Ir bonds crash october

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Ir bonds crash october

  1. 1. Bonds Crash : Myth or Reality ? Nicolas Forest, Head of Interest Rate Strategy Koen Van de Maele, CFA, Global Head of Fixed Income October 2009 - Brussels
  2. 2. Bonds Crash : Myth or Reality ? Nicolas Forest, Head of Interest Rate Strategy Koen Van de Maele, CFA, Global Head of Fixed Income October 2009 - Brussels
  3. 3. Agenda I. The Usual Suspects II. Can we really trust Central Banks ? III. Can we really trust Governments ? IV. Can we really trust Bonds Market ? Government bond market Corporate bond market 3 Source : Bloomberg & Dexia Asset Management Interest Rate Research
  4. 4. The Usual Suspects The “Money Printers” and “Inglorious Spenders”… Bonds Crash 4 Source : Bloomberg & Dexia Asset Management Interest Rate Research
  5. 5. The Usual Suspects …could cause a Bond Crash ? “Central banks around the « L'ensemble de la dette “L'ombre du krach globe are printing money, américaine (État, entreprises, obligataire de 1994 plane à lowering interest rates, and ménages) est de 400 % du nouveau sur les marchés” La altogether loosening up PIB, proche des niveaux de Tribune, 15 September 2009 monetary policy—all of which 1929», prévient Michaël will lead to inflation and high Benhaïm, responsable de la commodity (i.e., gold) costs.” gestion obligataire chez Epoch Times, 15 September Pictet. Faut-il craindre un 2009 krach obligataire ? « On ne “Ben Bernanke said this peut pas écarter ce scénario week that the recession is lors de la sortie de crise» "very likely over." Yes, the Moneyweek, 25 June 2009 recession may be over in “At some point, the Fed will “The U.S. Congressional nominal terms, but massive need to drain this cash out of Budget Office is pegging the inflation has just begun and the financial system as it federal budget deficit for prices of stocks and real raises interest rates. If it 2009 at US$1.6-trillion "I estate will continue to doesn't act soon enough, it would not be surprised that at plummet when valued in real could risk letting inflation rise some point after 2011 that money, gold and silver. And it above desired levels.” The yields rise as high as 6% to may still be too late to Wall Street Journal, 17 7%." says Mr. Zandi chief prevent hyperinflation” September 2009 economist of Moody's. This National Inflation Association, rise in yields would equate to September 2009 significant capital losses for bondholders.” Financial Post, 22 September 2009 5 Source : Bloomberg & Dexia Asset Management Interest Rate Research
  6. 6. Can we really trust Central Banks ? The quantity of reserves in the banking system has risen dramatically… 2 500 000 Evolution of Central Bank Supply * 2 500 000 Composition of the Supply (millions of us dollars) 2 000 000 2 000 000 Central Bank Liquidity Sw aps 1 500 000 + 1 162 billions of 1 500 000 Portf olio Holding of Commercial Paper Funding Facility us dollars in 1 year Other loans i.e. 9% of the GDP Term auction credit Securities Held Outright 1 000 000 1 000 000 500 000 500 000 - - 2002 2003 2004 2005 2006 2007 2008 2002 2003 2004 2005 2006 2007 2008 * The Fed has the ability to purchase assets or offer loans with The massive asset purchases & the liquidity facilities explain money created by itself : it prints money the increase of the supply offered by the Federal Reserve 6 Source : Bloomberg & Dexia Asset Management Interest Rate Research
  7. 7. Can we really trust Central Banks ? These facilities have unfreezed the credit markets… 5.0 400 000 300 600 000 Ted Spread & CP Fund Facility Credit Spread & Term Auction Credit 4.5 350 000 250 500 000 4.0 300 000 3.5 200 400 000 The commercial paper 250 000 3.0 facilities aim to unfreeze The Federal reserve the money markets and 2.5 200 000 150 wanted to decrease the 300 000 reduce the Ted Spread… risk premium & normalize 2.0 the credit spreads… 150 000 100 200 000 1.5 100 000 1.0 50 100 000 50 000 0.5 - 0 - 0 2002 2003 2004 2005 2006 2007 2008 2003 2004 2005 2006 2007 2008 Ted Spread Credit Spread Term auction credit Portfolio Holding of Commercial Paper Funding Facility 7 Source : Bloomberg & Dexia Asset Management Interest Rate Research
  8. 8. Can we really trust Central Banks ? … and have created a large quantity of excess reserves… 1 800 000 Supply absorbed by depository institutions 1 000 000 Supply non absorbed by depository 1 600 000 900 000 institutions 1 400 000 800 000 700 000 1 200 000 600 000 1 000 000 500 000 The supply non absorbed by 800 000 depository institutions are excess 400 000 600 000 reserves 300 000 400 000 200 000 200 000 100 000 - - 2002 2003 2004 2005 2006 2007 2008 2002 2003 2004 2005 2006 2007 2008 Currency in circulation Deposits w ith Banks Other 8 Source : Bloomberg & Dexia Asset Management Interest Rate Research
  9. 9. Can we really trust Central Banks ? … which banks don’t transmit into the economy 2 000 000 2.1 10 Components of the Monetary Base The Money Multipliers 1 800 000 1.9 9 1 600 000 1.7 8 1 400 000 1.5 1 200 000 The increase of monetary base is 7 explained by the excess reserves 1 000 000 1.3 6 800 000 1.1 600 000 The excess reserves are not 5 0.9 transmitted to the monetary mass : 400 000 money multipliers have collapsed ! 0.7 There is no inflationary 4 200 000 risk in the short term - 0.5 3 2002 2003 2004 2005 2006 2007 2008 2002 2003 2004 2005 2006 2007 2008 Currency in circulation Reserve balances w ith Federal Reserve Banks Money Multiplier M1 Money Multiplier M2 9 Source : Bloomberg & Dexia Asset Management Interest Rate Research
  10. 10. Can we really trust Central Banks ? Should the excess reserves be converted into new loans, money would grow faster… Current Simulation Excess Reserves (billion of $) 833 833 20% Annual Growth of M2 Monetary Base (billion of $) 1 743 1 743 18% M2 (billion of $) 8 283 15 688 16% 14% Money Multiplier 4.75 9.00 12% Annual M2 Growth 8% 13% 10% 8% The amount of excess reserves doesn’t change… 6% … but the multiplier normalizes… 4% M2 increases to 7 405 billions of dollars 2% The excess reserves are used in the real economy 0% 60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 11 14 … and annual M2 growth increase significantly We assume a shift on 5 years Simulation The average is close to 13% 10 Source : Bloomberg & Dexia Asset Management Interest Rate Research
  11. 11. Can we really trust Central Banks ? … and cause severe inflation 14% US M one y Growth & Inflation 12% US Money Growth & Inflation 12% 1910 10% 10% 8% 1970 8% Inflation 6% 1980 6% 1940 4% 4% In the long term, money 1990 growth and 1960 2% 1950 2000 2% inflation are correlated… Annual Growth of M2 1920 0% 0% 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96 01 06 0% 2% 4% 6% 8% 10% 12% 14% 16% -2% -2% 1930 -4% M2 CPI -4% 11 Source : Bloomberg & Dexia Asset Management Interest Rate Research
  12. 12. Can we really trust Central Banks ? The German example in the 1920s 1200% Annual Growth of Monetary Mass in Germany (in percentage) 1000% 800% 600% The currency in circulation has been 400% multiplied by 215 Currency in circulation between 1910 & 1922 200% Monetary Base 0% 1910 1911 1912 1913 1914 1915 1916 1917 1918 1919 1920 1921 1922 800 000 000 000 Wholesale Price Index 700 000 000 000 600 000 000 000 500 000 000 000 400 000 000 000 300 000 000 000 200 000 000 000 Wholesale Price Index 100 000 000 000 - 1914 1919 1921 1922 1923 1923 12 Source : Bloomberg & Dexia Asset Management Interest Rate Research
  13. 13. Can we really trust Central Banks ? But the Federal Reserve could reduce the excess reserves… The Fed can reduce the size of excess reserves… By selling securities Bill, Notes and Bonds Federal agency debt securities & mortgage-backed securities By reducing the credit facilities Term auction credit Other Programs (ABCP Liquidity Facility, Term Asset-Backed Securities Loan Facility…) … but that could impact market stability Selling Securities risk on interest rates risk on credit spreads Reducing the credit facility Risk on inter banking market 13 Source : Bloomberg & Dexia Asset Management Interest Rate Research
  14. 14. Can we really trust Central Banks ? …or raise its interest rate to discourage the lending opportunities Since October 2008, the Fed remunerates 6.00 Ev olution Central Bank Rate the excess reserves 5.00 An increase of interest rates will reduce the 4.00 transmission from excess reserves to the real economy 3.00 The Fed can keep its securities and support the 2.00 bond market 1.00 The Fed will reduce the inflation expectations 0.00 The beginning of the tightening cycle can favor the Sep-08 Dec-08 Mar-09 Jun-09 flattening of the curve FF LI BOR 3M OI S 3M Why does the Federal Reserve want to pay interest on excess balances? “Paying interest on excess balances should help to establish a lower bound on the federal funds rate by lessening the incentive for institutions to trade balances in the market at rates much below the rate paid on excess balances. Paying interest on excess balances will permit the Federal Reserve to provide sufficient liquidity to support financial stability while implementing the monetary policy that is appropriate in light of the System's macroeconomic objectives of maximum employment and price stability” Board of Governors of the Federal Reserve System. 14 Source : Bloomberg & Dexia Asset Management Interest Rate Research
  15. 15. Can we really trust Central Banks ? Excess reserves are not always inflationary 35 000 New-Zealand - Components of Monetary Base 6% New-Zealand - Inflation & Monetary Mass 25.00% 30 000 5% 20.00% Despite the increase of excess reserves, 25 000 The Reserve bank of New Zeeland inflation has 4% 15.00% has used the same framework since decreased since 2006 2006…and the excess 20 000 reserves have been 3% 10.00% multiplied X 2 15 000 2% 5.00% 10 000 1% 0.00% 5 000 0% -5.00% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 - 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 -1% -10.00% Currency in Circulation Excess Reserves A nnual Grow th of M2 [R.H.S] CPI Sweden’s Riksbank pays banks a negative interest rate of minus 25 basis points for dumping excess reserves in its deposit facility. The idea is to give them an incentive to lend excess reserves to the real economy. 15 Source : Bloomberg & Dexia Asset Management Interest Rate Research
  16. 16. Can we really trust Central Banks ? Yes, we can The massive excess reserves have saved the banking system… Normalization of money markets Reduction of risk premiums …and can be controlled by a specific framework Increase of interest rates Without removing the excess reserves from the banking system The quantitative easing permits to regulate the economy… Stabilization of mortgage rates Stabilization of bonds market …if central banks keep their credibility Perfect economic consensus to avoid the deflation risk Unusual coordination of monetary policy 16 Source : Bloomberg & Dexia Asset Management Interest Rate Research
  17. 17. Can we really trust Central Banks ? We expect the end of the Zero Interest Policy in 2010 10 Fed Fund Target & Logit Model Central Bank can 8 raise interest rate without removing liquidity…a useful 6 tool in the case of rebound of the 4 economy 2 0 87 90 93 96 99 02 05 08 -2 ACT FI T +3 6 ECB Target Rate & Logit M odel The Taylor rules 5 suggest possibility of hikes…if the 4 employment market improves 3 2 1 0 96 99 02 05 08 ACT FI T T+3 17 Source : Bloomberg & Dexia Asset Management Interest Rate Research
  18. 18. Can we really trust Governments ? The global public debt increases… 1999 18 Source : Bloomberg & Dexia Asset Management Interest Rate Research Source : The economist
  19. 19. Can we really trust Governments ? …more and more 2011 19 Source : Bloomberg & Dexia Asset Management Interest Rate Research Source : The economist
  20. 20. Can we really trust Governments ? …more and more European Budget Deficit 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2% 0% -2% -4% -6% -8% -10% Belgium France Germany 25% Government Debt (as a percentage of the global public debt) 20% 15% 10% 5% 0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Belgium France Germany US 20 Source : Bloomberg & Dexia Asset Management Interest Rate Research Source : The economist
  21. 21. Can we really trust Governments ? But the relation between public debt and government yield is not very stable... 8% 1950-1970 16% 1970-1985 14% 1985-2009 7% 14% 12% 6% 12% 10% 5% 10% Yield Level Yield Level Yield Level 8% 4% 8% 6% 3% 6% 4% 2% 4% 1% y = -0.7643x + 0.1162 2% y = -0.1105x + 0.1226 2% y = 0.4552x + 0.0293 R2 = 0.7586 R2 = 0.6817 R2 = 0.7521 0% 0% 0% 6% 8% 10% 12% 14% 6% 11% 16% 21% 26% 31% 0% 20% 40% 60% 80% 100% De bt/Gdp De bt/Gdp De bt/Gdp The impact of rising government debt on bond yields is unclear The sign of the relation between debt and yield can be negative The Fed estimates the possible impact of government debt For 1% of Debt / Gdp, interest rates can increase between 3 and 4 basis points For a change of 35% of the Debt / Gdp, the bonds yield could increase to 1.25% 21 Source : Bloomberg & Dexia Asset Management Interest Rate Research
  22. 22. Can we really trust Governments ? The demand for government debt changes… (Central Banks Demand) 850 000 Initial Situation US Treasuries Held by the FED 800 000 (milions of USD) 750 000 700 000 650 000 600 000 550 000 500 000 450 000 Source 400 000 Gongdon 2002 2003 2004 2005 2006 2007 2008 (2003) Final Situation If a central bank buys treasury bonds It increases the bank reserves And impacts the government bond prices The Fed held 740 billions of treasuries 7% of the total public debt The announcement of purchases has significant impact on government yield 22 Source : Bloomberg & Dexia Asset Management Interest Rate Research
  23. 23. Can we really trust Governments ? The demand for government debt changes… (Central Banks Demand) BOE announces to buy £75 billion FED announces to buy $300 billion 23 Source : Bloomberg & Dexia Asset Management Interest Rate Research
  24. 24. Can we really trust Governments ? The demand for government debt changes… (Foreign Holders Demand) 3 500 Foreign Holders Treasuries 30% Foreign Holders Treasuries (billion of US dollars) (as a percentage of the total public debt) 3 000 25% 2 500 20% 2 000 15% 1 500 10% 1 000 32% Debt Held by Foreign 30% Holders 5% 500 (on total public debt) 28% - 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 26% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 A sia Emu Europe ex EMU A merica Other A sia Emu Europe ex EMU A merica Other 24% 22% In 1 year, US public debt has increased 20% with 22%... 18% … of which 38% 16% has been bought by 14% foreign holders 12% 2001 2002 2003 2004 2005 2006 2007 2008 2009 Foreign Holders 24 Source : Bloomberg & Dexia Asset Management Interest Rate Research
  25. 25. Can we really trust Governments ? The demand for government debt changes… (Internal Demand) 800 Net Purchases of Tresuries Bonds In 2006, 7% of treasuries have 600 been purchased by households… Household sector Rest of the w orld in 2008, 12% ! 400 Monetary authority Money market mutual f unds Brokers and dealers 200 - 2006 2007 2008 2009 S1 -200 -400 400 14.0% 14 Treasuries pruchased by households Real 10Y Government Yield 12 12.0% 300 10 10.0% 8 200 8.0% 6 100 4 6.0% 2 - - 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 4.0% 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 -2 -100 2.0% -4 Savings Ratio -200 0.0% -6 Savings Ratio [R.H.S] Real 10Y Govt Y ield Us Treasury - Households Sector 25 Source : Bloomberg & Dexia Asset Management Interest Rate Research
  26. 26. Can we really trust Governments ? The Japanese example 10.00 Japan Government Debt 180 9.00 160 8.00 140 7.00 120 6.00 In Japan, the increase in debt has 100 5.00 not caused a rebound of 80 4.00 government yields… 3.00 60 2.00 40 1.00 20 - 0 82 84 86 88 90 92 94 96 98 00 02 04 06 08 Govt Bench Bond Y ield 10Y Debt / GDP [R.H.S] 1 000 000 Holdings of JGB 180% 900 000 (billion of JPY ) 160% 800 000 140% 700 000 120% 600 000 100% 500 000 80% 400 000 60% 300 000 200 000 40% 100 000 20% - 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Overseas Non-Fin Corp. Households BoJ Debt / Gdp [R.H.S] 26 Source : Bloomberg & Dexia Asset Management Interest Rate Research
  27. 27. Can we really trust Governments ? The capacity to reach a fiscal equilibrium again 80% Average of Past Cycle Debt / Gdp 40% Net Borrowing in credit Markets We have calculated an average of (as a percentage of GDP) the Debt / Gdp for different countries 70% including Canada, Finland or 30% Sweden… 60% 20% 50% 10% 40% 0% 30% … after a deep recession, we 70 73 76 79 82 85 88 91 94 97 00 03 06 09 observe a rebound then a decrease of the government debt 20% -10% 10% -20% Government Non-Government 0% 0 Years to peak -30% 27 Source : Bloomberg & Dexia Asset Management Interest Rate Research
  28. 28. Can we really trust Governments ? Yes, we can The fiscal stimulus avoided new “Great Depression”… Rescue of the banking system Help for consumers …but caused an explosion of budget deficit Record of budget deficit And increase of government debt supply The increased supply can be absorbed by new demand… Quantitative easing via Central Banks Foreign Holders Internal demand due to increased savings …if government keeps it credibility Possibility to the return to equilibrium The releveraging public sector compensates the deleveraging in the private sector 28 Source : Bloomberg & Dexia Asset Management Interest Rate Research
  29. 29. Can we really trust Bonds markets ? The US bond market has offered significant excess returns against money market rates 15% Excess Return of Us Government Bond Market (against Cash 1 Month Index) 10% 5% 0% 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 -5% End of the recession… -10% End of the Tightening cycle recession and tightening cycle US EMU -15% 29 Source : Bloomberg & Dexia Asset Management Interest Rate Research
  30. 30. Can we really trust Bonds markets ? The combination of inflation and a tightening cycle put pressure on bond markets Gove rnm e nt Bonds Pe rform ance & Inflation 20% 6.00% An increase of inflation 15% causes a negative return of 5.00% government bonds… 4.00% 10% 3.00% 5% 2.00% 0% 1.00% 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 -5% 0.00% A nnual return of US Gvt Bonds CPI (average 12M) [R.H.S] Gove rnm e nt Bonds Pe rform ance & M one tary Policy 20% 12.0% The last tightening cycle 15% has not had not a direct 10.0% impact on government bond yields: it is the 8.0% 10% famous conundrum 6.0% 5% 4.0% 0% 2.0% 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 -5% 0.0% A nnual return of US Gvt Bonds Fed Fund Target Rate [R.H.S] 30 Source : Bloomberg & Dexia Asset Management Interest Rate Research
  31. 31. Can we really trust Bonds markets ? Today, global government bond yield is close to its fair value 5.50 Global Gov ernment Bond Yield 5.00 2.50 G7 Bond Valuation Indicator 4.50 2.00 4.00 1.50 3.50 Bargain Area 1.00 3.00 0.50 2.50 98 99 01 02 04 05 06 08 09 0.00 4.00 Global G7 CPI 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 3.50 -0.50 3.00 -1.00 2.50 Expensive Area 2.00 -1.50 1.50 1.00 -2.00 0.50 0.00 -2.50 -0.50 98 99 01 02 04 05 06 08 09 -1.00 -1.50 31 Source : Bloomberg & Dexia Asset Management Interest Rate Research
  32. 32. Can we really trust Bonds markets ? The recession’s end is near… Implied Volatility US TED Spread 04 05 06 07 08 -1.00 0 0 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 10 0.00 20 20 1.00 30 30 40 40 2.00 50 50 60 3.00 60 70 70 80 4.00 80 VDAX VI X 90 5.00 Probability of Recession in US 100% 75% 50% 25% 0% 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 NBER Recessions Probability 32 Source : Bloomberg & Dexia Asset Management Interest Rate Research
  33. 33. Can we really trust Bonds markets ? … due to technical rebounds 80 1600 ISM New Orders US Ho me Sales 1400 70 1200 60 1000 50 800 600 40 400 30 200 20 0 88 90 92 94 96 98 00 02 04 23 06 08 US A uto Sales 88 90 92 94 96 98 00 02 04 06 08 New O r ders 21 US New O ne family Houses Sold 19 17 15 13 11 9 7 5 93 95 97 99 01 03 05 07 09 33 US Auto Sales Source : Bloomberg & Dexia Asset Management Interest Rate Research
  34. 34. Can we really trust Bonds markets ? But the deleveraging process could substantially impact consumer spending… The household leverage reached an all-time high of 133% in 2007 !!! How much further will be the deleveraging process go ? Real consumption and real debt are correlated… 34 Source : Bloomberg & Dexia Asset Management Interest Rate Research
  35. 35. Can we really trust Bonds markets ? … and durably affect the labor market 6 Core CPI & Employment 600 12 Unemployment Rate On the road to 400 a double digit 5 10 figure... 200 4 8 0 3 6 -200 2 4 -400 1 -600 2 0 -800 - 95 96 97 98 99 00 01 02 03 04 05 06 07 08 88 90 92 94 96 98 00 02 04 06 08 EMU US UK NFP Core CPI 8% Part time for economic reasons 7% The part time has increased 6% significantly and will put wages under 5% pressure… 4% 3% 2% 99 01 03 05 07 09 total employed part time f or economic reasons as a percent of all civilian labor f orce 35 Source : Bloomberg & Dexia Asset Management Interest Rate Research
  36. 36. Can we really trust Bonds markets ? Headline inflation will remain in the comfort zone… 7% US CPI (yoy) 7% EMU CPI (yoy) 6% 6% 5% 5% 4% Seasonal models expect 4% 3% the end of negative inflation for the months 3% Seasonal models expect 2% to come the end of negative 2% inflation for the months 1% to come 1% 0% 0% -1%Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 -1% Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 -2% -2% -3% -3% 2% US CPI (mom) 2% EMU CPI (mom) 2% 2% 1% 1% 1% 1% 0% 0% -1%Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 -1%Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 -1% -1% -2% -2% -2% -2% 36 Source : Bloomberg & Dexia Asset Management Interest Rate Research
  37. 37. Can we really trust Bonds markets ? …if commodities prices remain under control 16% 100% Inflation & Commoditie s 14% 80% 12% The increase of commodities creates 60% 10% inflation… 8% 40% 6% 20% 4% 0% 2% -20% 0% 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 -40% -2% -4% CRY (yoy) [R.H.S] CPI -60% 10% 100% GDP & Commoditie s … but also a slowdown 8% of the GDP ! 80% 6% 60% 4% 40% 2% 20% 0% 0% 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 -2% -20% -4% -40% -6% CRY (yoy) [R.H.S] GDP -60% 37 Source : Bloomberg & Dexia Asset Management Interest Rate Research
  38. 38. Can we really trust Bonds markets ? Myth or Reality ? The bonds Crash could become But the bonds crash remains a reality… myth If central banks lose the control over the Credibility of the central banks money Success in the financial crisis Injection of the excess reserves in the real Unusual coordination economy New framework to control the reserves Sale of securities & market instability Credibility of the governments If governments lose their credibility Success in the financial crisis Explosion of the debt without return at Possibility to equilibrium equilibrium New structural demand Buyers' strike of Foreign Holders No domestic inflation risk In the case of the V recovery High level of unemployment Increase in risky assets and commodities The risk of the W Inflation via fiscal stimuli A too strong rebound of commodities leads a new recession 38 Source : Bloomberg & Dexia Asset Management Interest Rate Research
  39. 39. 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. 46 Source : Bloomberg & Dexia Asset Management Interest Rate Research
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