Deutsche Bank
Who is buying Treasuries,
M t
Mortgages,
Credit,
C dit and
d Munis?
M i ?
December 2014
Peter Hooper, Matthew Luzzetti, and Torsten Slok
60 Wall Street
New York,
York New York 10005
Tel: 212 250 7275
DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 114/04/2014.
US Overview
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
2
December 2014
Total global AUM is around $117 trn
Assets under management in USD trillion,
2013 Estimates
Pension funds
35.2
Mutual funds
28.9
Insurance funds
28
FX reserves
11.7
6.3
SWFs
Hedge
g funds
2.6
ETFs
2.3
Private equity
22
2.2
0
10
20
30
40
NOTE: An average growth trend has been assumed for Private Equity, Insurance Funds and Pension Funds
Source: DB estimates, Hedge Fund Research, The City UK, SWF Institute, ICI. DB Global Markets Research
Source: CBO, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
3
December 2014
Who is funding the US budget deficit?
$ bln
2500
$ bln
Rest of the world
Fed
Other domestic
Net issuance of treasuries
2500
2000
2000
1500
1500
1000
1000
500
500
0
0
-500
-500
-1000
-1000
-1500
-1500
07
08
09
10
11
12
13
14
Source: FRB, Haver Analytics, DB Global Markets Research
Source: CBO, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
4
December 2014
Trading volumes: US government bond market dominates
Daily trading volumes
$ bln
$ bln
600
600
500
500
400
400
300
300
200
200
100
100
0
0
US treasuries
UK gilts
German bunds
Source: Fitch, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
5
December 2014
US fixed income markets much bigger in size
Size of treasury markets
bln
Germ
many
(go
ovt.)
Cove
ered
bon
nds
(Germ
many)
Canada
(go
ovt.)
Cov
vered
bo
onds
(Sp
pain)
UK (g
govt.)
Frrance
(g
govt.)
Italy (govt)
US ag
gency
10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
U
US
treas
suries
10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
bln
Source: Fitch Ratings, US Treasury, SIFMA, US debt management office, Agency France Tresor,
Bundesrepublik Deutscheland, European Covered Bond Council, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
December 2014
6
Non-Fed sector mainly holding <5yr Treasuries = foreigners and
US private sector vulnerable to changes in Fed speak
Marketable debt held outside the Fed Reserve: maturity
breakdown
% of GDP
% of GDP
less than 1
1-5
60
60
5-10
>10
Total outstanding
50
50
40
40
30
30
20
20
10
10
0
0
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13
Source: Treasury, BEA , Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
7
December 2014
The Fed holds +40% of long Treasuries
Fed holdings of treasury securities outstanding (% of
total securities outstanding by maturity)
%
%
50
Fed share of total: 0-5 years
50
45
Fed share of total: 0-10 years
45
40
Fed share of total: 10+ years
35
Fed share of total: 5+ years
40
35
30
30
25
25
20
20
15
15
10
10
5
5
0
0
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Sources:Source:
IMF, Treasury,
Haver
Analytics
DBMarkets
Global Market
Research
FRB, Haver
Analytics,
DBand
Global
Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
8
December 2014
Auction outcomes
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
9
December 2014
Primaryy dealers mainlyy holding
g < 3yr
y coupons
$ bln Primary dealer positions in coupon treasuries by maturity
sector
<3yr
3yr-6yr
6yr-11yr
>11yr
$ bln
Total
150
150
100
100
50
50
0
0
Oct-14
4
Jul-14
4
Apr-14
4
Jan-14
4
Oct-13
3
Jul-13
3
Apr-13
3
Jan-13
3
Oct-12
2
Jul-12
2
Apr-12
2
2
Jan-12
Oct-2011
Jul-2011
1
Apr-2011
Jan-2011
1
Oct-2010
0
-100
Jul-2010
0
-100
Apr-2010
0
50
-50
Jan-2010
0
50
-50
Source: FRB, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
10
December 2014
Foreign
g p
participation
p
in 10y
y and 30y
y auctions stable
10 and 30 yr auction amounts awarded to foreigners
(% of total issued)
%
%
45
40
40
35
35
30
30
25
25
20
20
15
15
10
5
10
5
0
0
Jul-09
9
Oct-09
9
Jan-10
0
Apr-10
0
Jul-10
0
Oct-10
0
Jan-11
1
Apr-11
1
Jul-11
1
Oct-11
1
Jan-12
2
Apr-12
2
Jul-12
2
Oct-12
2
Jan-13
3
Apr-13
3
Jul-13
3
Oct-13
3
Jan-14
4
Apr-14
4
Jul-14
4
Oct-14
4
45
Source: ODM, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
11
December 2014
Direct bidding
g trending
g down for 10s…
%
50
US 10 Year Notes Bidder Participation for % of Direct Bidder
Amount Accepted
%
50
45
40
35
30
35
30
25
20
25
20
15
10
5
0
15
10
5
0
May-03
Oct-03
Mar-04
Aug-04
Jan-05
Jun-05
Nov-05
Apr-06
Sep-06
Feb-07
Jul-07
Dec-07
May-08
Oct-08
Mar-09
Aug-09
Jan-10
Jun-10
Nov-10
Apr-11
Sep-11
Feb-12
Jul-12
Dec-12
May-13
Oct-13
Mar-14
Aug-14
45
40
Source: Treasury, Bloomberg Finance LP, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
12
December 2014
…and direct bidding
g for 2s also lower…
U.S. 2 Year Notes Bidder Participation for % of Direct Bidder
Amount Accepted
p
%
45
%
45
Dec-14
Jun-14
Dec-13
Jun-13
Dec-12
Jun-12
Dec-11
0
Jun-11
0
Dec-10
5
Jun-10
5
Dec-09
10
Jun-09
10
Dec-08
15
Jun-08
15
Dec-07
20
Jun-07
20
Dec-06
25
Jun-06
25
Dec-05
30
Jun-05
30
Dec-04
35
Jun-04
35
Dec-03
40
Jun-03
40
Source: Treasury, Bloomberg Finance LP, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
13
December 2014
…is China behind direct bidding
g on 10s?
%
50
US 10 Year Notes Bidder Participation for % of Direct Bidder USD bln
Amount Accepted (ls)
60
China Gross Purchases of US Treasury Bonds & Notes (rs)
45
50
40
35
40
30
25
30
20
20
15
10
10
5
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
0
Source: Treasury, Bloomberg Finance LP, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
14
December 2014
Bid-to-cover ratios up for 2s and down for 10s
Treasury auction results: bid-to-cover ratio
Ratio
Ratio
5
5
2-yr
10-yr
4
4
3
3
2
2
1
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
1
Source: U.S. Treasury, Bloomberg finance LP, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
15
December 2014
…and indirect bidding stable for 2s and 10s
Indirect bidding for Treasuries at Treasury auctions
%
%
80
80
2-yr
10-yr
70
70
60
60
50
50
40
40
30
30
20
20
10
10
0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
0
2015
Source: U.S. Treasury, Bloomberg Finance LP, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
16
December 2014
What are foreign
central banks doing?
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
17
December 2014
Foreign official holdings of Treasuries moving sideways…
$bn
$bn
Foreign US Treasury holdings:
4500
4500
4000
Official
Private
4000
3500
3500
3000
3000
2500
2500
2000
2000
1500
1500
1000
1000
500
500
0
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
0
Source: Treasury, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
18
December 2014
...and Japan has stepped up purchases recently...
USD bln
1400
Chinese and Japanese US treasury holdings
China
USD bln
Japan
1400
800
800
600
600
400
400
200
200
0
May-2013
Aug-2013
Nov-2013
Feb-2014
May-2014
Aug-2014
Nov-2014
1000
Aug-2011
Nov-2011
Feb-2012
May-2012
Aug-2012
Nov-2012
Feb-2013
1000
Feb-2010
May-2010
Aug-2010
Nov-2010
Feb-2011
May-2011
1200
May-2009
09
Aug-200
Nov-2009
1200
0
Source: Treasury, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
19
December 2014
China’s foreign reserves have started falling...
$bn, q/q chg.
$bn, q/q chg.
Chi ’ foreign
China’s
f
i
reserves
200
200
160
160
120
120
80
80
40
40
0
0
-40
40
40
-40
-80
-80
-120
-120
-160
-160
04
05
06
07
08
09
10
11
12
13
14
Source: PBC, SAFE, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
20
December 2014
…despite a record-high trade balance surplus
$ bln
China's trade balance
$ bln
50
50
40
40
30
30
20
20
10
10
0
0
10
-10
10
-10
-20
-20
-30
-30
-40
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
-40
Source: IMF, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
21
December 2014
…and the monthly data shows that
China's FX reserves are now around $3.8trn
$ trn
$ trn
China's FX reserves declining
4.5
4.5
4.0
4.0
35
3.5
35
3.5
3.0
3.0
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
2005
0.5
2006
2007
2008
2009
2010
2011
2012
2013
2014
Note: data for Jan and Feb 2014 was not available in PBC
Source: PBC, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
22
December 2014
Custodyy holdings
g fell a lot in October…
Rolling 4 week change in Fed custody holdings
GSE
Treasury
Total
$bn
120
100
80
60
40
20
0
-20
-40
-60
-80
-100
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
$bn
120
100
80
60
40
20
0
-20
-40
-60
-80
-100
Source: Bloomberg Finance LP, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
23
December 2014
…and overall Fed custody holdings moving sideways
$bn
Fed custody holdings of Treasuries and agencies for
foreign
g central banks
4000
3500
3000
Agency debt
Treasury securities
Total
$bn
4000
3500
3000
2500
2500
2000
2000
1500
1500
1000
1000
500
500
0
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
0
Source: FRB, Bloomberg Finance LP, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
24
December 2014
In real effective terms the Chinese
Yuan is well above where it was in 2002
July 2005=100
July 2005=100
R l effective
Real
ff ti exchange
h
rate
t off Yuan
Y
vs. a basket
b k t off 58 currencies
i
150
150
140
140
130
130
120
120
110
110
100
100
90
2000
90
2002
2004
2006
2008
2010
2012
2014
Source: BIS, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
25
December 2014
FX reserves: $8trn in EM and $4trn in DM…
Foreign reserves: Emerging vs Developed markets
$ bln
8000
Developed markets
Emerging markets
$ bln
8000
7000
7000
6000
6000
5000
5000
4000
4000
3000
3000
2000
2000
1000
1000
0
0
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Source: IMF COFER, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
26
December 2014
…and as a share of GDP emerging markets holding what
corresponds to 27% of EM GDP in reserves
International reserves held by Emerging Markets
% of GDP
% of GDP
30
30
25
25
20
20
15
15
10
10
5
5
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
Source:
IMF COFER , Haver Analytics, DB Global Markets Research
Source: CBO, DB Global Markets
Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
27
December 2014
China’s
China
s reserves as a share of reserves held by:
2000M12 2004M12 2010M12 2011M6
All countries
2012M9
2013M9 2013M12
9%
16%
31%
31%
29%
32.0%
32.7%
Advanced
economies
i
14%
30%
92%
96%
83%
97 3%
97.3%
100%
Emerging/
Developing
economies
23%
36%
46%
47%
45%
47 7%
47.7%
48 6%
48.6%
Source: IMF, PBC, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
28
December 2014
Unallocated (meaning undisclosed) share
of total world reserves rising
g
US dollars
Euro
Others currencies
Unallocated
100%
100%
80%
80%
60%
60%
40%
40%
20%
20%
0%
0%
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Source: IMF COFER, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
29
December 2014
Central bank appetite for US
bonds much lower than in 2009-2013
m/m chg,
m/m
12m sum
12m
700
Foreign net purchases ($bln) of US Treasuries: official holders
600
chg,
sum
700
500
500
400
Bonds
Bills
600
400
300
300
200
200
100
100
0
0
-100
-200
200
-200
200
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
-100
Source: Treasury, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
30
December 2014
On a yoy basis central banks
are buying fewer dollar assets
assets…
Year-over-year change in world USD reserves
$ bln
$ bln
500
500
400
400
300
300
200
200
100
100
0
0
-100
-100
-200
-200
00
01
02 03
04
05
06
07 08
09
10
11
12 13
14
Source: IMF COFER, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
31
December 2014
...and foreigners more broadly have
less appetite for all US assets...
$bn
1200
Net foreign buying of all US securities
(12-month rolling sum)
Long term public & private debt
Long-term
Short-term public & private debt
Equities
$bn
1200
800
800
400
400
0
0
-400
-400
1990199219941996199820002002200420062008201020122014
Source: Treasury, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
32
December 2014
…with the level of purchases lower for
Treasuries, MBS, and Credit…
$Mln
1000
800
Net foreign buying of US long-term debt securities
(12-month rolling sum)
Treasury bonds & notes
GSE MBS & agency debt
$Mln
1000
800
Corporate & other bonds
600
600
400
400
200
200
0
0
-200
-200
19901992 1994199619982000 2002200420062008 201020122014
Source: Treasury, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
33
December 2014
Who is buying Treasuries?
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
34
December 2014
Framework for thinkingOverview
about demand for fixed income
-The key driver of rates is the economy. But different buyers
have different p
price sensitivities:
P i sensitivity
Price
iti it
L
Low
Fed
Foreign
central
banks
Money
market
funds
Mutual
funds
Pension/ Households
insurance
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
High
Banks
35
December 2014
Foreigners, Fed, and mutual funds
have increased their holdings of Treasuries
Holders of Treasury debt
securities
Q3 2014
Q1 2007
Q1 2003
R t off world
Rest
ld
47 7%
47.7%
44 3%
44.3%
36%
Fed
19.2%
15.6%
17.5%
Mutual funds
8.6%
5.2%
7.6%
Households/Hedge funds
5.7%
6.1%
8.4%
Government retirement funds
3.5%
4.7%
5.9%
Private pension funds
2.6%
2.8%
3.0%
Commercial banks
3.5%
2.2%
4.0%
Insurance companies
2.2%
3.7%
4.5%
Investment banks
0.4%
-0.8%
0.5%
GSEs
0 5%
0.5%
0 3%
0.3%
0 7%
0.7%
ABS issuers
0.2%
1.3%
0.0%
Others
5.9%
13.5%
12.3%
Source: FRB, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
36
December 2014
Fed buying Treasuries has been eating into
share of Treasuries held by others
Holdings of treasuries as % of treasury debt outstanding
%
60
50
40
Foreigners
Banks
Pension+insurers
Households
Others
Mutual funds
Federal Reserve
%
60
50
40
30
30
20
20
10
10
0
1955 1961 1967 1973 1979 1985 1991 1997 2003 2009
0
Source: FRB, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
37
December 2014
70% of Treasuries are held by foreigners and the Fed
Holdings of treasuries as % of treasury debt outstanding
%
80
Federal Reserve
US domestic real money, banks, and households
Foreigners
%
80
70
70
60
60
50
50
40
40
30
During QE domestic real money
“sold” their Treasuries to the Fed
20
30
20
10
10
0
0
1985 1988
1991
1994 1997 2000
2003 2006
2009 2012 2015
Source: FRB, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
38
December 2014
Most Treasuries held by foreigners
Holders of US Treasuries,% outstanding
Household/Corp
Fed
Insurance
Mutual funds
Banks and brokers
Other
Foreign
Pension
100%
100%
90%
80%
90%
80%
70%
60%
70%
60%
50%
40%
30%
50%
40%
30%
20%
20%
10%
0%
10%
0%
90
95
00
05
10
Source: FRB, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
39
December 2014
Treasury net issuance down recently
$bn, 3m MA
300
$bn, 3m MA
Gross issuance of Treasury notes & bonds
Net issuance off Treasury notes & bonds
300
250
250
200
200
150
150
100
100
50
50
0
0
-50
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013
-50
Source: Bureau of Public Debt, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
40
December 2014
Global rebalancing is needed – China needs more
consumption
p
and the US less imports.
p
This process will take many years
Private consumption as a share of GDP
%
80
China
Germany
Japan
%
US
80
70
70
60
60
50
50
40
40
30
30
1995
2000
2011
2012
2013
Source: CAO, EUROSTAT, BEA, CNBS , Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
December 2014
41
Fed holdings of MBS and Treasuries
Treasuries outstanding and MBS outstanding held by the
USD bln
Fed
USD bln
4500
4500
Mortgage Backed Securities (MBS)
4000
4000
Treasuryy securities
3500
3500
3000
3000
2500
2500
2000
2000
1500
1500
1000
1000
500
500
0
0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Source: FRB, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
42
December 2014
Repo outstanding highly correlated with
US fixed income daily traded volume
$trn
7
Primary dealer total financing vs total daily traded volume
across US fixed income
Repo outstanding (ls)
Daily traded volume(rs)
6
$bln
1200
1000
5
800
4
600
3
400
2
1
200
0
0
1996
1998
2000
2002
2004
2006
2008
2010
2012
Source: SIFMA, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
43
December 2014
Who is buying GSE
MBS and agency debt?
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
44
December 2014
Fed holds 22% of all outstanding
agency and GSE-backed debt securities
Holders of agency and GSE-backed
debt securities
Q3 2014
Q1 2007
Q1 2003
Commercial banks
22 4%
22.4%
18 3%
18.3%
18 6%
18.6%
Fed
22.2%
0.0%
0.0%
Rest of world
11.4%
20.1%
11.4%
Mutual funds
14.9%
9.7%
13.6%
Insurance companies
5.7%
7.6%
8.0%
GSEs
3 7%
3.7%
10 5%
10.5%
20 8%
20.8%
Government retirement funds
3.0%
3.0%
3.6%
Private pension funds
2.9%
3.1%
3.4%
Households
0.1%
9.7%
3.0%
Investment banks
1.4%
2.2%
2.3%
ABS issuers
0 0%
0.0%
5 0%
5.0%
5 6%
5.6%
Others
12.3%
10.4%
9.7%
* Agency and GSE-backed debt securities consists of GSE debt and Agency and GSE-backed mortgage pools.
Source: FRB, Haver Analytics , DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
45
December 2014
Fed holds 20% of mortgages
%
Holdings of GSEs as % of GSE debt outstanding
90
80
70
%
90
Fed
Banks
Insurance companies
Mutual funds
Foreigners
Others
80
70
60
60
50
50
40
40
30
30
20
20
10
10
0
1955 1961 1967 1973 1979 1985 1991 1997 2003 2009
0
Source: FRB, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
46
December 2014
Mortgage originations moving down recently
$bn
Total new mortgages
$bn
1400
1400
1200
1200
1000
1000
800
800
600
600
400
200
400
0
200
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Source: MBA, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
47
December 2014
Trading volumes in MBS declining, steady for Treasuries
Turn over in treasuries & agencies
average daily trading volume ($bn)
T
Treasury
MBS
A
Agency
$ bln
600
$ bln
600
500
500
400
400
300
300
200
200
100
100
* As of March 2014
YTD 2014
2013
2012
2011
2010
200
09
200
08
200
07
200
06
200
05
200
04
200
03
200
02
200
01
200
00
199
99
199
98
199
97
0
199
96
0
Source: SIFMA, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
48
December 2014
Primary dealer inventory of IG and high yield
bonds
bo
ds cu
currently
e y 20%
0% o
of what
a it was
as in 2007
00
Primary dealer positions, $bn
$ bln
300
$ bln
300
C
Corporate
t b
bonds
d
250
250
200
200
150
150
100
100
50
50
0
0
01
02
03
04
05
06
07
08
09
10
11
12
13
14
Source: FRB, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
49
December 2014
Primary dealer inventory of spread
product
p
oduc cu
currently
e y 20%
0% o
of what
a it was
as in 2007
00
Primary dealer positions by asset class, $bn
$ bln
300
GSE
$ bln
300
Corporate
250
250
200
200
150
150
100
100
50
50
0
0
01
02
03
04
05
06
07
08
09
10
11
12
13
14
Source: FRB, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
50
December 2014
Who is buying Corporate and
Who is buying Corporate
Foreign Bonds?
Who is buying GSE MBS and agency debt?
and Foreign Bonds?
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
51
December 2014
Holders of HY and HG credit
Holders of corporate and foreign bonds
Q3 2014
Q1 2007
Q1 2003
Rest of world
24.90%
23.70%
17.90%
Life insurance companies
20.10%
17.30%
22.80%
Mutual funds
19.50%
7.50%
7.20%
Other
15.00%
22.30%
21.70%
Households/Hedge funds
8 00%
8.00%
15 10%
15.10%
17 90%
17.90%
Commercial banks
6.70%
8.70%
8.20%
Private pension funds
5.10%
3.40%
3.90%
Funding corporations
0.70%
0.70%
1.10%
Source: FRB, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
52
December 2014
Mutual funds buying more credit in recent years
Holdings of Corporate bonds as % of corporate bonds outstanding
%
70
60
%
Households
Banks
Life insurance companies
Mutual funds
Foreigners
70
60
50
50
40
40
30
30
20
20
10
10
0
1955 1961 1967 1973 1979 1985 1991 1997 2003 2009
0
Banks include US charted depository institutes, foreign banking offices in US, bank holding companies, and Banks
in U
U.S.
S Possessions
Source: FRB, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
53
December 2014
Net issuance of corporate and foreign bonds
$ bln
Net issuance of corporate & foreign bonds
$ bln
Nonfinancial
Rest of the world
Financial
1500
1500
1000
1000
500
500
0
0
-500
-1000
2000
-500
-1000
2002
2004
2006
2008
2010
2012
2014
Source: FRB, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
54
December 2014
Distribution of corporate credit ratings
Global corporate rating distribution (issuer count)
7000
7000
AAA
6000
AA
A
BBB
BB
B
CCC and below
6000
5000
5000
4000
4000
3000
3000
2000
2000
1000
1000
0
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
0
S&P and DB Global Markets Research
Source: CBO, DB Global MarketsSource:
Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
55
December 2014
Who is buying
municipal
securities
MUNI problems
and loans?
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
56
December 2014
Holders of munis
Holders of Municipal securities and loans
Q4 2013
Q1 2007
Q1 2003
Households/Hedge funds
42.9%
50.5%
37.0%
Mutual funds
25.5%
23.9%
32.8%
I
Insurance
companies
i
13 1%
13.1%
11 7%
11.7%
11 9%
11.9%
Commercial banks
12.2%
6.1%
7.2%
Rest of world
2.0%
1.1%
0.7%
Security brokers and dealers
0.4%
1.5%
1.1%
Other
3.9%
5.1%
9.3%
Source: FRB, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
57
December 2014
Munis mainly held by households/mutual
funds but banks have been buying more recently
Holdings of Municipal securities by agent as % of
municipal securities outstanding
%
60
Households
Insurance companies
Foreigners
Banks
Mutual funds
Others
Break in data
%
60
50
50
40
40
30
30
20
20
10
10
0
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
0
Source: FRB, Haver Analytics , DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
58
December 2014
Market not worried about muni situation
%
%
4.5
Treasury 10Y
4.5
BVAL 10Y AAA Muni index
4.0
4.0
Sep-14
May-14
Jan-14
Sep-13
1.0
May-13
1.0
Jan-13
1.5
Sep-12
1.5
May-12
2.0
Jan-12
2.0
Sep-11
2.5
May-11
2.5
Jan-11
3.0
Sep-10
3.0
May-10
3.5
Jan-10
3.5
Source: Bloomberg Finance LP, FRB, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
59
December 2014
Muni CDS not showing signs of distress
bps
400
Illinois 5Y
California 5Y
MCDX 5Y
Muni CDS level
New York 5Y
bps
400
350
300
300
250
250
200
200
150
150
100
100
50
50
0
0
May-10
0
Jul-10
0
Sep-10
0
Nov-10
0
Jan-11
1
Mar-11
1
May-11
1
Jul-11
1
Sep-11
1
Nov-11
1
Jan-12
2
Mar-12
2
May-12
2
Jul-12
2
Sep-12
2
Nov-12
2
Jan-13
3
Mar-13
3
May-13
3
Jul-13
3
Sep-13
3
Nov-13
3
Jan-14
4
Mar-14
4
May-14
4
Jul-14
4
Sep-14
4
Nov-14
4
350
Source: Bloomberg Finance LP, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
60
December 2014
State and local government problems closely linked to the
overall macro outlook
% y/y
Retail sales (1Q lead)
% y/y
State and local general sales taxes
15
15
10
10
5
5
0
0
-5
-5
-10
-10
-15
-15
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Source: Census, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
61
December 2014
Improving macro picture helping state & local govt
% y/y
Federal employee withholding receipts (ls)
State and local personal income taxes (rs)
% y/y
16
30
12
20
8
10
4
0
0
10
-10
-4
-8
-20
-12
-30
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Source: Census, Haver Analytics, Treasury, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
62
December 2014
State and local govt problems mainly
dealt with via workforce reduction
Surveyed cities response to their fiscal crisis in various
ways
y
Human services cuts
Debt renegotiation
Public safety cuts
Across the board cuts
Employee health benefit modifications
Cuts in general services
Delay/cancelation of capital projects
W kf
Workforce
reduction
d ti
0% 10% 20% 30% 40% 50% 60% 70% 80%
Source: NLC, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
63
December 2014
State budget is mainly confronted with
the problem of cuts in state-aid
state aid
State Actions Since FY 2010
Other
8%
Transfer programs
18%
Cut funds for state-required services
21%
Reduce/limit local authority
21%
Cut reimbursement or other transfers
26%
Cut state aids
39%
Cut state-shared revenues
0%
37%
3
%
10%
20%
30%
40%
Source: NLC report ‘’ City Fiscal Conditions in 2013’’, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
December 2014
50%
64
Local government expenditures and revenues
Expenditures
p
Revenues
Sources of revenues for local governments, 2012
Types of spending by local governments, 2012
Social
services,
13%
Other
revenues,
24%
Aid from State
govt 29%
govt,
Education,
36%
Administatio
n, interst
and others,
14%
Utility
revenues, 9%
Public
safety, 10%
Environment
, 9%
Aid from
Federal govt,
4%
Utility, 11%
Sales and
other taxes,
7%
Property
taxes, 27%
Source: Census, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
65
December 2014
2010 DB Blue template
Some states rely heavily on property taxes
In which states does Govt rely mostly on property taxes?
Fiscal Year 2010
State
Fraction of tax revenue coming from
property taxes
New Hampshire
64.6%
NJ
N.J.
48 4%
48.4%
Vermont
45.8%
Rhode Island
45.6%
Texas
45.2%
Illinois
43.6%
Fl id
Florida
42 9%
42.9%
Wyoming
42.5%
Connecticut
42.0%
Note: Includes residential and commercial real estate (mostly local revenue) as well as personal
property taxes on cars, boats, etc. (mostly state revenue).
Source: Tax foundation calculations based on Census Bureau’s data, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
66
December 2014
State and Local Property Tax Collections Per Capita, Top 15
State Collections Per Capita Rank
FY2010
N.J. $2,663
1
Conn.
$2,473
2
State
St
t N.H. $2,440 Collections
C3 ll ti
Per
P Capita
C it
Wyo. $2,285
4
New Jersey
$2,819
N.Y. $2,136
5
Wyoming
$2,633
Vt. $2,056
6
R.I. $2,018
7
Connecticut
$2 522
$2,522
Mass.
$1,874
8
New Hampshire
$2,463
Ill.
$1,782
9
Alaska
$1,728
10 $2,280
New Jersey
Maine
$1,640
11
VermontWis.
$2,166
$
,
Wis $1,633
$1 633
12
Fla. $1,589
13
Rhode Island
$2,083
Tex. $1,475
14
Massachusetts
$1,986
Calif. $1,465
15
Alaska
$1,865
Illinois
$1,827
Maine
$1,786
Wisconsin
$1,698
C l d
Colorado
$1 601
$1,601
Texas
$1,562
Florida
$1,507
Rank
R
k
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Source: U.S. Census Bureau, Tax Foundation, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
67
December 2014
2010 DB Blue template
Asset allocation for
Households/Hedge funds,
Institutional Investors
Investors, and Foreigners
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
68
December 2014
Households’/hedge funds’ asset allocation
Treasury
Agency & GSEs
Munis
Credit*
Equity**
Other
100%
100%
80%
80%
60%
60%
40%
40%
20%
20%
0%
0%
52
57
62
67
72
77
82
87
92
97
02
07
12
*Credit includes corporate & foreign bonds
**Equities includes corporate equities, mutual fund shares, life insurance reserves and pension funds reserves
Source: FRB, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
69
December 2014
Pension funds’ asset allocation
Treasury
Agency & GSEs
Munis
Credit*
Equity**
Other
100%
100%
80%
80%
60%
60%
40%
40%
20%
20%
0%
0%
92
94
96
98
00
02
04
06
08
10
12
14
Pension funds incl. Private, State& local govt.retirement and Federal govt. retirement funds
Credit includes corporate and foreign bonds
Equities includes corporate equities and mutual fund shares
Source: FRB, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
70
December 2014
Insurance companies’ asset allocation
Treasury
Agency and GSEs
Munis
Credit*
Equity**
Other
100%
100%
80%
80%
60%
60%
40%
40%
20%
20%
0%
0%
94
96
98
00
02
04
06
08
10
12
14
Insurance sector includes both life and non-life insurance
*Credit includes foreign and corporate bonds; **Equities include mutual fund shares and corporate equities
Source: FRB, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
71
December 2014
Mutual funds’ asset allocation
Treasury
Agency & GSEs
Munis
Credit*
Equity**
Other
100%
100%
80%
80%
60%
60%
40%
40%
20%
20%
0%
0%
08
09
10
11
12
13
14
Mutual funds incl. traditional mutual funds, money mkt. MFs, exchange traded MFs & open ended MFs
*Credit incudes corporate and foreign bonds; **Equity includes corporate equites and mutual fund shares
Source: FRB, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
72
December 2014
Asset allocation of foreigners in US assets
Treasury
Agency & GSEs
Munis
Credit*
Equities**
Other
100%
100%
80%
80%
60%
60%
40%
40%
20%
20%
0%
0%
92
97
02
07
12
*Credit is Corporate bonds held by Foreign sector; **Equities is calculated as sum of corporate equities and mutual fund
shares
Source: FRB, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
73
December 2014
Banks’ asset allocation
Treasury
Agency & GSEs
Munis
Credit*
Equity**
Other
100%
90%
100%
90%
80%
70%
60%
80%
70%
60%
50%
40%
50%
40%
30%
20%
10%
30%
20%
10%
0%
-10%
0%
-10%
89
91 93
95 97
99 01
03 05
07 09
11 13
Banks incl. all US charted depository instituions and brokers and dealers
*Credit includes corporate and foreign bonds; **Equities includes corporate equities and mutual fund shares
Source: FRB, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
74
December 2014
Who is buying Corporate and
Foreign
O tl Bonds?
Outlook
k
Who is buying GSE MBS and agency debt?
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
75
December 2014
US 10y fair value is currently 2.7% in the weekly model
%
%
6
Actual
6
Model predicted forecast
Model-predicted
5
5
15-yr average 1993-2008
4
4
3
3
2
2
Equation:
1
T10 = c
T2 5Y implied inflation Euro risk
Coeff. 2.8 0.2
0.5
-0.00
(29 15) (21
(29.15)
(21.4)
4)
(14
(14.2)
2)
((-42.1)
42 1)
Fed holdings of long term try
-1.7
((-6.6)
6 6)
1
0
0
03
04
05
06
07
08
09
10
11
12
13
14
Note: Explanatory variables used in the model are 2y treasury yield and Aruoba-Diebold-Scotti Business Conditions Index
Source: FRB, BDlt, BDE, Bbk, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
76
December 2014
Monthly model suggests 10y rates should be 3.6%
10y tsy monthly model
%
Actual
9
Estimated
%
9
8
8
7
7
6
6
5
5
4
4
3
2
1
Equation:
T10 =
c
IP_YoY
IP YoY
Coeff.
-0.3
0.02
(-0.4)
(1.74)
Note: t-stats in parentheses
Inflation exp
2.84
(13.5)
Unemp(-1)
Unemp( 1)
-0.44
(-15.1)
0
3
2
1
0
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Source: FRB, BLS, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
77
December 2014
The quarterly model suggests 10y fair value is 2.4%
10yr yield forecast model with fiscal variables
%
Actual
7
%
Model-predicted forecast
7
6
6
5
5
4
4
3
2
Equation:
T10 =
c
Debt to GDP Output gap
Coeff.
6.0
-0.03
0.10
(8 12)
(8.12)
((-6.8)
6 8)
(2
(2.40)
40)
Note: t-stats in parentheses
1
2000
2002
2004
2006
3
Inflation expectations
0.33
(0
(0.89)
89)
2
1
2008
2010
2012
2014
Source: FRB, BEA, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
78
December 2014
GDP forecast suggests 10y rates in the US are too low
%
Nominal GDP growth (% y/y)
%
10y treasury yield (%)
15
15
12
12
9
9
6
6
3
3
0
0
53
58
63
68
73
78
83
88
93
98
03
08
13
Source:
BEA,
FRB ,DB
DBGlobal
Global
Markets
Source:
FRB,BEA,
Markets
ResearchResearch
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
79
December 2014
Outstanding amount of risk-free assets globally
Outstanding amounts of marketable potentially safe assets
(percent of total)
Gold
11%
Corporate debt
(investment
grade)
11%
Covered bonds
4%
AAA/AA OECD
government
securities
46%
ABS,MBS,
ABS
MBS other
th
securitization
17%
U S agency d
U.S
debt
b
3%
A/BBB OECD
government
securities
7%
Supranational
d bt
debt
1%
Data for government and corporate debt are as of 2011:Q2; supranational debt, covered bonds, and gold, as of end-2010;
and U.S. agency debt and securitization, as of 2011:Q3. ABS = asset-backed securities; MBS = mortgage-backed securities;
OECD = Organization for Economic Cooperation and Development
Development.
Source: IMF, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
80
December 2014
Holders of risk-free assets globally
Holdings of government securities worldwide,by investor type,
end 2010
Other
22%
Banks
34%
Cental banks
i l di
including
reserve
managers
22%
Insurance
companies
15%
Pension funds
7%
Sovereign
wealth funds
1%
Note: Banks include commercial, investment, and development banks; data for pension funds include only direct holdings; SWF
holdings are an IMF staff estimate; reserve manager holdings are an IMF staff estimate based on a representative allocation of total
official reserves to government securities and own government bond holdings by the Federal Reserve, Bank of England, and Bank
of Japan.
Japan "Other"
Other is estimated as a remainder based on BIS data on total outstanding government securities worldwide
worldwide.
Source: IMF, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
81
December 2014
US government debt mainly held by foreigners
Sovereign debt holdings,by type and location of investor
(In percent of total,June 2011)
United States
Total outstanding marketable debt *= $ 9.3 trillion
3.0
18.7
Domestic banks
banks**
48.2
Insurance,pensions
and mutual funds
Other
Federal reserve
11 8
11.8
Nonresidents
18.2
*Excludes $5 trillion of nonmarketable public debt securities held mostly in intragovernmental
accounts.
**Domestic depository institutions.
Source: IMF, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
82
December 2014
Fewer sovereign risk-free assets outstanding…
Fewer sovereign risk-free assets outstanding…
Historical Overview of S&P Sovereign Debt ratings of Selected OECD Countries, 1970-January 2012
Country
Austria
Belgium
Canada
Denmark
Finland
France
Germany
Greece
Iceland
Ireland
Italy
Japan
Luxembourg
Netherlands
Norway
Port gal
Portugal
Spain
Sweden
Switzerland
Turkey
U it d
United
Kingdom
United States
Year of
First
Rating
1975
1988
1949
1981
1972
1975
1983
1988
1989
1988
1988
1959
1994
1988
1958
1988
1988
1977
1988
1992
1978
1941
1970
NR
NR
AAA
NR
NR
NR
NR
NR
NR
NR
NR
NR1
NR
NR
NR1
NR
NR
NR
NR
NR
1975
AAA
NR
AAA
NR
AAA
AAA
NR
NR
NR
NR
NR
AAA
NR
NR
AAA
NR
NR
NR
NR
NR
1980
AAA
NR
AAA
NR
AAA
AAA
NR
NR
NR
NR
NR
AAA
NR
NR
AAA
NR
NR
AAA
NR
NR
1985
AAA
NR
AAA
AA+
AAA
AAA
AAA
NR
NR
NR
NR
AAA
NR
NR
AAA
NR
NR
AAA
NR
NR
NR
AAA
AAA
AA
NR
AAA
AAA
AAA
AAA
AAA
A
BBB
1990
AAA
AA+
AAA
AA
AAA
AAA
AAA
BBBA
AAAA+
AAA
NR
AAA
AAA
A
AA
AAA
AAA
NR
1995
AAA
AA+
AA+
AA+
AAAAA
AAA
BBBA
AA
AA
AAA
AAA
AAA
AAA
AA
AAAA
AA+
AAA
B+
2000
AAA
AA+
AA+
AA+
AA+
AAA
AAA
AA+
AA+
AA
AAA
AAA
AAA
AAA
AA
AA+
AA+
AAA
B+
2005
AAA
AA+
AAA
AAA
AAA
AAA
AAA
A
AAAAA
AA
AAAAAAA
AAA
AAA
AA
AAAAA
AAA
AAA
BB-
2010
AAA
AA+
AAA
AAA
AAA
AAA
AAA
BB+
BBBA
A+
AA
AAA
AAA
AAA
A
AAA
AAA
AAA
BB
2011
AAA
AA
AAA
AAA
AAA
AAA
AAA
CC
BBBBBB+
A
AAAAA
AAA
AAA
BBB
BBBAAAAA
AAA
BB
2012
AA+
AA
AA
AAA
AAA
AAA
AA+
AAA
CC
BBBBBB+
BBB+
AAAAA
AAA
AAA
BB
A
AAA
AAA
BB
AAA
AAA
AAA
AAA
AAA
AAA
Noninvestment grade
AAA
AAA
AAA
AAA
AAA
AA+
AAA
AA+
Note: The Organization for Economic Cooperation and Development (OECD) was established in 1961. Countries selected
Source: S&P , IMF, DB Global Markets Research
constituted the OECD membership in 1970. Ratings shown are S&P's long-term foreign currency ratings. NR = not rated.
1Sovereign
Deutscherating
Banksuspended; see Bhatia (2002).
83
Torsten Slok, torsten.slok@db.com +1 212 250-2155
December 2014
…and
d ffewer risk-free
i kf
assets
t outstanding
t t di more generally
ll
Distribution of Sovereign Debt Ratings for OECD
countries, Before crisis
Distribution of Sovereign Debt Ratings for OECD countries,
Today
A
12%
BB
4%
CC
4%
BBB
8%
A
8%
AA
20%
AAA
52%
AAA
68%
AA
24%
Source: IMF, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
84
December 2014
Treasury issuance down as a
share of total fixed income issuance
Change in debt outstanding
US$trn
Open
p market
Corp & frn
Cons. credit
5
Munis
Mortgages
Total
Other loans
GSE-backed
US$trn
Trsy
y
Bank loans
5
4
4
3
3
2
2
1
1
0
0
-1
-1
-2
-2
-3
-3
1996
1998
2000
2002
2004
2006
2008
2010
2012
Source: FRB, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
85
December 2014
The composition of fixed income issuance has changed
recently: More spread product
product, fewer treasuries
US$trn
2.0
Change in debt outstanding
O
Open
market
k t
M i
Munis
Oth loans
Other
l
Trsy
Corp & frn
Mortgages
GSE-backed
Bank loans
Cons. credit
Total
US$trn
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
-0.5
-0.5
-1.0
-1.0
-1.5
-1.5
2007
2008
2009
2010
2011
2012
2013
2014
Source: FRB, Haver Analytics, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
86
December 2014
Holders of U.S. equities
6%
3%
3%
US residents
6%
Advanced markets
Financial centers
China
Other emerging
g g
markets
90%
Middle East oil
producers
Others
Note: Data for 2009.
Deutsche Bank
Source: TIC and IMF, DB Global Markets Research
Torsten Slok, torsten.slok@db.com +1 212 250-2155
87
December 2014
Holders of U.S. debt
4%
5%
US residents
5%
Advanced markets
Financial centers
11%
China
Other emerging markets
73%
Middle East oil
producers
Others
Data for 2009. Source: TIC and IMF, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
88
December 2014
Financial markets in advanced economies
are six times bigger
gg than in emerging
g g markets
Absolute size of capital markets, 2009
US$ trn
Debt securities
150
Stock market cap
US$ trn
150
$122trnGDP at current prices
120
120
90
90
60
60
30
30
0
0
AE
G7
T t l EMs
Total
EM
Note: AE equals G7 plus other AE.
** Total Ems is the sum of EM in LatAm, MENA, Africa and Europe
Source: Adapted from IMF, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
89
December 2014
Recent developments
p
in
ownership
p of
government debt
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
90
December 2014
High spread euro area constitutes 11% of the advanced
economy government debt universe. Traditional reserve
currencies (US,
(US Japan
Japan, UK
UK, and Switzerland) make up 68%
68%.
Advanced Economy Sovereign Debt Universe
(trillion U.S. dollars, end-2012)
$ trn
$ trn
30.0
30
30
25
25
Total US $44 trillion
20
20
15
15
10
10
6.1
5.0
5
3.0
0
5
0
Low-spread euro High-spread euro Other advanced
Traditional
reserve countries
area
area
economies
Source: Sovereign investor base estimates by Arslanalp and Tsuda (2012), DB Global Markets Research
Deutsche Bank
91
Torsten Slok, torsten.slok@db.com +1 212 250-2155
December 2014
China is the biggest foreign holder of Japanese JGBs
Yen trn
90
80
70
Foreign Holdings of Government Debt by Region 1/ 2/
Japan
China
US
Euro Area
Other Europe
Other Advanced
Offshore Centers
Developing
Yen trn
90
80
70
60
60
50
50
40
40
30
30
20
20
10
10
0
0
2004
2005
2006
2007
2008
2009
2010
2011
11/ Excluding foreign official loans and SMP holdings of foreign central banks.
2/ Regional groups are based on country classifications of BIS international banking statistics.
Source: Sovereign investor base estimates by Arslanalp and Tsuda (2012), DB Global Markets Research
Deutsche Bank
92
Torsten Slok, torsten.slok@db.com +1 212 250-2155
December 2014
Foreign holdings of high spread
euro area government debt rising
Foreign Holdings of Advanced Economy Sovereign Debt,
2004-2014 Q2, High spread euro area
100%
Greece
Ireland
Italy
Portugal
Spain
90%
90%
80%
80%
70%
70%
60%
60%
50%
50%
2014Q1
2013Q1
2012Q1
2011Q1
2010Q1
2009Q1
20%
2008Q1
20%
2007Q1
30%
2006Q1
30%
2005Q1
40%
2004Q1
40%
Source: Sovereign investor base estimates by Arslanalp and Tsuda (2012), DB Global Markets Research
Deutsche Bank
93
Torsten Slok, torsten.slok@db.com +1 212 250-2155
December 2014
Foreign holdings of low spread
euro area government debt rising in Germany
Foreign Holdings of Advanced Economy Sovereign Debt,
2004-2014 Q2, Low spread euro area
90%
Austria
Finland
France
Netherlands 90%
Germany
30%
2014Q1
30%
2013Q1
40%
2012Q1
40%
2011Q1
50%
2010Q1
50%
2009Q1
60%
2008Q1
60%
2007Q1
70%
2006Q1
70%
2005Q1
80%
2004Q1
80%
Source: Sovereign investor base estimates by Arslanalp and Tsuda (2012), DB Global Markets Research
Deutsche Bank
94
Torsten Slok, torsten.slok@db.com +1 212 250-2155
December 2014
Foreign holdings of traditional reserve countries
government debt rising in United States
Foreign Holdings of Advanced Economy Sovereign Debt,
2004-2014 Q2, Traditional reserve countries
35%
%
30%
30%
25%
25%
20%
20%
15%
15%
10%
10%
5%
5%
0%
0%
2012Q1
2011Q1
2010Q1
2009Q1
2008Q1
2006Q1
2005Q1
2004Q1
United Kingdom
2014Q1
35%
%
Switzerland
2013Q1
40%
United States 45%
40%
Japan
2007Q1
45%
Source: Sovereign investor base estimates by Arslanalp and Tsuda (2012), DB Global Markets Research
Deutsche Bank
95
Torsten Slok, torsten.slok@db.com +1 212 250-2155
December 2014
Who owns different countries’ government debt?
Investorbase of Advanced Economy Government Debt at end-2013
(% of total)
Domestic central bank
Domestic banks
Domestic nonbanks
Foreign official
Foreign banks
Foreign nonbanks
Japan
Korea
K
Czech Rep
public
Italy
Slov
venia
New Zea
aland
Switze
erland
Belgium
Canada
United King
gdom
Spain
S
No
orway
Denmark
0%
Au
ustria
0%
Fin
nland
20%
Swe
eden
20%
Aus
stralia
40%
Germ
many
40%
United S
States
60%
Frrance
60%
Netherllands
80%
Ire
eland
80%
Porrtugal
100%
Gre
eece
100%
Source: Sovereign investor base estimates by Arslanalp and Tsuda, DB Global Markets Research
Deutsche Bank
Torsten Slok, torsten.slok@db.com +1 212 250-2155
96
December 2014
Half of foreign central bank holdings
of government bonds are Treasuries
9 000
9,000
Foreign Central Bank Holdings of Advanced Economy Government
( billion USD))
Debt Securities,, 2004-14 (in
Other
United States
United Kingdom
8,000
Japan
Germany
7,000
,
Canada
Australia
France
9000
8000
7000
6,000
6000
5,000
5000
4,000
4000
3,000
3000
2,000
2000
1,000
1000
0
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(June)
Source: Sovereign investor base estimates by Arslanalp and Tsuda (2012), DB Global Markets Research
Deutsche Bank
97
Torsten Slok, torsten.slok@db.com +1 212 250-2155
December 2014
Peter Hooper
Managing Director, Chief Economist
Deutsche Bank Securities, Inc.
+1 (212) 250-7352
peter.hooper@db.com
Peter Hooper joined Deutsche Bank Securities in 1999 as Chief US
Economist. He became Chief Economist and co-head of global
economics in 2006. Prior to joining Deutsche Bank, Hooper enjoyed a
distinguished 26-year career at the Federal Reserve Board in
Washington, D.C. While rising to senior levels of the Fed staff, he held
numerous positions, including as an economist on the FOMC. Hooper
and his team produce weekly and quarterly publications for Deutsche
Bank with a focus on US and global economic developments and Fed
policy; he also comments on US and global economic and financial
developments in the news media.
media
Hooper currently serves as a member of the Economic Advisory Panel of the
Federal Reserve Bank of New York, a member and former chairman of
the Economic Advisory Committee of the American Bankers Association,
a founding member of the US Monetary Policy Forum
Forum, a member of the
Economic Leadership Council for the University of Michigan, and a
member of the Forecasters’ Club of New York. Hooper earned a BA in
Economics (cum laude) from Princeton University and an MA and Ph.D.
in Economics from University of Michigan
Michigan. He has published numerous
books, journal articles, and reviews on economics and policy analysis.
Deutsche Bank
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98
December 2014
Torsten Slok, Ph.D.
Chief International Economist, Managing Director
Deutsche Bank Securities, Inc.
 Torsten Slok joined Deutsche Bank Securities in the fall of 2005.
 Mr. Slok’s Economics team has been ranked Top 3 by Institutional Investor for the
past three years. Slok currently serves as a member of the Economic Club of New
York
 Prior to joining the firm
firm, Mr
Mr. Slok worked at the OECD in Paris in the Money and
Finance Division and the Structural Policy Analysis Division. Before joining the
OECD he worked for four years at the IMF in the Division responsible for writing the
World Economic Outlook and the Division responsible for China, Hong Kong, and
Mongolia.
Mongolia
 Mr. Slok studied at University of Copenhagen and Princeton University. He has
published numerous journal articles and reviews on economics and policy analysis,
including in Journal of International Economics, Journal of International Money and
Fi
Finance,
and
d Th
The E
Econometric
t i JJournal.
l
Deutsche Bank
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99
December 2014
Matthew Luzzetti
212-250-6161
Matthew.luzzetti@db.com
Matthew Luzzetti received a Ph.D. in Economics from the
University of California, Los Angeles, focusing on
macroeconomics. Prior to that he worked as a research
analyst at the Federal Reserve Bank of Philadelphia. Matt
joined Deutsche Bank in September 2012 and is part of
DB’s top II ranked economics team.
Deutsche Bank
100
Torsten Slok, torsten.slok@db.com +1 212 250-2155
22/12/2014 11:00:54
2010 DB Blue template
December 2014
Torsten Slok, Ph.D.
Chief International Economist, Managing Director
Deutsche Bank Securities, Inc.
 Torsten Slok joined Deutsche Bank Securities in the fall of 2005.
 Mr. Slok’s Economics team has been top-ranked by Institutional Investor in fixed
income and equities for the past five years. Slok currently serves as a member of
the Economic Club of New York
 Prior to joining the firm
firm, Mr
Mr. Slok worked at the OECD in Paris in the Money and
Finance Division and the Structural Policy Analysis Division. Before joining the
OECD he worked for four years at the IMF in the Division responsible for writing the
World Economic Outlook and the Division responsible for China, Hong Kong, and
Mongolia.
Mongolia
 Mr. Slok studied at University of Copenhagen and Princeton University. He has
published numerous journal articles and reviews on economics and policy analysis,
including in Journal of International Economics, Journal of International Money and
Fi
Finance,
and
d Th
The E
Econometric
t i JJournal.
l
Deutsche Bank
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101
December 2014
Deutsche Bank
Appendix 1
Important Disclosures
Additional Information Available upon Request
For disclosures pertaining to recommendations or estimates made on securities other than the primary
subject of this research, please see the most recently published company report or visit our global
di l
disclosure
look-up
l k
page on our website
b it att http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr
htt //
db
/
/di l
/Di l
Di t
Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition, the undersigned lead
analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Torsten Slok
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December 2014
Deutsche Bank
Regulatory Disclosures
po ta t Additional
dd t o a Co
Conflict
ct Disclosures
sc osu es
1. Important
Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the “Disclosures Lookup” and “Legal” tabs.
Investors are strongly encouraged to review this information before investing.
2. Short-Term Trade Ideas
Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche
Bank’s existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com.
3. Country-Specific Disclosures
Australia and New Zeeland: This research, and any access to it, is intended only for “wholesale clients” within the meaning of the Australian Corporations Act
and New Zealand Financial Advisors Act
Act.
EU countries: Disclosures relating to our obligations under MiFiD can be found at http://globalmarkets.db.com/riskdisclosures.
Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc. Registration number - Registered as a
financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, The Financial Futures
Association of Japan. This report is not meant to solicit the purchase of specific financial instruments or related services. We may charge commissions and fees
g
of investment advice,, p
products and services. Recommended investment strategies,
g ,p
products and services carryy the risk of losses to
for certain categories
principal and other losses as a result of changes in market and/or economic trends, and/or fluctuations in market value. Before deciding on the purchase of
financial products and/or services, customers should carefully read the relevant disclosures, prospectuses and other documentation. "Moody's", "Standard &
Poor's", and "Fitch" mentioned in this report are not registered as rating agency in Japan unless specifically indicated as Japan entities of such rating agencies.
Malaysia: Deutsche Bank AG and/or its affiliate(s) may maintain positions in the securities referred to herein and may from time to time offer those securities for
purchase or may have an interest to purchase such securities. Deutsche Bank may engage in transactions in a manner inconsistent with the views discussed
herein.
Qatar: Deutsche Bank AG in the Qatar Financial Centre (registered no
no. 00032) is regulated by the Qatar Financial Centre Regulatory Authority
Authority. Deutsche Bank
AG - QFC Branch may only undertake the financial services activities that fall within the scope of its existing QFCRA license. Principal place of business in the
QFC: Qatar Financial Centre, Tower, West Bay, Level 5, PO Box 14928, Doha, Qatar. This information has been distributed by Deutsche Bank AG. Related
financial products or services are only available to Business Customers, as defined by the Qatar Financial Centre Regulatory Authority.
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AG. Related financial products or services are only available to Professional Clients
Clients, as defined by the Dubai Financial Services
Authority.
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103
December 2014
Risks to Fixed Income Positions
Macroeconomic fluctuations often account for most of the risks associated with exposures to instruments that promise to pay
fixed or variable interest rates. For an investor that is long fixed rate instruments (thus receiving these cash flows), increases
in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a loss. The longer the
maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the loss. Upside surprises in
inflation, fiscal funding needs, and FX depreciation rates are among the most common adverse macroeconomic shocks to
receivers.
i
B
Butt counterparty
t
t exposure, issuer
i
creditworthiness,
dit
thi
client
li t segmentation,
t ti
regulation
l ti (including
(i l di changes
h
iin assets
t
holding limits for different types of investors), changes in tax policies, currency convertibility (which may constrain currency
conversion, repatriation of profits and/or the liquidation of positions), and settlement issues related to local clearing houses
are also important risk factors to be considered. The sensitivity of fixed income instruments to macroeconomic shocks may be
mitigated by indexing the contracted cash flows to inflation, to FX depreciation, or to specified interest rates – these are
common in emerging markets. It is important to note that the index fixings may -- by construction -- lag or mis-measure the
actual move in the underlying variables they are intended to track
track. The choice of the proper fixing (or metric) is particularly
important in swaps markets, where floating coupon rates (i.e., coupons indexed to a typically short-dated interest rate
reference index) are exchanged for fixed coupons. It is also important to acknowledge that funding in a currency that differs
from the currency in which the coupons to be received are denominated carries FX risk. Naturally, options on swaps
(swaptions) also bear the risks typical to options in addition to the risks related to rates movements.
Deutsche Bank
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104
December 2014
Global Disclaimer
The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively "Deutsche Bank"). The information herein is believed to be reliable and has been
obtained from public sources believed to be reliable. Deutsche Bank makes no representation as to the accuracy or completeness of such information.
Deutsche Bank may engage in securities transactions, on a proprietary basis or otherwise, in a manner inconsistent with the view taken in this research report. In addition, others within Deutsche Bank,
including strategists and sales staff, may take a view that is inconsistent with that taken in this research report.
Opinions, estimates and projections in this report constitute the current judgement of the author as of the date of this report. They do not necessarily reflect the opinions of Deutsche Bank and are
subject to change without notice. Deutsche Bank has no obligation to update, modify or amend this report or to otherwise notify a recipient thereof in the event that any opinion, forecast or estimate set
forth herein, changes or subsequently becomes inaccurate. Prices and availability of financial instruments are subject to change without notice. This report is provided for informational purposes only. It
is not an offer or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy. Target prices are inherently imprecise and a product of the analyst
judgement.
In August 2009, Deutsche Bank instituted a new policy whereby analysts may choose not to set or maintain a target price of certain issuers under coverage with a Hold rating. In particular, this will
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result of p
price fluctuations and other factors. If a financial instrument is denominated in a currency
y other than an investor's currency,
y, a change
g in exchange
g rates may
y adversely
y affect the investment.
Past performance is not necessarily indicative of future results. Deutsche Bank may with respect to securities covered by this report, sell to or buy from customers on a principal basis, and consider this
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co ld damage the data
could
data, hard
hardware
are or soft
software
are with
ith which
hich it might be used,
sed it is s
supplied
pplied on the basis that the recipient accepts full
f ll
responsibility for, any consequences of use. The accompany files do not constitute investment advice and Deutsche Bank is not
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105
December 2014