ScotiaBank JUL 16 Fixed Income and Relative Value Weekly

8/9/2019 ScotiaBank JUL 16 Fixed Income and Relative Value Weekly

1/14

Fixed Income Research

Fixed Income Relative-Value Weekly

Friday, July 16, 2010Roger Quick, CFA

Highlights

Canada 1y/2y Update: last months flattener recommendation worked well, improving by close to 20bps. We would now take profits. A lot of the front-end flattening trades are now I think largely done,though one that should still have reasonable potential left is 1y/3y.

Canada-US spreads: I think Canada should underperform going into the BoC statement, but I think awidening in the spread back out to 110 bps represents reasonable value from an income standpoint.

Canada 10s: after being positive on 10-year Canadas vs the curve for many months, we are now moreneutral. In particular, we recommended earlier this week taking profits on the 5/10/30 butterfly.

What is priced in for the BoC? the market is fully pricing in a July 20th rate increase, but the impliedpace of tightening after that is relatively modest. For example, the market is pricing less than 35 bps of

tightening for the remainder of this year after July 20th, followed by an even more modest pace in2011.

The low implied tightening expectations further out the curve are likely as much a byproduct of shortcovering, as they are a reflection of a change in fundamental view on the part of investors, which sug-gests they may not be sustained.

Scotia Economics recently revised its BoC forecast (July 7th), and now forecasts just two more rate in-creases this year, including July 20th, which takes the overnight target to 1.0% by the end of the year.For 2011, Scotia Economics now forecasts that the BoC will raise rates to 2.25% by mid year.

The Appendix shows 1) updates of various yield curve rate-cycle charts, 2) an extract from the daily but-terfly report for swaps and bonds, 3) Canada bonds valued off our theoretical multi-factor yield curvemodel, and 4) Canada bond asset-swap spreads.

VIX Index of Implied Volatility vs US 10-Yr Treasury Yield

2

2.5

3

3.5

4

12/31/08

1/31/09

2/28/09

3/31/09

4/30/09

5/31/09

6/30/09

7/31/09

8/31/09

9/30/09

10/31/09

11/30/09

12/31/09

1/31/10

2/28/10

3/31/10

4/30/10

5/31/10

6/30/10

US10-Y

earYield

10

15

20

25

30

35

40

45

50

55

60

VIX(ScaleReversed,%)

US10 Generic VIX

Source: Bloomberg


2/14


Fixed Income & Relative-Value Strategy Friday, July 16, 2010

2

Deep Thoughts on the BoC:

One of the things I have been pondering after a few weeks away from the office is the relationship between the strongCanadian economic data, the BoCs decision last month to take a significantly less hawkish stance than could havebeen justified by the domestic fundamentals, and what these things might mean going forward. I dont know the an-swer, but here are a few thoughts.

Canadian economic data have continued to come in strong, most notably employment. Earlier this week, BoC surveyssuggested excess capacity was declining, and that credit conditions were easing. One recent exception to the goodnews was the drop in existing home sales reported this week. Though perhaps also a sign of a further slowdown tocome, this was at least in part likely a reflection of the tendency for people to have rushed to buy homes in the first halfof the year ahead of things like higher mortgage rates, the HST, and stricter mortgage rules.

A counterpoint to the generally strong Canadian economic numbers has been the weakness of the US data. Concernsabout the US economy have kept US 10-year yields low in recent weeks, even as concerns about contagion fromEurope have apparently subsided (subsidedat least as measured by a decline in the VIX, a one-week rally in US stocks,and by a couple of well-received auctions by Greece and Portugal. Credit spreads on peripheral European debt remainhigh. I am guessing that many investors are hoping that Europes bank stress tests will have the same dramatic effectthat the US ones did last year. The risk would seem to be these investors are disappointed.). Concern about the US eco-nomic outlook was also highlighted this week in the FOMC minutes.

Implications for the BoC? Presumably the risk of a deteriorating US economy adversely affecting Canada in the futurewill be one factor that causes the BoC to be again less hawkish than the strong domestic fundamentals alone wouldseem to justify.

What is Priced In for the BoC?

My colleagues in Scotia Economics have revised down their forecast for BoC tightening since the last RV Weekly onJune 11th. Scotia Economics now calls for two more hikes this year, taking the BoC target to 1pct by year end. ScotiaEconomics has lowered its BoC call twice in the past few months, reducing its year-end target from 1.5 pct to 1.0 pct,most recently on July 7th. For 2011, Scotia Economics now forecasts that the BoC will raise rates to 2.25% by the sum-mer of 2011, down from the May forecast of 2.75%.

Scotias forecast for the BoC is actually less aggressive than what is priced into the market for the remainder of 2010,and more aggressive for the first half of 2011. Based on OIS levels as of Friday morning, the market is fully pricing a July20th hike, followed by about a 50% probability of rate hikes at each meeting through December, and an even moregradual pace in 2011.

The fact that the markets implied tightening in 2011 is less aggressive than Scotias forecast isnt too surprising, if onlybecause it is likely that short-covering in BAXs and short-term Canadas has likely played a significant role in drivingdown the implied probability of central bank tightening next year, at least as much as have fundamental expectationsfor the Canadian economy.


3/14



3

Update: 1y/2y Flattener Recommen-dation

The 1y/2y flattening recommendationhas worked out well, improving close to20 bps since our recommendation last

month. (it is 3 bps tighter at the time ofwriting Friday, which is not captured inthe graph shown here).

We would now recommend taking prof-its. When we recommended the flat-tener again on June 16th, our target wasa further 15-20 bps of flattening in thenext two months. We have reached thattarget, a bit faster than planned. Thespread may ultimately flatten further, assuggested by the long-run cyclical pat-tern in the chart, but that may be atleast several months away. The charts atright suggest to me that the 1y/2yspread has already reached quite flatlevels for this point in the cycle, espe-cially the 1y/2y spread in swaps.

N.B. The 1y/2y flattener trade had beenone of our major recommendationssince early April. We recommended tak-ing profits May 21st (RV Weekly). Wethen recommended entering the tradeagain on June 16th (daily note). Betweenearly April and now the spread has flat-tened some 40 bps.

CDA 1y/3y

For those readers who may still be inter-ested in entering into a front-end flat-tener trade, I think a somewhat betteropportunity than 1y/2y now may be1y/3y. The graph at right shows that the

1y/3y spread may still have somewhatgreater flattening potential, based onthe experience in past cycles..

1s/2s CDA Par Slope vs. BoC Tightening

0

20

40

60

80

100

120

-200 -150 -100 -50 0 50 100 150 200

Business Days Before First Rate Hike

Spread

(bps)

Average 9/8/2004 4/16/2002 6/26/1997 Forwards 6/1/2010

Source: Scotial Captial

Recommended April 6th,

and reiterated frequently

since then.

Take profits May 21st

Recommended 1y/2y

again June 16th

1s/2s CDA Swaps Slope vs. BoC Tightening

0

20

40

60

80

100

120

-200 -150 -100 -50 0 50 100 150 200


Spread

(bps)



Recommended April 6th,

and reiterated frequently

since then.

Take profits May 21st

Recommended 1y/2y

again June 16th


0

20

40

60

80

100

120

140

160

180

200

-200 -150 -100 -50 0 50 100 150 200


Spread

(bps)



Recommended April

21st, and reiterated

frequently since then.


4/14



4

Update: Canada US Spreads

Last month we suggested that Canada2s were reasonable value at about 105bps over the US from a carry and roll-down standpoint. This was based onthe view that a reasonable amount ofdivergence between the BoC and Fedhad been priced in, and skepticism thatthe BoC would continue to tightenmuch more than 100 bps beyond theFed. Since that time, the spread initiallytightened almost 25 bps, which I thinkhad as much or more to do with inves-tors covering short Canada positions asit had to do with a fundamental shift ininvestors views. The spread has wid-ened back out since then, in particularafter last weeks very strong Canadianemployment number.

I think a move back out to 105-110 bps above the US in the 2-year sector would again be a reasonable opportunity tobuy Canada vs the US. I would wait until after the BoC meeting before doing anything though. I think Canada 2sshould cheapen further going into the BoC meeting (Friday mornings outperformance in Canada 2s seems to be an-other round of short-covering, since it has come amid weaker US data and a rallying Treasury market).

NB: the long-term graph shows true constant-maturity 2-year spread, which was at about 101 bps as of Thursdaysclose (and about 95 bps Friday morning at the time of writing). This corresponds to the spread between the CanadaSep 2012 benchmark and the Treasury June 2012 benchmark of about 106 bps as of Thursdays close.

Canada/US Govt Yield Spreads (Constant-Maturity Theoretical Bonds)

-40

-20

0

20

40

60

80

100

120

140

Jun-07

Aug-07

Oct-07

Dec-07

Feb-08

Apr-08

Jun-08

Aug-08

Oct-08

Dec-08

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Feb-10

Apr-10

Jun-10

Yield

spread(bps)

CU2

Source: Scotia Capital constant-maturity par bond series

June 15th: "Back to

levels that are getting

interesting"


5/14



5

CDA 10-Year Sector Expensive

We have liked the 10-year sector vs therest of the Canada bond curve for along time. This general view has takenvarious forms. Back in December andJanuary we began recommending the

5/10/30 butterfly as an early way totake advantage of eventual centralbank tightening. In late April we rec-ommended the 10s/longs steepener.More recently, in May we argued thatthe 10-year fly should continue to dowell heading into the start of BoCtightening, even though by that pointthe fly had already rallied from cheapto largely neutral levels vs the curve(May 13th). This more recent viewworked out well, though not necessar-ily for all the expected reasons. The 10-year sector continued to outperform over the past two months, in part related to the start of BoC tightening, but evenmore due to the overall safe-haven bid into bonds and concerns about global growth, which were driven by events inEurope, and more recently by weak US economic data.

The 10-year sector is now relatively expensive vs the curve. This can be seen in the top chart, which shows the 5/10/30fly graphed against the slope of the yield curve. This chart uses our constant-maturity par bond series in order to showa long history. A similar chart using actual bonds is shown on the next page.

As argued earlier this week, although the 5/10/30 fly is not at extreme levels, it had become rich enough that we wouldget out of long 10-year positions vs the curve. I dont have an especially strong view that the butterfly will cheapen,though it would seem that the risk is for some underperformance if the BoC is a bit more hawkish next week, given thegenerally strong Canadian data since the last BoC statement, the latest drop in housing starts notwithstanding. (Notethat in making this argument we are implicitly placing more emphasis on the market-directional nature of the butterfly,than on its tendency to be correlated with the slope of the curve, since a slightly more hawkish BoC should be associ-ated with a flattening of the curve, all else equal).

What about vs rate cycle? The 10-yearbutterfly looks fairly neutral when com-pared to the typical tightening cycle ex-perience, in contrast to what we seewhen comparing the fly to curve slope.The typical rally in the 10-year fly associ-ated with a tightening cycle has alreadyhappened. There has not been a strongpattern to this butterfly in the monthsafter the BoC starts tightening. If youwant to bet on a more hawkish BoC via

this part of the curve, a better optionwould seem to be just a 5/10 flattener.See the chart of 5/10 vs the rate cycle onthe next page

5s/10s/30s CDA Par Fly vs. BoC Tightening

-10

-5

0

5

10

15

20

25

30

35

-200 -150 -100 -50 0 50 100 150 200


S

pread

(bps)



Conventionally Weighted Can Par 5s-10s-30s Fly vs. Slope

0

5

10

15

20

25

30

35

7/19/05

10/19/05

1/19/06

4/19/06

7/19/06

10/19/06

1/19/07

4/19/07

7/19/07

10/19/07

1/19/08

4/19/08

7/19/08

10/19/08

1/19/09

4/19/09

7/19/09

10/19/09

1/19/10

4/19/10

Butterfly(bps)

-50

0

50

100

150

200

250

Slope(bps)

Par5s-Par10s-Par30s Par5s-Par30s Slope


6/14



6

Another 5/10/30 Chart:This graph shows the 5/10/30 fly using ac-tual bonds. In this case, we have shown old10s, June 2019, in order to show a longerhistory.

The butterfly has cheapened from its richestlevels referred to in our July 13th note, butremains expensive vs the curve. See theprevious page for further discussion.

CDA 5/10 Slope & Rate CycleIn early June we argued that the flatteningtrend in Canada was largely over, with acouple of exceptions. One of those wasfront-end flatteners like 1y/2y, whichworked out well. Another possible flat-tener was 5s/10s (mentioned in bullet in

June 11th weekly), which has not workedout at all. The spread continued tosteepen, exacerbated in swaps by the rela-tive tightening of the 5-year spread rela-tive to 10s.

In a world where many of the flatteningopportunities may be over, 5s/10s stilllooks like one of the better ones. It seemsto me that the 5-year sector has benefit-ted a lot from safe-haven concerns andshort covering (n.b. short covering in thebond sense), which may have contributedto the ongoing steepening of 5s/10s.Some of this steepening should thereforereverse on either a decline in safe-havenconcerns, or a slightly more hawkish BoCthan last time.

CDA 10s/Longs UpdateWe had been negative on long bonds forsome time. For example, back in April wesuggested a 10s/longs steepener. The curvehas re-steepened by about 20 bps since thattime, helped in part by the safe-haven rallyover the past six weeks, which has tended to

favour the 10-year sector.

I think the re-steepening of the past fewmonths has brought long bonds to fairlyattractive levels vs 10s again. However, Idont have a strong view that this spreadshould tighten. I am not recommending 10s/longs flatteners as an RV trade, but Ithought it was something worth pointingout.


0

10

20

30

40

50

60

70

80

90

-200 -150 -100 -50 0 50 100 150 20


Spread

(bps)

Average 9/8/2004 4/16/2002 6/26/1997 4/28/1994 Forwards 6/1/2010



0

20

40

60

80

100

120

-200 -150 -100 -50 0 50 100 150 200


Spread

(bps)



-2

0

2

4

6

8

10

12

14

16

6/10/09

7/10/09

8/10/09

9/10/09

10/10/09

11/10/09

12/10/09

1/10/10

2/10/10

3/10/10

4/10/10

5/10/10

6/10/10

7/10/10

Trade Date

YTM

ButterflySp

read(bps)

70

80

90

100

110

120

130

140

150

160

YieldSpread

(bps)

Can 3.75 Jun-19 vs (Can 4.5 Jun-15 & Can 5 Jun-37) (LHS)

Can 5 Jun-37 - Can 4.5 Jun-15 (RHS)


7/14



7

Update: 5/10/30 (CDA Swaps)

The recommendation to receive 10s inswaps vs paying 5s and 30s is onside,though it did not perform as well asplanned, because the difference between 5

and 10-year swap spreads has continued towiden. The butterfly spread has tightenedabout 3.5 bps from our original May 13threcommendation, and about 8 bps from itswidest levels on June 4th.

I would take profits on this trade, based onour view of the underlying bond curve. Ithink eventually the 5 and 10-year swapspread term structure should flatten more,but I dont have a strong view at the mo-ment on when this will happen, and wouldultimately look to play that view directlythrough an asset-swap trade rather thanthrough this butterfly trade.

Conventionally Weighted Can Swap 5s-10s-30s Fly vs. Slope

-15

-10

-5

0

5

10

15

20

25

30

7/19/05

10/19/05

1/19/06

4/19/06

7/19/06

10/19/06

1/19/07

4/19/07

7/19/07

10/19/07

1/19/08

4/19/08

7/19/08

10/19/08

1/19/09

4/19/09

7/19/09

10/19/09

1/19/10

4/19/10

Butterfly(bps)

-50

0

50

100

150

200

250

CSW5s-CSW10s-CSW30s CSW5s-CSW30s Slope


8/14


Fixed Income & Relative-Value Strategy:

8

2s/5s/10s CDA Par Fly vs. BoC Tightening

-10

0

10

20

30

40

50

-200 -150 -100 -50 0 50 100 150 200


Spread(bps)



2s/5s CDA Par Slop

0

20

40

60

80

100

120

140

160

180

-200 -150 -100 -50

Business Da

Spread(bps)

Average 9/8/2004 4/16/200



0

50

100

150

200

250

300

-200 -150 -100 -50 0 50 100 150 200


Spread(bps)



10s/30s CDA Par Slo

0

10

20

30

40

50

60

70

-200 -150 -100 -50

Business Day

Spread(bps)

Average 9/8/2004 4/16/200



9/14


Fixed Income & Relative-Value Strategy: Canada Swap Conventionally-Weighted Butterflies

9

2s/5s/10s CDA Swaps Fly vs. BoC Tightening

-20

-10

0

10

20

30

40

50

-200 -150 -100 -50 0 50 100 150 200


Spread(bps)



2s/5s CDA Swaps Sl

0

20

40

60

80

100

120

140

160

180

-200 -150 -100 -50

Business Da

Spread(bps)

Average 9/8/2004 4/16/200



0

50

100

150

200

250

300

-200 -150 -100 -50 0 50 100 150 200


Spread(bps)



5s/30s CDA Swaps S

0

20

40

60

80

100

120

140

160

180

200

-200 -150 -100 -50

Business Da

Spread(bps)

Average 9/8/2004 4/16/200



10/14


Fixed Income & Relative-Value Strategy: Canada Swap Conventionally-Weighted Butterflies

10

Can Swap 10/20/30 Fly

Inc + Roll

Spread 1-Day Chg 5-Day Chg 500 Day 1250 Day 500 Day 1250 Day 500 Day 1250 Day 500 Day 1250 Day 500 Day 1250 Day 1-month

Fly: 41.00 -1.62 -2.25 42.22 25.09 -0.12 1.01 0.52 1.32 0.84 0.93 -0.48 -0.83 -29,033Slope: 55.36 1.59 2.16

Can Swap 5/10/30 Fly

Inc + Roll


Fly: 14.25 -0.07 -1.14 9.10 3.73 0.74 1.59 0.69 1.32 -0.32 0.49 0.55 -0.36 54,973Slope: 139.23 3.04 2.05

Z-Score

Moving Average Z-Score Z-Score vs. Regr. - Fly vs. Slope - Fly vs. Body

Z-Score vs. Regr. - Fly vs. Slope - Fly vs. BodyMoving Average

4

14

24

34

44

54

64

J-05

O-05

J-06

A-06

J-06

O-06

J-07

A-07

J-07

O-07

J-08

A-08

J-08

O-08

J-09

A-09

J-09

O-09

J-10

A-10

J-10

ButterflySpread(bps)

-2

18

38

58

78

98

118

WingSlope(bps)

Fly Slope

y = 0.5956x + 0.4565

R2 = 0.8683

4.0

14.0

24.0

34.0

44.0

54.0

64.0

-2.0 18.0 38.0 5

Wing S


FlyCurrentDay AgoWeek Ago

Month AgoLinear (Fly)

-10

-5

0

5

10

15

20

25

J-05

O-05

J-06

A-06

J-06

O-06

J-07

A-07

J-07

O-07

J-08

A-08

J-08

O-08

J-09

A-09

J-09

O-09

J-10

A-10

J-10

Butterfly

Spread(bps)

1

51

101

151

201

WingS

lope(bps)

Fly Slope

y = 0.0596x - 1.649

R2 = 0.241

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

1.0 51.0 101.0

Wing


FlyCurrentDay AgoWeek AgoMonth AgoLinear (Fly)


11/14


Fixed Income & Relative-Value Strategy: Canada Par Bond Conventionally Weighted Butterfly

11

Can Par 10/15/30 Fly

Roll/Carry


Fly: 14.35 0.78 0.89 23.72 14.22 -1.33 0.01 -1.88 -1.90 0.71 0.89 -0.27 -0.71 27,700Slope: 48.30 1.20 1.01

Can Par 10/20/30 Fly

Roll/Carry


Fly: 29.84 1.09 1.12 39.10 22.97 -0.94 0.45 -1.81 -1.86 0.86 0.96 -0.24 -0.65 -36,104Slope: 48.30 1.20 1.01

- Fly vs. Slope - Fly vs. Body

Z-Score vs. Regr. - Fly vs. Slope - Fly vs. BodyMoving Average Z-Score

Moving Average Z-Score Z-Score vs. Regr.

3

8

13

18

23

28

33

38

43

J-05

O-05

J-06

A-06

J-06

O-06

J-07

A-07

J-07

O-07

J-08

A-08

J-08

O-08

J-09

A-09

J-09

O-09

J-10

A-10

J-10


-19

1

21

41

61

81

WingSlope(bps)

Fly Slope

3.0

8.0

13.0

18.0

23.0

28.0

33.0

38.0

43.0

-19.0 1.0 21.0

Wing S


FlyCurrentDay AgoWeek Ago

Month AgoLinear (Fly)

0

10

20

30

40

50

60

J-05

O-05

J-06

A-06

J-06

O-06

J-07

A-07

J-07

O-07

J-08

A-08

J-08

O-08

J-09

A-09

J-09

O-09

J-10

A-10

J-10

Butterfly

Spread(bps)

-19

1

21

41

61

81

WingS

lope(bps)

Fly Slope

0.0

10.0

20.0

30.0

40.0

50.0

60.0

-19.0 1.0 21.0

Wing S


FlyCurrentDay AgoWeek AgoMonth AgoLinear (Fly)


12/14



12

Appendix: Canada Bonds vs Theoretical Yield Curve

Description of the model: The option-adjusted spread (OAS) is the spread to the theoretical curve that would equatethe model price to the market price. A positive OAS means that a bond is cheap to the theoretical curve, all else equal,while a negative OAS means that a bond is rich.

The term-structure model that underlies this report is similar to models used for option pricing, in that it explicitly modelsthe uncertainty in the future evolution of interest rates (as a simplified analogy, think of the standard binomial option-pricing tree). However, it differs from the usual option pricing model in two main ways. First, the term structure modelused here has multiple, partially-correlated sources of risk, which enables it to capture a wide range of interest-rate andvolatility term structures. Second, it is a so-called equilibrium model. Models for interest-rate options typically try to fitthe underlying term structure exactly. In contrast, the equilibrium model is calibrated to fit the prices of just a few keybenchmark bonds (typically 6-month T-Bills, and 2, 10, and 30-year benchmarks). We do, however, make use of option-market data to estimate the models volatility and correlation parameters.

Coupon Maturity Dt Yield OAS Chg 1 Chg 5 Av g 20

Chg vs

20 MA SD 20 # SD 20* Avg 75

Chg vs

75 MA SD 75 # SD 75*

1.250 6/1/11 1.131 8.0 0.4 -0.3 6.3 1.8 2.0 0.9 2.1 5.9 3.9 1.5

3.750 9/1/11 1.205 1.5 0.1 0.7 1.1 0.4 2.5 0.2 -0.7 2.1 1.9 1.1

1.000 9/1/11 1.210 2.4 0.1 0.8 1.3 1.1 0.9 1.3 -0.2 2.6 1.6 1.6

1.250 12/1/11 1.305 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

1.500 3/1/12 1.413 -0.8 0.1 -1.2 0.0 -0.8 0.6 -1.3 0.8 -1.6 0.9 -1.8

3.750 6/1/12 1.518 -0.8 -1.3 -1.9 0.8 -1.6 1.2 -1.3 2.1 -2.9 1.6 -1.9

5.250 6/1/12 1.513 -1.0 -1.3 -1.9 0.6 -1.6 1.2 -1.3 2.3 -3.3 1.7 -1.9

1.500 6/1/12 1.528 -0.4 -1.3 -1.8 1.2 -1.5 1.2 -1.3 2.4 -2.7 1.6 -1.7

2.000 9/1/12 1.658 1.0 -1.4 -1.6 3.8 -2.9 1.5 -1.9 3.0 -2.1 1.8 -1.2

1.750 3/1/13 1.879 5.1 -1.4 -1.2 7.9 -2.8 1.6 -1.7 7.9 -2.8 1.9 -1.5

5.250 6/1/13 1.964 5.8 -1.4 0.1 7.7 -1.9 1.5 -1.3 7.4 -1.6 1.7 -1.0

3.500 6/1/13 1.969 5.4 -1.9 -0.3 7.7 -2.3 1.5 -1.5 7.3 -1.9 1.7 -1.1

2.500 9/1/13 2.077 6.9 -1.3 -0.7 10.1 -3.2 1.8 -1.8 10.0 -3.0 1.7 -1.7

5.000 6/1/14 2.282 7.0 -1.5 -3.1 9.0 -1.9 1.6 -1.2 8.9 -1.9 1.7 -1.1

3.000 6/1/14 2.290 6.3 -1.5 -3.0 8.2 -1.9 1.6 -1.1 7.7 -1.4 1.8 -0.8

2.000 12/1/14 2.403 3.3 -1.6 -2.6 4.8 -1.5 1.6 -1.0 3.8 -0.5 1.9 -0.2

4.500 6/1/15 2.464 -0.2 -2.0 -2.1 0.9 -1.2 1.5 -0.8 1.2 -1.4 1.7 -0.8

2.500 6/1/15 2.483 -0.5 -1.8 -1.4 0.2 -0.7 1.6 -0.4

3.000 12/1/15 2.611 1.6 -1.9 -2.8 3.4 -1.9 1.5 -1.3 3.4 -1.9 1.7 -1.1

4.000 6/1/16 2.706 2.1 -1.7 -2.3 3.4 -1.3 1.6 -0.8 2.7 -0.5 1.8 -0.3

4.000 6/1/17 2.860 -0.1 -2.5 -2.8 2.4 -2.5 0.9 -2.8 1.7 -1.8 1.0 -1.8

4.250 6/1/18 3.016 1.2 0.2 -0.6 2.1 -1.0 0.5 -1.9 1.9 -0.8 0.6

3.750 6/1/19 3.142 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.2

3.500 6/1/20 3.233 -1.9 -0.2 1.2 -2.9 0.9 0.7 1.4 -1.8 -0.2 1.1 -0.2

8.000 6/1/23 3.468 7.8 -0.6 3.0 4.0 3.8 2.1 1.8 4.4 3.4 2.0 1.7

8.000 6/1/27 3.681 11.5 0.0 1.3 10.5 1.0 0.9 1.2 9.6 1.9 1.2 1.6

5.750 6/1/29 3.739 7.6 0.5 0.8 6.9 0.8 0.5 1.4 6.2 1.4 0.8 1.8

5.750 6/1/33 3.796 6.8 0.3 0.2 6.3 0.5 0.4 1.2 5.5 1.3 0.7 1.9

5.000 6/1/37 3.768 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.04.000 6/1/41 3.737 -4.8 -0.4 -0.5 -4.4 -0.4 0.5 -0.9 -3.6 -1.2 0.7 -1.7

Canada OAS (Multifactor Model)

4Jun41

5Jun37

5.7

5Jun33

3.5

Jun20

3.7

5Jun19

4Jun17

3Dec15

2Dec14

2.5

Sep13

5.2

5Jun13

2Sep12

1.5

Mar12

1.2

5Jun11

4.2

5Jun18

8Jun23

8Jun27

5.7

5Jun29

-20

-15

-10

-5

0

5

10

15

20

25

30

35

40

45

50

55

60

65

70

75

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32

Term (Years)

OAS

(bps)

-1.00

-0.75

-0.50

-0.25

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

3.50

3.75

4.00

4.25

Yield(%)

O AS 5 days prior Yield F itted P ar C ur ve


13/14



13

Appendix: Canada Asset-Swap Spreads

Coupon Maturity Dt

Par Asset

Swap

Yld/Yld

Swap C hg 1 C hg 5 A vg 20

Chg vs

20 MA SD 20 # SD 20* Avg 60

Chg vs

60 MA SD 60 # SD 60*

Carry

($K)1Carry Delta

($K)2

1.250 12/1/2011 -14.9 -14.7 1.5 -2.7 -14.7 -0.1 2.1 0.0 -12.9 -1.8 3.4 -0.5 98.9 68.7

1.500 3/1/2012 -14.7 -14.4 1.9 -2.4 -14.5 0.0 1.5 0.0 -13.6 -0.8 2.5 -0.3 79.0 58.03.750 6/1/2012 -14.7 -14.5 0.9 -1.5 -14.9 0.3 1.0 0.4 -14.8 0.3 1.6 0.2 84.0 50.7

1.500 6/1/2012 -13.7 -13.5 0.9 -1.5 -13.9 0.3 1.0 0.4 -13.7 0.2 1.7 0.1 79.0 49.85.250 6/1/2012 -15.1 -15.0 0.9 -1.5 -15.4 0.3 1.0 0.4 -15.2 0.2 1.6 0.1 87.7 51.3

2.000 9/1/2012 -12.3 -10.8 0.8 -0.4 -10.4 -0.4 1.0 -0.4 -12.0 1.2 1.7 0.7 81.1 44.3

1.750 3/1/2013 -8.6 -8.4 0.9 0.8 -9.3 1.0 1.2 0.8 -11.0 2.6 1.7 1.6 70.5 35.63.500 6/1/2013 -9.5 -9.3 0.4 2.2 -11.5 2.2 1.8 1.2 -14.1 4.8 2.4 2.0 75.9 33.15.250 6/1/2013 -9.4 -9.8 0.9 2.7 -12.5 2.7 1.9 1.4 -15.1 5.3 2.4 2.2 83.8 33.8

2.500 9/1/2013 -8.5 -7.6 1.0 1.8 -9.0 1.4 1.5 0.9 -11.5 3.9 2.8 1.4 68.2 30.35.000 6/1/2014 -11.0 -12.2 0.8 -1.0 -15.1 2.9 3.4 0.9 -18.0 5.8 3.3 1.8 61.6 25.4

3.000 6/1/2014 -11.3 -11.4 0.8 -1.0 -14.3 2.9 3.4 0.9 -17.3 6.0 3.3 1.8 50.6 24.62.000 12/1/2014 -13.9 -13.4 1.0 -0.2 -16.6 3.2 3.0 1.1 -20.2 6.8 3.6 1.9 33.4 21.5

2.500 6/1/2015 -17.8 -17.6 1.0 1.8 -22.0 4.4 2.9 1.5 -25.1 7.4 3.6 2.1 24.5 19.64.500 6/1/2015 -18.4 -19.6 0.8 1.2 -23.5 3.9 2.9 1.4 -26.8 7.2 3.7 2.0 35.2 20.4

3.000 12/1/2015 -15.6 -15.8 0.9 0.3 -18.8 3.0 2.5 1.2 -21.8 6.1 3.7 1.6 29.2 18.1

4.000 6/1/2016 -15.8 -16.7 0.9 0.5 -20.2 3.5 2.8 1.3 -23.6 6.8 3.9 1.8 33.1 17.04.000 6/1/2017 -17.8 -18.7 -0.2 0.7 -21.0 2.3 2.3 1.0 -23.8 5.1 3.9 1.3 26.8 14.8

4.250 6/1/2018 -18.4 -19.7 2.6 3.0 -23.1 3.4 1.9 1.8 -24.8 5.2 3.7 1.4 25.4 13.23.750 6/1/2019 -21.9 -22.3 2.4 3.6 -26.7 4.4 2.1 2.1 -27.3 5.0 4.2 1.2 16.2 11.8

3.500 6/1/2020 -27.6 -27.7 2.1 4.8 -32.9 5.2 2.2 2.4 -31.6 3.9 4.1 1.0 6.4 10.78.000 6/1/2023 -34.2 -38.8 2.8 7.7 -46.9 8.1 3.3 2.4 -45.0 6.2 4.7 1.3 29.4 9.9

8.000 6/1/2027 -41.4 -43.1 3.7 7.2 -48.3 5.2 2.6 2.0 -45.9 2.7 4.4 0.6 23.1 8.25.750 6/1/2029 -44.1 -43.8 4.3 6.7 -49.3 5.5 2.6 2.2 -46.7 2.9 4.4 0.7 6.5 7.1

5.750 6/1/2033 -40.3 -38.0 3.6 5.2 -42.9 4.9 2.3 2.1 -40.2 2.2 3.8 0.6 7.3 6.35.000 6/1/2037 -38.7 -35.4 2.5 4.0 -39.2 3.8 2.1 1.8 -36.2 0.7 3.7 0.2 1.1 5.6

4.000 6/1/2041 -35.2 -34.0 1.3 2.8 -37.0 3.0 2.3 1.3 -33.8 -0.2 3.7 0.0 -6.7 4.9

1Carry over 1-mo for 100K of DV01 risk, assuming bond financed at general collateral.

2Carry Delta is the change in carry for a 10bp decline in the bond financing rate.

Canada Yield/Yield Asset-Swap Spreads, 2 through 10 Year Bonds

3.7

5Jun19

4.2

5Jun

18

2Dec14

3Jun14

2.5

Sep13

5.2

5Jun13

1.7

5Mar13

2Sep12

5.2

5Jun12

1.5

Mar12

4.5

Jun15

3Dec15

4Jun16

4Jun17

3.5

Jun20

-40

-35

-30

-25

-20

-15

-10

-5

0

1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0

Term (Years)

Yield/Yield

Spread

(bps)

Yld/Yld Swap Avg 20 Prior 5 days prior

Canada Yield/Yield Asset-Swap Spreads, all terms

4Jun41

5Jun37

5.7

5Jun33

5.7

5Jun29

8Jun27

8Jun23

3.5

Jun2

0

3.7

5Jun

19

4.2

5Jun

18

4Jun17

4Jun

16

3Dec

15

4.5

Jun1

5

3J

un1

4

2.5S

ep1

3

-60

-50

-40

-30

-20

-10

0

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33

Term (Years)

Yield/Yield

Spread

(bps)

Yld/Yld Swap Avg 20 Prior 5 days prior


14/14

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