First Quarter 2016 (data as of March 31)

A review of financial market themes and developments

This monitor reflects the best interpretation of financial market developments and views of the staff of the Office of Financial Research (OFR). It does not n ecessarily reflect a consensus of market participants or official positions or policy of the OFR or the U.S. Department of the Treasury. Contributors: V

iktoria Baklanova, Ted Berg, Soumya Kalra, Daniel Maddy-Weitzman, Thomas Piontek, Daniel Stemp.

Markets Tentatively Stabilize; Growth and Policy Concerns Persist Global risk assets, such as stocks and corporate bonds, sold off sharply in the first six weeks of 2016. They have partly recovered, but many of the underlying concerns remain. The outlook for global growth is still weak. Excess supply persists in oil markets, and oil price swings are spilling into U.S. stock and corporate bond markets. Some investors fear monetary policymakers have run out of effective tools to stimulate growth. Some also fear negative interest rates will do more harm than good. In this edition of the markets monitor, we discuss market concerns about negative interest rates, the sell-off in bank stocks, and the high levels of U.S. stock valuations. We start with a review of key developments.

Developments in the first quarter of 2016 • In January, renewed concerns about Chinese economic policies and growth triggered sharp sell-offs

in risk assets. Global markets for stocks and corporate bonds fell sharply. Plunging oil prices worsened the sell-offs.

• The Bank of Japan unexpectedly cut a key interest rate below zero in January (to -0.1 percent). That added to Japan’s aggressive policies to stimulate the weak economy and inflation. Many in the market expressed doubt that negative rates would be successful. The move renewed debates about whether monetary policymakers have run out of effective tools and whether negative rates do more harm than good.

• Many risk assets have had “relief rallies” since mid-February. The trigger was news of a potential oil production freeze by the Organization of the Petroleum Exporting Countries. More accommodative policy signals in the euro area, U.S., and China also contributed to the rally. By March 31, oil prices and leading indexes for U.S. stocks and corporate bonds had fully recovered from early-year losses. However, U.S. bank stocks and major foreign markets remain significantly weaker than they were at year-end, and long-term U.S. Treasury yields are again near historic lows.

• The European Central Bank announced monetary easing measures in March that exceeded market expectations. The Federal Open Market Committee (FOMC) released a new set of forecasts in March that was viewed as consistent with an easier path for policy.

• Market concerns that the United Kingdom may exit the European Union grew. A June date was set

for a U.K. referendum on the matter, and some prominent politicians announced support for exit. The British pound fell to its lowest point against the dollar since early 2009.

OFR MARKETS MONITOR First Quarter 2016 | 2

Markets focused on negative interest rates and their potential risks. Market commentary and analysis have focused on negative interest rates since the Bank of Japan’s surprise January decision to cut rates below zero on new excess reserves. There are two leading concerns: (1) Will other major central banks surprise

markets by cutting rates below zero? (2) What risks do negative rates pose to

financial institutions’ business models and market functioning?

Will other central banks “go negative”? Some European central banks have already introduced negative interest rates in recent years (see Figure 1). The news in Japan raised the possibility that other major central banks might follow suit as global growth slows. Since the Bank of Japan’s decision in January, central banks in Canada and Norway have discussed negative rates as policy options and the European Central Bank cut rates further into negative territory. Expectations for negative rates in the United States remain very low. In the March FOMC press conference, Federal Reserve Chair Janet Yellen said the central bank is “not actively considering negative rates” and that other options could be used if the economic outlook called for more stimulus. Although market expectations for the federal funds rate have declined, the expected path is still well above zero (see Figure 2). Market participants expect the FOMC to use other tools before cutting rates below zero. These tools include returning the federal funds rate to the 0-to-0.25 percent range or resuming large-scale asset purchases. What risks do negative rates pose to financial markets? Negative interest rates reverse the returns on savings and investments. Savers and investors, accustomed to earning returns, instead must pay returns to borrowers. Some market participants have expressed the concern that this could cause a withdrawal of savings and investments that would disrupt the functioning of certain financial markets. To date, market participants have not reported major disruptions in the European economies with negative rates. There have been no reports of major shifts in

-1.00

-0.50

0.00

0.50

1.00

Jan-14 Jul-14 Jan-15 Jul-15 Jan-16

Figure 1. More central banks have adopted negative ratesKey central bank negative policy rates (percent)

Sweden Switzerland

Note: Rates in Sweden represent the central bank repo rate; in Switzerland, the overnight sight deposit rate; in Denmark, the one-week CD; in the euro area, the overnight deposit facility rate; in Japan, the macro add-on balance on new excess reserves. Source: Bloomberg L.P.

DenmarkEuro AreaJapan

0

1

2

3

4

Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18

Figure 2. U.S. interest rate expectations flattenedThree-month Eurodollar futures (percent)

March 31, 2016December 15, 2015

Federal Funds Target Rate Expectations by FOMC

Note: FOMC expectations are from the 03/16/2016 meeting.Source: Bloomberg L.P.

As of:

-1.00

-0.50

0.00

0.50

1.00

Jan-14 Jul-14 Jan-15 Jul-15 Jan-16

Figure 3. Negative policy rates drove interbank rates lowerThree-month interbank offered rates (percent)

Sweden Switzerland

Source: Bloomberg L.P.

DenmarkEuro AreaJapan

OFR MARKETS MONITOR First Quarter 2016 | 3

market structure or functioning. Negative policy rates have been successfully transmitted to interbank rates, repurchase agreement rates, and foreign exchange basis swap rates (see Figures 3 and 4). In some cases, banks have passed on the negative rates to corporate depositors, but generally not to retail depositors. However, these experiences with negative rates have been too limited to rule out disruptions in the future or in other markets. Policy rates have been only modestly negative so far — lower negative rates could cause greater withdrawals by savers and investors. Similarly, most of these economies have had negative rates for less than a year, and longer-term responses could be different. Meanwhile, some of the observed responses to negative rates may increase risks over time.

• European money market funds have expanded their investments outside Europe to find yield. This strategy may increase currency risk in these funds.

• Some European companies are exploring cutting cash balances to reduce the impact of negative rates.

• Japanese money market funds have had heavy investor withdrawals in recent months, forcing some funds to close. More fund closures could reduce liquidity in Japan’s short-term funding markets.

In addition, the reductions in interest rates in Europe and other foreign countries may spill over to U.S. interest rates. Long-term U.S. Treasury yields and term premiums fell markedly in the first quarter, and they are again near historic lows (Figure 5). As discussed in the OFR’s 2015 Financial Stability Report, the continued low level of U.S. long-term interest rates is a source of financial stability risk. Bank stocks came under pressure due to interest rates, growth fears, and local concerns. In early 2016, bank stocks in advanced economies had large losses (see Figure 6). Tensions spread to debt obligations of global banks as credit default swap spreads widened sharply (see Figure 7). The pressure on banks eased during the broader relief rally that

-120

-100

-80

-60

-40

-20

0

20

Jan-14 Jul-14 Jan-15 Jul-15 Jan-16

Figure 4. Negative policy rates depressed foreign exchange basesOne-year cross-currency basis swap rates (basis points)

Sweden Switzerland

Source: Bloomberg L.P.

DenmarkEuro AreaJapan

-0.50

0.00

0.50

1.00

1.50

Mar-14 Sep-14 Mar-15 Sep-15 Mar-16

Figure 5. Treasury term premium fell further Ten-year term premium (percent)

Note: Ten-year Treasury term premium based on the Adrian, Crump, and Moench (2013) model.Source: Bloomberg L.P.

-32

-28

-24

-20

-16

-12

-8

-4

0

4

KBW U S.Bank Index

S&P 500Index

Euro StoxxBank Index

Euro Stoxx50

TOPIX JapanBank Index TOPIX Index

Figure 6. Bank stocks sold off markedlyYear-to-date global bank and equity index returns (percent)

Bank Equity Market Index ReturnsBroad Equity Market Index Returns

Note: Local currency returns, index 100 = December 31, 2015Source: Bloomberg L.P.

OFR MARKETS MONITOR First Quarter 2016 | 4

started in mid-February. But bank stocks and credit default swaps (CDS) remain considerably weaker than they were at year-end. There are several common underlying factors, as well as some that are unique to certain regions and institutions. Investors fear that negative rates, flatter yield curves, and slowing global growth will hurt bank profits. The Bank of Japan’s adoption of a negative interest rate, and the fear of others following, was a catalyst for the bank sell-off. Japanese bank stocks have fallen most. The fear is that negative rates will disrupt bank business models or at least reduce their interest margins. The recent flattening of yield curves is also expected to reduce banks’ interest margins and, therefore, expected earnings (see Figure 8). Investors expect less revenue from loans and investment banking due to slower global economic growth. Many advanced economy banks also have exposure to the energy sector and emerging markets. Weak oil prices and financial turbulence in some emerging markets pose challenges due to these exposures. The sell-off in European bank stocks was amplified by local factors. Several large European banks, including Deutsche Bank and Credit Suisse, posted fourth-quarter earnings well below market expectations. These results sharpened investors’ focus on European banks’ relatively weaker earnings and capital positions. Concerns over contingent convertible capital securities (CoCos) added to the market pressure on European banks. Deutsche Bank’s disappointing earnings announcement led to speculation that the bank might not make coupon payments on some of its CoCo instruments. The price of some of Deutsche Bank’s CoCo bonds fell below 75 percent of par value and pressure mounted on the broader European CoCo market (see Figure 9). Deutsche Bank clarified that it will continue making coupon payments, but new issuance in the CoCo market reportedly remains expensive for euro area banks with lower capital ratios. This situation is a concern because many of these banks will need to raise capital in the coming years to meet regulatory standards.

30

60

90

120

150

180

210

Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16

Figure 7. Bank CDS spreads widened sharply on credit worriesCredit default swap spreads (basis points)

S&P/ISDA U.S. Bank CDS Index

S&P/ISDA European Bank CDS IndexJapanese Bank CDS Index

Note: Japanese Bank CDS Index is the average of 5-year Senior CDS on Bank of Tokyo-Mitsubishi UFJ, Mizuho Bank, Nomura Holdings, and Sumitomo Mitsui Banking Corp. Source: Bloomberg L.P.

50

100

150

200

0

1

2

3

Mar-15 Jun-15 Sep-15 Dec-15 Mar-16

Figure 8. Flatter yield curve compressed bank net interest margins U.S. Treasury yields (percent) and yield curve (basis points)

2Y (left axis)

10Y (left axis)2Y/10Y Spread (right axis)

Source: Bloomberg L.P.

400

450

500

550

600

650

60

70

80

90

100

110

Mar-15 Jun-15 Sep-15 Dec-15 Mar-16

Figure 9. CoCo bonds came under pressureBond price ($) and option-adjusted spread (basis points)

Deutsche Bank 6%, 5/31/2049,CoCo Bond (left axis)

BofA/Merrill Lynch ContingentCapital Index (right axis)

Source: Bloomberg L.P.

OFR MARKETS MONITOR First Quarter 2016 | 5

U.S. stock valuations remain high and fundamentals are weak. After the recent recovery in U.S. stock prices, the S&P 500 Index is close to its level of a year ago, and less than 5 percent from its record high reached last May. Meanwhile, fundamentals continued to deteriorate. U.S. corporate profit margins have trended lower since peaking in the third quarter of 2014. Consensus estimates for S&P 500 pro forma earnings are for less than 1 percent growth in 2016, down from earlier forecasts of more than 10 percent. The slowdown in earnings growth is not limited to energy firms. Excluding energy, pro forma earnings are expected to decline 3.6 percent in the first quarter of 2016. The March 2015 Financial Markets Monitor highlighted that U.S. stock valuations were very high according to a number of metrics. One year later, those valuation metrics remain elevated. Specifically, the cyclically-adjusted price-to-earnings ratio (CAPE), the ratio of market value of corporate equities outstanding to net worth (Q ratio), and the ratio of market value to Gross National Product (Buffett indicator) remain highly elevated compared to long-term averages (see Figures 10, 11, and 12). These metrics are discussed in depth in the OFR Brief Quicksilver Markets. They provide a view of valuations that is less subject to cyclical inflation than metrics based on one-year earnings or forecasts.

0

10

20

30

40

50

1881 1897 1914 1931 1947 1964 1981 1997 2014

Feb '15: 27x

Figure 10. CAPE ratio is near prior peakCyclically Adjusted Price-to-Earnings Ratio (CAPE ratio)

Average

Note: Data as of March 2016. CAPE is the ratio of the monthly S&P 500 price level to trailing 10-year average earnings (inflation adjusted).

Sources: Robert Shiller, OFR analysis

Dec '99: 44x

Sep '29: 33x

Mar '09: 13x

Jul '82: 7xJun '32: 6x

May '07: 27x

0

30

60

90

120

150

18Q-Ratio (percent)Figure 11. Q-Ratio well above average and most cyclical highs

Average

Note: Data as of Q4 2015. Q-ratio is the market value of nonfinancial corporate equities outstanding divided by net worth at market value.Sources: Haver Analytics, OFR analysis

Q1 '00

Q4 '68 Q2 '14

Q1 '09

Q2 '82Q3 '53

Q2 '07

0

1951 1959 1967 1975 1983 1991 1999 2007 2015

0

30

60

90

120

150

180

1970 1980 1990 2000 2010

Figure 12. Buffett indicator well above averageRatio of corporate market value to GNP (percent)

NNototee:: Data as of Q4 2015. Buffett indicator is the market value of corporate equities (Wilshire 5000 market capitalization) divided by nominal GNP.Sources: Haver Analytics, Wilshire Associates

Q1 '09

Q1 '15Q2 '07

Average

Q1 '00

OFR MARKETS MONITOR First Quarter 2016 | 6

Selected Global Asset Price Developments

LATEST LEVEL 90-DAY CHANGE 90-DAY CHANGE YTD CHANGE 12-MONTH RANGE**(3/31/2016) (bps or %) (standard (bps or %)

deviations)*

EQUITIESS&P 500 2060 0.8% -0.2 1% ––––––––––––––––––––|––O–––––––U.S. KBW Bank Index 64 -12.1% -1.1 -12% ––––––––––O–––––––––|––––––––––Russell 2000 1114 -1.9% -0.4 -2% ––––––––––––––O––––|–––––––––––Nasdaq 4870 -2.7% -0.4 -3% –––––––––––––––––––O|––––––––––Euro Stoxx 50 3005 -8.0% -0.9 -8% ––––––––O––––––––|–––––––––––––Shanghai Composite 3004 -15.1% -1.0 -15% ––––O–––––––|––––––––––––––––––Nikkei 225 16759 -12.0% -1.1 -12% –––––––––O––––––––––|––––––––––Hang Seng 20777 -5.2% -0.6 -5% –––––––O–––––––|–––––––––––––––FTSE All World 263 -0.2% -0.2 0% –––––––––––––––O––|––––––––––––

RATESU.S. 2-Year Yield 0.72% -33 -0.5 -33 ––––––––––––O|–––––––––––––––––U.S. 2-Year Swap Rate 0.84% -34 -0.5 -34 ––––––––––O–––|––––––––––––––––U.S. 10-Year Yield 1.77% -50 -0.9 -50 ––––O––––––––––––|–––––––––––––U.S. 10-Year Swap Rate 1.64% -55 -0.9 -55 ––––O–––––––––––––|––––––––––––U.S. 30-Year Yield 2.61% -40 -0.8 -40 –––––O––––––––––|––––––––––––––U.S. 2y10y Spread 104 -17 -0.5 -17 –––O––––––––––––|––––––––––––––U.S. 5Y5Y Inflation Breakeven 1.70% -11 -0.3 -11 ––––––––––O–––––––|––––––––––––U.S. 5Y5Y Forward Rate 2.41% -44 -0.7 -44 –––––O–––––––––––|–––––––––––––Germany 10-Year Yield 0.15% -48 -1.1 -48 –––O––––––––––––|––––––––––––––Japan 10-Year Yield -0.03% -29 -0.8 -29U.K. 10-Year Yield 1.42% -55 -1.1 -55 ––––O––––––––––––|–––––––––––––Euro area 5Y5Y Inflation Breakeven 1.41% -28 -1.6 -28 –––O–––––––––––––––|–––––––––––

FUNDING1M T-Bill Yield 0.17% 5 0.2 5 ––––––––––|––––––––O–––––––––––DTCC GCF Treasury Repo 0.64% 0 -0.3 0 ––––––––––|–––––––––––––––––––O3M Libor 0.63% 2 0.1 2 –––––––––––|–––––––––––––––––O–Libor-OIS Spread 25 1 0.0 1 –––––––––––––|–––––––––––––––O–EURUSD 3M CCY Basis Swap -25 -7 -0.1 -7 ––––––––––––––––––––––––O|–––––

U.S. MBSFNMA Current Coupon 2.57% -43 -0.8 -43 –––––O–––––––––––|–––––––––––––FHLMC Primary Rate 3.71% -30 -0.6 -30 ––––––O–––––––––|––––––––––––––

CREDITCDX Investment Grade 5-Year CDS Spread 78 -10 -0.5 -10 ––––––––O–|––––––––––––––––––––CDX High Yield 5-Year CDS Spread 442 -32 -0.2 -32 ––––––––––|––O–––––––––––––––––CDX Itraxx Euro 5-Year CDS Spread 73 -4 -0.2 -4 –––––––––O|––––––––––––––––––––U.S. 5-Year Sovereign CDS Spread 20 2 0.3 2 –––––––––––––|––––––––––––––O––

IMPLIED VOLATILITYVIX Index 14 -23% -0.8 -23% ––O–––|––––––––––––––––––––––––V2X Index 23 6% 0.1 6% ––––––––O––|–––––––––––––––––––VDAX Index 21 -2% -0.2 -2% ––––––––O–––|––––––––––––––––––MOVE Index 69 1% 0.0 1% –––O–––––––––|–––––––––––––––––3M2Y Swaption Volatility 57 1% 0.0 1% –––––O–––––|–––––––––––––––––––3M10Y Swaption Volatility 75 1% 0.0 1% ––O––––––––|–––––––––––––––––––DB G10 FX Volatility Index 11 19% 1.0 19% ––––––––––––|–––––––––O––––––––JPM EMFX Volatility Index 12 1% -0.1 1% –––––––––––––––|–––O–––––––––––

FOREIGN EXCHANGE & COMMODITIESU.S. Dollar Index*** 95 -4.1% -1.0 -4% ––––––O–––––––––|––––––––––––––EUR/USD 1.14 4.8% 0.9 5% –––––––––––––|–––––––––O–––––––USD/JPY 113 -6.4% -1.1 -6% ––O––––––––––––––––|–––––––––––GBP/USD 1.44 -2.6% -0.6 -3% –––––––O–––––––––––|–––––––––––USD/CHF 0.96 -4.0% -0.7 -4% –––––––––––––O––|––––––––––––––Brent Crude 40 0.2% 0.3 0% –––––––O––––––––|––––––––––––––Gold 1233 16.2% 2.2 16% –––––––––––––|–––––––––––O–––––S&P GSCI Commodities Index 323 3.8% 0.2 4% –––––––––O––––––|––––––––––––––

EMERGING MARKETSJPM EMFX Index 69 4.4% 1.2 4% ––––––––––––O––|–––––––––––––––MSCI Emerging Market Equity Index 837 5.4% 0.3 5% ––––––––––––O–|––––––––––––––––CDX EM 5-Year CDS Spread 284 -73 -0.9 -73 –O–––––––––––|–––––––––––––––––

* 90-Day change standard deviations based on quarterly data from January 1994 or earliest available thereafter.** Trailing 12-month range. Latest (O); Mean ( | ).*** Dollar index from Bloomberg (ticker: DXY); averages the exchange rates between the U.S. dollar and major world currencies.Sources: Bloomberg L.P., OFR analysis

1

Select U.S. Interest Rates

U.S. T reasury yields and yield curve

S ource: Bloomberg L.P .

percent basis po ints2y (Left Axis)10y (Left Axis)2y/10y Spread (Right Axis)

Apr2015

Jul2015

Oct2015

Jan2016

Apr2016

0

1

2

3

75

100

125

150

175

200

225

250

U.S. T reasury t erm premium (basis point s)

Note s: Adrian, Crump, & Moe nch mode lS ource: Bloomberg L.P .

10y 2y

2010 2011 2012 2013 2014 2015 2016-50

0

50

100

150

200

250

300

U.S. swap spreads (basis point s)

S ource: Bloomberg L.P .

2y 10y

Apr2015

Jul2015

Oct2015

Jan2016

Apr2016

-20

-15

-10

-5

0

5

10

15

20

25

30

Short -t erm market rat es (percent )

S ource: Bloomberg L.P .

1-month Treasury bill 3-month LIBORGCF Treasury Repo

Apr2015

Jun2015

Aug2015

Oct2015

Dec2015

Feb2016

Apr2016

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

3-mont h Eurodollar fut ures (percent )

Note s: T he high and low points of the FOMC proje ctions are the maximum andminimum fore casts and the re ctangle re pre se nts the me dian.S ource: Bloomberg L.P .

3/31/2016 3/1/2016 2/1/2016FOMC pro jections from Mar 2016

Jan2016

Jul2016

Jan2017

Jul2017

Jan2018

Jul2018

Jan2019

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Money market and policy int erest rat es (percent )

S ource: Bloomberg L.P .

GCF Treasury RepoFed Funds EffectiveInterest on Excess ReservesReverse Repo Facility

2011 2012 2013 2014 2015 20160.0

0.25

0.5

0.75

2

U.S. Corporate Debt Markets

U.S. corporat e bond opt ion-adjust ed spreads(basis point s)

S ource: Haver Analytics

Investment Grade (Left Axis) High Yield (Right Axis)

Apr2015

Jul2015

Oct2015

Jan2016

Apr2016

100

120

140

160

180

200

220

240

200

400

600

800

1000

U.S. corporat e CDS indexes (basis point s)

Note s: Five -ye ar maturity CDS Inde xS ource: Bloomberg L.P .

Investment Grade (Left Axis) High Yield (Right Axis)

Apr2015

Jul2015

Oct2015

Jan2016

Apr2016

0

30

60

90

120

150

200

300

400

500

600

U.S. corporat e credit gross issuance ($ billions)

S ource: S ecurities Industry and Financial Markets Association, S tandard & Poor'sLeveraged Commentary & Data

Investment Grade High Yield Leveraged Loans

Feb2015

Apr2015

Jun2015

Aug2015

Oct2015

Dec2015

Feb2016

0

40

80

120

160

U.S. corporat e credit fund flows ($ billions)

Note s: Flows data are re le ase d with one month lag. Late st data point isFe bruary 2016.S ource: Haver Analytics

High Yield Leveraged Loans

Feb2015

May2015

Aug2015

Nov2015

Feb2016

-15

-10

-5

0

5

10

Leveraged loan issuance by use of proceeds (percent )

Note s: 2016 is ye ar-to-date as of March 31st.S ource: S &P LCD, OFR Analysis

M&A/LBO Dividend/Buyback RefinancingOther

2000 2002 2004 2006 2008 2010 2012 2014 20160

10

20

30

40

50

60

70

80

90

100

Leveraged loan price act ivit y

Note s: S&P Le ve rage d Loan Inde x. Inde x 100=Jan. 1st 2012S ource: Bloomberg L.P .

Jan2012

Jul2012

Jan2013

Jul2013

Jan2014

Jul2014

Jan2015

Jul2015

Jan2016

95

100

105

110

3

Primary and Secondary Mortgage Markets

Primary mort gage rat es (percent )

S ource: Bloomberg L.P .

5y/1y Adjustable Rate 30y Fixed

Apr2015

Jul2015

Oct2015

Jan2016

Apr2016

2

3

4

5

MBS yield and opt ion-adjust ed spread t o U.S. T reasurysecurit ies

S ource: Bloomberg L.P .

percent basis po ints

Spread (Right Axis) Current Coupon (Left Axis)

Apr2015

Jul2015

Oct2015

Jan2016

Apr2016

1

2

3

4

40

60

80

100

120

30-year home mort gage fixed and jumbo rat es and spread

S ource: Bloomberg L.P .

percent basis po ints30y Fixed (Left Axis)30y Jumbo (Left Axis)30y Jumbo-Conforming Spread (Right Axis)

Apr2015

Jul2015

Oct2015

Jan2016

Apr2016

3.5

4.0

4.5

5.0

5.5

6.0

-20

0

20

40

60

80

Agency MBS holdings by invest or

Note s: 2015 is as of Q 4 2015S ource: Inside Mortgage Finance

Other Agencies (GSEs) Foreign InvestorsMutual Funds Commercial Banks Federal Reserve

2009 2010 2011 2012 2013 2014 20150

10

20

30

40

50

60

70

80

90

100

Refinance and purchase loan applicat ions

Note s: Inde x 100 = April 01, 2015S ource: Bloomberg L.P .

percent

Purchase Index (Left Axis) Gov Refi Index (Left Axis)Conv Refi Index (Left Axis)Refi % of Total Apps (Right Axis)

Apr2015

Jul2015

Oct2015

Jan2016

Apr2016

0

50

100

150

45

50

55

60

65

Convent ional mort gage severe delinquencies(percent , 90+ days lat e, seasonally adjust ed)

S ource: Haver Analytics

Prime Subprime

2007 2008 2009 2010 2011 2012 2013 2014 2015 20160

4

8

12

16

4

Equity Markets

Global equit y indices

Note s: Inde x = April 01, 2015S ource: Bloomberg L.P .

S&P 500 MSCI EM Nikkei 225Shanghai Euro Stoxx 50

Apr2015

Jul2015

Oct2015

Jan2016

Apr2016

70

90

110

130

150

U.S. equit y indexes

Note s: Inde x 100 = Jan 1, 2000S ource: Bloomberg L.P .

S&P 500 NASDAQ Russell 3000

2000 2003 2006 2009 2012 201520

60

100

140

180

S&P 500 sect or performance

Note s: Inde x 100 = April 01, 2015S ource: Bloomberg L. P .

S&P 500 Financials Consumer StaplesEnergy

Apr2015

Jul2015

Oct2015

Jan2016

Apr2016

60

70

80

90

100

110

120

S&P 500 price-t o-earnings and price-t o-book rat ios(mult iple)

S ource: Bloomberg L.P .

Price-to -Earnings (Left Axis) Price-to -Book (Right Axis)

Apr2015

Jul2015

Oct2015

Jan2016

Apr2016

12

14

16

18

20

2.3

2.5

2.7

2.9

3.1

Price-to-Book 10YR Avg

Price-to-Earnings 10YR Avg

S&P 500 cyclically adjust ed price-t o-earnings (CAPE) rat io

Note s: CAPE is the ratio of the monthly S&P 500 price le ve l to trailing 10-ye arave rage e arnings (inflation adjuste d). Ave rage and two standard de viationsline s are base d on data from 1881 to pre se nt.S ource: Haver Analytics, OFR analysis

1920 1940 1960 1980 20000

10

20

30

40

50

Average

Two Standard Deviations

S&P 500 implied volat ilit y and opt ion skew(percent )

Note s: Option ske w is the diffe re nce be twe e n 3-month implie d volatility of outof the mone y puts and calls with strike s e qual distance from the spot price (+/-20% ). Highe r value s re fle ct gre ate r de mand for downside risk prote ction.S ource: Bloomberg L.P .

VIX 80% - 120% Skew

Apr2015

Jul2015

Oct2015

Jan2016

Apr2016

5

15

25

35

45

5

Volatility

Implied volat ilit y by asset class (z-score)

Note s: Note : Z-score re pre se nts the distance from the ave rage , e xpre sse d instandard de viations. Standardization use s data going back to Jan 1, 1993.S ource: Bloomberg L.P .

U.S. Equities (VIX) Global Currencies (JPMVXYGL)U.S. Treasuries (MOVE) Average

Apr2015

Jul2015

Oct2015

Jan2016

Apr2016

-2

-1

0

1

2

3

Realized volat ilit y by asset class (z-score)

Note s: 30 Day re alize d volatility. Equitie s base d on S&P 500 inde x, inte re strate s base d on we ighte d ave rage of T re asury yie ld curve , FX base d on we ightsfrom JPMVXY inde x. Standardization use s data going back to Jan 1, 1993.S ource: Bloomberg L.P ., OFR Analysis

Global FX U.S. Interest Rates U.S. EquitiesAverage

Apr2015

Jul2015

Oct2015

Jan2016

Apr2016

-1

0

1

2

3

4

Volat ilit y risk premium by asset class (percent )

Note s: 1-month option-implie d volatility minus 1-month mode l-pre dicte dvolatility. T he latte r is compute d base d on re alize d volatility, using a he te ro-autore gre ssive mode l with 1, 5, and 22 day lags. U.S. Inte re st Rate s re pre se ntsthe ave rage volatility risk pre mium of 2- and 10-ye ar swap rate s. Equitie s base don S&P 500 inde x. Curre ncie s base d on we ights from JPMVXYGL Inde x. S ource: Bloomberg L.P ., OFR Analysis

U.S. Equities U.S. Interest RatesGlobal Currencies

Apr2015

Jul2015

Oct2015

Jan2016

Apr2016

-10

10

30

Slopes of implied volat ilit y curves(basis point s)

Note s: 7-day moving ave rage . Slope re pre se nts diffe re nce be twe e n 1ye ar and1month maturitie s. G10 FX base d on we ights from De utsche Bank's CVIX inde x.S ource: Bloomberg L.P ., OFR Analysis

G10 FX (Left Axis) S&P 500 (Left Axis)2Y USD Swaption Rate (Right Axis)10Y USD Swaption Rate (Right Axis)

Apr2015

Jul2015

Oct2015

Jan2016

Apr2016

-1000

-800

-600

-400

-200

0

200

400

600

800

-50

-40

-30

-20

-10

0

10

20

30

40

Opt ion skew by asset class (z-score)

Note s: Option ske w is the diffe re nce be twe e n 3-month implie d volatility of outof the mone y puts and calls with strike s e qual distance from the spot price (+/-10% ). Highe r value s re fle ct gre ate r de mand for downside risk prote ction.Equitie s re pre se nts S&P500 inde x. Inte re st rate s re pre se nt we ighte d ave rageske w of T re asury future s curve . Curre ncie s re pre se nt dollar ske w against majorcurre ncie s base d on JPMVXY inde x we ights. Z-score standardization use s datagoing back to Jan 1, 2006.S ource: Bloomberg L.P ., OFR Analysis

U.S. Equities U.S. Interest RatesGlobal Currencies Average

Apr2015

Jul2015

Oct2015

Jan2016

Apr2016

-3

-2

-1

0

1

2

3

Volat ilit y of equit y volat ilit y

Note s: VVIX Inde x me asure s the e xpe cte d volatility of the 30-day forward priceof the CBOE VIX Inde x.S ource: Bloomberg L.P .

Apr2015

Jul2015

Oct2015

Jan2016

Apr2016

60

80

100

120

140

160

180

6

Advanced Economies

T wo-year sovereign bond yields (percent )

S ource: Bloomberg L.P .

US Germany UK Japan

Apr2015

Jul2015

Oct2015

Jan2016

Apr2016

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

T en-year sovereign bond yields (percent )

S ource: Bloomberg L.P .

US Germany UK Japan

Apr2015

Jul2015

Oct2015

Jan2016

Apr2016

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Breakeven inflat ion (percent )

S ource: Bloomberg L. P .

US 10y Germany 10y UK 10y Japan 10y

Apr2015

Jul2015

Oct2015

Jan2016

Apr2016

0

1

2

3

10-year Euro Area periphery government bond spreadsover German Bunds (basis point s)

S ource: Bloomberg L.P .

Italian Govt (Left Axis) Spanish Govt (Left Axis)Portuguese Govt (Left Axis) Greek Govt (Right Axis)

Apr2015

Jul2015

Oct2015

Jan2016

Apr2016

40

80

120

160

200

240

280

320

360

0

400

800

1200

1600

2000

Major currency indexes

Note s: Fore ign curre ncie s incre ase s re pre se nt gre ate r stre ngth ve rsus the USDollar. DXY incre ase s re pre se nt gre ate r stre ngth of the US Dollar ve rsus abaske t of major world curre ncie s. Inde x 100 = Oct 1, 2014.S ource: Bloomberg L.P .

DXY (US Dollar) Euro British PoundJapanese Yen Swiss Franc

Apr2015

Jul2015

Oct2015

Jan2016

Apr2016

90

95

100

105

110

U.S. dollar long posit ioning vs. major currencies(net speculat ive posit ions, t housands of cont ract s)

Note s: Positive value s re pre se nt ne t U.S. dollar long positions. T he DollarInde x (DXY) is a future s contract base d on the U.S. dollar's value against abaske t of major world curre ncie s. T o e xpre ss a U.S. dollar long position in anon-U.S. dollar contract, the contract must be shorte d.S ource: Bloomberg L.P .

DXY (US Dollar) Euro British PoundJapanese Yen Total

Apr2015

Jul2015

Oct2015

Jan2016

Apr2016

-100

0

100

200

300

400

7

Emerging Markets

Emerging market currencies(foreign currency unit s per $US)

Note s: Incre asing value s indicate we ake ning ve rsus the U.S. Dollar. T he J.P.Morgan EM Curre ncy Inde x is inve rte d to provide the same inte rpre tation asothe r curre ncy inde xe s. Inde x 100=April 01, 2015.S ource: Bloomberg L.P .

RussiaChina OffshoreBrazilEM Currency Index

Apr2015

Jul2015

Oct2015

Jan2016

Apr2016

80

90

100

110

120

130

140

150

Spreads t o T reasuries (basis point s)

Note s: EM Gove rnme nt and Corporate Hard Curre ncy spre ads to worst are fromthe dollar-de nominate d J.P. Morgan Eme rging Marke ts Bond Inde x Global andthe J.P. Morgan Corporate Eme rging Marke ts Bond Inde x. Gove rnme nt localcurre ncy spre ads are the nominal yie ld diffe re nce be twe e n the J.P. MorganGove rnme nt Bond Inde x – Eme rging Marke ts and the 5-ye ar U.S. T re asury note .S ource: Bloomberg L.P .

EM Govt Hard CurrencyEM Corporates Hard CurrencyEM Govt Local Currency

Apr2015

Jul2015

Oct2015

Jan2016

Apr2016

300

400

500

600

700

Equit y price indexes

Note s: Note : Inde x 100 = April 01, 2015. T he US e quity inde x is the S&P 500Inde x. T he Chine se e quity inde x is the Shanghai Composite Inde x. T heDe ve lope d Economie s inde x is the MSCI World Inde x and the Eme rgingMarke ts inde x is the MSCI EM Inde x (both are in local te rms).S ource: Bloomberg L.P .

US China Developed EconomiesEmerging Markets

Apr2015

Jul2015

Oct2015

Jan2016

Apr2016

70

80

90

100

110

120

130

140

150

One-mont h realized emerging market s volat ilit y (percent )

Note s: Re alize d volatility is the annualize d standard de viation. Hard curre ncysove re ign de bt base d on the J.P. Morgan Eme rging Bonds - Global Price Inde xand curre ncie s base d on a we ighte d ave rage of EM curre ncy re turns against thedollar using we ights from J.P. Morgan VXY-EM curre ncy volatility inde x.S ource: Bloomberg L.P ., OFR Analysis

EM Sovereign Hard Currency Debt EM Currencies

2010 2011 2012 2013 2014 2015 20160

10

20

IIF port folio f lows t o emerging market s ($ billion)

Note s: Data re pre se nts the Institute of Inte rnational Finance 's monthly e stimate sof non-re side nt flows into 30 EM countrie s. Data for late st obse rvations arede rive d from IIF's e mpirical e stimate s using data from a smalle r subse t ofcountrie s, ne t issuance and othe r financial marke t indicators.S ource: Bloomberg

Debt Flows Equity Flows

2010 2011 2012 2013 2014 2015 2016-20

-10

0

10

20

30

40

China's FX Reserves ($ T rillion)

S ource: Bloomberg

FX Reserves

Jan2006

Jan2007

Jan2008

Jan2009

Jan2010

Jan2011

Jan2012

Jan2013

Jan2014

Jan2015

Jan2016

$0.5

$1

$1.5

$2

$2.5

$3

$3.5

$4

$4.5

8

Commodit ies

Major commodit ies prices

Note s: Inde x 100 = Jan 01, 2010S ource: Bloomberg L.P .

Bloomberg Commodities IndexCrude Oil Front Month (Brent) Gold Front Month

2010 2011 2012 2013 2014 2015 20160

50

100

150

200

Crude oil

Note s: WT I and Bre nt are front-month contracts.S ource: Bloomberg L.P .

$/Barrel Million BarrelsWTI (Left Axis)Brent (Left Axis)U.S. Inventories (Right Axis)

2011 2012 2013 2014 2015 201620

50

80

110

140

300

350

400

450

500

550

Oil and nat ural gas fut ures curves

Note s: Data as of Mar 31st, 2016S ource: Bloomberg L.P ., OFR Analysis

$/barrel $/mmbtu

Brent (Left Axis) Natural gas (Right Axis)

2mo 6mo 12mo 24mo 60mo30

40

50

60

1.5

2.0

2.5

3.0

3.5

Oil supply and demand fact ors

Note s: Global production and consumption are e stimate s by the Inte rnationalEne rgy Age ncy.S ource: Bloomberg L.P .

Million Barrels per Day

Global Production (Left Axis)Global Consumption (Left Axis)US Rig Count (Right Axis)

2010 2011 2012 2013 2014 2015 201685

90

95

100

200

400

600

800

1000

1200

1400

1600

1800

Speculat ive fut ures posit ioning(t housands of cont ract s)

Note s: Positive value s re pre se nt ne t long positions and ne gative value sre pre se nt ne t short positions.S ource: Bloomberg L.P .

Brent (Left Axis) Gold (Left Axis)Copper (Left Axis) Steel (Right Axis)

Jan2014

Jul2014

Jan2015

Jul2015

Jan2016

-100

-50

0

50

100

150

200

250

-20

-10

0

10

20

30

40

50

Met als spot price indexes

Note s: Inde x 100 = Jan 01, 2010S ource: Bloomberg L.P .

Copper Steel Precious Metals

2010 2011 2012 2013 2014 2015 20160

50

100

150

200

250