Rates Weekly: US Rates Can't Escape The Taper Specter

Nomura | Rates Weekly
22 November 2013
Rates Weekly
Rates | North America
US rates can't escape the taper specter

The tapering fear is back! We argue the Fed will not rush or taper aggressively because they still have to convince us that forward guidance will work as well as QE. Note: The next Rates Weekly will be published on 12/7 after Thanksgiving.
The latest Fed developments, including the October FOMC minutes and comments from various Fed speakers, imply that stronger forward guidance will eventually replace QE. While this may be the end goal in the long-term, as of now, we question whether strengthening forward guidance can actually result in the Fed achieving success in all three mandates (employment, inflation and wealth effect). In the weekly, we search for clues from the October minutes to assess our Fed projections going forward (page 5). In particular, we look in detail at how the Fed can enhance forward guidance (page 6). At this juncture, we dont believe forward guidance is a substitute to QE as forward guidance lacks the ability to generate the same sort of wealth effect which boosts stocks and then growth (page 7). We believe it is up to the Fed to convince the market participants that stronger forward guidance will foster employment, prevent disinflation and help the economy through wealth creation. Until people buy in, the FOMC cannot stop QE fully. Special Topics: We recap a recent client trip to South Africa and the Middle East (page 8) and review the September TIC data (page 9). Lastly, we project the FOMCs options and believe that tapering is most likely a Q1-14 event (page 10).
2 2 NO V E M BE R 2 0 1 3
Fixed Income Research

Strategists
George Goncalves
+1 212 298 4216 george.goncalves@nomura.com
Stanley Sun
+1 212 667 1236 stan.sun@nomura.com
Andy Chaytor
+44 20 7103 1219 andy.chaytor@nomura.com
Martin Whetton
+61 2 8062 8611 martin.whetton@nomura.com
Vivek Rajpal
+65 6433 6555 vivek.rajpal@nomura.com
Jeffrey Young
+1 212 667 1389 jeffrey.young@nomura.com
David Thielke
+1 212 667 1389 david.thielke@nomura.com
Market Focus:
USTs: We see value in 7yr but cautious of an earlier-than-expected tapering fear. TIPS: We are in favor of front end TIPS ASW trade and slightly bearish on real yield Futures: We provide a summary on December future calendar roll. MM: Further discussion of stronger forward guidance. Swaps: Recent positioning flush has tightened spreads to an attractive level. Europe: We like paying 3yr swaps and long 5yr ASW in UK rates. AEJ: We review and restate our positive carry spread trades. $Bloc: We look at the new 20yr ACGB and recommend shorting 5s CANS.
Penglu Zhao
+1 212 667 9516 Penglu.Zhao@nomura.com This report can be accessed electronically via: www.nomura.com/research or on Bloomberg (NOMR)
Trade Portfolio Update

Despite stopping out of our long 10yr UST vs. Bunds and 5s7s UST flattener, our portfolio managed to finish the week slightly in the green. We restocked with a short in 2s5s10s CAN PCA-weighted fly, long 30yr spreads, and long Apr17s TIPS ASW. Trade Watch: We stopped out of our long 10yr ACGB vs. CAN, but our two other existing trade watches have performed. This week we add a small long 10yr spreads
The Week Ahead Calendar

SUPPLY: Next week, supply includes 2yr, 5yr and 7yr UST auctions. CENTRAL BANK POLICIES: Next week there is a light schedule for central bank policy makers, with a few speakers from Monday through Thursday. ECONOMIC DATA: Investors should watch for a few regional Fed activities survey results, and be mindful of consumer confidence index on Tuesday.
Nomura Securities International Inc.
See Disclosure Appendix A-1 for the Analyst Certification and Other Important Disclosures
22 November 2013
Contents
US Rates Weekly Outlook
The Week Ahead (Nov 25 - Nov 29): Key Events for Rates Investors The Week Ahead (Dec 2 - Dec 6): Key Events for Rates Investors 3 3 4
Rates Macro View

US rates cannot escape the taper specter, for now
5 5 8 8 9 10 12 12 15 16 17 18 18 19 19 20 21 21
Special Topics
Special Topic: Thoughts from South Africa and the Middle East Special Topics: US TIC Large Foreign Net Purchases Special Topics: Policy Evolution and Fed Paths
Market Focus
US Rates European Rates AEJ Rates Dollar-Bloc Rates
Trade Portfolio
Trade Idea: Long 4/16s & 4/17s TIPS ASW Rates Trade Watch Trade Watch Tracker Sub-Portfolio Current Rates Trade Portfolio
Appendix
QE4 Round 11 - POMO Schedule
Nomura US, Canada and Australia Economic Rates Forecasts versus Forward Yields 22 Auction Tables Recent Rates Strategy Publications 23 26
22 November 2013
US Rates Weekly Outlook

The Week Ahead (Nov 25 - Nov 29): Key Events for Rates Investors
Monday Nov 25 US: Pending Home Sales MoM
(10:00am): [Oct] {2.00%, n.a., -5.60%}
Tuesday Nov 26 Wednesday Nov 27 Thursday Nov 28 US: Sept./Oct. Housing Starts Released UK: GDP QoQ (4:30am): [3Q P] {0.8%, Germany: CPI Saxony (3:00am):
(8:30am) n.a., 0.8%} [Nov]
Canada: Bloomberg Nanos Confidence US: Sept/Oct Building Permits (8:30am) US: MBA Mortgage applications (10:00am): [Nov] US: S&P/CS 20 City MoM SA (9:00am): (7:00am): [Nov] US: Dallas Fed Manf. Activity [Sep] {0.90%, n.a, 0.93%} Canada: Average Weekly Earnings (10:30am): [Nov] {4.4, n.a., 3.6} (8:30am): [Sep] US: Consumer Confidence Index US: Initial Jobless Claims (8:30am) (10:00am): [Nov] {72.1, n.a., 71.2} US: Richmond Fed Manufacturing Index US: Durable Goods Orders (8:30am):
(10:00am): [Nov] {3, n.a., 1} [Nov] {-1.50%, n.a., 3.70%}
Germany: Unemployment Rate

(3:55am): [Nov] {6.9%, n.a., 6.9%}
Friday Nov 29 IT: Unemployment Rate (4:00am): [Oct] IT: CPI (5:00am): [Nov] Eurozone: Unemployment Rate (5:00am):
[Oct] {12.2%,n.a., 12.2%}
Eurozone: Money Supply (4:00am): Canada: Quarterly GDP Annualized [Oct] (8:30am): [3Q] {2.5,n.a., 1.7} Eurozone: Business Climate
Indicator (5:00am): [Nov]
Data
Note: Highlighted indicators mark critical data/events Source: Nomura
{Consensus, Nomura, Previous}
US: Chicago Fed Nat Activity Index

(8:30am) [Oct] {0.10, n.a., 0.14}
Germany: CPI (8:00am): [Nov] Canada: Current Account Balance

(8:30am): [3Q]
US: Chicago Purchasing Manager

(9:45am): [Nov] {60, n.a., 65.9}
France: Jobseekers Net Change

(12:00pm): [Oct]
US: Univ. of Michigan Confidence

(9:55am): [Nov] {73, n.a., 72}
US: Leading Index (10:00am): [Oct]

{0.00%, n.a., 0.70%}
Japan: Jobless Rate (6:30pm): [Oct] Japan: National CPI YoY (6:30pm)
[Oct]
Japan: Retail Trade YoY (6:50pm):

[Oct]
Japan: Industrial Production MoM

(6:50pm) [Oct P] {2.0%, n.a., 1.3%}
US: US Fed to purchase USD2.75-3.50 IT: Bonds Auction (5:00am) Bln Notes (11:00am) (Feb.21- Nov.23) US: US Fed to purchase USD1.25-1.75 US: 3m & 6m Bills Auction (11:30am) Bln Notes (11:00am) (Feb.36 Nov.43) US: $32bn 2y Notes Auction (1:00pm) US: 4w Bills Auction (11:30am) AU: Bond Auction (7:00pm) US: $35bn 5y Notes Auction (1:00pm) Japan: 40y Bonds Auction (10:45pm)
Germany: 10yr Bonds Auction (5:30am) IT: Bonds Auction (5:00am) Canada: 30y Bonds Auction (12:00pm) UK: Bonds Auction (5:30am) US: $29bn 7y Notes Auction (1:00pm) Japan: 2y Bonds Auction (10:45pm)
Operations Policy
Spain: BoS Governor Linde Speaks

(7:45am)
Eurozone: ECBs Mersch Speaks

(7:30am)
Japan: BoJ October 31 meeting

minutes (6:50pm)
UK: BoEs Bulley Speaks (8:45am) Eurozone: Asmussen speaks (1:00pm) Japan: BoJ Shirai speaks (8:30pm)
UK: BoEs Gracie Speaks (4:20pm) Eurozone: ECBs Asmussen speaks

(1:00pm)
UK: Carney Speaks (5:30am)
22 November 2013
The Week Ahead (Dec 2 - Dec 6): Key Events for Rates Investors
Monday Dec 02 Eurozone: PMI Manufacturing
(4:00am): [Nov]
Tuesday Dec 03 Eurozone: PPI (5:00am): [Oct] US: ISM new York (9:45am): [Nov] US: IBD/TIPP Economic Optimism
(10:00am): [Dec]
Wednesday Dec 04 Eurozone: PMI (4:00am) Eurozone: GDP SA QoQ (5:00am):

[3Qp]
Thursday Dec 05 France: Unemployment Rate

(1:30am): [3Q]
Friday Dec 06 France: Trade Balance (2:45am): [Oct] UK: BoE/GFK Inflation Next 12 Mths
(4:30am): [Nov]
US: Markit US PMI Final (8:58am):

[Nov]
US: ISM Manufacturing (10:00am):

[Nov] {55, n.a., 56.4}
US: Total Vehicle Sales (5:00am): [Nov]

{15.70m, n.a., 15.15m}
Eurozone: Retail Sales MoM (5:00am):

[Oct]
UK: Unemployment Confidence

(4:30am): [Nov]
US: Construction Spending (10:00am): AU: GDP (7:30pm): [3Q] [Oct] AU: BoP Current Account Balance
(7:30pm): [3Q]
US: MBA Mortgage Applications

(7:00am): [Nov]
UK: BoE Bank Rate (7:00am): [Dec]

{0.50%, n.a., 0.50%}
US: Change in Nonfarm Payrolls

(8:30am): [Nov] {185K, n.a., 204K}
Data
US: ADP (8:15am): [Nov] {175K, n.a.,

130K}
US: Challenger Job cuts (7:30am):

[Nov]
US: Unemployment Rate (8:30am): [Nov]

{7.2%, n.a., 7.3%}
AU: Retail Sales MoM (7:30pm): [3Q]
Canada: Intl Merchandise Trade

(8:30am): [Oct]
Eurozone: ECB Announces Interest

Rates (7:45am): [Dec]
US: Personal Income (8:30am): [Oct]

{0.3%, n.a., 0.5%}
Note: Highlighted indicators mark critical data/events Source: Nomura
{Consensus, Nomura, Previous}
US: Trade Balance (8:30am): [Oct] $40.0B, n.a., -0.44B}
Canada: Building Permits (8:30am):

[Oct]
Canada: Unemployment Rate (8:30am):

[Nov]
Canada: BoC Rate Decision (10:00am):

[Dec]
US: GDP QoQ (8:30am): [3Q S]

{3.10%, n.a., 2.80%}
US: Univ. of Michigan Confidence

(9:55am) : [Dec]
US: ISM Non-Manf. Composite

(10:00am): [Nov] {55.1, n.a., 55.4}
US: Bloomberg Consumer Comfort

(9:45am): [Dec]
US: Consumer Credit (3:00pm): [Oct]
US: Sept./Oct. New Home Sales

Released Jointly due to shutdown (10:00am)
Canada: Ivey Purchasing Managers

Index (10:00am): [Nov]
US: Factory Orders (10:00am): [Oct]

{-0.60%, n.a., 1.70%}
US: New Homes Sales (10:00am): [Oct] Russia: CPI [Nov] AU: Trade Balance (7:30pm): [Oct] US: Household Change in Net Worth US: 3m & 6m Bills Auction (11:30am) UK: Bonds Auction (5:30am) US: 4w Bills Auction (11:30am) China: 5y Bonds Auction (10:00pm) Germany: Bonds Auction (5:30am) Russia: Bonds Auction (7:00am) Japan: 10y Bonds Auction (10:45pm) Spain: Bonds Auction (4:30am) France: Bonds Auction (4:50am)
Operations Policy
Eurozone: ECBs Constancio &

Honohan speaks (3:30am)
UK: BoE Publishes Record of Financial US: Federal Reserve releases Beige
Policy Committee (4:30am) Book (2:00pm)
US: Feds Plosser speaks Hawkish

(7:00pm)
Japan: BoJ Board Member Sato

Speaks (8:30pm)
Canada: Bank of Canada Rate Decision

(10:00am)
UK: BoE Rates Decision (7:00am) Eurozone: ECB Rates Decision

(7:45am)
IT: BoI Report on Balance Sheet

Aggregates (5:00am)
AU: RBA cash rate target (10:30pm)
US: Feds Lockhart speaks (8:15am) (8:30am)
US:
Dovish
Feds Plosser speaks Hawkish (9:30am) (3:00pm)
Eurozone: ECBs Draghi speaks US: Feds Fisher speaks Hawkish

(12:15pm)
US: Feds Evans to speak Dovish
22 November 2013
Rates Macro View

US rates cannot escape the taper specter, for now
The tapering fear is back! We argue the Fed will not rush or taper aggressively because they still have to convince us that forward guidance will work as well as QE.
Its been a rough two weeks as rates markets continue to trade on their back-foot because of tapering fears. In our prior weekly (see link pages 5-8) we suggested the tough uphill battle for the Fed will come as a result of them trying to assure markets rates will remain anchored once they taper. But, as seen by the price action and odd curve bear steepening moves, its clear that they need more time to convince traders that forward guidance can work as well as QE, G-luck! In the week ahead for US rates markets, the risk of an earlier-than-expected tapering and illiquidity of a shortened week could deter some investors from bidding aggressively at the 7yr auction. On the other hand, we expect much less saga to unfold for the 2yr and 5yr auctions (page 12). In TIPS land, the 10yr TIPS had a very strong auction despite tails risks of a December tapering and 10-year real should do well versus 5yr TIPS (page 12). We hope that after a violent flushing of long spreads positions, they will be able to go back to trading on fundamentals (page 14). Meanwhile, while we wait for the taper-to-forward-guidance handoff, the front-end continues to look attractive as the Fed markets its message (page 14). Lastly, we provide our views on the December Treasury futures calendar roll (page 13). In global rates markets space, as we continue to provide views on the ever more correlated global rates markets. In this weekly we introduce, in the market focus section, our views that cover EMEA and AEJ rates. Specifically, we update our views in the UK rates market and outline some of our favourite local and cross market trades in a rare and fascinating time (see page 16). In AEJ, we continue to advocate spread carry trades to ride things out, especially given the recent FOMC developments. We also take a look at the new 20yr ACGB as well as the upcoming debt ceiling fight down-under (page 17). In Canadian rates, we recommend to trade dislocations on the curve while maintaining our neutral view in the market (page 17). We included three special topics in the weekly (page 8 - 11). First, we provide our thoughts on a recent client trip to South Africa and the Middle East (page 8). We then review the interesting September Treasury International Capital (TIC) flows and found that foreign investors became supportive of US assets after the FOMCs decision not to taper (page 9). Lastly, we outline our Fed policy evolution views and believe that tapering is most likely a Q1 2014 event (page 10). FOMC Minutes Recap: Can Forward Guidance Help the Fed Achieve its 3 Mandates? The October FOMC Minutes were perceived as being more hawkish and as per scenario 1 of our policy evolution report (page 11), that is one of the criteria in our opinion that needs to happen if the Fed is about to taper in December (i.e., they need to flag the market ahead of time). Now having said that, there is nothing in the minutes that demonstrates a decision has been made (see pages 10) and, furthermore, the Fed is actually exploring additional policy options to anchor rates. Perhaps the Fed wants to sound tough to prevent speculative behavior running amok. That surely seems to be working for long-end duration players as nobody wants to touch anything beyond the 5yr point. However, even after slight pullback, its equities that are going into vertical phase lately and we argue thats where the speculative flows from QE are heading. The Fed needs to bite the bullet one day and taper and, in our view, it will be equity investors that will be more let down that us bond folks (who have been moving to the sidelines for months already and in many ways having been pricing in tapering). The one-trillion dollar question is why the Fed would start the tapering process in December before financial and corporate yearends and why do such a thing one week before Christmas. (Evidence shows large amount of shopping keeps getting further delayed, think last minute shoppers and post holiday sales around Christmas.) Bernanke has always viewed QE as a "credit easing" measure where QE worked to lower risk premium by pushing long-term interest rates lower. But, if they are ignoring fact that QE also
George Goncalves
Jeffrey Young
David Thielke
22 November 2013
displaced investors and pushed them into Credit, EM and ultimately into stocks, a quick taper and/or starting with large cuts (greater than $5-10bn) could derail risk. If that were to happen at the end of the year it makes no logical sense given that financial conditions would worsen at an odd time in the calendar and economic evidence of a self-sustaining recovery still fleeting. The October FOMC minutes revealed valuable clues on possible changes in the upcoming meetings. Overall, there were not huge surprises in the minutes, and the Fed continued to weigh QE vs. forward guidance. While the voices for a tapering of QE are growing louder, a consensus is also forming to strengthen forward guidance (see link for our economists views). The market took the minutes as slightly hawkish, given the FOMCs commitment to reduce its asset purchase if data turns. However, we dont believe this is anything new and real progress towards the strengthening of forward guidance should continue to see flows filter up to the 5yr point. Eventually, 7s and 10s will benefit too, in our opinion, once tapering of QE is finally implemented. (That is, a post relief rally after Fed starts the tapering process due to sell the rumor / buy the fact.) One particular point we like to highlight is that while there are still uncertainties on the exact method to strengthen forward guidance, it seems that there is consensus in the FOMC that a strengthening is needed. It is not longer a question of if, but of when and how. Enhancing forward guidance through thresholds and committing to lower rates We do not think the Fed will rush its next move, but it needs to start to prepare the markets for a world with eventually less QE. Looking at the four potential ways of strengthening guidance outlined in the FOMC minutes, we are of the view that the Fed is most likely going to either lower the unemployment rate threshold and/or resort to a quantitative inflation floor. While Bernanke recently mentioned that progress has been made in the labor market from a cumulative perspective, weakness still remains. Moreover, as show in Figure 1, the condition of the labor market remains mixed, and metrics other than the unemployment rate do not paint as rosy a picture. Specifically, the temporary worker as a percentage of labor force is closing in on multi-decade highs and shows no signs of losing steam. In the same vein, if we include marginally attached and part-time workers, the U6 rate of 13.8% is still significantly above pre-crisis levels and dwarfs the 7.3% unemployment. This suggests that many of the new jobs have been low quality and part-time in nature. (In the past two recoveries as temp workers numbers rose, they were coming from the marginally attached; its not really the case now.) Overall, its clear that while the unemployment rate has declined, the quality of the jobs added is unimpressive. Thus, the Fed should not rush to taper and could address the optically improving unemployment rate by actually lowering the corresponding threshold of 6.5% on its rates forward guidance. This could be the most natural way to add to forward guidance, given that the unemployment rate threshold is in place. However, some FOMC members expressed concern that adjusting existing thresholds damages creditability.
Fig. 1: Not a good sign, overall improvements in the labor market not uniform despite a falling unemployment rate
Unemployed, Marginally Attached & Part-time %
Fig. 2: Market expectation and Core PCE has been on a downwards trend ending QE too early should be avoided
%
3.5
3.0 1.5 5y5y BEI Core PCE (RHS)
18
16 14 12
Temp worker % (RHS) 2.0 1.8 1.6 1.4
QE 1
QE 1 END
QE 2
QE 2 END
%
2.0
QE 3
2.5
2.0 1.5 1.0
1.0
0.5 0.0
10 8
6
1.2 1.0
0.8
Apr-09
Apr-10
Apr-11
Apr-12
Apr-13
Jul-09
Jul-10
Jul-11
Jul-12
Oct-10
Oct-11
Oct-12
Jul-13
Source: Nomura, Haver
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Nomura, Bloomberg
Oct-13
Oct-09
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
22 November 2013
Wealth Effect Feds third mandate, is it working as planned, can they stop QE fully? The S&P500 continues to grind higher, tracking the Feds balance sheet (Figure 3). Rising equities have always been correlated with a rise in household wealth, as seen in Figure 4 this link is particularly strong in recent years, as a re-pricing of stocks driven most of the gains. In most circumstances, an increase in household wealth leads to an increase in household spending, and ultimately, economic growth. Unfortunately, as we have seen in recent times, the increase in household wealth has failed to spur increases in household spending (Figure 5). Therefore, it is not surprising that the Fed is looking for an exit to this controversial policy. However, as seen over the summer, tapering had a profound effect on risk allocation and market dynamics, the mere mention of tapering killed risk appetite and tightened financial conditions. As shown in Figure 6, despite the new highs, US stocks have continued to lose support from foreigner investors in recent months. Lackluster earning and reduced foreign investment have left the Fed, essentially, to become the indirect a buyer of last resort for equities. (This has been via the portfolio re-balancing channel where displaced fixed income investors seek returns elsewhere.) Bernanke recently mentioned that the biggest challenge to tapering is to conduct it in such a way that causes minimal disruptions to markets, lest we see the same tightening of financial conditions witnessed over the summer. A combination of higher rates and lower equity markets would unwind a large benefit of what QE has done for the economy and runs the risk of stunting growth again, thus the Fed will be careful and taper slowly so to full-fill its third mandate.
Fig. 3: S&P 500 vs. Feds balance-sheet: both continue to rise printing money its the siren call to go long equities.
$bn 4,000 SOMA Holdings S&P 500 (RHS) 1,900
60% 40%
Fig. 4: The S&P 500 correlates strongly with overall household wealth as stocks rose faster than housing prices
Difference SPX YoY % change HH Wealth YoY % change
3,500
1,700
20%
1,500 3,000 1,300 2,500 1,100
0% -20% -40% -60%
2,000
900
1,500
700
30% 10% -10% -30%

Dec-90 Dec-96 Dec-99 Dec-02 Dec-05 Dec-08 Mar-96 Mar-02 Mar-08
Mar-93 Mar-99 Mar-05 Mar-11
Apr-09
Apr-11
Apr-13
Apr-10
Apr-12
Dec-11
Dec-93
Sep-94
Sep-00
Sep-06
Sep-12
Sep-91
Sep-97
Sep-03
Sep-09
Jun-92
Jun-98
Jun-04
Jun-10
Jul-10
Jul-12
Jun-95
Jun-01
Jun-07
Oct-10
Oct-11
Oct-12
Oct-09
Oct-13
Jan-09
Jan-12
Jan-13
Jan-10
Jan-11
Source: Nomura, Bloomberg, FOMC
Source: Nomura, Bloomberg, Federal Reserve
Fig. 5: Increased in Household wealth is unfortunately not translating into higher Household real spending
USA HH Wealth 12m Chg USA HH Real Spending 12m chg (RHS)
Fig. 6: With reduced foreign investment in US stocks, equity PE expansion more dependent than ever on the Feds QE
S&P 500 Price Earnings Ratio
25%
20% 15%
10%
8%
Foreigners into US stocks 12m moving sum
$bn
250
200 150
20
19
10% 5%
0% -5% -10%
6%
4%
18
17
16
15 14 13 12
100
50 0
2%
0%
-15%
-20% -25% 96 98 00 02 04 06 08 10 12
-2%
-4%
11
-50
Oct-10
Oct-11
Oct-12
Apr-10
Apr-11
Apr-13
Apr-12
Source: Nomura, Federal Reserve
Source: Nomura, Bloomberg, US TIC
Oct-13
Jan-10
Jan-11
Jan-12
Jan-13
Jul-10
Jul-11
Jul-12
Jul-13
Jun-13
Jul-09
Jul-11
Jul-13
22 November 2013
Special Topics
Special Topic: Thoughts from South Africa and the Middle East
Note: This is a reprint from our First Insights published on November 20 (see link)
This past week we have visited a number of fixed income investors sovereign wealth funds, central bank reserve managers and commercial banks in South Africa and the Middle East (specifically the UAE and Saudi Arabia). We shared our US and cross-rates market views and came away with some interesting observations (especially on the Fed and EM), the most interesting of which we deem worth sharing. More Fed feedback from the road: Unsurprisingly, much discussion revolved around the path of rates in coming quarters, if and when the Fed starts to reduce its asset purchases, and whether the Fed can win back some of the credibility it lost when it decided not to taper in September, when many thought it seemed fully committed to doing so but then ultimately got cold feet. One witty client challenged us to conduct the meeting without mentioning the "T" word (tapering), given how fed up they had become with US monetary policy and all the potential scenarios. Many investors expressed an annoyance and the view that the Fed had forgotten about us, given that the rest of the world is beholden to the USD and USTs. Many were also unconvinced that the Fed can control the yield curve as it once did during Operation Twist in late 2011. A different investor agreed with us that yield curves will take a hockey-stick shape for years as private foreign investors pile into the front end and that somebody else will need to buy the back end at steeper levels if the Fed stops its QE quickly. A majority of those we spoke to agreed that tapering is now a 2014 story, with a handful of clients expecting it to begin after March (none believed in a December move btw), and at a slow and in an open-ended fashion (i.e., the Fed will not commit to a tapering pace once it makes a move; we generally agree with this notion as well). EM economies won't bail out the West: As our plane dodged electrical storms high over the desert sands, the clouds rained down an abundance of liquidity which is something we are rarely greeted with when visiting clients in the Middle East. One bank portfolio manager (PM) joked that the liquidity had been here since the Fed has been easing, as sourcing cheap USD funding allows banks in the region to offer more credit. However, this PM said that just like the rainfall in the Middle East, when it stops, the cost of staying hydrated goes back up. There was a fear that the widening of spreads and EM FX under-performance during the summer when the Fed was just talking about tapering was child's play. The same PM stated that just because these countries (and he was speaking in relation to all EM, not just the Middle East) have become more productive and better-balanced in handling another crisis, did not mean they would survive unscathed because of all the embedded leverage in EM due to the Fed forcing investors abroad to pick up yield. Where the irony may be seen, is in the fact that just when the West wants to see broader balanced growth worldwide, led by faster growing economies, it is the West's easy money policies that will stunt EM progress at just the time the West needs them most. Overall, it is fair to say that sentiment was pretty dour and that we are closer to an end than the beginning of a new growth cycle. Some we spoke to made our we are just muddling through view and rates staying contained, but in a wider range, seem like a positively bullish view. However, although they do not think growth justifies valuations, as long as the Fed is in play and easy money flows from all central banks, most investors are shying away from long-end duration, in barbell front-end type trades, and staying long credit all with the hope that the Fed slowly changes policy (see link for our views used in the trip), or else matters are likely to get worse again, maybe leaving the Fed having to resort to what the Bank of Japan is doing now. George Goncalves
22 November 2013
Special Topics: US TIC Large Foreign Net Purchases

Note: This is a reprint from our Capital Flow Monitor published on November 18 (see link). Foreign investors Net Buyers of UST In September, foreign investors were net buyer of long-term US fixed income securities by $36.4bn (including prepays). They were net buyers of USTs by $27.8bn, agencies by $4.3bn (including net outflow of $10.4bn in repayment adjustments), and corporates by $4.3bn also. In the USTs space, foreign official institutions continued to be net seller of USTs (by $23.2bn) in the month of September as the private sector were large accumulators. This is the fourth consecutive month of net selling of USTs by official accounts, despite a large rally in USTs, trigged by Larry Summers withdrawal and further fueled by the FOMCs surprising decision to not begin tapering in September. However, the more nimble private sector clearly reacted to the bullish USTs news. Flows in other assets by foreign official institutions were muted, as they were net sellers in agencies (by $0.6bn) and net buyers in corporates ($1.9bn). Looking at regional breakdowns for USTs, the majority of the purchases came from the Caribbean ($19.3bn), a proxy for US hedge funds. Looking at CFTC non-commercial positioning data in UST futures, the net purchase came in the last two weeks of the month, likely a direct response to the Feds decision to not taper (see Rates Positioning Index: CFTC data slowly returns, as some bearish flows surface, 27 October 2013). The other large regional net buyer of USTs was Europe ($13.0bn), with large net purchases from France ($12.3bn) and UK ($13.6bn, with a majority of the flows likely from Asia. Latin America and Asia were overall net sellers of USTs by $4.9bn and $4.3bn respectively. However, we believe the selling trend might reverse soon as EM central banks added FX reserves and the pressure on EM currencies abated in October (see EM Reserves and Pressure Index Update, 7 November 2013).In Asia, Japan was large net buyers of USTs (by $10.6bn), as yield spreads got attractive. This was largely within our expectations as we continued to believe Japanese buyers will eventually return to the USTs market. This trend was also suggested in the release of Japanese investment in foreign securities by MOF Japan (RPI: Shutdown = No CFTC data: ushering in bullish flows, 6 October 2013). However, the Japanese net purchases were offset up net selling from Hong Kong ($6.8bn) and China ($5.6bn). China was a large net buyer in Agencies (by $6.9bn), a trend we have seen over the past few months as China switched to higher yielding US fixed income assets. This is also consistent with our observation back in October that China has been adding its FX reserves as opposed to other EM countries, which sold foreign currencies (see China Bucks EM Reserve Selling Trend, 15 October 2013). The other noticeable net buyers of agencies include the Caribbean (by $2.3bn, the same no-taper trade) and UK (by $5.2bn, likely flows from China or rest of Asia).
Fig. 1: Foreign investment in USTs (long term)
100 ($bn) 80
60
George Goncalves
Jeffrey Young
Fig. 2: US investment in foreign securities

40 ($bn) US investment in f oreign bonds
Foreign private investment in UST

Foreign of f icial investment in UST
30
20
US investment in f oreign equities
40 20
0
10
0
-10
-20
-20 -40
-60 1/2010 7/2010 1/2011 7/2011 1/2012 7/2012 1/2013 7/2013
-30
-40 1/2010 7/2010 1/2011 7/2011 1/2012 7/2012 1/2013 7/2013
Source: Nomura, US Treasury
The Caribbean and UK were also the large net buyers in the corporate space, with $3.1bn and $6.4bn net purchases respectively. US agencies and corporates both benefited from the no taper trade and a rally in rates, but foreign investors interest in them were secondary compared to USTs as the flow data showed. This was expected as USTs (and equities) were more directly affected by FOMC policy decisions and succession uncertainties.
22 November 2013
Special Topics: Policy Evolution and Fed Paths

Note: This is a reprint of our Rates Insight published on November 14 (see link). While some forecasters believe the economy is far out ahead of and on the path to recovery (from fiscal drag, overseas shocks and recently from the financial tightening); Yellen says no the economy is actually still falling far short of its potential. We agree and explore Fed policy scenarios, market implications & trade ideas. Over the past five years the Fed has pulled out, what seems like, all the stops moving from liquidity provider of last resort, to buyer of first resort of MBS and USTs in an attempt to get the credit channels open and the economy growing at full potential again. Yet, we havent achieved escape velocity as the recovery has been more muddle-thru type growth as the economy has faced some structural changes and has dealt with numerous external (eurozone crisis) and internal (fiscal drag / fighting in DC) shocks. This has obviously not helped the Feds cause and were it not for all the Fed support, most would agree that things would have been different for sure. That said, although the Fed controls the price of money (policy rate) and the quantity of money (QE), these tools have not bolstered the economy as much as they would have hoped for nor have they been able to force businesses to invest in the real economy (capital expenditure, human capital etc). Instead, the financial economy has mostly benefited from Fed policy and in the end the Fed is resorting (hoping) the wealth effect will get animal spirits going again. We are at an interesting crossroad, in that Fed leadership is about to transition from a Bernanke-led Fed to, most likely, Congress confirming Yellen (see link for economists thoughts). Meanwhile, calls for a policy mix shift, which we dub Policy Evolution have been in the air lately. The Fed is sending more trial balloons that forward guidance is a substitute for QE. See page 4 in full document for our thoughts on forward guidance options. We strategists are skeptical and we get the fact that Fed policy pertains to the US economy, given the dollars status in the world and search for yield. However, changes in Fed policy transcend all markets/economies, as seen by the rout in carry trades and emerging markets following recent hints at tapering. Moreover, its odd that the Fed moves away from the QE tool now, when there is still uncertainty over how sustainable the recovery is, while the BOJ sees QE as the way out after years of deflation. That said, we hope tapering happens for the right reasons (not just because there is less supply or operational concerns). We acknowledge that the Fed is determined to find a window of opportunity to reduce asset purchases and move to new easing methods. We provide a comprehensive outline and scenario analysis of the several paths that exist and their corresponding Fed/market implications (see Figure 1 below). We explore conditions (economic data, fiscal events and Fed views) that need to fall in place for tapering to start at each of the upcoming FOMC meetings. We continue to believe that the right time for tapering should be in 2014, with our base case for it to first occur sometime in Q1. Trade Ideas: A December tapering is not priced-in and would be highly disruptive. We are nonetheless looking for cheap hedges to our portfolio and are adding TYH4 put structure and will look to use our one month carry in our portfolio to pay for this trade. Overall, we think tapering will get dragged out and forward guidance will actually result in yields staying contained in lower / tighter ranges ahead. George Goncalves
Stanley Sun
Jeffrey Young
David Thielke
10
22 November 2013
Fig. 1: Tapering will likely occur in Q1-14 (January at the earliest) but several paths exists as we explore conditions needed for tapering to start at each of the upcoming FOMC meetings
Source: Nomura
11
22 November 2013
Market Focus
US Rates
UST
Stanley Sun We see value in 7yr but cautious of an earlier-than-expected tapering fear. The upcoming month-end 2y/5y/7y UST auctions may be the highlight of the US thanksgiving holiday week. All eyes will be on the 7yr in our view, as the auction could be a binary event given recent price action. We see value in the issue with 5s7s remaining stubbornly steep (Figure 1) but we could also see investors throw in the towel on the trade heading into year-end. The risk of an earlier-thanexpected Fed tapering in December is the biggest concern for taking a block of 7yrs. This is especially so because the November jobs report one week later might have a major impact on steering tapering probability for December. For this reason, we expect more concession for the 7yr pre-auction, exacerbated by illiquidity of a shortened week. For the 2yr and 5yr auctions, we expect much less saga. With the market pricing for further fine-tuning of the Feds forward guidance, the 5yr auction could become boring just like the 2yr but well received regardless.
Penglu Zhao
+1 212 667 9516 Penglu.Zhao@nomura.com
TIPS
We are in favor of front end TIPS ASW trade and are slightly bearish on real yield 10yr TIPS had a remarkable auction this week, considering a weak CPI report on Wednesday and the lack of sponsorship for inflation recently (Figure 2). The attractive real yield level as well as the steep real curve could have drawn interests from dip buyers and provided support for the auction. The direct bids were the highest since September 2011 and accounted for better than average non-dealer takedowns. The 10yr breakeven resurged back to Tuesdays level post auction, a reflection that the market was seemingly not concerned that the incoming November job report could resume Feds tapering talk and suppress inflation expectation. However, the continued fund outflows and bearish momentum could limit any further richening on the belly. Carry investors instead should focus more on front end TIPS ASW trades amid a low realized October CPI and the risk of a December tapering. Since TIPS ASWs are indexed to a floating rate, any duration risk is hedged out if tapering does come. Investors could also swap out the inflation accrual and stay relatively safe if there is a lack of realized inflation out to the TIPS maturity. We identified cheap carry in the Apr16s and Apr17s and expected both ASWs to richen as the search for carry continues, especially on any strengthening of forward guidance. Stanley Sun
Penglu Zhao
Fig. 1: 5s7s has been on a stretched level for a while.

bp 80 75 350
70
September No Taper FOMC
October NFP
bp 400
Fig. 2: TIPS fund outflow could cap further richening on real yield
$mln 200
0
-200 -400
65 60 55 50
300
250
-600
200 45 40 Jan-13 150 Feb-13 Mar-13 Apr-13 May-13 Jun-13 5s7s UST Jul-13 Aug-13 Sep-13 10yr UST (RHS) Oct-13 Nov-13
-800 -1000 Jan-13
Mar-13
May-13 TIPS Funds
Jul-13 TIPS ETF
Sep-13
Nov-13
Source: Nomura, Lipper
12
22 November 2013
Futures
We provide a summary on December future calendar roll (see link for full document) WN: We are neutral on the WN calendar roll. Asset managers longs in the WN contract remain prominent and have stabilized around just north of 200k contracts. Interestingly in the latest positioning data, commercials in the WN contract spiked up, likely driven by dealers and levered funds trimming their shorts. Hence, we expect the usual cheapening pressure on the WN calendar to remain intact during this roll cycle. With the open interest of the WN contracts at historical high, we expect the impact on the calendar from asset managers rolling their long to be meaningful, although the WN calendar may not exhibit much volatility given the front and back contracts again share the same CTD, Aug39s. US: We are mildly bearish given the front and back contracts share the same CTD. Although asset managers have been the dominating longs in US contracts, it was levered funds that drove the rally back in early October. During that time, levered funds covered all their shorts while asset managers cut back longs. In contrast, the open interest vs. price relationship has become much weaker in the selloff since late October, implying the long bias remains in the US contracts, in our view. This is bearish for the US calendar during the roll cycle, especially as asset managers actually got longer during the selloff and their rolling activities should keep a lid on the calendar. From a valuation perspective, the calendar is rich, both outright and vs. historical averages and, according to our futures model, mostly thanks to the back contract being cheap. However, given the front and back contracts have the same CTD, Aug29s, any big moves in the roll is limited. TY: We are bearish on the calendar. Investors in TY contracts seem to have chased the trend in price actions, as we see open interest rise in both rallies and selloffs. TY positioning should be less offside this roll cycle as levered funds are not as long, mirrored by asset managers who are not as short, and, hence, widening pressure on the calendar. On our futures model, TY calendar is rich vs. fair value, as well as towards the richer end of the historical range. Any convergence to fair value of the front contract should put downward pressure on the calendar. Our bearish stance on TY calendar is encouraged by the cheapening of the front contract CTD vs. the back contract CTD, likely that the RV community is positioning for a narrowing calendar. FV: We expect the calendar to richen. Asset managers are actually near the longest ever. The non-reportable category, which includes the likes of corporate treasurers and central banks, which are less price-sensitive in our view, are still very net short. With dealers and levered funds both pretty much flat on FV, this roll cycle may become a tug of war between asset managers and non-reportables, the two investor categories with the strong hands. Therefore, valuation may be extra important this time and our futures models indicate the FV calendar are cheap vs. fair value and also hovering around the cheaper end of historical levels. TU: We are leaning bullish on the TU calendar as shorts roll. The buy-on-dips mentality in the front end, thanks to the Feds forward guidance, is self-evident in the open interest vs. price action relationship of the TU contracts. Open interest fell as TU got expensive and yield dropped, likely as a result of investors shunning the contract. In the same vein, the short base seems to be driving price action as TU are likely used as a rate hedge for carry trades hiding in higher-yielding fixed income. It is worth noting that positioning is very balanced in TU with all investor categories being close to home. Our futures model is indicating an average valuation vs. historicals, along with the CTD spreads, on Libor OAS, also right in the middle of the range.
Fig. 1: Summary of our December Future Calendar Roll
Contract WN US TY FV TU Current 46.0 47.0 43.0 27.8 5.8 Model 47.7 45.7 41.1 29.2 6.6 (Rich)/ Cheap 1.7 (1.3) (1.9) 1.5 0.9 Hedge Ratio 1.004 1.001 1.067 1.047 1.130 Model Delivery Date 31-Dec-2013 31-Dec-2013 31-Dec-2013 6-Jan-2014 6-Jan-2014 Delivery Option Zero Zero Medium Zero Zero Recom m endation Neutral Mildly bearish, longs roll early Bearish, longs roll early Bullish, shorts roll early Mildly bullish, shorts roll early As of 11/15/2013
Stanley Sun
Penglu Zhao
Source: Nomura, CM E
Source: Nomura, CME
13
22 November 2013
Money Markets
Further discussion of stronger forward guidance a green light for front-end carry? Front-end rates finished the week essentially flat from last week (EDZ6 +2bp richer w/w). The lack of any real movement in this space reflects the market consensus that the October FOMC minutes failed to reveal any new material information. However, while the minutes were free of any real surprises and there is still no clear consensus on the fate of QE, they did provide some hints regarding the evolution of forward guidance. The Fed outlined at least four different methods of potentially strengthening forward guidance, but there still doesnt seem to be consensus building for any particular route. However, what stands out to us is that despite the potentially contentious discussion, the idea of enhanced forward guidance seems to have essentially no opposition. At the end of the day, this is all that matters that forward guidance will be renewed and the Fed will likely commit to lower for longer in one form or another. As shown in Figure 1, blues maintained the most longs compared with greens (the old favorite) and golds following the surprisingly positive October NFP print. So to some extent, at least, the market has begun to price in stronger forward guidance and a move towards optimal control. However, the Feds apparent attitude towards forward guidance is that it is a relatively safe option compared with QE. Thus the front end in and around blues continues to look attractive given the substantial rolldown and relatively low beta to the rest of the curve in a sell-off. David Thielke
Swap Spreads
Recent positioning flush has tightened spreads to an attractive level for year-end longs After a number of quiet weeks, the past week saw dramatic movements in swap spreads as the entire spreads curve tightened substantially. The moves have certainly raised a few eyebrows as 5yr spreads have reached all-time tights and 10yr spreads threatened to dip back into negative territory, reaching as low as 3.5bp. The pressure on spreads, particularly in the long end, appears to be the result of a continued steepening of the curve (including the first marked occurrence of a bear steepening in recent memory) combined with relatively thin liquidity and poor positioning. Given the widespread market bias towards being long spreads, the initial curve-driven tightening quickly accelerated as stops were hit and old spread longs were closed. For the past few months, spreads have traded in lock-step with curve movements, which has also been reflected by the strong correlation with the rich/cheapness of the long end. As shown in Figure 2, the recent tightening has overshot the cheapening of the 30yr point (in terms of OAS to our 3-factor model). We, therefore, begin to leg into small longs on 30yr spreads at a risk of $50k 01 with a stop at -13bp. Our initial target is -5bp, but we may look to add another $50k if spreads start to run around and reach -8bp.
Fig. 1: Blues seem more resistant to selloffs lately
0.6
David Thielke
Fig. 2: Selling of 30yr ASW looks overdone vs. move in OAS

30yr ASW 5 0 -5 30yr CMT OAS (RHS, Inverted) -10 0 10 20 30 40 50 60
Nov-13 Dec-12 Oct-13 May-13 Mar-13 Aug-13 Dec-13
Jan-13
Eurodollar Positioning Bias

Greens Blues Golds
Rolling 20d Correlation b/w Price & OI
0.4
0.2
Long
-10
-15
-0.2
Short
-20 -25 -30

Feb-13
Apr-13
-0.4
Jun-13
-0.6 Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
14
Sep-13
Jul-13
22 November 2013
European Rates
We recently published a European Rates Insights updating our views on the UK rates markets as well as outlining out latest trades local and x-market trades (see link for the full document). These are rare and fascinating times, and the UK is in a unique position. This should lead to some very profitable strategies as the end of the year approaches and into 2014. However, we have to be very clear in our minds as to what exactly will work. Outright shorts are expensive. Carry and roll make a mockery of bearish trades expected to last longer than a month or two unless you have extreme views on the size and smoothness of yield rises. As in any bear market, timing is more important than view. There is little justification to be short beyond 5yr unless it is based on a view of US (or perhaps German) yields going higher. In which case why express the view in Gilts? We got out of flatteners on 1 November, but the curve has steepened back up to interesting pivot points since then and we want to go back into flattening views. The long-end is rich and there may be more normal levels of LDI activity for four months or so, and thus a more normal beta between 10s30s and 5s. We want to pay long-end forwards. (Again, we have been stopped out of this before but are trying again.) We also take a look at the implications of the recently announced pension fund regulations (not a lot). The cross-market remains an area of great interest to us. There is correlation breakdown in nominal growth stories. However, history suggests that you only get the 100bp+ moves in frontends when central banks start moving in different directions. For now we recommend you trade for a 40bp widening between 3yr Gilts and Bunds. Taking the above into consideration, we like the following trades to supplement our current trades of paying 3yr swaps and long 5yr on ASW: Andy Chaytor
+44 20 7103 1219 andy.chaytor@nomura.com
Outright short linker 2017s: More attractive than real yield curve flatteners here and now, front-end real yields may march significantly higher. Greens/Golds flatteners: The best forward flattener we see. If you cant do forwards we recommend you trade 5s10s in swaps. If you cant do derivatives we would not put you off 3s7s flatteners in Gilts. Long 1yr fwd 2s5s10s: Lovely roll, lovely relationship with US yields and marks the clear differential between us and the bearish street consensus that short trades should be set in the front-end, not the belly (Figure 1). Pay 20yr fwd 10yr: As betas go back to normal levels (or probably overshoot) the long-end forwards will likely sell-off and 20f10y looks markedly better value than 15f15y or 10f20y (Figure 2). Sell 3yr Gilts vs. Bunds: We have little idea why the street is very concerned with short USTs vs. Bunds in 10yr. We think trading Bunds against Gilts is a much more justifiable trade and doing it in the 3yr area makes much more sense than the 10yr.
Fig. 2: Key long-end forwards We believe the 20yr forward 10yr is the stand out structure to pay
%
4.4 4.2 FWD 10y_20y FWD 20y_10y FWD 15y_15y
Fig. 1: 1yr forward 2s5s10s vs. outright yields Attractive entry levels to capture bullish belly thoughts
bp 1yr Fwd 2s5s10s 5y outright (RHS)
80
60 40 20 0 -20 -40
% 8
7 6
4.0
5 4 3 2 1
3.2 3.8 3.6 3.4
Aug-12
Aug-13
Apr-12
Feb-12
Sep-12
Feb-13
Apr-13
Jan-12
Jan-13
Nov-12
Sep-13
Jul-13
May-12
May-13
Mar-12
Mar-13
-60
Aug-00 Aug-07 Apr-05 Feb-04 Sep-04 Feb-11 Nov-05 Sep-11
Apr-12
0
Jan-00 Jan-07 Jul-03 Jul-10 Nov-12 Jun-06 May-02 May-09 Dec-02 Mar-01 Mar-08 Dec-09 Oct-01 Oct-08 Jun-13
Source: Nomura
Source: Nomura
15
Nov-13
Jun-12
Jul-12
Dec-12
Oct-12
Jun-13
Oct-13
22 November 2013
AEJ Rates
With recent market moves, especially the change in Feds communication, we review and restate our positive carry spread trades in the AEJ rates space (see link for the full document). In our last two notes (see Rates Strategy Update: Stick with policy carry, 11 November 2013 and AEJ Rates Strategy: Let carry be the differentiating factor, 8 November 2013) we highlighted two important points: Vivek Rajpal
+65 6433 6555 vivek.rajpal@nomura.com
The Fed has started to set the stage for its forward guidance. As a result, the difference between tapering (plus a strengthening in forward guidance) and tightening is becoming increasingly clear to the market. Recent economic data from the US demonstrate improved growth prospects.
The first point is being driven by the Feds communication and has been reinforced by Yellen and Bernanke. Consequently, we are not surprised to see front-end rates finding new lows in the US. Put another way, the market is becoming more comfortable with the notion of Policy Carry positive carry as a result of stable monetary policy. As see in Figure 1; the 2yr UST yield is near its recent lows). On the second point, our US economists have pushed up their Q4 US GDP tracking estimate again, from 1.7% to 1.8%. Improving economic prospects are also compressing the risk premia (as evident from indicators such as VIX, swap spreads and the LIBOR-OIS spread) and the cumulative impact of these two factors can be seen in the term premium for yield curves being driven higher. This is demonstrated in the 5s10s US curve also shown in Figure 1 (please also see, Retail sales robust in spite of government shutdown, 20 November 2013). In Asian rates, we deploy spread trading strategies that leverage 1) growth momentum and 2) policy carry. Our conviction remains strong given the circumstances described above. In particular, we recommend:
Pay Korea 5yr vs. receive Singapore 5yr: Pay Korea 5yr is a trade expression that monetises growth momentum in Korea, while a Singapore 5yr swap receiver offers high quality policy carry. We increase our target on t his trade from -175bp to -180bp. Pay Malaysia 2yr vs. receive Thailand 2yr: Our Asia economics team is more sanguine about reforms and growth prospects in Malaysia, which argues well for a paid bias in Malaysia swaps. Historically, the Bank of Thailand (BOT) has been more active than Bank Negara Malaysia in fine-tuning monetary policy, but the widening in growth between the two countries is significant. As a result, we expect the BOT to be on hold for longer, which is beneficial in taking on attractive valuations by receiving the front end in Thailand swaps (see also Taking the pulse of Asian growth, 7 November 2013, by Rob Subbaraman and team).
Fig. 1: US 2yr rates at recent lows shows stable policy rate going forward; a steep 5s10s curve implies a high term premium
% 0.5 0.4
US 2y Treasury Yield
US 5y10y Curve (RHS)
bp 150
120
0.3
90
0.2
0.1
Nov-12 Sep-13
Feb-12 Sep-12 Feb-13
60
May-13
May-12 Mar-12 Mar-13 Nov-13
Jun-12
Dec-12
Jun-13
Aug-12
16
Aug-13
Apr-12
Apr-13
Oct-13
Oct-12
Jan-12
Jan-13
Jul-13
Jul-12
22 November 2013
Dollar-Bloc Rates
Australia
We look at the new 20yr ACGB as well as the approaching debt limit As Australia approaches its own moment on the Potomac, with arguments over the debt ceiling, the highest yielding AAA rated market extended its curve, with the introduction of a 20yr ACGB. We discussed the need for this issuance in early November before it was announced (see Rates Insights - Australia: The case for a 30yr bond). The syndicated deal saw a book of AUD9bn reached, for a launch size of AUD5.9bn. This is the largest single issuance from Australia. This hugely successful deal priced at a yield of 4.86%, at an EFP of +70.5 over 10yr futures, or ASW -8bp. The AOFM typically does not give distribution statistics, but in this case provided the information that central banks took 28%, hedge funds took 9.7% and fund managers took 35% of the issue. We noted in First Insights - ACGB Rates RV- the new 20yr and First Insights - ACGB Rates RVthe new 20yr that the 2033 bond is cheap on an asset swap basis, and rolls up the curve. When compared with the current 10yr or the ACGB 2.75% April 2024, we see that the two bonds represent the richest and cheapest points on the asset swap curve (Figure 1). Accordingly, we recommend investors sell the ACGB 2.75% April 2024 to buy the ACGB 4.5% April 2033 on an asset swap basis. This trades at -30, and we would expect to see this compress to -18bp. Debt ceiling- What does it mean? As of the end of the week (ending 22nd November), Australias gross debt counted under the debt cap will sit at AUD295.6bn. This is 4.4bn from the cap. The AOFM would be able to issue its regular auctions of 2 lots of AUD800m coupon bonds, AUD1bn in T-Notes and the scheduled AUD200m in linkers, taking it to AUD298.4bn. At a practical level, this tiny buffer would be impractical for further issuance. We outlined in Figure 2 the potential paths and options.
Martin Whetton
+61 2 8062 8611 martin.whetton@nomura.com
Jeffrey Young
Canada
We recommend shorting 5s on the curve and maintain our neutral view on CANs. The Canadian rates market had been trading in range recently, roughly between 2.5% and 2.65% on the 10yr. On Friday, rates rallied from the highs of the range as October CPI (headline 0.7% Y-o-Y vs. 0.8% consensus) came in below market expectations (see link for thoughts from our economist). In the coming week, the key data point is September GDP (Nov 29th) before the BOC meets on Dec 4th followed by employment data on Dec 6th. We continue to hold our neutral view on Canadian rates and, bar a surprising December tapering from the Fed, we expect CANs to range trade into year end. In such environments, we look at our analytics to find attractive trades. In particular, the 5yr sector of the Canada curve looks particularly rich, especially compared with 2s and 30s, on a PCA weighted scale (over 2.3 standard deviations from the 2yr average). Thus we enter the trade: short 5s vs. 2s and 30s PCA weighted, (84%/100%/65%) at 121bp with target of 114 and stop of 124.5 at 1/6 risk.
Fig. 1: ACGB outstanding and corresponding ASW spread
AUD (bn)
25
Fig. 2: Australia Debt Ceiling Options and Path
bp
Outstanding
20.40
Asset Swap Spread (RHS)
-5
-10 18.80 19.10 16.55

15.70
20
19.80 18.40 18.70 16.70 -20

-15
15
14.80 13.30 12.00 10.80

10.20 9.30 13.90
-25
10
-30 7.40 6.50 5.90

-35
5 -40
-45
Source: Nomura
17
22 November 2013
Trade Portfolio
Trade Idea: Long 4/16s & 4/17s TIPS ASW
Cheap carry still exists in front end TIPS ASWs Note: This is a reprint of our US Rates Trade Idea published on Nov. 22, 2013 (see link).
Stanley Sun
After the Feds tapering fear cheapened TIPS ASW to the highs back in June, front end TIPS ASWs are again approaching those attractive levels (Figure 1). Only this time it has been driven by nominal spread tightening, thanks to all the front end carry trades. Front end TIPS, especially Apr16 and Apr17, have cheapened to about 3mL + 4bps and 3mL + 9bps levels, respectively. It is worth noting that front end TIPS ASW are carry trades by definition and for that reason, front end TIPS ASW typically do not trade at 3mL positive territory for long. As Figure 2 shows, Apr16 and Apr17 TIPS are both trading near the cheapest levels in history (given their remaining years to maturity). We expect both ASWs to richen as the search for carry continues in earnest, especially when other high-grade issuers have recently printed floaters at much tighter levels. TIPS ASW are indexed to a floating rate, which helps hedge any rate rises when tapering does come. Also, investors swaps out the inflation accrual and should not worry about any lack of realized inflation out to the TIPS maturity. Apr16 and Apr17 TIPS ASW both earn about 2.5bps carry and rolldown over 3 months (vs. only about 1.5bps for nominal UST ASW trades). Target: 3mL flat (on Apr17s). Stop: 3mL + 13bps (on Apr17s).
Fig. 1: Front-end forward curves beyond 2y1y remain steep

Bps 10 5 Apr16 TIPS ASW Apr16 UST MMASW
Fig. 2: Still trading far above long-term history despite rally

30
20 10 0 -10 Apr13 Apr14 Apr15 Apr16 Apr17
-5
-10 -15
TIPS ASW (bps)

10/14/13 10/28/13 11/11/13
-20
-20
4/15/13
4/29/13
5/13/13
5/27/13
6/10/13
6/24/13
7/22/13
8/19/13
9/16/13
9/30/13
4/1/13
7/8/13
8/5/13
9/2/13
-30
-4.0 -3.8 -3.6 -3.4 -3.2 -3.0 -2.8 -2.6 -2.4 -2.2 -2.0 -1.8 -1.6 -1.4 -1.2 -1.0 -0.8 -0.6 -0.4 -0.2 0.0
No. of Years till Maturity
18
22 November 2013
Rates Trade Watch

Trade Idea Long 2.625 Aug20s Duration Level 2.0% ZScore 3.0 Info Ratio Abs Spread 3m RDC 15.9bp Total Pickup Comments One of the cheapest USTs in terms of spline spread z-score Trade Watch Portfolio? N
5s10s BE Steepener Inflation
45bp
7.7bp
Long 1.75 May16 vs. 3.25 May16 Curve
2.01bp
0.9bp
Highest z-score and info ratio with reasonable return out of our tracked micro-switches
Long 10yr Spreads Spreads Long 2yr NZGB vs. 5yr CAN
161bp 128bp
2.6 1.5
9.6 3.5
31bp 16bp
0.3bp 75bp
Very strong information ratio and wide spread from historical norms Strong RDC with reasonably favourable zscore/info ratio
Y N
Source: Nomura
Trade Watch Tracker Sub-Portfolio

Current Trades Long 1.75 May16 vs. 3.25 May16 5s10s BE Steepener Long 10yr Spreads Opened 10/24/13 10/31/13 11/22/13 Portfolio Curve Inflation Spread Entry 2.41bp 36bp 4.7bp Stop 3bp 30bp 3bp Target 1.1bp 45bp 15bp Current Level 2.01 37.6bp 4.7bp P&L ($) 5k 42k -
SUB-PORTFOLIO TOTAL
(144k)
Source: Nomura
Note: The Rates Trade Watch consists of various trades that we track for fundamental or relative value purposes but do not have entries we deem attractive enough to include in our primary portfolio on the next page. Many of the included trades are flagged from our various daily analytical publications and include relevant statistics when available. The Trade Watch Tracker is a sub-book of our primary portfolio which consists of trade watches with slightly higher conviction and are each assigned a very modest risk allocation ($20k DV01 where applicable). The total performance of this book is tracked alongside our primary portfolio and is included as an item on the following page.
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22 November 2013
Current Rates Trade Portfolio

Recent Portfolio Changes New Positions Short 2s5s30s CAN (PCA wgts) Long 30yr Spread Long 4/17s TIPS ASW Long TYF4 123-121 Put Spread Rec 3y1y vs. 1y1y USD Closed Positions Long 10yr UST vs. Bund 5s7s UST Flattener Long 5s10s30s UST Opened 11/22/13 11/22/13 11/19/13 11/14/13 11/7/13 Closed 11/21/13 11/20/13 11/8/13 Portfolio Statistics P&L Rolling 1yr P&L Current Risk / Reward Gain / Loss Required Hit Rate 1d 99% VaR Portfolio Size Trades Closed Avg. Holding Period Current Trades 1y10y Payer Ladder 1x2 EDZ6 Midcurve Call Spread Rec 3y1y vs. 1y1y USD Long TYF4 123-121 Put Spread Long 4/17s TIPS ASW Long 30yr Spread Short 2s5s30s CAN (PCA wgts) Trade Watch Tracker Opened 1/30/2013 10/24/13 11/7/13 11/14/13 11/19/13 11/22/13 11/22/13 $23,161,241 [+$401k w/w] $23,998,512 1.60 1.38 42% $1,340,053 $1,023,161,241 94 18d Type Strategic Tactical Tactical Tactical Tactical Tactical Tactical Portfolio Vol Vol Curve Duration Inflation Spread Curve Publication Trade Idea Trade Idea First Insight Rates Insight Trade Idea Rates Weekly Rates Weekly Entry 121bp -11.5bp 3mL+9bp 12tk 173bp P&L ($) (300k) (400k) (634k) Risk (Fraction) $50k (1/6) $50k (1/6) $100k (1/3) 600 lots $50k (1/6) Reason Hit Stop Hit Stop Hit Stop Portfolio Performance Performance Distribution
$MM 30.0 25.0 20.0 15.0 10.0 5.0 0.0
VaR
YTD P&L
$MM 3.5
3.0
35% 30% 25% 20%

15%
Daily P&L Frequency
2.5 2.0
1.5
1.0
0.5
10%
5%
0.0
8-Jun 8-Mar 8-Nov 8-Feb 8-Apr 8-Sep 8-Oct 8-Jul 8-May 8-Aug 8-Jan
0% -56 -47 -38 -29 -19 -10 -1 8 Daily P&L ($100K) 17 26 36
Performance Breakdown
Portfolio Correlations
3m S&P 500 USD Commodities UST 10yr UST 2s10s UST 10s30s US 10yr BEI USD 3m10y Vol VIX
-0.50 -0.25 0.00 0.25 0.50
3m
Duration Inflation Curve Spread Vol
6m
6m
-5.00
0.00 5.00 Net P&L ($MM)

Risk $100MM 1000 lots $50k 600 lots $100k $50k $50k
10.00
Entry Zero Cost 2bp 173bp 12tk 3mL + 9bp -11.5bp 121bp
Stop $350k -5bp 187bp HTE* 3mL + 13bp -13bp 124.5bp
Target $2MM 14.5bp 155bp;140bp 128tk 3mL flat -2bp 114bp
P&L (bp) (0.3) 1.7 0tk 0 -
P&L ($) 1,193,454 (7,500) 87,094 0 0 (144k)
Source: Nomura Portfolio as of 11/21/2013

Note: Trades in the current rates trade portfolio represent high conviction trades which are fully priced including carry, rolldown and repo considerations where applicable. The trade portfolio summary statistics do not include the Trade Watch Tracker sub-portfolio, which is a separate book of low conviction and pure relative value trades derived from our analytics. The trade types are denoted as strategic (trade horizon > 1m) and tactical (trade horizon < 1m). Trade portfolio types include duration, curve, inflation, spread (including cross-market spreads), and volatility. *HTE: Hold To Expiry.
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Appendix
QE4 Round 11 - POMO Schedule

Date Sector Nov 1 20s - 30s Nov 4 5s - 7s Nov 5 20s - 30s Nov 6 7s - 10s Nov 7 20s - 30s Nov 8 4s - 5s Nov 12 20s - 30s Nov 13 TIPS Nov 14 7s - 10s Nov 15 10s - 20s Nov 18 20s - 30s Nov 18 5s - 7s Nov 19 7s - 10s Nov 20 20s - 30s Nov 21 4s - 4s Nov 22 20s - 30s Nov 25 7s - 10s Nov 26 20s - 30s QE4 Total Amt Accepted or Est. ($mlns) $1,565 $3,718 $1,565 $3,171 $1,474 $5,247 $1,565 $1,390 $3,171 $917 $1,474 $3,718 $3,171 $1,565 $4,811 Amt Submitted ($mlns) $5,804 $15,173 $5,114 $12,280 $5,090 $14,877 $5,424 $5,026 $8,786 $4,240 $5,064 $16,745 $10,426 $4,891 $15,095 Submitted/Accepted Ratio 3.71x 4.08x 3.27x 3.87x 3.45x 2.84x 3.47x 3.62x 2.77x 4.62x 3.44x 4.50x 3.29x 3.13x 3.14x QE4 Sector Avg Ratio 2.82x 3.76x 2.82x 3.52x 2.82x 2.75x 2.82x 3.34x 3.52x 3.81x 2.82x 3.76x 3.52x 2.82x 2.73x
$506,662
$1,565,752
3.09x
Source: Nomura, Federal Reserve
Note: POMO stands for Permanent Open Market Operations. On December 12, 2012, the Federal Open Market Committee (FOMC) directed the Open Market Trading Desk at the Federal Reserve Bank of New York to purchase longer-term Treasury securities after the maturity extension program is completed at the end of December 2012, initially at a pace of about $45 billion per month. The program is indefinite in length and there is no formal indication on how many rounds the program will last.
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22 November 2013
Nomura US, Canada and Australia Economic Rates Forecasts versus Forward Yields
4Q2013 NMR Forward Forecast Yield 0.250 0.238 0.350 0.306 0.620 0.633 1.350 1.468 1.950 2.151 2.500 2.861 3.550 3.901 1.450 1.124 2.200 1.859 2.800 2.900 2.400 2.877 3.100 3.611 3.900 4.343 0.300 0.109 0.800 0.695 1.850 1.840 0.580 0.542 1.750 1.747 2.850 2.904 0.120 0.098 0.320 0.222 0.800 0.656 Diff (bp) 1 4 -1 -12 -20 -36 -35 33 34 -10 -48 -51 -44 19 11 1 4 0 -5 2 10 14 1Q2014 NMR Forward Forecast Yield 0.300 0.253 0.450 0.401 0.900 0.786 1.700 1.636 2.250 2.300 2.850 2.984 3.650 3.957 1.550 1.199 2.300 1.969 2.850 2.792 2.650 3.009 3.150 3.727 4.050 4.425 0.350 0.134 0.950 0.796 2.000 1.931 0.700 0.673 1.950 1.907 3.000 3.012 0.150 0.106 0.400 0.249 0.950 0.692 Diff (bp) 5 5 11 6 -5 -13 -31 35 33 6 -36 -58 -37 22 15 7 3 4 -1 4 15 26
Security 3m LIBOR 2yr UST 3yr UST 5yr UST 7yr UST 10yr UST* 30yr UST 2yr CAN 5yr CAN 10yr CAN 2yr ACGB 5yr ACGB 10yr ACGB 2yr Bund 5yr Bund 10yr Bund 2yr Gilt 5yr Gilt 10yr Gilt 2yr JGB 5yr JGB 10yr JGB
Current 0.24 0.28 0.55 1.35 2.07 2.74 3.83 1.11 1.76 2.57 2.76 3.58 4.32 0.14 0.69 1.75 0.44 1.55 2.79 0.10 0.20 0.63
JP
UK
DE
AU
CA
US
*For 10yr UST, our Q4 end range is 2.35-2.75; and Q1 2014 end range is 2.50-3.00.
As of 11/22/2013
Source: Nomura
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22 November 2013
Auction Tables
2 Year Auction History Table

Auction 10/25/2011 11/21/2011 12/19/2011 1/24/2012 2/21/2012 3/27/2012 4/24/2012 5/22/2012 6/26/2012 7/24/2012 8/28/2012 9/25/2012 10/23/2012 11/27/2012 12/17/2012 1/28/2013 2/25/2013 3/26/2013 4/23/2013 5/28/2013 6/25/2013 7/23/2013 8/27/2013 9/24/2013 10/28/2013 Avg. Last 6 Size $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $34.00 $33.00 $32.00 $34.00 Coupon 0.250% 0.250% 0.125% 0.250% 0.250% 0.250% 0.250% 0.250% 0.250% 0.125% 0.250% 0.250% 0.250% 0.250% 0.125% 0.250% 0.250% 0.250% 0.125% 0.250% 0.375% 0.250% 0.375% 0.250% 0.250% 0.292% Stop 0.281% 0.280% 0.240% 0.250% 0.310% 0.340% 0.270% 0.300% 0.313% 0.220% 0.273% 0.273% 0.295% 0.270% 0.245% 0.288% 0.257% 0.255% 0.233% 0.283% 0.430% 0.336% 0.386% 0.348% 0.323% 0.351% Bid/Cover 3.64x 4.07x 3.45x 3.75x 3.54x 3.69x 3.76x 3.95x 3.62x 4.00x 3.94x 3.60x 4.02x 4.07x 3.59x 3.77x 3.33x 3.27x 3.63x 3.04x 3.05x 3.08x 3.21x 3.09x 3.32x 3.13x Tail (0.7) (0.6) (0.2) 0.0 0.0 (0.5) (0.3) (0.3) 0.1 1.0 (0.1) (0.2) (0.9) (0.3) (0.1) (0.2) (0.3) (0.2) (0.2) 0.3 0.0 (0.4) (0.1) (0.5) (0.2) (0.1) bp Yld Gap 1.6 3.0 1.1 0.8 2.0 1.6 2.0 1.4 1.3 0.8 0.8 0.9 1.2 0.9 1.1 1.9 0.8 1.1 1.3 1.2 2.6 2.1 1.4 1.8 1.8 1.8 Dealer% 52.6% 46.5% 63.7% 58.8% 54.7% 44.3% 60.0% 57.5% 60.4% 59.2% 61.6% 55.3% 28.3% 41.9% 53.9% 52.0% 46.4% 57.6% 51.6% 65.5% 56.3% 53.2% 54.6% 54.2% 40.0% 54.0% Direct% Indirect% 8.2% 39.2% 11.2% 42.2% 14.7% 21.6% 8.3% 32.9% 9.5% 35.8% 21.4% 34.3% 7.8% 32.1% 9.0% 33.5% 7.9% 31.7% 9.9% 30.9% 16.1% 22.3% 17.5% 27.2% 38.2% 33.5% 23.6% 34.4% 28.4% 17.7% 30.0% 18.0% 31.6% 22.0% 21.8% 20.6% 27.7% 20.7% 12.6% 21.9% 7.8% 35.8% 16.4% 30.4% 26.1% 19.3% 21.8% 24.0% 31.0% 29.0% 19.3% 26.7% Dlr Hit 20% 17% 17% 21% 21% 17% 22% 19% 22% 19% 21% 21% 10% 14% 19% 20% 19% 24% 20% 28% 25% 24% 23% 24% 17% 24% Dir Hit 21% 17% 28% 17% 23% 41% 15% 19% 19% 22% 31% 37% 53% 42% 54% 47% 48% 42% 44% 29% 19% 35% 45% 38% 49% 36% Indir Hit 64% 58% 55% 69% 66% 63% 70% 69% 70% 66% 44% 60% 65% 66% 67% 36% 79% 64% 51% 88% 87% 73% 68% 74% 81% 79% Grade B+ A C B B AB+ B BB BBA+ AB B+ B+ BB C B B B+ B+ A-
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Auction 10/26/2011 11/22/2011 12/20/2011 1/25/2012 2/22/2012 3/28/2012 4/25/2012 5/23/2012 6/27/2012 7/25/2012 8/29/2012 9/26/2012 10/24/2012 11/28/2012 12/18/2012 1/29/2013 2/26/2013 3/27/2013 4/24/2013 5/29/2013 6/26/2013 7/24/2013 8/28/2013 9/25/2013 10/29/2013 Avg. Last 6 Size $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 Coupon 1.000% 0.875% 0.875% 0.875% 0.875% 1.000% 0.875% 0.625% 0.750% 0.500% 0.625% 0.625% 0.750% 0.625% 0.750% 0.875% 0.750% 0.750% 0.625% 1.000% 1.375% 1.375% 1.500% 1.375% 1.250% 1.313% Stop 1.055% 0.937% 0.880% 0.900% 0.900% 1.040% 0.887% 0.748% 0.752% 0.584% 0.708% 0.647% 0.774% 0.641% 0.769% 0.889% 0.777% 0.760% 0.710% 1.045% 1.484% 1.410% 1.624% 1.436% 1.300% 1.383% Bid/Cover 2.90x 3.15x 2.86x 3.17x 2.89x 2.85x 3.09x 2.99x 2.61x 2.71x 2.92x 3.06x 2.73x 2.89x 2.72x 2.88x 2.85x 2.73x 2.86x 2.79x 2.45x 2.46x 2.38x 2.67x 2.65x 2.57x Tail (1.1) (1.2) (0.7) (1.6) (0.3) 1.4 (0.9) 0.4 1.8 0.9 0.1 (0.5) 0.3 (0.7) 0.5 0.0 0.1 (0.2) (0.5) 0.0 (0.4) 0.1 0.7 0.6 0.1 7.1 bp Yld Gap 2.6 3.7 6.0 4.1 5.0 5.0 4.2 4.8 5.3 4.2 3.3 2.8 3.9 2.3 3.1 3.2 3.4 3.5 3.2 3.5 5.5 3.7 3.7 3.8 3.3 3.9 Dealer% 40.3% 45.1% 40.3% 41.5% 45.3% 46.8% 43.1% 50.9% 54.1% 52.2% 49.4% 47.2% 42.2% 38.8% 37.2% 43.5% 44.0% 37.1% 42.4% 32.6% 43.5% 37.8% 46.9% 43.4% 41.9% 41.0% Direct% Indirect% 10.4% 49.3% 9.6% 45.3% 9.1% 50.6% 15.1% 43.4% 12.9% 41.8% 11.4% 41.9% 9.4% 47.5% 6.5% 42.6% 10.7% 35.2% 5.2% 42.6% 11.0% 39.7% 10.7% 42.1% 15.5% 42.4% 15.9% 45.4% 30.4% 32.4% 16.8% 39.7% 14.3% 41.7% 16.8% 46.1% 14.0% 43.6% 23.3% 44.0% 3.6% 53.0% 8.3% 53.9% 12.7% 40.3% 11.8% 44.9% 12.2% 45.9% 12.0% 47.0% Dlr Hit 20% 21% 21% 19% 23% 23% 20% 24% 29% 27% 24% 22% 23% 20% 20% 22% 23% 22% 22% 17% 26% 23% 28% 24% 24% 24% Dir Hit 39% 29% 34% 36% 41% 33% 24% 19% 35% 21% 31% 27% 38% 36% 58% 41% 33% 38% 34% 58% 19% 47% 53% 33% 33% 40% Indir Hit 79% 68% 79% 75% 73% 82% 84% 81% 87% 83% 79% 81% 89% 88% 90% 74% 89% 80% 86% 86% 91% 88% 89% 88% 89% 89% Grade A AB A B C+ B+ BC BB+ B+ B AB B+ B AB ABB BB B
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22 November 2013

Auction 10/27/2011 11/23/2011 12/21/2011 1/26/2012 2/23/2012 3/29/2012 4/26/2012 5/24/2012 6/28/2012 7/26/2012 8/30/2012 9/27/2012 10/25/2012 11/29/2012 12/19/2012 1/30/2013 2/27/2013 3/28/2013 4/25/2013 5/30/2013 6/27/2013 7/25/2013 8/29/2013 9/26/2013 10/30/2013 Avg. Last 6
Source: Nomura, Treasury
Size $29.00 $29.00 $29.00 $29.00 $29.00 $29.00 $29.00 $29.00 $29.00 $29.00 $29.00 $29.00 $29.00 $29.00 $29.00 $29.00 $29.00 $29.00 $29.00 $29.00 $29.00 $29.00 $29.00 $29.00 $29.00 $29.00
Coupon 1.750% 1.375% 1.375% 1.250% 1.375% 1.500% 1.250% 1.125% 1.000% 0.875% 1.000% 1.000% 1.250% 1.000% 1.125% 1.375% 1.250% 1.125% 1.125% 1.375% 1.875% 2.000% 2.125% 2.000% 1.750% 1.854%
Stop 1.791% 1.415% 1.430% 1.360% 1.420% 1.590% 1.347% 1.203% 1.075% 0.954% 1.081% 1.055% 1.267% 1.045% 1.233% 1.416% 1.260% 1.248% 1.155% 1.496% 1.932% 2.026% 2.221% 2.058% 1.870% 1.934%
Bid/Cover 2.59x 3.20x 2.68x 2.73x 3.11x 2.72x 2.83x 2.80x 2.64x 2.64x 2.80x 2.61x 2.56x 2.81x 2.72x 2.60x 2.65x 2.56x 2.71x 2.70x 2.61x 2.54x 2.43x 2.46x 2.66x 2.57x
Tail 3.3 (2.3) 1.5 0.9 (2.5) 0.3 (0.4) 0.5 2.1 0.6 (0.1) (0.2) 0.2 0.1 0.0 0.9 0.3 0.9 (0.5) (1.6) (0.9) 0.0 0.3 1.0 (0.2) (0.2) bp
Yld Gap 8.3 2.5 7.1 6.9 2.8 6.1 4.0 4.4 5.6 4.4 3.1 3.2 4.0 3.6 3.3 4.8 4.0 4.4 3.5 2.6 3.4 3.6 3.1 4.1 3.3 3.4
Dealer% 54.2% 41.3% 45.0% 56.6% 38.9% 43.8% 44.1% 41.6% 51.5% 46.6% 43.8% 48.1% 43.7% 41.2% 37.0% 42.0% 48.4% 45.0% 41.0% 38.5% 37.8% 34.9% 36.8% 40.2% 33.8% 37.0%
Direct% Indirect% 11.9% 33.9% 18.9% 39.9% 12.9% 42.0% 11.6% 31.8% 19.3% 41.9% 13.4% 42.8% 17.6% 38.2% 15.7% 42.7% 6.5% 42.0% 7.1% 46.3% 17.9% 38.4% 17.0% 34.9% 18.0% 38.3% 19.7% 39.1% 23.1% 39.9% 19.7% 38.2% 18.2% 33.4% 19.5% 35.5% 19.7% 39.3% 20.7% 40.8% 15.7% 46.4% 16.6% 48.6% 22.4% 40.8% 17.8% 42.0% 23.9% 42.3% 19.5% 43.5%
Dlr Hit 28% 19% 25% 29% 19% 24% 22% 21% 27% 26% 22% 26% 24% 21% 20% 24% 25% 25% 22% 21% 23% 21% 23% 24% 20% 22%
Dir Hit 43% 43% 38% 37% 44% 41% 51% 46% 29% 29% 50% 48% 55% 44% 57% 55% 46% 53% 49% 54% 48% 52% 70% 57% 47% 55%
Indir Hit 87% 69% 83% 70% 63% 77% 81% 86% 80% 81% 84% 80% 96% 92% 87% 83% 95% 93% 83% 79% 69% 87% 81% 91% 88% 82%
Grade CA BBA B AB+ C BB BB B+ AC+ BBB+ AB B+ B BA
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22 November 2013
Recent Rates Strategy Publications

Rates Weekly Date 11/08/2013 11/01/2013 10/25/2013 10/16/2013 10/06/2013 09/27/2013 09/20/2013 Title Something for Nothing, Taper for Free? Spooky Stealth Rally Over? Taper, Fiscal Fight & Growth: Delayed? Markets lift-off on short-term solution? Captive to Fiscal Gridlock 3Q13Review and 4Q13 Outlook Fed kicks the can, will DC as well? Link File File File File File File File Summary Fed in straits as it wants to reduce the pace of QE while convincing short rates low for longer We think the drop in 10-year rates of 3% was mostly short-covering.. Given the backdrop, the Fed isnt in a position to taper its QE program. Short-term solution should be met with short-term enthusiasm. We downplay the fearmongering but caution investors to stay vigilant. Mixed economic data and fiscal issues suggest 10y will remain between 2.4% and 2.9%. Fed kicked the can on starting the QE unwind and fiscal fight will remain contentious.
First Insights Date 11/21/2013 11/20/2013 11/20/2013 11/14/2013 11/13/2013 Title $13bn 10yr TIPS Auction Review Impressive Directs $13bn 10yr TIPS Auction Preview Thoughts from South Africa and the Middle East $16bn 30yr Auction Review $16bn 30yr UST Auction Link File File File File File Summary Auction Grade: A+ We are leaning slightly bearish on the auction and expect a 1-2bps tail. We are closer to an end than the beginning of a new growth cycle Auction Grade: BWe expect fairly decent auction as pros slightly outweigh the cons
Rates Insights Date 11/18/2013 11/17/2013 11/14/2013 10/27/2013 10/25/2013 10/24/2013 10/20/2013 10/13/2013 Title US Treasury Future Positioning: Bearish US flows drove last sell-off but foreigners add Policy Evolution & Fed Paths Positioning: CFTC data slowly returns; bearish flows surface November UST Refunding Preview US Treasury Floating Rate Notes Positioning: Flows turn bullish on record purchases Positioning: A defensive Posture in USTs Return? Link File File File File File File File File Summary Calendar Roll Outlook Dec13 Mar14 We look to hedge some of the tail risk to Dec Tapering through a TYF4 123-121 put spread We see a greater chance of tapering in Q12014 The uncertainty will reduce economic growth ahead; remain biased to rally. We share our responses to the November Treasurys quarterly refunding questionnaire. We analyze their unique features, pricing, duration and the floor. We still think yields have room to rally.. Unless we get a long-term resolution, we believe the bullish dynamic for rates remains.
Rates Trade Ideas Date 11/19/2013 10/24/2013 10/10/2013 07/01/2013 06/13/2013 Title Long 4/16s & 4/17s TIPS ASW Buying 1x2 Call Spreads on 3yr Eurodollar Midcurves Debt Ceiling Hedge: TU Spread Widener Q2-2013 US Rates Strategy Portfolio Performance Buying Agency Callables on the Cheap Link File File File File File Summary Cheap carry still exists in front end TIPS ASWs Attractive trade to leverage further downwards consolidation in front end rates. We recommend a conditional TU bear widener as a low-risk doomsday hedge. Net Gains This Qtr (bp): 10.5 Capture wide agency spreads, gain long duration, and short vol exposures in a single package.
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Disclosure Appendix A-1
ANALYST CERTIFICATIONS
Each research analyst identified herein certifies that all of the views expressed in this report by such analyst accurately r eflect his or her personal views about the subject securities and issuers. In addition, each research analyst identified on the cover page hereof hereby certifies that no part of his or her compensation was, is, or will be, directly or indirectly related to the specific recommendations or views that he or she has expressed in this research report, nor is it tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.
Important Disclosures
Online availability of research and conflict-of-interest disclosures
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Rates Weekly: US Rates Can't Escape The Taper Specter

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Rates Weekly: US Rates Can't Escape The Taper Specter

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Nomura | Rates Weekly

US rates can't escape the taper specter

Fixed Income Research

Trade Portfolio Update

The Week Ahead Calendar

Nomura | Rates Weekly

Rates Macro View

Nomura | Rates Weekly

US Rates Weekly Outlook

Germany: Unemployment Rate

Note: Highlighted indicators mark critical data/events Source: Nomura

{Consensus, Nomura, Previous}

US: Chicago Fed Nat Activity Index

Germany: CPI (8:00am): [Nov] Canada: Current Account Balance

US: Chicago Purchasing Manager

France: Jobseekers Net Change

US: Univ. of Michigan Confidence

US: Leading Index (10:00am): [Oct]

Japan: Retail Trade YoY (6:50pm):

Japan: Industrial Production MoM

Spain: BoS Governor Linde Speaks

Eurozone: ECBs Mersch Speaks

Japan: BoJ October 31 meeting

UK: BoEs Gracie Speaks (4:20pm) Eurozone: ECBs Asmussen speaks

UK: Carney Speaks (5:30am)

Nomura | Rates Weekly

Wednesday Dec 04 Eurozone: PMI (4:00am) Eurozone: GDP SA QoQ (5:00am):

Thursday Dec 05 France: Unemployment Rate

US: Markit US PMI Final (8:58am):

US: ISM Manufacturing (10:00am):

US: Total Vehicle Sales (5:00am): [Nov]

Eurozone: Retail Sales MoM (5:00am):

UK: Unemployment Confidence

US: MBA Mortgage Applications

UK: BoE Bank Rate (7:00am): [Dec]

US: Change in Nonfarm Payrolls

US: ADP (8:15am): [Nov] {175K, n.a.,

US: Challenger Job cuts (7:30am):

US: Unemployment Rate (8:30am): [Nov]

AU: Retail Sales MoM (7:30pm): [3Q]

Canada: Intl Merchandise Trade

Eurozone: ECB Announces Interest

US: Personal Income (8:30am): [Oct]

Note: Highlighted indicators mark critical data/events Source: Nomura

{Consensus, Nomura, Previous}

US: Trade Balance (8:30am): [Oct] $40.0B, n.a., -0.44B}

Canada: Building Permits (8:30am):

Canada: Unemployment Rate (8:30am):

Canada: BoC Rate Decision (10:00am):

US: GDP QoQ (8:30am): [3Q S]

US: Univ. of Michigan Confidence

US: ISM Non-Manf. Composite

US: Bloomberg Consumer Comfort

US: Consumer Credit (3:00pm): [Oct]

US: Sept./Oct. New Home Sales

Canada: Ivey Purchasing Managers

US: Factory Orders (10:00am): [Oct]

Eurozone: ECBs Constancio &

US: Feds Plosser speaks Hawkish

Japan: BoJ Board Member Sato

Canada: Bank of Canada Rate Decision

UK: BoE Rates Decision (7:00am) Eurozone: ECB Rates Decision