27 March 2015 US Faced Income Weekly Term premium itself could also adjust even if the terminal funds rate outlook doesn't. In many ways this is probably a bigger risk especially if we link the term premium decline to foreign demand for US rates. We showed the other week the correlation between the decline in the term premium and "overinvestment" by foreign central banks into Treasuries. Note that the term premium enjoyed an accelerated decline in late 2014 but has since been more stable, in line with the collapse in euro yields. Clearly any shift in the Euro outlook could lead to a reversal in the drop in term premium in the US. However in this regard the Fed's own shift in their dot plot should be taken into consideration. The dots have both become less diverse and importantly the lower long term dot outlook - which we think has more to go - serves by definition to reduce market uncertainty around the Fed's normalization process. As such it is not at all clear that term premium should rebound 100 - 150 bps or so i.e. to mid 2014 levels or at least might be confined to a more moderate rise. This is especially likely once normalization begins in that in all the tightening cycles since the late 1980s term premium falls when the Fed tightens. [Funds vs. 5y5y term premium 20 18 16 14 T 12 10 8 6 4 2 1.5 al 01 01 cri r-4 IN VNIVIN get Nfle.1 .0•NrIf N in co mN4 11) 01 fel 1C1 o '0 co 00 Cl Crl 0 Nt 010100010101010 0 0 0 NI NI NI H .... N N N Son Starrborg Finner (Per Panda Bog 6 5 Corporate Profits yoyo 60 50 40 30 4 20 3 10 2 1 10 0 20 1 30 - -40 (5y5y term premium, fitted and neutral rate 5 4 3 2 1 0 -1 ...-...-....-....-...-....-...-...-....-••-•._ —5y5y ter 5y5y fitted —Risk neutral rate O% 44 Qti Oti tprb re s iv is) Q.„-, „ „ cs% % % ri• et* rtl l• 4)S ei5) Scarce Mac, Waren hum, LIO sal Padre Ant Deutsche Bank Securities Inc. —Corporate profitsply 3 irtigit2 're. 7-2 cr. .43 cto cO3 5 A 1.4; — 01 01 CA ON 01 01 a 01 0 (31 01 Or 0'8' `8' § 0" Sower Oa. Speenbre Anne* (Pal Dane& Sn 'Nominal Private final demand vs. 5y5y risk neutral rate 20 15 10 0 -5 5y5y RN rate nom private final demand yoy rt7I NI IN 0.1 N IN N NI NJ IN NI AN IN ran reincog-in. Nat-nitro-1n. 0 03 01 I.0 r.Cr N N 0 00 CO 01 01 01 Q 8 8mcncnatcncncnalacncncncno #4 el el el el el el el el el el el N N ". Salta lAlt: 61:O71/ely Andra LP MO Detach. eon Page 9 CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) CONFIDENTIAL DB-SDNY-0087390 SDNY_GM_00233574 EFTA01385922