 4.1 234.320 1.003 -0.3% -0.1% 1.47% 1.5% 1.64% 0.997 1.070 3.7 TIIJul19 4.4 213.518 1.101 -9.1% -2.2% 1.67% 3.8% 1.82% 0.909 1.082 0.4 TIIJan20 4.9 216.246 1.087 -8.0% -1.7% 1.57% 3.3% 1.74% 0.920 1.088 1.0 TIIJul20 5.4 218.085 1.078 -7.2% -1.4% 1.72% 3.1% 1.87% 0.928 1.105 1.1 TIIJan21 5.9 218.753 1.074 -6.9% -1.2% 1.65% 2.9% 1.82% 0.931 1.112 1.5 TIIJul21 6.4 225.384 1.043 -4.1% -0.7% 1.75% 2.4% 1.92% 0.959 1.129 2.3 TIIJan22 6.9 226.335 1.038 -3.7% -0.5% 1.68% 2.2% 1.87% 0.963 1.136 3.1 TIIJul22 7.4 229.963 1.022 -2.1% -0.3% 1.74% 2.0% 1.96% 0.979 1.154 3.6 TIIJan23 7.9 230.822 1.018 -1.8% -0.2% 1.71% 1.9% 1.92% 0.982 1.162 4.2 TIIJul23 8.4 232.718 1.010 -1.0% -0.1% 1.75% 1.9% 2.00% 0.990 1.181 4.3 TIIJan24 8.9 233.331 1.007 -0.7% -0.1% 1.72% 1.8% 1.96% 0.993 1.189 4.9 TIIJul24 9.4 237.446 0.990 1.0% 0.1% 1.79% 1.7% 2.04% 1.010 1.209 5.9 TIIJan25_2.375 9.9 188.497 1.247 -19.8% -2.2% 1.68% 3.9% 2.01% 0.802 1.218 0.6 TIIJan25 9.9 236.854 0.992 0.8% 0.1% 1.74% 1.7% 2.01% 1.008 1.218 6.1 TIIJan26 10.9 198.477 1.184 -15.5% -1.5% 1.70% 3.2% 2.04% 0.845 1.246 1.2 TIIJan27 11.9 201.665 1.165 -14.2% -1.3% 1.71% 3.0% 2.07% 0.858 1.276 1.5 TIIJan28 12.9 209.496 1.122 -10.9% -0.9% 1.72% 2.6% 2.09% 0.891 1.306 2.1 TIIApr28 13.1 161.740 1.453 -31.2% -2.8% 1.77% 4.6% 2.08% 0.688 1.311 0.2 TIIJan29 13.9 214.700 1.095 -8.6% -0.6% 1.75% 2.4% 2.11% 0.914 1.337 2.7 TIIApr29 14.1 164.393 1.430 -30.0% -2.5% 1.77% 4.3% 2.10% 0.700 1.342 0.4 TIIApr32 17.2 177.500 1.324 -24.5% -1.6% 1.75% 3.4% 2.14% 0.755 1.439 1.3 TIIFeb40 25.0 216.140 1.087 -8.0% -0.3% 1.87% 2.2% 2.20% 0.920 1.721 2.9 TIIFeb41 26.0 218.991 1.073 -6.8% -0.3% 1.85% 2.1% 2.20% 0.932 1.761 2.8 TIIFeb42 27.0 225.961 1.040 -3.8% -0.1% 1.87% 2.0% 2.21% 0.962 1.802 2.7 TIIFeb43 28.0 229.911 1.022 -2.2% -0.1% 1.89% 2.0% 2.21% 0.978 1.844 2.5 TIIFeb44 29.0 233.059 1.008 -0.8% 0.0% 1.90% 1.9% 2.21% 0.992 1.886 2.3 TIIFeb45 30.0 235.482 0.998 0.2% 0.0% 1.89% 1.9% 2.22% 1.002 1.930 2.1

* Cum DfF: cumulative Distance from Floor; Ann DfF: annualised Distance from Floor Source: Bloomberg Finance LP, Deutsche Bank

Deutsche Bank AG/London Page 9

25 February 2015

DB Inflation Volatility Report: Inflation Volatility Update

EUR/FRF ILB Floor Analysis

T Base Index Cum DfF* Ann DfF* Bond BEI sprd Swap Strike Swap Floor CPI Ratio BEI Fwd Prem Euro area HICP ex tob (bp) DBRei16 1.1 100.883 1.160 -13.8% -12.2% -0.96% 11.2% -0.64% 0.862 0.993 0.0 OBLei18 3.1 110.325 1.061 -5.7% -1.9% 0.08% 1.9% 0.23% 0.943 1.007 1.6 DBRei20 5.1 107.025 1.093 -8.5% -1.7% 0.55% 2.3% 0.64% 0.915 1.033 0.5 DBRei23 8.1 113.236 1.033 -3.2% -0.4% 0.93% 1.3% 0.97% 0.968 1.081 3.1 DBRei30 15.1 116.035 1.008 -0.8% -0.1% 1.22% 1.3% 1.42% 0.992 1.238 3.5 OATei15 0.4 98.056 1.193 -16.2% -34.8% -0.45% 34.3% -0.16% 0.838 0.999 0.0 OATei18 3.4 112.742 1.038 -3.7% -1.1% 0.48% 1.6% 0.65% 0.963 1.022 1.7 OATei20 5.4 96.086 1.218 -17.9% -3.6% 0.74% 4.3% 0.90% 0.821 1.050 0.0 OATei22 7.4 108.086 1.083 -7.6% -1.1% 0.90% 2.0% 1.06% 0.924 1.081 0.7 OATei24 9.4 115.421 1.014 -1.4% -0.1% 1.08% 1.2% 1.20% 0.986 1.118 3.3 OATei27 12.4 109.681 1.067 -6.3% -0.5% 1.15% 1.7% 1.37% 0.937 1.185 1.4 OATei30 15.4 116.923 1.001 -0.1% 0.0% 1.35% 1.4% 1.51% 0.999 1.260 3.3 OATei32 17.4 94.833 1.234 -19.0% -1.2% 1.38% 2.6% 1.57% 0.810 1.311 0.4 OATei40 25.4 102.377 1.143 -12.5% -0.5% 1.49% 2.0% 1.73% 0.875 1.548 1.2

BTPei16 1.6 109.523 1.068 -6.4% -4.2% -0.25% 3.9% 0.17% 0.936 1.003 0.0 BTPei17 2.6 100.883 1.160 -13.8% -5.6% 0.13% 5.8% 0.37% 0.862 1.009 0.0 BTPei18 3.6 115.978 1.009 -0.9% -0.3% 0.30% 0.6% 0.56% 0.991 1.020 8.3 BTPei19 4.6 105.917 1.105 -9.5% -2.2% 0.42% 2.6% 0.71% 0.905 1.033 0.2 BTPei21 6.6 108.222 1.081 -7.5% -1.2% 0.68% 1.9% 0.94% 0.925 1.063 0.7 BTPei23 8.6 102.698 1.139 -12.2% -1.5% 0.92% 2.4% 1.09% 0.878 1.097 0.3 BTPei24 9.6 116.670 1.003 -0.3% 0.0% 0.97% 1.0% 1.16% 0.997 1.117 4.4 BTPei26 11.6 110.560 1.058 -5.5% -0.5% 0.98% 1.5% 1.29% 0.945 1.160 1.6 BTPei35 20.6 98.080 1.193 -16.2% -0.9% 1.45% 2.3% 1.62% 0.838 1.391 0.8 BTPei41 26.6 107.915 1.084 -7.8% -0.3% 1.39% 1.7% 1.74% 0.922 1.583 1.9 SPGei19 4.8 117.091 0.999 0.1% 0.0% 0.57% 0.6% 0.74% 1.001 1.036 8.5 SPGei24 9.8 117.091 0.999 0.1% 0.0% 1.04% 1.0% 1.18% 1.001 1.121 4.7 French CPI ex tob BTANi16 1.4 120.008 1.048 -4.6% -3.3% 0.37% 3.6% 0.17% 0.954 1.002 0.7 OATi17 2.4 111.177 1.132 -11.6% -5.0% 0.57% 5.6% 0.61% 0.884 1.015 0.0 OATi19 4.4 118.139 1.065 -6.1% -1.4% 0.69% 2.1% 0.85% 0.939 1.038 0.7 OATi21 6.4 124.746 1.008 -0.8% -0.1% 0.85% 1.0% 1.08% 0.992 1.072 3.8 OATi23 8.4 114.685 1.097 -8.8% -1.1% 1.03% 2.1% 1.23% 0.912 1.109 0.5 OATi25 10.0 125.820 1.000 0.0% 0.0% 1.11% 1.1% 1.28% 1.000 1.136 3.8 OATi29 14.4 100.600 1.251 -20.0% -1.5% 1.31% 2.8% 1.54% 0.800 1.247 0.2

* Cum DfF: cumulative Distance from Floor; Ann DfF: annualised Distance from Floor Source: Bloomberg Finance LP, Deutsche Bank

Page 10 Deutsche Bank AG/London

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DB Inflation Volatility Report: Inflation Volatility Update

TIPS embedded floor premium

7.0 Embedded floor premium, bp 6.0

5.0

4.0

3.0

2.0

1.0

0.0

…

TIIJul15 TIIJul16 TIIJul17 TIIJul18 TIIJul19 TIIJul20 TIIJul21 TIIJul22 TIIJul23 TIIJul24

TIIJan16 TIIJan17 TIIJan18 TIIJan19 TIIJan20 TIIJan21 TIIJan22 TIIJan23 TIIJan24 TIIJan25 TIIJan26 TIIJan27 TIIJan28 TIIJan29

TIIApr15 TIIApr16 TIIApr17 TIIApr18 TIIApr19 TIIApr28 TIIApr29 TIIApr32

TIIFeb40 TIIFeb41 TIIFeb42 TIIFeb43 TIIFeb44 TIIFeb45 TIIJan25_

Source: Bloomberg Finance LP, Deutsche Bank

EUR/FRF ILB embedded floor premium

9.0

8.0 Embedded floor premium 7.0 6.0 5.0 4.0 3.0 2.0 1.0

0.0

0

OATi17 OATi19 OATi21 OATi23 OATi25 OATi29

BTPei16 BTPei17 BTPei18 BTPei19 BTPei21 BTPei23 BTPei24 BTPei26 BTPei35 BTPei41

SPGei19 SPGei24

OBLei18

OATei15 OATei18 OATei20 OATei22 OATei24 OATei27 OATei30 OATei32 OATei40

BTANi16

DBRei16 DBRei20 DBRei23 DBRei30 FRF CPIx FRF EUR HICPx EUR Source: Bloomberg Finance LP, Deutsche Bank

Floor adjusted B/E curves

1.6 BEI, seas & floor adjusted 2.1 1.4 % 1.9 1.2 DEM 1.7 1.0 FRF 0.8 1.5 ITL

0.6 ESP 1.3 0.4 1.1 TIPS BEI, seas & floor adjusted 0.2 0.9 0.0

0.7 -0.2

0.5 -0.4 2014 2019 2025 2030 2036 2041 2014 2019 2025 2030 2036 2041

Source: Bloomberg Finance LP, Deutsche Bank

Deutsche Bank AG/London Page 11

25 February 2015

DB Inflation Volatility Report: Inflation Volatility Update

Appendix 1

Important Disclosures

Additional information available upon request

For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr

Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Markus Heider/Alex Li

Page 12 Deutsche Bank AG/London

25 February 2015

DB Inflation Volatility Report: Inflation Volatility Update

Regulatory Disclosures 1. Important Additional Conflict Disclosures Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing. 2. Short-Term Trade Ideas Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com. 3. Country-Specific Disclosures Australia and New Zealand: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act and New Zealand Financial Advisors Act respectively. 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Deutsche Bank AG/London Page 13

25 February 2015

DB Inflation Volatility Report: Inflation Volatility Update

Risks to Positions Macroeconomic fluctuations often account for most of the risks associated with exposures to instruments that promise to pay fixed or variable interest rates. For an investor that is long fixed rate instruments (thus receiving these cash flows), increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a loss. The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the loss. Upside surprises in inflation, fiscal funding needs, and FX depreciation rates are among the most common adverse macroeconomic shocks to receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation (including changes in assets holding limits for different types of investors), changes in tax policies, currency convertibility (which may constrain currency conversion, repatriation of profits and/or the liquidation of positions), and settlement issues related to local clearing houses are also important risk factors to be considered. The sensitivity of fixed income instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to FX depreciation, or to specified interest rates - these are common in emerging markets. It is important to note that the index fixings may -- by construction -- lag or mis-measure the actual move in the underlying variables they are intended to track. The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating coupon rates (i.e., coupons indexed to a typically short-dated interest rate reference index) are exchanged for fixed coupons. It is also important to acknowledge that funding in a currency that differs from the currency in which the coupons to be received are denominated carries FX risk. Naturally, options on swaps () also bear the risks typical to options in addition to the risks related to rates movements.

Page 14 Deutsche Bank AG/London

David Folkerts-Landau Group Chief Economist Member of the Group Executive Committee

Raj Hindocha Marcel Cassard Richard Smith and Steve Pollard Global Chief Operating Officer Global Head Co-Global Heads Research FICC Research & Global Macro Economics Equity Research

Michael Spencer Ralf Hoffmann Andreas Neubauer Steve Pollard Regional Head Regional Head Regional Head Regional Head Asia Pacific Research Deutsche Bank Research, Germany Equity Research, Germany Americas Research

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