2010 fixed income outlook

Money does not perform. People do.


Press conference: Fixed Income Markets – Outlook 2010

Nicolas Forest, Head of Interest Rate Strategy

Koen Van de Maele, CFA, Global Head of Fixed Income

12 January 2010 - Brussels

2

Agenda

I. Interest Rate Outlook

II. Currency Outlook

III. Credit Outlook

IV. Synoptic Table

3

Illiquidity

What are the legacies of the crisis ?The end of the global recession…

US Zone Euro Zone

Economic Data End of 2008 End of 2009 End of 2008 End of 2009

Manufacturing PMI 32.90 53.60 33.90 51.60

Inflation 0.10% 1.80% 1.60% 0.50%

Unemployment Rate 6.80% 10.00% 8.00% 9.80%

Budget Deficit -4.70% -10.00% -2.00% -6.35%

US Zone Euro Zone

Market Data End of 2008 End of 2009 End of 2008 End of 2009

3 Months Libor Rate 1.43% 0.25% 2.83% 0.71%

10Y Government Yield 2.07% 3.83% 2.94% 3.38%

Equity Market 898.00 1115.00 4900.00 5957.00

Implied Volatility 38.87 21.68 38.00 20.16

Systemic Risk

Housing Crisis

Global Recession

Return of Liquidity

Market Normaliza

-tion

Rebound of

Housing Prices

Global Recovery

Explosion of Government

Debt

Source : Bloomberg – IMF – European Commission – Dexia Asset Management

4

Global Public Debt (as a percentage of nominal GDP)

20%

40%

60%

80%

100%

201020092008200720062005200420032002200120001999

Emerging Economies Developed Economies

What are the legacies of the crisis ?

Global Public Debt(in billion of USD)

10 000

20 000

30 000

40 000

50 000

201020092008200720062005200420032002200120001999

Net Borrowing in US credit Markets(as a percentage of GDP)

-30%

-20%

-10%

0%

10%

20%

30%

40%

70 72 74 76 79 81 83 85 88 90 92 94 97 99 01 03 06 08

Government Non-Government

…and the explosion of government debt

x 2.25 in 10 years

Evolution of Central Banks Balance Sheets(basis 100 in 2003)

0

100

200

300

400

500

600

700

800

900

1000

2003 2004 2005 2006 2007 2008 2009

Euro Area

United Kingdom

United States

Emerging Economies

120%(2014)

40%(2014)


5

Inflation Risk

Inflation risk will increase due to the accommodative monetary

policy. But sovereign debt remains credible.

Buy inflation linked bonds

In 2010, the exit timing will be crucialExiting too late will increase the inflation & sovereign risks

Too

Lat

e (Q

1 20

11)

Too

Ear

ly (

Q1

2010

) M

on

etar

y

Budgetary TighteningToo Early (Q1 2010) Too Late (Q1 2011)

Double Dip(no sovereign & inflation risk)

The tightening will derail the recovery. A double dip scenario could support government debt.

Buy core countries

Sovereign & Inflation Risks

The explosion of deficits is strongly bearish and the inflation

risk could support the steepening of the curve

Sovereign Risk

The restrictive monetary policy could reinforce the sovereign risk with risk of downgrades

Sell government bonds


6

The Federal Reserve could be too late… A schedule for the Fed

Inflation RiskInflationist risk will increase due to the accommodative monetary

policy. But sovereign debt remains credible


To

o L

ate

(Q

1 2

01

1)

To

o E

arl

y (Q

1 2

01

0)

Mo

ne

tary

Tig

hte

nin

g

Double DipThe combination of the tightening will derail the

recovery. The double dip scenario could support

government bonds

Sovereign RiskInflationist risk and explosion of deficit are strongly bearish even

if curve could remain steep

Worst CaseThe restrictive monetary policy could reinforce the sovereign

risk. Important risk of downgrades

FED ?

ECB ?




To

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ate

(Q

1 2

01

1)

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y (Q

1 2

01

0)

Mo

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tary

Tig

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nin

g



government bonds





FED ?

ECB ?

Q4 2009 :End Treasury Buying

February 1 :End Lending Facilities

June 30 :End Credit Easing

H2 2010Draining Reserves ?

20102009

Federal Reserve - Holdings of Assets

52% 65%

100%

23%

39% 35%

9%

76%

1%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Dec-07 Dec-08 Dec-09 Jun-10

LT Assets (Treasury Debt)

LT Assets (Agency Debt & MBS)

Temporary Assets

Federal Reserve Balance Sheet

0

500

1 000

1 500

2 000

2 500

Jan-08 Apr-08 Jul-08 Oct-08 Jan-09Apr-09 Jul-09 Oct-09

-1.0

-0.5

0.0

0.5

1.0

Federal Reserve Balance SheetSpread Target-Effective Rate

Programs Ending 01-Feb-10

0

200

400

600

800

1 000

1 200

1 400

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09

CB LiquiditySw apsCPFF

TSLF

ABCP MMMFLF

Primary DealerCredit Facility

FED Holdings of Long Term Assets (Treasuries, Agency Debt & MBS ; $ Bln)

0

500

1 000

1 500

2 000

2 500

2007 2008 2009 2010 2011 2012 2013 2014 2015


7

The Federal Reserve could be too late…

Taylor Rules - Main ScenarioCore CPI NFP FF

T 1.50 -11.00 0.25

T+1 1.50 -11.00 0.24

T+2 1.50 -11.00 0.23

T+3 1.50 0.00 0.23

T+4 1.50 0.00 0.22

T+5 1.50 0.00 0.22

T+6 1.50 50.00 0.25

T+7 1.50 50.00 0.28

T+8 1.50 50.00 0.32

T+9 1.50 50.00 0.36

T+10 1.50 50.00 0.40

T+11 1.50 50.00 0.44

T+12 1.50 50.00 0.47

A schedule for the Fed

Taylor Rules - Alternative ScenarioCore CPI NFP FF

T 1.50 -11.00 0.25

T+1 1.50 0.00 0.25

T+2 1.50 0.00 0.24

T+3 1.60 40.00 0.27

T+4 1.60 40.00 0.30

T+5 1.60 80.00 0.36

T+6 1.70 80.00 0.43

T+7 1.70 120.00 0.52

T+8 1.70 120.00 0.62

T+9 1.80 180.00 0.77

T+10 1.80 180.00 0.91

T+11 1.80 230.00 1.09

T+12 1.80 230.00 1.28




To

o L

ate

(Q

1 2

01

1)

To

o E

arl

y (Q

1 2

01

0)

Mo

ne

tary

Tig

hte

nin

g



government bonds





FED ?

ECB ?




To

o L

ate

(Q

1 2

01

1)

To

o E

arl

y (Q

1 2

01

0)

Mo

ne

tary

Tig

hte

nin

g



government bonds





FED ?

ECB ?

Treasury Yield & Fed Fund Expectations

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10-Year Treasury Yield

Fed Fund Rate expected in 12 months

Jun 91 Jun 94 Jun 97 Jun 00 Jun 03 Jun 06 Jun 09

Liquidity Premium Slope

Jun 91 Jun 94 Jun 97 Jun 00 Jun 03 Jun 06 Jun 09

Term Premium


8

… but the ECB too early

Composition of ECB Open Market Operation

85%

39%

17% 14%

100%

15%

12%

13%

4%

82%

70%

49%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Dec-08 Jun-09 Oct-09 Dec-09 Dec-10

12M

6M

3M andBelow

A schedule for the ECB




To

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ate

(Q

1 2

01

1)

To

o E

arl

y (Q

1 2

01

0)

Mo

ne

tary

Tig

hte

nin

g



government bonds





FED ?

ECB ?




To

o L

ate

(Q

1 2

01

1)

To

o E

arl

y (Q

1 2

01

0)

Mo

ne

tary

Tig

hte

nin

g



government bonds





FED ?

ECB ?

0

50 000

100 000

150 000

200 000

Dec-09

Projected Excess Liquidity

Jun-10 Sep-10 Dec-10Mar-10

December 16 Last 1y LTROEONIA = 0.35%

March 31Last 6m LTROEONIA = 0.35%

April 13 End Full Alloc.

EONIA = 0.50%

July 1€ 442 bln mature

EONIA = 1.00%

September 30€ 75 bln mature

EONIA = 1.05%

2009 2010

Average Duration of ECB Open Market Operations

0

50

100

150

200

250

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09

(day

s)

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

(Spr

ead)

Average Duration

Refi-EONIA

Refi-EONIA Moving Avg (15)


9

German Yield & ECB Expectations

0.0

1.0

2.0

3.0

4.0

5.0

6.0

10-Year German Yield

ECB Rate expected in 12 months

Jan 99 Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09

Liquidity Premium Slope

Jan 99 Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09

Term Premium

… but the ECB too early

Taylor Rules - Main ScenarioCPI U RATE ECB RATE

T 0.31 7.80 1.00

T+1 0.50 7.80 1.06

T+2 0.50 7.80 1.11

T+3 1.00 7.80 1.16

T+4 1.00 7.80 1.22

T+5 1.50 7.80 1.29

T+6 1.50 7.80 1.35

T+7 1.30 7.80 1.39

T+8 1.30 7.80 1.43

T+9 1.00 7.80 1.48

T+10 1.00 7.80 1.53

T+11 1.00 7.80 1.58

T+12 1.00 7.80 1.63

A schedule for the ECB




To

o L

ate

(Q

1 2

01

1)

To

o E

arl

y (Q

1 2

01

0)

Mo

ne

tary

Tig

hte

nin

g



government bonds





FED ?

ECB ?




To

o L

ate

(Q

1 2

01

1)

To

o E

arl

y (Q

1 2

01

0)

Mo

ne

tary

Tig

hte

nin

g



government bonds





FED ?

ECB ?

Taylor Rules - Alternative ScenarioCPI U RATE ECB RATE

T 0.31 7.80 1.00

T+1 0.50 7.80 1.06

T+2 0.50 7.80 1.12

T+3 1.00 7.80 1.17

T+4 1.00 7.60 1.24

T+5 1.50 7.60 1.32

T+6 1.50 7.60 1.39

T+7 1.70 7.40 1.44

T+8 1.70 7.40 1.52

T+9 2.00 7.40 1.60

T+10 2.00 7.00 1.68

T+11 2.30 7.00 1.78

T+12 2.30 7.00 1.88


10

The surge in public debt will create new imbalances…

Net interest payments to fiscal revenues2014

0

5

10

15

20

25

Indi

a

Tur

key

Uni

ted

Sta

tes

Ital

y

Mex

ico

Bra

zil

Indo

nesi

a

Adv

ance

dG

-20

econ

omie

s

G-2

0C

ount

ries

Em

ergi

ngG

-20

econ

omie

s

Uni

ted

Kin

gdom

Jap

an (

net

debt

)

Arg

entin

a

Fra

nce

Kor

ea

Ger

man

y

Sou

thA

fric

a

Chi

na

Aus

tral

ia

Rus

sia

Sau

diA

rabi

a

Can

ada

Net interest payments to GDP 2014

0

1

2

3

4

5

6

7 It

aly

Indi

a

Tur

key

Uni

ted

Sta

tes

Bra

zil

Adv

ance

dG

-20

econ

omie

s

Fra

nce

Uni

ted

Kin

gdom

G-2

0C

ount

ries

Mex

ico

Arg

entin

a

Jap

an (

net

debt

)

Em

ergi

ngG

-20

econ

omie

s

Ger

man

y

Indo

nesi

a

Kor

ea

Sou

thA

fric

a

Aus

tral

ia

Chi

na

Rus

sia

Sau

diA

rabi

a

Can

ada

The Debt Conundrum







government bonds





GREECE ?IRELAND ?







government bonds





GREECE ?IRELAND ?

General government gross debt to fiscal revenues2014

050

100150200250300350400450500

Jap

an (

net

debt

)

Uni

ted

Sta

tes

Indi

a

Adv

ance

dG

-20

econ

omie

s

Sou

thA

fric

a

Ital

y

Uni

ted

Kin

gdom

G-2

0C

ount

ries

Mex

ico

Ger

man

y

Fra

nce

Indo

nesi

a

Can

ada

Tur

key

Bra

zil

Em

ergi

ngG

-20

econ

omie

s

Kor

ea

Arg

entin

a

Chi

na

Aus

tral

ia

Rus

sia

Sau

diA

rabi

a

+ 105%in 7 years

+ 111%in 7 years

+ 76%in 7 years


11

Country Experiences with Large Fiscal adjustments

United States (2000)

United Kingdom (2000)

Sweden (1987)

Spain (2006)

P ortugal (1985)

New Zealand (1995)

Nether (2000)

J apan (1990) Italy (1993)

Ireland (1989)

Greece (1995)

Germany (1989)

Finland (2000)

Denmark (1986)

Canada (1999) Belgium (1998)

Australia (1988)

0

5

10

15

20

25

0 2 4 6 8 10 12 14 16Length (years)

Siz

e of

adj

ustm

ent (

% o

f GD

P)

2030 Debt target

r-g = 0 r-g = 1 r-g = 2

60 percent of GDP

All advanced economies 6.6 7.8 9.1

G-20 advanced economies 6.8 8.0 9.4

High debt 7.1 8.4 9.8

Low debt 0.5 0.9 1.3

80 percent of GDP



High debt 5.7 7.0 8.5

Low debt 0.5 0.9 1.3

Pre-crisis levels



High debt 7.0 8.3 9.6

Low debt 1.2 1.5 1.9

* r-g indicates the assumed difference betw een the interest rate and the rate of economic grow th

Required adjustment of Structural Primary Balance between 2010 and 2020

… and require large fiscal restrictions The Debt Conundrum







government bonds





GREECE ?IRELAND ?







government bonds





GREECE ?IRELAND ?

Structural Balance(percentage of potential GDP )

-14-12-10-8-6-4-20246

Australia Belgium Finland France Germany Greece Ireland Italy Netherlands Portugal Spain UnitedKingdom

UnitedStates

2007 2008 2009 2010


12

The fiscal exit strategy will penalize budgetary excesses…

Public Deficit-20

-15

-10

-5

0

5

10

AUSTRIA BELGIUM FINLAND FRANCE GERMANY GREECE IRELAND ITALY NETHER PORTUGAL SPAIN UK US JAPAN

2008 2009 2010

Unemployment Rate

0

5

10

15

20

25

AUSTRIA BELGIUM FINLAND FRANCE GERMANY GREECE IRELAND ITALY NETHER PORTUGAL SPAIN UK US JAPAN

2009 2010 2011

Euro Area - implosion or political test ?







government bonds





GREECE ?IRELAND ?







government bonds





GREECE ?IRELAND ?

Fiscal Adjustment Strategy to achieve debt target 2030 of 60%

0

24

6

8

1012

14

16

AUSTRIA BELGIUM FINLAND FRANCE GERMANY GREECE IRELAND ITALY NETHERLANDSPORTUGAL SPAIN UK USA JAPAN


13

… but will offer opportunities to investors

Intra-EMU Scoring

SPAINPORTUGAL

NETHERLANDS

ITALY

IRELAND

GREECE

GERMANY

FRANCE

FINLAND

BELGIUM

AUSTRIA

3

4

5

6

7

8

9

1 2 3 4 5 6 7 8

Fundamental Score

Mar

ket

Sco

re

Government spread against Germany(10y generic yield)

0

50

100

150

200

250

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

0

100

200

300

400

500

600

Average of EMU spreads OAS [R.H.S]

Government spread against Germany(10y generic yield)

-100

0

100

200

300

400

500

600

01 02 03 04 05 06 07 08 09

OAS ITALY GREECE IRELAND

Euro Area - implosion or political test ?







government bonds





GREECE ?IRELAND ?







government bonds





GREECE ?IRELAND ?

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00AUSTRIA

BELGIUM

FINLAND

FRANCE

GERMANY

GREECEIRELAND

ITALY

NETHERLANDS

PORTUGAL

SPAIN

ECONOMY SCORE

DEBT SCORE

Specific risk…


* Composed by debt score (public deficit – debt / GDP) and economy score (GDP – unemployment – inflation)

* C

ompo

sed

by s

prea

d ad

just

ed t

o ris

k an

d to

liqu

idity

14

Public debt per capita2010

JAPAN

BELGIUM

ITALY

FRANCE

CANADA

GERMANY

UNITED KINGDOM

UNITED STATES

SPAIN

EMERGING COUNTRIES

0 20 000 40 000 60 000 80 000 100 000

2010

Emerging economies have more favorable debt ratio trends…

Emerging Public Debt as a percentage of total public debt

12%

13%

14%

15%

16%

17%

18%

19%

20%

201020092008200720062005200420032002200120001999

Emerging Nominal PIBas a percentage of total nominal PIB

15%

20%

25%

30%

35%

40%

201020092008200720062005200420032002200120001999

The virtues of the emerging economies

In 2010, the debt of emerging economies

remains relatively stable against the global public

debt…

…but over the last 10 years, its share in the global GDP has

increased with 12%

The public debt per capita ratio of the emerging

countries is clearly below average


15

…and remain buyers of Western government bonds

GDP constant prices( as a percentage of GDP)

-6

-4

-2

0

2

4

6

8

10

12

1990 1993 1996 1999 2002 2005 2008 2011 2014

WorldAdvanced economiesEuropean UnionEmerging and developing economiesDeveloping Asia

Gross national savings( as a percentage of GDP)

0

10

20

30

40

50

60

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

WorldAdvanced economiesEmerging and developing economiesDeveloping Asia

The virtues of the emerging economies

General Government Balance(as a percentage of GDP)

-12

-10

-8

-6

-4

-2

0

2

4

6

1990 199219941996 199820002002 200420062008 2010

Major advanced economies (G7)

European Union

New ly industrialized Asian economies

After the financial crisis, emerging economies seem reinforced. They represent more than 35% of the global GDP but their share of the global debt remains low.The Asian savings rates are high and could decrease in a long term perspective (shift from saving

to spending)But in the short term, the Asian savings could support the Western government debt


16

2010 Trade recommendationsInterest Rate Trades

Long TIPS The Federal Reserve could continue to buy financial assets in 2010 and therefore increase its balance sheet. To tackle the unemployment issue, the Fed could risk higher inflation. US inflation could therefore face upside risks due to the accommodative monetary policy and higher commodity prices. Buy US inflation linked bonds 7 years segment

Euro curve flattenerThe ECB has already laid out its roadmap for exit strategies. The normalization of liquidity conditions could allow the ECB to envisage the end of the full-allotment in Q2 2010 and the short term maturities could suffer from a rebound of Eonia. Anticipations of a tightening cycle will favor a flattening trade. Buy 10 year relative to 2 year

Long Greece against SpainThe current situation of Greece is critical due to a negative growth and high debt. Despite the recent downgrades by different agencies, we consider that the cheapening of Greece offers a buying opportunity. On the contrary, Spain has become too expensive in regards with the current economic situation. The level of unemployment combined with the critical housing market will weigh on the debt situation. Sell Spain 5 years against Greece

Long Netherlands against GermanyThe economic and debt situation remain robust in the Netherlands. Dutch bonds give a pick-up of 20 bps with a comparable liquidity to Germany. Buy Netherlands 10 year against Germany

Long Emerging debtPerspectives on growth are clearly positive (6% against 4% for the global growth in 2010) and the debt situation is much better and has improved relative to the developed countries. On a long term perspective, emerging markets offer a diversification with attractive yields. Buy Brazil or Russia


Too

Lat

eT

oo E

arly

Too Early Too Late

FED

ECB

BOE

Ireland Spain Greece

USA

17

2010 Trade recommendations

-4 -2 0 2 4

USA

Euro Area

UK

Japan

DU

RA

TIO

N

-4 -2 0 2 4

USA

Euro Area

UK

Japan

CU

RV

E

Interest Rate Strategies

-4 -2 0 2 4

USA

Euro Area

UK

Japan

BE

IN

FL

AT

ION

BullishBearish 2s10s Steeper2s10s Flatter HigherLower

Buy Area

Sell Area

Intra-EMU Relative Scoring

ITALY NETHER PORT IRELAND AUSTRIA GREECE FRANCE FINLAND GERMANY SPAIN BELGIUM

Global Relative Scoring

JAPAN

UK

USA

EURO ZONE

-200

-150

-100

-50

0

50

100

2 2.5 3 3.5 4 4.5 5

Fundamental Score

10y

go

vern

men

t sp

read

ag

ain

st G

erm

any


18

Agenda

I. Interest Rates Outlook


III. Credit Outlook

IV. Synoptic Table

19

2010 - the end of a disliked USD ?USD recent appreciation is premature…

Rebound of the leadings, Rebound of the stock markets, Surge of positive data surprises

USD/EUR & US Stock Market

600

700

800

900

1000

1100

1200

J an 09 Apr 09 J ul 09 Oct 09

1.2

1.25

1.3

1.35

1.4

1.45

1.5

1.55

S&P 500 USD/ EUR

End of Year positioning reversal

Recent risk aversion due to Greek downgradesFed Funds Futures

0

0.2

0.4

0.6

0.8

1

1.2

Jan 10 Apr 10 Jul 10 Oct 10Implied Fed Fund rate from FFunds Futures

The market expects the Fed to hike in H2 2010 with a end year target of 1.1%

Implied Speculative USD Positions (against liquid major currencies)

-300000

-200000

-100000

0

100000

200000

Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10

1.15

1.25

1.35

1.45

1.55

Source : Bloomberg - DataStream – Dexia Asset Management

USD/EUR and Risk Aversion

1.21.251.3

1.351.4

1.451.5

1.551.6

1.65

Jul-08 Jan-09 Jul-09 Jan-10

0

50

100

150

200

250

300

350

USD/EUR (l.h.s.) Greece 10Y spread (vs Bund)

20

2010 - the end of a disliked USD ?

2009 Currency changes vs EUR

CHF

NOK

SEK

NZD

AUD

CAD

GBP

JPY

USD

- 10% - 5% 0% 5% 10% 15% 20% 25%

…but the current USD levels remain cheap in a longer term perspective

“Natural Funders”Low yieds with CA surplus

Comeback of the carry trades

USD/EUR and Purchasing Power Parity

0.7

1

1.3

1.6

Feb-86 Feb-91 Feb-96 Feb-01 Feb-06

0.7

1.0

1.3

1.6

USDEUR USDEUR PPP (1980-04 CPI average)

Expensive EUR

The USD follows long term cycles

Hig

h sh

ort r

ates

Sust

aine

d gr

owth

USD

und

erva

lued

Res

trict

ive

mon

etar

y po

licy

New

Eco

nom

yU

SD u

nder

valu

ed

USD Trade Weighted Index

60

80

100

120

140

160

180

1975 1980 1985 1990 1995 2000 2005

Danger Zone

1.40

AU

NZ

NO

JP CHSW

US

UKCA

EMU

0

3

5

-10 -5 0 5 10 15 20

C/A Balance (%GDP)

3M

th D

epos

it R

ate

Source : DataStream – Dexia Asset Management

21

JPY - still a lagging economyJapanese deflation, high public debt and weak internal demand will weigh on JPY

JPY/USD & Monetary Base Growth(from 2000 to 2009)

80

90

100

110

120

130

140

-20 -10 0 10 20 30 40

Relative Monetary Base Growth (US minus J P)

J PY/ USD

US drastic quantitative easing helped to sustain JPY till now but …

J apan GDP : Contribution to Growth

-6

-4

-2

0

2

4

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Private Consumption Public ConsumptionTotal Investment InventoryNX GDP

Japanese export driven growth will not be enough to bring GDP growth above 2% in 2010

CPI - Favorable Scenario

-2

-1

0

1

2

3

4

5

Q1 1999 Q1 2002 Q1 2005 Q1 2008

US J apan Euro area UK

Quantitative easing will persist for a while in Japan due to continuing deflation…

100


22

Norwegian krona benefits from good fundamentals…

Norway - Public Finances

0

5

10

15

20

Jan 99 Jan 02 Jan 05 Jan 08

Public Balance (%GDP)

Norway - Current Account

0

5

10

15

20

25

1989 1992 1995 1998 2001 2004 2007

Current account %GDP

Potential for more appreciation

7.80Unemployment Rates

-2

0

2

4

6

8

10

US EMU UK JP CA AU NZ SWD NW SWS

10Y Avg Last Data

NOK/EUR Fair Value

7

7.5

8

8.5

9

9.5

10

Jan 99 Jan 02 Jan 05 Jan 08NOK/EUR LT Value Actual NOK/EUR

Cheap NOK is not yet back to fair value

Comfortable Norway current account surplus

Still a positive budget account

Unemployment remains low and will sustain internal growth


23

Polish zloty will outperform other Eastern European currencies…

Poland : Convergence criteria

Maastricht criteria Poland current

Fiscal Balance: -6.25% of GDP

Long-term interest rate (12mth avge): 6.10%

HICP inflation: 4%

Public debt : 53% of GDP

1.7%

60%

-3%

6%

Real GDP Growth (%YOY)

-10-8-6-4-202468

10

Dec 99 Dec 01 Dec 03 Dec 05 Dec 07

Poland Hungary Czech Rep.

Poland’s prospects remain good for convergence

3Mth Yield Forward Change

-60

-40

-20

0

20

40

60

80

100

Jun 09 Sep 09 Dec 09

Poland Hungary Czech Rep.

PLN/EUR Evolution

3.00

3.40

3.80

4.20

4.60

5.00

J an 00 J an 02 J an 04 J an 06 J an 08 J an 10

Poland is not so bad positioned w.r.t. Maastricht criteria

Polish growth remains positive

Rate hikes will occur in 2010

PLN should recover toward previous crisis level

3.60


24

Agenda



III. Credit Outlook

IV. Synoptic Table

25

The rally has just startedDon’t exit credit yet…spreads to tighten further in 2010

0

100

200

300

400

500

600

J an-73 J an-77 J an-81 J an-85 J an-89 J an-93 J an-97 J an-01 J an-05 J an-09

Opt

ion

Adju

sted

Spr

ead

Source : Datastream – Dexia Asset Management

-15

-10

-5

0

5

10

15

20

J an-73 J an-77 J an-81 J an-85 J an-89 J an-93 J an-97 J an-01 J an-05 J an-09

Cum

ulat

ed E

xces

s Re

turn

9 months of rally compared to 40

months of recovery on

average since 1970

Credit market is remunerative on the long term… Outperformance generated 1 year after the bottom

of the crisis (5.79%) exceeds the cumulative loss (-4.99%)

$ Credit over 4 decades and 6 crisis

26

20

30

40

50

60

70

J an-90 J an-93 J an-96 J an-99 J an-02 J an-05 J an-08

US

ISM

New

Ord

ers

-15%

-10%

-5%

0%

5%

10%

Indu

stri

al P

rodu

ctio

n % Y

oY

ISM New Orders IP

Exiting an economical recession context

Source : Dexia Asset Management, Datastream, Moody’s, Federal Reserve, Bankscope

Corporate activity is set to pick up

2-3 % growth has been an ideal environment for credit

Ideal for investment grade credit

Non performing loans cycle to peak at the end of Q2 2010

R² : 46%

-2.50

-2.00

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

-3-0 0-1 1-2 2-3 3-4 >4

Real GDP Bucket

Quar

terl

y Ex

cess

Retu

rn (

%)

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

J un-85 J un-88 J un-91 J un-94 J un-97 J un-00 J un-03 J un-06 J un-09

Empl

oym

ent

Surv

ey Ind

ice

(%)

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

Cha

rge

Off

(%)

ISM Manufacturing - Employment Survey US Charge Off Rates

27

Exiting an economical recession context

0

100

200

300

400

500

600

J an-74 J an-78 J an-82 J an-86 J an-90 J an-94 J an-98 J an-02 J an-06

Spre

ad T

o G

over

nmen

t (b

p)

0

5

10

15

20

US

Fede

ral Fu

nds

Rate

(%)

OAS FED

Source : Dexia Asset Management, Datastream

Monetary policy is not a risk

Fed policy rate over the last 40 years

Cumulated Spread changes before & after first rate hike

-50

-40

-30

-20

-10

0

10

20

30

40

50

-12 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12

Months

Mon

thly

Spr

ead

Cha

nge

(bp)

1977 1988 1994 1999 2004

28

Balance sheet repairment supports credit in 2010

Source : Dexia Asset Management, Datastream, FDIC, Bankscope

Further strengthening of the capital base

From an ‘intensive care’ year into a ‘back to life’ year

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

Dec-

02

Jun-0

3

Dec-

03

Jun-0

4

Dec-

04

Jun-0

5

Dec-

05

Jun-0

6

Dec-

06

Jun-0

7

Dec-

07

Jun-0

8

Dec-

08

Jun-0

9

Dec-

09

Loans Growth Deposits Growth

Deleveraging remains the focusUS commercial banks

Towards a new banking system (BIS, CRD, National regulators)‘More than a stricter regulatory scheme, the philosophy is to ensure that banks are sufficiently sound to refinance the real economy’

New regulation on capital-Higher minimum requirements-Better quality towards Core Tier 1 (equity, retained earnings)-Counter-cyclical provisioning philosophy

New leverage measure-Limit the balance sheet size

New liquidity constraint-30 days liquidity coverage ratio & liquid assets buffer

Implications for Financial debt

Enhanced bondholder protection

Limited grandfathering of the current Tier 1 debt as capital: greater incentive to call

Current callable Lower Tier 2 debt will loose their capital status over time (step-ups will no longer be accepted)

0

50

100

150

200

250

300

350

400

450

Sep-07 Dec-07 Mar-08 J un-08 Sep-08 Dec-08 Mar-09 J un-09 Sep-09 Dec-09

$ bn

7

8

8

9

9

10

10

11

11

12Ti

er 1

cap

ital

rat

io

Total Loss Total Capital Tier 1 Ratio

29

2.00

2.50

3.00

3.50

4.00

4.50

5.00

5.50

6.00

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Deb

t To

Profi

ts

0

50

100

150

200

250

300

350

400

Spre

ad

Total Debt/ Operating Income Spread BBB+


0

50000

100000

150000

200000

250000

300000

350000

400000

450000

500000

Jan-9

0

Jan-9

2

Jan-9

4

Jan-9

6

Jan-9

8

Jan-0

0

Jan-0

2

Jan-0

4

Jan-0

6

Jan-0

8

M&A Volume

Source : Dexia Asset Management, Bloomberg, Datastream, Moody’s

Focus on revenues generation

The cyclical rebound of non-financials

Still in deleveraging mode

Opportunistic merger & acquisition can surface again

-40

-20

0

20

40

60

80

100

Q1

1990

Q3

1991

Q1

1993

Q3

1994

Q1

1996

Q3

1997

Q1

1999

Q3

2000

Q1

2002

Q3

2003

Q1

2005

Q3

2006

Q1

2008

Q3

2009

Lend

ing

surv

ey n

et t

ight

enin

g (%

)

0

2

4

6

8

10

12

14

Moo

dy's

Def

ault

Rat

e

US C&I Loan Survey Moody's Default Rate

Corporate health is improving

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

Sep-

07

Dec

-07

Mar

-08

Jun-

08

Sep-

08

Dec

-08

Mar

-09

Jun-

09

Sep-

09

Dec

-09

Mar

-10

Jun-

10

Sep-

10

Net

Inc

ome

Gro

wth

( -

1 y)

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

Sale

s G

row

th (

-1

y)

Net Income Growth Sales growth

Aggresive costs cutting & capex reduction

Default rate expectation tends

to its long term average 4.8%

30

2%

4%

6%

8%

10%

12%

14%

16%

Jan-9

0

Jan-9

2

Jan-9

4

Jan-9

6

Jan-9

8

Jan-0

0

Jan-0

2

Jan-0

4

Jan-0

6

Jan-0

8

Jan-1

0

Cash

Ass

ets

% T

ota

l (

$%)


15

25

35

45

Q1 1

990

Q2 1

991

Q3 1

992

Q4 1

993

Q1 1

995

Q2 1

996

Q3 1

997

Q4 1

998

Q1 2

000

Q2 2

001

Q3 2

002

Q4 2

003

Q1 2

005

Q2 2

006

Q3 2

007

Q4 2

008Liq

uid

Ass

ets

on S

hort

Term

Lia

bilit

ies

(%)

-50

0

50

100

150

200

250

300

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Eur

Billio

ns

Supply Redemptions Net Supply

Source : Dexia Asset Management, Datastream

US Banks increased liquid assets buffer Aggressive cost cutting & pre-financing increase cash on Non-fin balance sheets

Liquidity stays at the central stage

Non-financials supply – lower than in 2009 huge redemptions and pre-financing

Reopening of the primary market for covered & senior bonds

Desintermediation and liquidity

focus

New regulation will impose a minimum liquidity

requirement

0%

10%

20%

30%

40%

50%

60%

% covered % Govt Guaranteed % Senior Non Guaranteed

2009 2010

Gro

ss 2

60

bn

Net

-31

bn

Gro

ss 2

09

bn

Net

-14

bn

Gro

ss &

Net

27

6 b

n

Gro

ss 2

40

bn

Net

-94

bn

Gro

ss 3

75

bn

Net

-13

bn

Gro

ss 6

0 b

n

Net

38

bn

31

Credit Strategy 2010

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1Ja

n-9

9Ju

l-99

Jan-0

0Ju

l-00

Jan-0

1Ju

l-01

Jan-0

2Ju

l-02

Jan-0

3Ju

l-03

Jan-0

4Ju

l-04

Jan-0

5Ju

l-05

Jan-0

6Ju

l-06

Jan-0

7Ju

l-07

Jan-0

8Ju

l-08

Jan-0

9Ju

l-09

Spre

ad

To

yiel

d R

ati

o (%

)

3.15%

4.98%

6.30%

9.87%

7.09%

0.16%0.73%

1.19%

3.10%

1.71%

0%

2.22%

4.45%

6.43%

4.49%

0%

2%

4%

6%

8%

10%

12%

AAA AA A BBB I nvestmentGradeI mplied Default Rate with Recovery Rate = 30%

Average 5Y Historical Default RateWorst 5Y Historical Default Rate

2

3

4

5

6

7

8

Jan

-05

Se

p-0

5

Ma

y-0

6

Jan

-07

Se

p-0

7

Ma

y-0

8

Jan

-09

Se

p-0

9

Cre

dit

Yie

ld -

Div

iden

d Y

ield

(%

)

Yield Gap

Source: Dexia Asset Management, iBoxx, Datastream

Spreads imply a default rate of 7.09% over the next 5 years versus 1.71% historically

Risk premium accounts for50% of yield

Credit valuation is still attractive…

Technicals favour credit bonds over sovereign bonds Credit - Equity premium is narrowing

Rising dividend expectations will

favour equity, however

demand for credit from

institutionals will remain strong

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

2003 2004 2005 2006 2007 2008 2009 2010

Corp % GDP Govt % GDP

32

Ove

rwei

ght

Source: Dexia Asset Management, iBoxx

Credit Strategy 2010

Auto

Financial services

Health Care

Media

Bank LT2

Bank Upper tier 2

Ins Senior

Ins Sub

BasicChemicals

Construction

Food

IndustrialsOilRetailTelecom

Travel

Utilities

Bank Tier 1

Bank Senior

50

150

250

350

450

550

650

750

850

950

Average Credit Quality

Spre

ad T

o G

ovt

AA- A+ A A- BBB+ BBB BBB-

IssuerNational

Champion

Diversified Earnings

profile

Strong asset quality

Capital & liquidty buffer

Strong franchise- wholesale

market

Potential winner new

regulation

Gain on T1 debt - exit govt support

BNP v v v v v x xBPCE v v v v v x xCitigroup v v x v v x vCredit Suisse v v v v v x xRBS v v x x v x vSan Paolo IMI v v v v v v xSantander v v v v v v xSoc. Générale v v v v v x x

Be long credit …financial sector remains our core strategy

Relative attractiveness of the financial sector Switch from Non-financial defensive issuers into more cyclical issuers

Te

lec

om

Ita

lia

- T

ele

co

m

Pem

ex

– O

il &

Gas

Veo

lia

– U

tili

tie

s

Sab

ic –

Ch

em

ica

ls

Ber

tels

ma

n –

Me

dia

BA

T –

To

ba

cco

La

farg

e –

Co

ns

tru

cti

on

CE

Z –

Uti

liti

es

Ma

n –

In

du

str

ials

Favour improving fundamentals and better liquidity names within higher beta names

Arc

elo

r –

Bas

ics

0

100

200

300

400

500

Non Fin AAA Non Fin AA Non Fin A Non Fin BBB

Libor

Spre

ad

33

Agenda



III. Credit Outlook

IV. Synoptic Table

34

Synoptic Table

Current Q1 2010 Q4 2010

Fed Fund Target 0.25 0.25 0.25

2 Years Interest Rate 1.15 0.80 1.10

10 Years Breakeven Rate 2.40 2.30 2.60


2s10s Curve 275 280 310

Eonia Rate 0.35 0.35 1.00


10 Years Breakeven Rate 2.00 1.90 2.10


2s10s Curve 205 210 180

USD/EUR 1.44 1.52 1.40

JPY/USD 91.00 85.00 100.00

GBP/EUR 0.90 0.95 0.90

AUD/USD 0.89 1.00 0.85

CAD/USD 1.05 1.00 1.10

NOK/EUR 8.35 8.20 7.80

SEK/EUR 10.40 10.10 9.80

PLN/EUR 4.16 4.00 3.80

HUF/EUR 273.00 270.00 290.00

CREDIT Euro Corporate Spread 166.00 145.00 90.00

USA INTEREST

RATE

GERMANY INTEREST

RATE

CURRENCY

Source : Dexia Asset Management

35

Addresses

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36

Disclaimer


This document is published purely for the purposes of information, it contains no offer for the purchase or sale of financial instruments does not comprise investment advice and it is not confirmation of any transaction unless expressly agreed otherwise. The information contained in this document was obtained from a number of different sources. Dexia Asset Management exercises the greatest care when choosing its sources of information and passing on this information. Nevertheless errors or omissions in those sources or processes cannot be excluded a priori. Dexia AM cannot be held liable for any direct or indirect damage or loss resulting from the use of this document. The contents of this document may be reproduced only with the prior written agreement of Dexia AM. The intellectual property rights of Dexia AM must be respected at all times.

Warning : If this document mentions the past performances of a financial instrument or index or an investment service, refers to simulations of such past performances or contains data relating to future performances, the client is aware that those performances and/or forecasts are not a reliable indicator of future performances.

Moreover, Dexia AM specifies that:• in the case where performances are gross, the performance may be affected by commissions, fees and other charges;• in the case where the performance is expressed in another currency than that of the investor’s country of residence, the returns mentioned may increase or decrease as a result of currency fluctuations.

If this document makes reference to a particular tax treatment, the investor is aware that such information depends on the individual circumstances of each investor and that it may be subject to change in the future.

This document does not comprise any investment research as defined in article 24, §1 of Directive 2006/73/CE dated 10 August 2006 implementing Directive 2004/39/CE of the European Parliament and Council. If this information is a marketing communication, Dexia AM wants to clarify that it was not designed according to the legal requirements to promote the independence of investment research, and it is not subject to any prohibition on dealing prior to the dissemination of the investment research.

Dexia AM invites the investors to always consult the fund prospectus before investing in a fund. The prospectus and other information relating to the fund are available on our site at www.dexia-am.com.

2010 fixed income outlook

Documents

global debt

sovereign debt

western government debt

years source

global public debt

debt of emerging economies

ecb source

us inflation