jpm fixed income

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1

Michael FeroliChief US Economist

JPMorganNovember 2010

C l i c k t o e d i t M a s t e r t i t l e s t y l e

The US outlook: growth, with malaise



2

Economic outlookForecast: gradual improvement in growth, low inflation

Forecast: Sustained, but unexciting, economic growth

Economy has lost momentum since April

Look for gradual improvement from here

Profits are up, and business is spending and hiring Financial markets are improving, reduced chance of tax increases

Labor income is expanding, saving rate has already lifted

But…

— Inventory situation is challenging— Fiscal drags continue, intensify

Low core inflation and a Fed wanting to help the economy

The unemployment will be high for years

Core inflation is down to 1% and probably still falling

The Fed wants to be growth-supportive; another QE program

Fed easing will be helpful, but no panacea



3

US economic forecastUS economic forecast

Another year of dull growthAnother year of dull growth

%ch, saar

1H10 2H10 1H11 2H11

Real GDP 2.7 1.8 2.5 3.5

Real consumer spending 2.0 2.0 2.1 2.9

Core CPI 0.4 0.9 0.5 0.9

Unemployment (%, eop) 9.5 9.8 9.7 9.5

Fed Funds rate (%, eop) 0.13 0.13 0.13 0.13

10-year Treasury (%, eop) 2.88 2.25 2.25 2.25



4

The recovery in pictures: dull growthgradually firming over time

-10

-5

0

5

10

%ch at annual rate over 1 quarter

Real GDP

80 85 90 95 00 05 10

Forecast

2

4

6

8

10

12

percent, sa

Unemployment rate

80 85 90 95 00 05 10

Forecast



5

Two near term drags: inventories andfiscal withdrawal

-10

-5

0

5

10

% ch, saar

Inventories and sales

98 00 02 04 06 08 10

Business final sales

Private inventories

-2

-1

0

1

2

3

Percentage point contribution to annualized GDP

growth

Impact of 2009 fiscal stimulus packag

2009 2010 2011 2012



6

Recessions plant the seeds for recovery

-5

0

5

10

15

% ch, oya

Business costs and prices

48 53 58 63 68 73 78 83 88 93 98 03 08

Unit labor

costs

Business output prices

-5

0

5

10

15

% ch, oya

Business costs and prices

48 53 58 63 68 73 78 83 88 93 98 03 08

Unit labor

costs

Business output prices



7

Profit margins, labor costs should eventuallylift hiring

-8

-4

0

4

8

4

6

8

10

12

14

%ch., oya

Profits and employment% of GDP

60 65 70 75 80 85 90 95 00 05 10

ProfitsPrivate payrolls

-8

-4

0

4

8

4

6

8

10

12

14

%ch., oyaProfits and employment

% of GDP

60 65 70 75 80 85 90 95 00 05 10

ProfitsPrivate payrolls



8

Labor market following the moderntemplate

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1 3 5 7 9 11 13 15 17 19 21 23 25

Index, trough=1

Job finding probability

Range of 6 prior post-

WWII recoveries

2001

Months after

19912009

98

99

100

101

102

103

104

105

106

107

108

-8 -4 0 4 8 12 16 20Months from trough

Private payrolls around recessionsTrough employment = 100

1982

1975

1991

2001

2009



9

Income, unemployment may tell differingstories in coming months

32.5

33.0

33.5

34.0

34.5

35.0

64.0

65.0

66.0

67.0

verage weekly hours share of working age pop.

88 93 98 03 08

Participation rate

Workweek

32.5

33.0

33.5

34.0

34.5

35.0

64.0

65.0

66.0

67.0

verage weekly hours share of working age pop.

88 93 98 03 08

Participation rate

Workweek



10

Unemployment mostly cyclical, notstructural

0

200

400

600

800

1000

1200

000s, sa, unemployed 27 weeks or moreLong-term unemployed

2005 2006 2007 2008 2009 2010

Manufacturing

Health andeducation

Trade

Construction

6000

6500

7000

7500

8000

8500

-6

-4

-2

0

2

4

6

000s

Job-related moving%ch, oya

98 00 02 04 06 08

Nonfarm

employmentJob-related

internal

migration

6000

6500

7000

7500

8000

8500

-6

-4

-2

0

2

4

6

000s

Job-related moving%ch, oya

98 00 02 04 06 08

Nonfarm

employmentJob-related

internal

migration

2.5

3.0

3.5

4.0

4.5

Ratio: unskilled/skilled unemp. rate

92 94 96 98 00 02 04 06 08 10

u-rate, less than high school / u

rate, college degree

2.5

3.0

3.5

4.0

4.5

Ratio: unskilled/skilled unemp. rate

92 94 96 98 00 02 04 06 08 10

u-rate, less than high school / u

rate, college degree



11

Labor market critical for consumers

20

40

60

80

100

120

140

-20

-10

0

10

20

30

Index, %less-%more

Employment expectations and real consumer

% ch, oya

U M ich survey, expected unemployment over next year

Real durables spending

78 83 88 93 98 03 08

20

40

60

80

100

120

140

-20

-10

0

10

20

30

Index, %less-%more

Employment expectations and real consumer

% ch, oya

U M ich survey, expected unemployment over next year

Real durables spending

78 83 88 93 98 03 08



12

Consumers have been adjusting

0

2

4

6

8

10

percent, sa

Saving rate

89 94 99 04 09

0

2

4

6

8

10

percent, sa

Saving rate

89 94 99 04 09

400

450

500

550

600

650

ratio

Household wealth-to-income ratio

89 94 99 04 09



13

Household leverage to keep decliningForecast of residential mortgage debt

$ bn, except as noted; ex home equity loans

2009 2010 2011 2012

New home sales (000s, saar) 374 340 374 411

Existing home sales (000s, saar) 5,160 5,150 5,408 5,678

Average price ($000s) 220 220 220 220Dollar spending on houses 1,217 1,208 1,272 1,340

Loan to value 0.75 0.75 0.75 0.75

Share of purchases with mortgage (%) 0.95 0.95 0.95 0.95

Mortgage loan originations 867 861 906 954

Amortization+curtailment 199 187 185 183Home sellers' cancellation 484 483 508 533

Net foreclosure cancellation 345 344 361 379

- Total repayments 1,028 1,015 1,054 1,095

+Cash-out refis 70 40 40 40

+Other 6 6 6 6

=Change in regular mortgage debt -85 -108 -101 -95

Mortgage debt outstanding (ex home equity) 9,353 9,245 9,143 9,049

Percent change -0.9 -1.2 -1.1 -1.0

Forecast of residential mortgage debt

$ bn, except as noted; ex home equity loans

2009 2010 2011 2012

New home sales (000s, saar) 374 340 374 411

Existing home sales (000s, saar) 5,160 5,150 5,408 5,678

Average price ($000s) 220 220 220 220

Dollar spending on houses 1,217 1,208 1,272 1,340

Loan to value 0.75 0.75 0.75 0.75

Share of purchases with mortgage (%) 0.95 0.95 0.95 0.95

Mortgage loan originations 867 861 906 954

Amortization+curtailment 199 187 185 183Home sellers' cancellation 484 483 508 533

Net foreclosure cancellation 345 344 361 379

- Total repayments 1,028 1,015 1,054 1,095

+Cash-out refis 70 40 40 40

+Other 6 6 6 6

=Change in regular mortgage debt -85 -108 -101 -95

Mortgage debt outstanding (ex home equity) 9,353 9,245 9,143 9,049

Percent change -0.9 -1.2 -1.1 -1.0

20

40

60

80

100

120

140

%

Household debt to income ratio

70 75 80 85 90 95 00 05 10

Forecast



14

Deleveraging doesn’t need to imply contraction

50

100

150

200

debt/income, %

Household leverage

70 75 80 85 90 95 00 05

Norway

Sweden

US

-10

0

10

20

30

% of disposable income, 4qtr ave

Personal saving -- gross flows

52 57 62 67 72 77 82 87 92 97 02 07

Asset accumulation

Debt accumulation

-10

0

10

20

30

% of disposable income, 4qtr ave

Personal saving -- gross flows

52 57 62 67 72 77 82 87 92 97 02 07

Asset accumulation

Debt accumulation



15

Business has been spending

90

100

110

120

130Sa, level at trough of recession=100

Real spending on equipment and software

during expansions

-2 0 +2 +4 +6

2001

1975

1991

1982

2009

90

100

110

120

130Sa, level at trough of recession=100

Real spending on equipment and software

during expansions

-2 0 +2 +4 +6

2001

1975

1991

1982

2009

500

550

600

650

700

485

510

535

560

585

610$2005 bn, saar

Business spending on information processing equipment,

software$ bn, saar

2006 2007 2008 2009 2010

Real

spending

Nominal

spending

500

550

600

650

700

485

510

535

560

585

610$2005 bn, saar

Business spending on information processing equipment,

software$ bn, saar

2006 2007 2008 2009 2010

Real

spending

Nominal

spending

0.25

0.50

0.75

1.00

1.25Index, 1Q05=1.00

Real business spending on business equipment ex high tech

2005 2006 2007 2008 2009 2010

Transportation

equipment

Industrial

equipment

Otherequipment

0.25

0.50

0.75

1.00

1.25Index, 1Q05=1.00

Real business spending on business equipment ex high tech

2005 2006 2007 2008 2009 2010

Transportation

equipment

Industrial

equipment

Otherequipment



16

Shadow inventory a risk to house prices

-20

-10

0

10

20

0

10

20

30

40

%change over year-ago

Distressed sales and home prices%

2006 2007 2008 2009 2010

Distressed sales as % of all home sales

LoanPerformance House Price Index

-20

-10

0

10

20

0

10

20

30

40

%change over year-agoDistressed sales and home prices

%

2006 2007 2008 2009 2010

Distressed sales as % of all home sales

LoanPerformance House Price Index



17

Slow grind toward more normal housinginventories

500

1000

1500

2000

2500

3000

3500

thousands, saar

Construction and demographics

New housing units started

Household growth (10-yr average)

69 74 79 84 89 94 99 04 09

500

1000

1500

2000

2500

3000

3500

thousands, saar

Construction and demographics

New housing units started

Household growth (10-yr average)

69 74 79 84 89 94 99 04 09

500

1000

1500

2000

2500

thousands, sa

Vacant, for-sale housing units

95 97 99 01 03 05 07 09

500

1000

1500

2000

2500

thousands, sa

Vacant, for-sale housing units

95 97 99 01 03 05 07 09



18

Bank credit turning slightly less restrictive

-50

-25

0

25

50

75

100

net % tightening

Lending standards, C&I loans

Large firm

Small firm

90 95 00 05 10



19

Unsteady improvement in state & local finances

-20

-10

0

10

20

% ch, saar

State and local tax receipts

97 99 01 03 05 07 09

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

% of GDP

State and local deficits

60 65 70 75 80 85 90 95 00 05 10



20

Election impact is a wildcard

5

10

15

20

25

30

35

%

Small business' biggest problem

86 91 96 01 06

Poor sales

Gov't requirements

5

10

15

20

25

30

35

%

Small business' biggest problem

86 91 96 01 06

Poor sales

Gov't requirements



21

No ambiguity about inflation trendsNo ambiguity about inflation trends

0

1

2

3

4

5

6

% ch, oya

CPI

90 95 00 05 10

Median

Core

0

1

2

3

4

5

6

% ch, oya

CPI

90 95 00 05 10

Median

Core



22

Core inflation forecast to stay under 1%

Core PCE price index

%oyaEnd of 2 years Change Unemployment

recession later rate, 2 years later

1960-1961 1.30 1.21 -0.09 5.8

1969-1970 4.82 3.06 -1.76 5.4

1973-1975 10.12 6.12 -4.00 7.5

1981-1982 5.91 3.89 -2.01 7.3

1990-1991 4.27 2.56 -1.71 7.1

2001 1.73 1.48 -0.25 5.8

Core PCE price index

%oya

End of 2 years Change Unemployment

recession later rate, 2 years later

1960-1961 1.30 1.21 -0.09 5.8

1969-1970 4.82 3.06 -1.76 5.4

1973-1975 10.12 6.12 -4.00 7.5

1981-1982 5.91 3.89 -2.01 7.31990-1991 4.27 2.56 -1.71 7.1

2001 1.73 1.48 -0.25 5.8

0

1

2

3

4

5

6

7

89 94 99 04 09

-4

-2

0

2

4

6

%oya

CPI: core services and core goods

Core

services

Core

goods



23

No ambiguity about inflation trendsNo ambiguity about inflation trends

1.5

2.0

2.5

3.0

3.5

4.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Percent over year ago, both scales

Two key influences on core inflation

2008 2009 2010

Average hourlyearnings

CPI measure of

hous ing costs (OER)



24

Fed to expand balance sheet by $600bn to $1tr

0

500

1000

1500

2000

2500

$ billions

The Fed balance sheet

Total

assets

Liquidity programs

Securities heldoutright

2007 2008 2009 2010



25

Economy stuck in a liquidity trap

10

12

14

16

18

20

22

% of GDP

Private saving and investment

60 65 70 75 80 85 90 95 00 05 10

Saving

Investmen

10

12

14

16

18

20

22

% of GDP Private saving and investment

60 65 70 75 80 85 90 95 00 05 10

Saving

Investmen



26

QE2 already working

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

Jan 1 Mar 6 May 10 Jul 14 Sep 17

2.2

2.4

2.6

2.8

3.0

3.2

%, both scalesInflation

breakeven

(Fed measure

5yr-5yr

forward)

Real yield

(10-year)

Jackson Hole

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8


2.2

2.4

2.6

2.8

3.0

3.2

%, both scalesInflation

breakeven

(Fed measure

5yr-5yr

forward)

Real yield(10-year)

Jackson Hole

82

84

86

88

90

92


1000

1050

1100

1150

1200

1250

index, both scales

S&P 500 index

nominal broad

effective

exchange rate

Jackson Hole

h S i f i b i f



27

The US economic forecast in brief

Sub-par growth in 2010

Business gradually turns more expansive

Europe shock dissipates

Fiscal tightening, monetary accommodation in 2011 Expansion continues at subdued pace

Second half of 2011, drags fade

Output gap stays large

Disinflation continues



December 2010

2 0 1 1 U S S H O R T – T E R M F I X E D I N C O M E O U T L O O K

The Year of the Regulator

Alex Roever, CFAAC

(212) 834-3316

[email protected]

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Key themes for 2011

Regulation will drive change in the liquidity markets

Basel III’s Liquidity Coverage Ratio

President’s Working Group Report on money fund reform proposals

Dodd-Frank

Issues in 2010 will continue into next year

Low short-term interest rates will persist through 2012, perhaps beyond

Sensitivity between Libor and European sovereign risk

Challenges for municipal money funds

Demand will continue to outstrip the supply of liquid products

Temporary run off of SFP bills in 1Q:2011 will push bill/GC repo yields down

Discount note outstandings are to decline modestly, pushing yields lower

USCP outstandings have stabilized but may move lower due to new regulations

and rising bank fees. Non-financial CP is an exception

1-3y bank note supply may increase, but structural mismatch between supply and

demand may cause 1-3y bank credit spreads to widen significantly

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% change Q/Q, saar 10Q3 10Q4 11Q1 11Q2 11Q3 FY'10 FY'11

Real GDP 2.50% 2.50% 2.00% 3.00% 3.00% 2.60% 3.00%

Core CPI 1.20% 0.40% 0.60% 0.60% 0.70% 0.60% 0.70%

Core PPI 2.20% 1.00% 0.60% 0.50% 0.50% 1.80% 0.60%

Unemployment rate (%, 9.60% 9.60% 9.60% 9.50% 9.40% - -

23-Nov 10Q4 11Q1 11Q2 11Q4

Fed funds rate 0-0.25% 0-0.25% 0-0.25% 0-0.25% 0-0.25%

3m LIBOR 0.28% 0.28% 0.28% 0.28% 0.28%

3-month T-bill (bey) 0.15% 0.14% 0.15% 0.18% 0.21%2yr UST 0.45% 0.50% 0.55% 0.75% 0.95%

5yr UST 1.42% 1.40% 1.55% 2.00% 2.40%

10yr UST 2.76% 2.50% 2.65% 3.00% 3.45%

30yr UST 4.17% 3.85% 3.95% 4.25% 4.70%

3m T-bill/LIBOR Spread 0.13% 0.14% 0.13% 0.10% 0.07%

2s/10s curve 231 bps 200 bps 210 bps 225 bps 250 bps

10s/30s curve 141 bps 135 bps 130 bps 125 bps 125 bpsJ.P. Morgan forecast as of 11/24/2010; forecasts are for quarter-end1 4Q/4Q change

US Economy: Low inflation + High unemployment = Low rates

Economic and interest rate forecastEconomic and interest rate forecast

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Money market supply has decreased especially excluding



Source: J.P. Morgan; Data through October 31, 2010Note: Supply data includes UST bills & coupons, agency discount notes & coupons, repo sold, unsecured commercial paper, ABCP, negotiable CDs, and bonds < 13 months

Money market supply has decreased, especially excludingTreasuries

Jul 2010 % of Total Change Change since

Assets ($tn) Level Oustanding YTD Sep 2008

T-Bills 1.79 24% 0.00 0.30

Repo 2.89 38% 0.37 -1.45

Agency DN 0.66 9% 0.02 -0.28

Unsecured CP 0.67 9% 0.00 -0.17

ABCP 0.40 5% -0.05 -0.30

Negotiable CDs 0.89 12% -0.09 -0.17

Bonds <1y 0.29 4% -0.10 -0.23

Total 7.58 100% 0.15 -2.29

Total ex-UST 5.79 76% 0.15 -2.59

5

6

7

8

9

10

11

12

Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10 Oct-10

ex Treasuries

Total

11.5

Supply of money market instrumentsSupply of money market instruments

9.3

9.6

6.6

Oct 2010 % of Total Change Change since

Assets ($bn) Level Oustanding YTD Sep 2008T-Bills 1,768 19% -25 279

Repo 3,189 34% 675 -1,143

Agency DN 620 7% -12 -322

Unsecured CP 655 7% 2 -181

ABCP 396 4% -75 -302

Negotiable CDs 939 10% -47 -126

Bonds <1y 331 4% -53 -183

Treasury Coupon 899 10% 142 211

Agency Coupon 511 5% -58 -98

Total 9,309 100% 550 -1,864

Total ex-UST 6,641 71% 433 -2,353

$tn

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0

500

1,000

1,500

2,000

2,500

Aug-08 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10

Prime Treasury Govt/Agency

Source: iMoneyNet Source: iMoneyNet

Breakdown of taxable money market fundsBreakdown of taxable money market funds

Money fund balances have stabilized

500

700

900

1,100

1,300

1,500

1,700

1,900

2,100

2,300

2,500

Aug-08 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10

Retail Institutional$bn $bn

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Holdco basel ine Holdco support l ift Bank basel ine Bank support li ft

BK

Holdco and bank level baseline and support lift ratingsHoldco and bank level baseline and support lift ratings

Source: Moody’s

JPM USB STT WFC BAC C GS MS PNC

B1

Ba3

Ba2

Ba1

Baa3

Baa2

Baa1

A3

A2

A1

Aa3

Aa2

Aa1

Aaa

Some Moody’s-rated banks are flirting with P-2 level ratings

P-1

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Note: J.P. Morgan estimates of geographic exposure in prime money market funds are based on a sample of large funds at March 31, 2010, June 30, 2010, September 30, 2010,and October 31, 2010 including funds managed by Fidelity, BlackRock, Vanguard, Dreyfus, Federated, Wells Fargo, Goldman Sachs, J.P. Morgan, and UBS (June 30 only).Allocation percentages are calculated from the sample and then applied to current total prime fund outstandings. Portfolios totaling about $750bn were sampled for March 31,$623bn for June 30, $740bn for September 30, and $746bn for October 31. Prime Fund total assets as of March 31, 2010, June 30, 2010, September 30, 2010, and October 31,

2010 according to iMoneyNet.Source: J.P. Morgan & company reports

Non-US banks still heavily reliant on US money markets

J.P Morgan estimates of US prime money fund unsecured CP, CD, and ABCPJ.P Morgan estimates of US prime money fund unsecured CP, CD, and ABCP

$bn $bn $bn $bn

Total Prime Fund Assets 1,668 1,563 1,610 1,623

Non -Bank CP 33 34 46 40

Bank CP/CD 870 669 816 859Eurozone 451 288 372 400

Other Regions 272 237 284 311

United Kingdom 94 97 120 94

United States 41 33 27 31

Switzerland 11 15 15 23

ABCP 99 133 103 98Eurozone 43 43 40 37

United States 27 36 26 22


Other Regions 5 6 2 2

Switzerland 0 1 1 1

er money mar e

inst rumen ts 665 727 645 626

1Q 2010 2Q 2010 3Q 2010 Oct 20101Q 2010 2Q 2010 3Q 2010 Oct 2010

Total Pr im e Funds 1,668 1,563 1,610 1,623

Total Bank CP/CD/ABCP 969 802 921 957

Eurozone 493 331 412 437

Austria 1 1 1 1

Belgium 16 14 12 13

France 216 142 183 206

Germany 70 59 76 73

Ireland 3 2 0 0

Italy 41 19 29 28

Luxembourg 6 5 1 1

Netherlands 101 64 88 93

Spain 40 25 22 22

Other Europe 187 224 243 230

Denmark 22 21 18 18

Norway 9 12 13 12

Sweden 26 31 41 45

Switzerland 11 16 17 24


Rest-of-World 289 248 266 291

Australia/NZ 79 59 69 82

Canada 70 62 68 80

Chile 0 0 0 0

India 3 1 0 0

Japan 69 57 77 76

US 68 69 52 52

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Q4

2007Q4

2008Q4

2009Q3

2010%

Change

Securities Lenders

Bank of New York 618 326 247 280 -55%

State Street 573 333 376 361 -37%

J.P. Morgan 391 170 173 186 -52%

Northern Trust 270 110 115 112 -59%

Total 1,851 939 911 938 -49%

Source: Risk Management Association

Securities lenders: investments are smaller and shorter

Source: Company annual reports and 10-Qs;Note: % change is from Dec 2007 to Sep 2010

Investments of Securities LendersInvestments of Securities Lenders

Q2

2007Q2

2009Q3

2010

Credit Tiering

Repurchase Agreements 27% 31% 28%

A-1/P-1 or better 92% 99% 89%

Other MMkt Instruments (<397 days) 41% 41% 62%

A-1/P-1 or better 95% 87% 67%

Other Fixed Income (>397 days) 32% 28% 11%

AAA 57% 58% 58%

AA or A 43% 39% 31%

Asset Mix

Fixed Rate Instruments 18% 15% 20%

Unsecured CP 28% 41% 40%

ABCP 71% 17% 13%

Other Corporates 2% 42% 46%

Floating Rate Instruments 36% 38% 23%

ABS 38% 35% 24%

Other Corporates 54% 64% 73%

Repurchase Agreements 26% 29% 30%

US Treasury 2% 12% 18%

Agency 39% 51% 39%Corp 57% 28% 24%

Deposits (CD & other) 15% 9% 15%

Money Market Funds 2% 7% 12%

Other 3% 2% 1%

Median WAM (final maturity) 170 77 61

Balances ($bn)Balances ($bn)

CommentaryCommentary

We estimate US SL reinvestment portfolios

measured $2.5 - $3.0Tn in mid-2007 and are now

around $1.1 - $1.3Tn

Historically SL have been major purchasers of

money market and longer term floating rate

securities like ABS and corporates

Median maturities have shortened dramatically

Holdings of ABS and FRNs has fallen from about

$1.0Tn to about $400bn

9 2 0 1 1

U S

S H

O

R

T – T E R

M

F I X E D

I N

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E

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O

K

Risk aversion may be back in the Libor market, but not to the



3m Libor surges on both cash and forwards Inset: Change in Libor in basis points3m Libor surges on both cash and forwards Inset: Change in Libor in basis points

Source: Bloomberg

y ,degree in 2Q

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Sep-08 Nov-08 Feb-09 May-09 Jul-09 Oct-09 Jan-10 Mar-10 Jun-10 Sep-10 Nov-10

3mL Spot

3mL 3m fwd

3mL 6m fwd

(20)

(10)

0

10

2030

40

50

60

70

Mar-

01

Mar-

28

Apr-

24

May-

22

Jun-

18

Jul-16 Aug-

12

Sep-

08

Oct-

06

Nov-

02

Nov-

30

%

bps

10 2 0 1 1

U S

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O

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Three month LIBOR has declined to pre-Euro crisis levels



20

25

30

35

40

45

50

55

60

65

0 6 J a n

2 0 J a n

0 3 F e b

1 7 F e b

0 3 M

a r

1 7 M

a r

3 1 M

a r

1 4 A p r

2 8 A p r

1 2 M a y

2 6 M a y

0 9 J u n

2 3 J u n

0 7 J

u l

2 1 J

u l

0 4 A u

g

1 8 A u

g

0 1 S e

p

1 5 S e

p

2 9 S e

p

1 3 O

c t

2 7 O

c t

1 0 N o v

2 4 N o v

Weekly 3-month LIBOR posting dispersion and trimmed mean LIBOR, bpWeekly 3-month LIBOR posting dispersion and trimmed mean LIBOR, bp

Source: Bloomberg, J.P. Morgan

pbut uncertainty lingers amongst USD LIBOR panel banks

Top/Bottom 25%

3m LIBOR

Middle 50%11/30 - 11/24

Panel Banks 11/30/2010 Change

Barclays 31 3

Bank of Tokyo Mitsubishi 32 0

RBS 30 1

Deutsche 27 0

RBC 31 2

Norinchukin 35 2

UBS 27 2

West LB 40 1

HSBC 27 0Credit Suisse 31 2

Citibank 29 1

Lloyds 31 1

JP Morgan 27 0

Rabo 29 1

Bank of America 30 0

Soc Gen 30 2

11 2 0 1 1

U

S

S H

O

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F I X E D

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Source: Federal Reserve Flow of Funds, Lipper FMI, iMoneyNet Source: J.P. Morgan, iMoneyNet, SIFMA

Cumulative monthly flows; $bnCumulative monthly flows; $bn Tax-exempt money fund AuM and as % of total munimarket

Tax-exempt money fund AuM and as % of total munimarket

Tax-exempt money funds lose cash as investors reach for yield

-200

-150

-100

-50

0

50

100

150

200

Aug 08 Jan 09 Jun 09 Nov 09 Apr 10 Sep 10

200

250

300

350

400

450

500

550

Dec 04 Dec 06 Dec 08 Dec 10

0

5

10

15

20

25

Directhousehold

holdings

Tax-exemptmutual funds

Tax-exemptmoney funds

Tax-exempt

money fundsAUM $bn

money funds %

of all Muni

Projected 2011decline

12 2 0 1 1

U

S

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VRDOs look attractive given higher SIFMA levels relative to



1w Libor vs. SIFMA vs. S&P Muni VRDO1w Libor vs. SIFMA vs. S&P Muni VRDO

Source: Bloomberg

Libor

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0.50

0.55

Dec-09 Feb-10 Apr-10 Jul-10 Sep-10 Nov-10

1w Libor

SIFMA

S&P Muni VRDO

%

13 2 0 1 1

U

S

S H

O

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jpm fixed income

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