Central bank assets

0

2

4

6

8

10

2006 2007 2008 2009 2010 2011 2012 2013

Bank of England Bank of Japan

U.S. Federal Reserve European Central Bank US$ trillions

Source: Datastream.

Central bank target interest rates in advanced countries

remain low

Source: Bloomberg.

0

1

2

3

4

5

6

2007 2008 2009 2010 2011 2012 2013 2014

Policy rate, percent

United Kingdom

Eurozone

Japan

United States

Global real short-term interest rates

Sources: Datastream, IMF, Milken Institute. Note: 3-month interest rates: Canada, China, France, Germany, Italy, Japan, United Kingdom, United States. Weighted by GDP.

-3

-2

-1

0

1

2

3

4

5

1996 1998 2000 2002 2004 2006 2008 2010 2012 2013 Q4

3-month real interest rate, percent

Real short-term interest rates

Sources: Datastream, OECD Statistics, Oxford Economics.

Percent

-6

-4

-2

0

2

4

6

8

10

12

1998 2002 2006 2010 2013 Q4

China Japan U.S. Eurozone UK Percent

A reduction in the Fed’s monthly asset purchases Change in Federal Reserve assets

-60

-40

-20

0

20

40

60

80

100

120

Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14

US$ billions

Source: Federal Reserve Bank of St. Louis.

Monetary base and velocity of money United States

0

4

8

12

16

20

0

1

2

3

4 US$ trillions GDP/Money-base

Monetary base (left axis)

Monetary base velocity (right axis)

Sources: Federal Reserve Bank of St. Louis, U.S. Bureau of Labor Statistics and the Milken Institute.

10-year U.S. Treasury yield

Source: Bloomberg.

0

2

4

6

8

10

12

14

16

18

1964 1971 1978 1985 1992 1999 2006 2013

Percent

Average: 6.6 percent

0

100

200

300

400

500

600

700

2006 2007 2008 2009 2010 2011 2012 2013 2014

Basis points

A rated

Source: Bloomberg.

Corporate bond spreads near lows Corporate bond spreads over U.S. Treasuries

BBB rated

Global inflation

-2

0

2

4

6

8

10

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

World

Headline inflation, percent

Advanced economies

Emerging market and developing countries

Source: IMF WEO.

Unemployment remains high in Eurozone

0

2

4

6

8

10

12

14

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Unemployment rate, percent

Japan

U.K.

Source: Eurostat.

Eurozone

U.S.

60

70

80

90

100

110

120

2011 2012 2013 2014

US$ per domestic currency unit, index (Jan 2011 = 100)

Thai baht Russian ruble

Brazilian real

Indian rupee

Source: Bloomberg.

Emerging market currencies depreciate on taper talk

Cliff Noreen’s slides

Corporate Profits at All Time High

Source: Federal Reserve

1973 - 2013 As of December, 2013

14/719

0

500

1,000

1,500

2,000

($ b

illi

on

)

Recessions U.S. Real After Tax Corporate Profits

$1.9T

S&P 500 Price/Earnings Ratio

Source: Bloomberg

1974 - 2014 As of April, 2014

14/719

5X

10X

15X

20X

25X

30X

S&P

Tra

ilin

g P

/E R

atio

Price/Earnings

17.2X

16.25X

Investment Grade Leverage

Source: BAML

2006 - 2014 As of March, 2014

14/719

1.5x

1.7x

1.9x

2.1x

2.3x

2006 2008 2010 2012 2014

Deb

t/E

BIT

DA

US IG Leverage

Investment Grade Interest Coverage

Source: BAML

2006 - 2014 As of March, 2014

14/719

10x

11x

12x

13x

14x

2006 2008 2010 2012 2014

EB

ITD

A/I

nte

rest

Exp

ense

US IG Coverage Ratio

High Yield Leverage

Source: BAML

2006 - 2014 As of March, 2014

14/719

3.0x

3.4x

3.8x

4.2x

4.6x

5.0x

2006 2008 2010 2012 2014

Deb

t/E

BIT

DA

US HY Leverage

High Yield Interest Rate Coverage

Source: BAML

2006 - 2014 As of March, 2014

14/719

2.5x

3.0x

3.5x

4.0x

2006 2008 2010 2012 2014

EB

ITD

A/I

nte

rest

Exp

ense

US HY Coverage Ratio

U.S. High Yield Issuance

Source: S&P

2006 - 2014 As of March, 2014

14/719

0

100

200

300

400

500

600

700

2006 2007 2008 2009 2010 2011 2012 2013 2014YTD

($ b

illi

on

s)

Bond Issuance Leveraged Loan Issuance

U.S. High Yield BOND Issuance by Rating

Source: S&P

2007 - 2014 As of March, 2014

14/719

18% 20%32% 27% 30% 27% 33% 35%

43% 44%

56%55% 52% 55% 45% 45%

40% 36%

12% 18% 18% 19% 23% 20%

0%

25%

50%

75%

100%

2007 2008 2009 2010 2011 2012 2013 1Q14

BB+ to BB- B+ to B- CCC

U.S. High-Yield LOAN Issuance by Rating

Source: S&P

2007 - 2014 As of March, 2014

14/719

41%

69% 67%58% 56%

48% 42%32%

53%

29% 30% 41% 43%48% 54%

60%

6% 2% 3% 1% 1% 4% 4% 8%

0%

25%

50%

75%

100%

2007 2008 2009 2010 2011 2012 2013 1Q14

BB+ to BB- B+ to B- CCC

U.S. High-Yield BOND Issuance by Purpose

Source: JP Morgan

2004 - 2014 As of March, 2014

14/719

0%

25%

50%

75%

100%

2004 2006 2008 2010 2012 YTD

Per

cen

t o

f to

tal

issu

ance

Refinancing Acquisition financing

U.S. High-Yield LOAN Issuance by Purpose

Source: JP Morgan

2004 - 2014 As of March, 2014

14/719

0%

20%

40%

60%

80%

2004 2006 2008 2010 2012 YTD

Per

cen

t o

f to

tal

issu

ance

Refinancing & Repricing Acquisition financing

New Issue PIK Volume as % of Issuance

Source: S&P

2007 - 2014 As of March, 2014

14/719

13.7%

19.9%

0.9% 0.2%1.8% 1.9%

3.7%2.5%

0%

5%

10%

15%

20%

2007 2008 2009 2010 2011 2012 2013 YTD

PIK/Toggle as % of Total Issuance

High Yield Default Rates

Source: Credit Suisse

2004 - 2014 As of March, 2014

14/719

0

2

4

6

8

10

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Def

ault

s %

HY Bonds Leveraged loans

U.S. Investment Grade Corporate Bond Spread

Source: Bloomberg

1994 - 2014 As of April 23, 2014

14/719

00

175

350

525

700

1994 1998 2002 2006 2010 2014

Bas

is P

oin

ts

Recessions U.S. Investment Grade Average

101

135

U.S. High Yield Corporate Bond Spread

Source: Bloomberg

1994 - 2014 As of April 23, 2014

14/719

00

400

800

1,200

1,600

2,000

1994 1998 2002 2006 2010 2014

Bas

is P

oin

ts

Recessions U.S. High Yield Average

523

343

Primary Dealer Positions

Source: Bloomberg, MarketAxxes, Babson Capital

2004- 2014 As of April, 2014

14/719

0

50

100

150

200

250

2004 2006 2008 2010 2012 2014

($b

illi

on

s)

($billions) Apr-13 Apr-14IG < 1 year 3.1 1.7

IG > 1 Year 11.3 9.4

High Yield 7.4 6.5