27 September 2012 Fixed Income Research http://www.credit-suisse.com/researchandanalytics US Interest Rate Strategy Weekly Interest Rate Strategy Strategy: Don’t Fade This Fed Research Analysts Treasury yields might temporarily move higher due to a likely near-term comeback Michael Chang for risk assets, but we look for yields to fall over time. We would look to use a +1 212 325 1962 [email protected] bear-steepening move at the beginning of the quarter to re-engage the market from the long side. Ira Jersey +1 212 325 4674 The front-end of the curve – twos and threes – should hold firm into the release of [email protected] the FOMC minutes next week as the market awaits hints on the prospects for an eventual IOER cut. Carl Lantz +1 212 538 5081 We expect a recommitted Fed to eventually deliver still lower yields via even larger [email protected] LSAPs and stronger rate guidance. An extension of the current $45B purchase William Marshall pace in governments, without the offsetting short-end sales, would be the baseline +1 212 325 5584 expectation. However, the ongoing weak tone to the data suggest a bias towards an [email protected] even higher purchase amount with a possible overweight in bonds. George Oomman Market Insight: Fears of negative bill rates in January overblown 212 325 7361 [email protected] FDIC emergency coverage of non-interest-bearing accounts is likely to be extended; Carlos Pro regardless, money market funds have already moved out of such deposits. +1 212 538 1863 [email protected] The termination of the Fed’ s “Twist” operation is well telegraphed, and the stock of front-end Treasuries sold will remain part of floating supply. Scott Sherman +1 212 325 3586 The most tangible risk is a full-on “fiscal cliff,” but we see the risk as very unlikely. [email protected] We think that Agency callables have some additional value relative to long mortgages against the backdrop of the latest round of Fed asset purchases. Trade Idea: Long 5y5y vs. 10y10y inflation swaps A cross-market PCA decomposition suggests that TIPS spent the past 10 days mainly catching up with other markets in the risk-off move. We view the “catch-up” sell-off nearly done. We recommend going long 5y5y versus 10y10y inflation swaps expecting the intermediate sector of the inflation curve to be better supported than the long end. Trade Idea: Favor Selling 2-year Forward 9-year Final Maturity Cap/Floor Straddles Against 2y7y Swaption Straddles The vol spread between the 2-year forward 9-year final maturity (2x9) cap/floor straddle and the 2y7y swaption straddle appears to be too wide after adjusting for the steepness of the vol surface. We favor selling 2x9 ATM cap/floor straddles and buying 2y7y ATM swaption straddles at flat vega and look to profit from a tightening in the 2x9 wedge. Technical Analysis The S&P 500 has found a near-term cap at multi-year channel resistance at 1267, but we look for better support at 1400/1395 to maintain the uptrend. 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 27 September 2012 Trade Update 3 Strategy 6 Market Insight 10 Trade Idea 16 Trade Idea 16 Technical Analysis 19 Economics Events Calendar 23 Databank 24 US Interest Rate Strategy Weekly 2 27 September 2012 Trade Update YTD Total P&L: $7,129,815 Total P&L weekly change: $602,814 Current Trade Recommendations P&L change on Target/ Stop-out Trade Start Date Last Mark P&L ($) week ($) ($) Long 5y5y vs 10y10y inflation swaps 27-Sep-12 27-Sep-12 0 0 250k/ (175k) Sell 2x9 Cap/Floor Straddle vs. 2y7y Swaption Straddles 27-Sep-12 27-Sep-12 0 0 200k/ (150k) 3yr Swap spread Widener vs FRA/OIS IMM3 25-Sep-12 25-Sep-12 0 0 250k/ (175k) Sell 5s on 3s5sUSZ2 fly 20-Sep-12 26-Sep-12 110,493 110,493 250k/ (150k) 3yr fwd 5s10s15s fly 20-Sep-12 26-Sep-12 -15,853 -15,853 200k/ (175k) Receive 1y basis swap 6s3s vs. 1y basis swap 3s1s basis 11-Sep-12 26-Sep-12 40,000 35,000 160k/ (80k) 6m fwd 7s30s Conditional Bull Steepener 7-Sep-12 26-Sep-12 35,349 -87,548 250k / (175k) Long FNMA 0.625 10/14s vs. FNMA 0.375 3/15s on ASW 6-Sep-12 26-Sep-12 69,287 28,458 150k/ (80k) 1x2x1 EDZ2 put fly 14-Aug-12 26-Sep-12 -47,500 25,000 200k/ (100k) 2y2y, 4y1y, 2y3y vol triangle 9-Aug-12 26-Sep-12 -68,610 -64,416 200k / (175k) 1y fwd 3s5s10s receiver fly 19-Jul-12 26-Sep-12 57,848 43,966 250k / (175k) 1x2x1 EDM3 put fly 2-Jul-12 26-Sep-12 -25,000 30,000 250k / (175k) Sell 6m10y payers and buy 1y5y payers 14-Jun-12 26-Sep-12 112,435 125,747 250k / (250k) ED11-13-15 Fly Widener 6-Jun-12 26-Sep-12 -87,472 50,033 250k / (175k) Sell 6m10y payers and buy 1y5y payers 2-May-12 26-Sep-12 147,407 -14,448 350k / (175k) Trades closed year-to-date in 2012 Closed P&L change on Target/Stop-out Trade Start Date Date Final P&L ($) week ($) P&L ($) Receive spot 10yr against 2y2y 13-Sep-12 26-Sep-12 559,194 377,089 400k/ (300k) 10s30s BE Steepener 1-Aug-12 26-Sep-12 -94,281 -40,707 250k / (170k) 2s10s real rate steepener 13-Sep-12 17-Sep-12 50,158 N/A 400k/ 150k Long April 14s TIPS vs Jan 15s 5-Sep-12 14-Sep-12 282,753 N/A 400k / 200k Sell 5y5y TIPS breakevens 23-May-12 13-Sep-12 -196,346 N/A 300k / (175k) Buying 6m 5s30s CMS curve caps 24-Aug-12 13-Sep-12 100,000 N/A 250k/ (175k) 5s7s Treasury Curve Flattener 7-Sep-12 12-Sep-12 -172,163 N/A 200k / (125k) Long FHLMC 5.125 10/16s vs. FNMA 2.375 7/15s on ASW 26-Jul-12 11-Sep-12 112,600 N/A 175k / (125k) Long 5s on the 3s5s10s fly 26-Jul-12 6-Sep-12 124,317 N/A 250k / (175k) 3s7s swap flattener vs ED9-ED17 Steepener 28-Aug-12 6-Sep-12 -96,140 N/A 200k/ (100k) Short 10s 28-Aug-12 6-Sep-12 130,299 N/A 650k / (480k) Long Jan22 TIPS vs. Jul22 9-Aug-12 30-Aug-12 78,894 N/A 300k / (175k) Buy 6m7y receivers versus payers 3-Aug-12 14-Aug-12 -328,948 N/A 350k / (250k) 3m fwd 5s7s10s payer fly 26-Jul-12 6-Sep-12 -130,141 N/A 175k / (125k) 1x2x1 EDU2 put fly 17-Jul-12 23-Aug-12 12,500 N/A 250k / (175k) 10s30s flattener 21-Jun-12 31-Aug-12 -605,482 N/A 900k / (525k) Long 30y TIPS Breakevens vs. 30y CPI Swaps 21-Jun-12 31-Aug-12 -101,825 N/A 200k / (100k) 1y10y vs 5y10y strangle switch 21-Jun-12 14-Aug-12 510,594 N/A 500k / 0 Short 4y sector vs. 3s and 5s PCA-weighted 14-Jun-12 9-Aug-12 -175,936 N/A 250k / (175k) 1x2 3m10y payer spread 10-May-12 10-Aug-12 45,000 N/A 250k / (175k) 10s30s TIPS breakeven steepener (80% nom curve beta) 4-May-12 30-Aug-12 -149,093 N/A 300k / (225k) EDM5/EDM6/EDM7 Fly Widener 31-Jul-12 3-Aug-12 350,035 N/A 250k / (175k) 3s5s TIPS breakevens flattener 28-Jun-12 25-Jul-12 95,576 N/A 250k / (175k) 7s/USU2 flattener 12-Jul-12 19-Jul-12 -224,915 N/A 400k / (200k) 3yr Swap Widener vs FRA/OIS IMM3 18-Jun-12 18-Jul-12 237,036 N/A 250k / (175k) 1y10y vs 5y10y payer calendar spread 21-Jun-12 9-Jul-12 614,563 N/A 350k / (300k) Long FNMA 5.375 6.17s vs. FHLB 1.0 6/17s 7-Jun-12 9-Jul-12 183,775 N/A 175k / (100k) 3m fwd 2s4s7s receiver fly 17-May-12 6-Jul-12 385,440 N/A 250k / (175k) Sell 6m10y payers and buy 1y5y payers (v2) 2-May-12 6-Jul-12 278,204 N/A 350k / (175k) Long FHMLC 1.25 5/17s vs. FNMA 2.75 3/14s on ASW 7-Jun-12 26-Jun-12 190,152 N/A 175k / (100k) 6m fwd 10s30s bull steepener 7-Jun-12 18-Jun-12 -31,283 N/A 250k / (175k) 1x1 1m10y payer spread 26-Apr-12 29-May-12 -340,000 N/A 500k / (341k) 1m5y payer spread 4-Apr-12 4-May-12 -304,430 N/A 500k / (310k) Long Apr13s TIPS Breakevens 6-Jun-12 12-Jun-12 108,924 N/A 250k / (175k) Short 10y inflation basis 10-May-12 13-Jun-12 -71,830 N/A 250k / (175k) US Interest Rate Strategy Weekly 3 27 September 2012 Trades closed year-to-date in 2012 Closed P&L change on Target/Stop-out Trade Start Date Date Final P&L ($) week ($) P&L ($) 10s30s Steepener 1-Jun-12 4-Jun-12 -656,000 N/A 600k / (400k) 3m Fwd 2s4s7s fly 15-Mar-12 6-Jun-12 0 N/A 250k / (175k) Long FRA/OIS IMM4 23-May-12 5-Jun-12 -209,935 N/A 375k / (200k) Long Sep expiry 3y ED mid-curve call 4-May-12 30-May-12 225,000 N/A 250k / (175k) Long 7s 24-May-12 30-May-12 825,000 N/A 450k / (200k) Long Jan 21s TIPS vs.