View
262
Download
9
Category
Preview:
Citation preview
May 15-17, 2017 | Charlotte, NC
2017 Financial Institutions Balance Sheet Strategy Conference
2017 Financial Institutions Balance Sheet Strategy Conference May 15-17, 2017 | Charlotte, NC | Attire: Business casual
Monday, May 15 Marriott Event Hub and Mezzanine 3rd Floor
Time Activity
5:00 8:00 p.m. Welcome reception and cocktails
Tuesday, May 16 Marriott Hotel Charlotte Ballroom ABCD 3rd Floor
Time Topic Presenter 7:15 8:00 a.m. Breakfast
8:00 8:10 a.m. Welcome remarks Sean Ladley,Conference Co-Chair, Head of Generalist Fixed Income Sales
8:10 8:45 a.m. Economic Outlook Tim Quinlan, Senior Economist
8:45 9:15 a.m. Rates Outlook: Central Bank Policy vs. Political Risk
Michael Schumacher, Rates Strategist
9:15 10:00 a.m. Current Regulatory Environment and its Impacts on the Banking Industry
April Frazer, Regulatory Advisory and Capital Structuring
10:00 10:30 a.m. Break
10:30 11:30 a.m. Client Panel: Navigating the Current Environment
Moderator: Charlie Crowley, Conference Co-Chair, Head of Depository Strategy Panelists: George Boyan SVP - Treasurer Bank Leumi USA New York, NY Marito Domingo Chief Credit and Investment Officer First Technology Federal Credit Union Mountain View, CA Ken Hessel Portfolio Manager and Senior Credit Analyst United Community Bank Blairsville, GA Tom Speir SVP - Head of Balance Sheet Management Regions Bank Birmingham, AL
11:30 a.m. 1:00 p.m. Lunch Keynote Address: The Leadership Differentiator Charlotte Ballroom EFGH, 3rd Floor
Joe Moglia TD Ameritrade Chairman of the Board Head Football Coach - Coastal Carolina 2017 Lombardi Hall of Fame Inductee
2017 Financial Institutions Balance Sheet Strategy Conference (continued)May 15-17, 2017 | Charlotte, NC
2017 Wells Fargo Securities. All rights reserved.
Tuesday, May 16
1:00 1:30 p.m. U.S. Mortgage Trading & Markets: Tactical Investing in an Uncertain World If, Then, Else.
Kevin Jackson, Mortgage Strategist
1:30 2:00 p.m. Relative Value Across the Curve: Whats happened and where are we going?
Will Fisher, Depository Strategist
2:00 3:00 p.m. Breakout sessions #1
Municipal Bonds: Current Market and Credit Evaluation Meeting Room: 1st Ward, 3rd Floor
Loan Opportunities: Residential Whole Loans and Asset Backed Syndications Meeting Room: 2nd Ward, 3rd Floor
CLOs: Sector Overview and Secondary Market Meeting Room: 3rd Ward, 3rd Floor
Agency CMBS: Common Structures and Investor Demand Meeting Room: 4th Ward, 3rd Floor
Choose two sessions (30 minute sessions)
Daymon Little, Muni BQ Trading Donald Lipkin, Head of Muni Credit Strategy
Greg Tsang, Whole Loan Trading Tim Andrew, Whole Loan Trading Michele Simons, ABF Syndicated Loans
Dave Preston, CLO Research Kevin Farley, CLO Trading
Chris Van Heerden, CMBS Research Chuck Mather, CMBS Trading
3:00 3:15pm Break
3:15 4:15 p.m. Breakout sessions #2
Interest Rate Hedging & Derivative-based ALM Strategies Meeting Room: 1st Ward, 3rd Floor
Value in the Agency MBS Market Meeting Room: 2nd Ward, 3rd Floor
Credit Outlook: Where are we in the cycle and expectations by sector. Meeting Room: 3rd Ward, 3rd Floor
M&A: Trends, Outlook and Portfolio Integration Meeting Room: 4th Ward, 3rd Floor
Choose two sessions (30 minute sessions)
Bill Kistner/Shannon Grant, Interest Rate Risk Management
Alex Papson, CMO Trading Chris Moen, MBS Specified Pool Trading
George Bory and Trey Winslett, Credit Strategy
Mohan Ramanathan, Depository Strategist John Hallett, Investment Banking
4:15 4:30 p.m. Break/Walk over to 550 S. Tryon, 4th floor 4:30 5:00 p.m. Option: Duke Energy Center Trading Floor Visit 5:00 5:15 p.m. Walk back to Hotel
5:15 5:45 p.m. Break
5:45 p.m.5 Shuttles to The Olde Mecklenburg Brewery
6:00 10:00 p.m. Dinner, Drinks & Fun | The Olde Mecklenburg Brewery Shuttles run to and from Marriott
http://www.oldemeckbrew.com/
2017 Financial Institutions Balance Sheet Strategy Conference (continued)May 15-17, 2017 | Charlotte, NC
2017 Wells Fargo Securities. All rights reserved.
Wednesday, May 17
Time Activity7:15 a.m. Shuttle departs from Marriot Lobby to TPC Piper Glen for Golf
8:15 9:00 a.m. Breakfast, Driving Range, Putting Green
9:00 a.m. Golf Shotgun Start
9:00 3:00 p.m. Golf Boxed Lunches served on back nine
Shuttles provided to the airport at 3:00 p.m. and 4:15 p.m. Travel time to the airport is approximately 45 minutes.
Addresses: Marriott Charlotte City Center Duke Energy Center 100 West Trade St 4th Floor, Wells Fargo Securities Trading Floor Charlotte, NC 28202 550 S Tryon St
Charlotte, NC 28202
The Olde Mecklenburg Brewery TPC at Piper Glen 4150 Yancey Rd 4300 Piper Glen Dr. Charlotte, NC Charlotte, NC 28277
*This event is eligible for CPE credit. Additional details and formal invitation to follow (planned release: March 2017). Conferencecontent and times are subject to change. Please contact your Wells Fargo Securities representative for the most recent conferenceagenda.
http://www.clubcorp.com/Clubs/TPC-Piper-Glen
Welcome Remarks Sean Ladley | Head of Generalist Fixed Income Sales
Thank you
3
Wells Fargo Strength and Stability Wells Fargo continues to be one of the strongest and best capitalized banks Wells Fargo is one of the strongest banks in the United States, rated A by
Standard & Poors Wells Fargo has a coast-to-coast footprint and a broad array of product
capabilities, allowing our clients to tap into a wealth of financial expertise
Wells Fargo U.S. Market Rank*
Market Capitalization $276 billion
#2 among banks globally
Total U.S. Deposits $1.2 trillion
#1 (as of 9/30/16)
Total Loans, net $983 billion #1
Mortgage Servicing $2.2 trillion #1 (as of 12/31/15)
Retail Brokerage
14,882 financial advisors1
3rd largest U.S. full-service brokerage based on financial
advisors
Mutual Funds $199 billion AUM #3 bank-owned mutual fund family
Insurance $2.2 billion #1 best insurance broker in the U.S. (2015)
Coast to Coast Presence
Wells Fargo Retail Branches Wells Fargo Advisors Wells Fargo Home Mortgage
Data is as of 12/31/2016 unless otherwise noted *Rankings are U.S. unless otherwise noted 1Series 7 brokers Sources: Earnings release, 10-Q/K, Capital IQ, SNL Financial, WF Funds Management Group monthly letter and Global Finance magazine
4
Proven domestic and global success An extensive global reach
Total Wells Fargo Wholesale offices globally 1,166*
A strong global presence with 45 international locations Leading provider of FX services #1 global financial institution in overall institutional satisfaction
(FImetrix, 2015)
Distinguished provider for global transaction services (FImetrix, 2013-2016)
Best trade finance bank in North America (Global Finance, 2016) Best provider of Supply Chain Finance (Trade & Forfaiting, 2015) U.S. large corporate trade finance quality leader (Greenwich, 2015)
Source: Wells Fargo unless otherwise specified, data as of 12/31/2016 * The map shows global Wells Fargo Wholesale Banking locations as of September 30, 2016.
5
U.S. Footprint - Wells Fargo Securities Fixed Income Offices
Coast-to-coast presence
MEM
BOS
CHI
CLT
DAL
DEN
LA
MIA
MNP
OMH PHI
PHO
SAC
SEA
SF
NYC
ATL
Wells Fargo Securities delivers a strong institutional and middle market distribution network.
Total of 17 Offices in the U.S. covering over 7,600 clients.
Fixed Income sales teams strive to partner with multiple Wells Fargo teams to deliver comprehensive solutions to our investing clients.
Access to New Issue Syndicated Product across the entire spectrum of fixed income securities.
Wells Fargo Securities Fixed Income Sales Office
6
The Power of Wells Fargo Securities platform
6
Sales & Trading Investment & Balance Sheet Solutions
Over $25 Billion of products offered daily in both new issue and secondary markets on one of the most active trading desks on the street: RMBS (#1 CMO issuer and CRA solutions) CMBS (#2 US Bookrunner3 and #1 Agency CMBS
issuer)
ABS (#3 U.S. issuer) Treasuries and Agencies (#2 Issuer) Municipals (includes Bank Qualified) High Grade (#6 US Issuer) and High Yield Corporates CLO (#1 middle market CLO issuance4) Money Markets (280 CP programs)
Strategy Portfolio Analysis & Reporting
Interest Rate Risk Reporting Generate gap, income simulation and EVE reports Recommend specific ALM strategies to mitigate interest
rate risk Monitor risk limits and internal policy guidelines Investment Portfolio Analysis Sector and security level breakdown Portfolio optimization recommendations Performance evaluation and considerations Impact to capital of changing interest rates Liquidity & Funding Reporting Evaluate current wholesale funding structure Determines retrospective liquidity ratios Projects available alternative liquidity sources
Analysis & Strategy Reports Recommend appropriate portfolio allocation to meet
investment objectives given current market conditions Maximize NIM and income by optimizing asset
allocations Recommend earnings strategies with appropriate
funding and investment mix to meet specific balance sheet objectives
Additional Custom peer analysis on a regional and national level Multi-sector fixed income relative value matrix Wholesale funding strategies Regularly published newsletter discussing industry
trends
Research Economics & Fixed Income
Economics Top 10 in forecasting in each of past four years
(Bloomberg, 2009-2013) Award winning economic commentary (American
Economic Assn, 2010, 2012, 2013, 2015)
Fixed Income #1 Overall High Grade 1 #3 High Yield1 #1 CLOs #1 in Strategy, Municipal Bond Research Team5 Seasoned team of RMBS, CMBS & ABS analysts
Power to Deliver
1 Institutional Investor 2016 Fixed Income Research Survey 2 Inside Mortgage Finance, 4Q16 3 Commercial Mortgage Alert as of December 30, 2016 4 Wells Fargo 5 Smiths Research and Gradings, 2014 and 2016
Chart1
10
10
10
10
10
10
Sales
Sheet1
Sales
1st Qtr10
2nd Qtr10
3rd Qtr10
4th Qtr10
10
10
7
2017: Potential for Increased Market Volatility Trump Administration
The Fed
Putins Russia
North Korea
8
Disclosure
This publication is intended for institutional accounts only (as defined in FINRA Rule 4512), please do not forward. This Commentary is a product of Wells Fargo Securities Fixed Income Sales and Trading and is not a product of Wells Fargo Securities, LLCs Research, Economics and Strategy. The views expressed herein might differ from those of Research, Economics and Strategy. This communication is for informational purposes only, is not an offer, solicitation, recommendation or commitment for any transaction or to buy or sell any security or other financial product, and is not intended as investment advice or as a confirmation of any transaction. Interested parties are advised to contact the entity with which they deal, or the entity that provided this report to them, if they desire further information. WFS and its investment representatives do not act as Municipal Advisors and only provide investment advice or recommendations with respect to bond proceeds as permitted by available exemptions. Accuracy of Information The information in this report has been obtained or derived from sources believed by Wells Fargo Securities, LLC to be reliable, but Wells Fargo Securities, LLC does not represent that this information is accurate or complete. Any opinions or estimates contained in this report represent the judgment of Wells Fargo Securities, LLC at this time and are subject to change without notice. Wells Fargo Securities, LLC and its affiliates may from time to time provide advice with respect to, acquire, hold or sell a position in, the securities or instruments named or described in this report. Important Disclosures Relating to Conflicts of Interest and Potential Conflicts of Interest Wells Fargo Securities, LLC may sell or buy the subject securities to/from customers on a principal basis. Wells Fargo Securities, LLC has or may have proprietary positions in the securities mentioned herein. The trading desk has or may have proprietary positions in the securities mentioned herein. The author's compensation is based on, among other things, Wells Fargo Securities, LLC's overall performance, the profitability of Wells Fargo Securities, LLC's Markets Division and the profitability of the trading desk. About Wells Fargo Securities Wells Fargo Securities is the trade name for the capital markets and investment banking services of Wells Fargo & Company and its subsidiaries, including but not limited to Wells Fargo Securities, LLC, a member of NYSE, FINRA, NFA and SIPC, Wells Fargo Prime Services, LLC, a member of FINRA, NFA and SIPC, and Wells Fargo Bank, N.A. Wells Fargo Securities, LLC and Wells Fargo Prime Services, LLC are distinct entities from affiliated banks and thrifts. Copyright 2017 Wells Fargo Securities, LLC SECURITIES: NOT FDIC:-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE
Global Economic Outlook Tim Quinlan| Senior Economist
2
GDP and Fed Funds Long-Run Expectations from the Fed Over the past several years, the Fed has dialed-back it own estimates of potential GDP growth as have private-sector economists and Congressional Budget Office
Openings Separations
1.0%
1.5%
2.0%
2.5%
3.0%
1.0%
1.5%
2.0%
2.5%
3.0%
Jun-2012 Jun-2013 Jun-2014 Jun-2015 Jun-2016
Long-Run GDP ProjectionsSummary of Economic Projections, Central Tendency Range
Midpoint of Central Tendency: Mar @ 1.9%2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
Jun-2012 Jun-2013 Jun-2014 Jun-2015 Jun-2016
Long-Run Fed Funds ProjectionsSummary of Economic Projections, Central Tendency Range
Midpoint of Central Tendency: Mar @ 2.9%
Source: Federal Reserve and Wells Fargo Securities
3
Real GDP Forecast
Outlook is for below-trend growth to continue
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
U.S. Real GDP Bars = CAGR Line = Yr/Yr Percent Change
GDP - CAGR: Q1 @ 0.7%GDP - Yr/Yr Percent Change: Q1 @ 1.9%
Forecast
Source: U.S. Department of Commerce and Wells Fargo Securities
4
Federal Fiscal Policy Outlook The fiscal policy checklist
Key Issues to Watch in the 115th Congress Budget Debates
Currently the government is funded through September 30 Repeal & Replace the Affordable Care Act
Failure here raises doubts about Trump agenda Corporate Tax Reform
We are assuming the top statutory corporate tax rate is cut only modestly perhaps to 30% from the current 35% rate
The tax cut will be at least partially paid for by reducing the tax rate for repatriated corporate profits.
Individual Tax Reform Cuts are likely but reforms will not likely move quickly We expect a total tax cut of roughly $1.6 trillion over 10
years.
5
Federal Fiscal Policy Outlook
Timeline
Key Dates Policy Action Expected Mar. 15th Debt Ceiling Re-Established Mar. 23rd ACA Repeal & Partial Replacement Bill Expected Apr. 28th Current Continuing Resolution Expires Early Spring Fiscal Year 2018 Budget Resolution Passed Late Spring Individual/Corporate Tax Cut Bill Expected May/Jun. Debt Ceiling Needs to be Increased Jul. 31 - Sep. 1st August Recess Sep. 30th Fiscal Year 2017 Ends
6
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
1948-1973 1974-1995
1996-2003
2004-Q2 2016
2004-2007
2008-2010
2011-Q4 2016
yAverage Annual Percent Change in Output Per Hour Worked
Potential GrowthLittle Help From Productivity Productivity growth has downshifted over the past cycle
Nonfarm Labor Productivity
Source: U.S. Department of Labor and Wells Fargo Securities
7
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
q p Bars = CAGR Line = Yr/Yr Percent Change
Equipment Investment - CAGR: Q1 @ 9.1%Equipment Investment - Yr/Yr Percent Change: Q1 @ 0.8%
Forecast
Business Spending Tough to find reasons to get excited about prospects for capital outlays
Real Equipment Investment
Source: U.S. Department of Commerce and Wells Fargo Securities
8
Business Fixed Investment The rebound in energy prices and more specifically oil prices is starting to boost business investment. Trump Effect?
Business Investment Ex-Mining Energy Share of Investment
-20%
-16%
-12%
-8%
-4%
0%
4%
8%
12%
16%
-20%
-16%
-12%
-8%
-4%
0%
4%
8%
12%
16%
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Real Business Fixed InvestmentYear-over-Year Percent Change
BFI Ex-Mining: Q1 @ 2.7%BFI: Q1 @ 3.1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
0%
1%
2%
3%
4%
5%
6%
7%
8%
95 97 99 01 03 05 07 09 11 13 15 17
Fixed Investment Spending on EnergyAs Percent of Total BFI
Energy: Q1 @ 2.7%
Source: U.S. Department of Commerce and Wells Fargo Securities
9
Oil Prices The OPEC meeting helped oil get back above $50
Baker-Hughes Rig Count vs. Oil Prices
Source: Baker Hughes Inc., Bloomberg LP and Wells Fargo Securities
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
05 06 07 08 09 10 11 12 13 14 15 16 17
Oil Rotary Rigs; USD per Barrel
Oil Rig Count: May-05 @ 703 (Left Axis)WTI: May-05 @ $46.23 (Right Axis)
10
-10%
-5%
0%
5%
10%
15%
-$100
-$50
$0
$50
$100
$150
2000 2001 2002 2003 2004 2005 2006 2007
Repatriated Earnings vs. Business Spending Billions of U.S. Dollars; Year-over-Year Percent Change
Repatratiated Profits: Q4 2007 @ $63.5B (L)
Equip + I-Prop: Q4 2007 @ 3.9% (R)
Repatriation Our analysis suggests a tax repatriation may provide short-term revenue, but it will not make a material impact on capital spending
Repatriated Earnings vs. Business Spending
Source: Baker Hughes Inc., Bloomberg LP and Wells Fargo Securities
11
Repatriation Impact on Capital Spending & Outlook
The Homeland Investment Act of 2004 did not lead to the anticipated influx of capital into fixed business investment.
Rebounding corporate profits and renewed animal spirits are supporting capital spending more than tax reform and repatriations will.
We expect capital expenditures to strengthen further in the next two years as the investment environment continues to improve.
-30%
-20%
-10%
0%
10%
20%
30%
-30%
-20%
-10%
0%
10%
20%
30%
00 02 04 06 08 10 12 14 16 18
Real Capital Investment by TypeYear-over-Year Percent Change
Equipment: Q4 @ -3.9%Intellectual Prop.: Q4 @ 5.1%Research & Development: Q4 @ 5.0%
ForecastRepatriatedTax Years2005-2007
2004 HomelandInvestment Act
$0
$400
$800
$1,200
$1,600
$2,000
$2,400
$0
$400
$800
$1,200
$1,600
$2,000
$2,400
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16
Corporate Profits USD Billions, SAAR
Corporate Profits: Q4 @ $2,150.0 Billion
Adjusted for Inventory Valuation & Capital Consumption
Source: U.S. Department of Commerce and Wells Fargo Securities
Corporate Profits Real Capital Investment by Type
12
Household Balance Sheets Consumer deleveraging may be nearing an end, but monthly debt and other financial obligation payments remain near historic lows
Household Debt Financial Obligations Ratio
Source: Federal Reserve Board and Wells Fargo Securities
0%
20%
40%
60%
80%
100%
0%
20%
40%
60%
80%
100%
60 65 70 75 80 85 90 95 00 05 10 15
Household Debt - Consumer & MortgageAs a Percent of Disposable Personal Income
Consumer Credit: Q4 @ 26.4%Home Mortgages: Q4 @ 68.4%
14.5%
15.0%
15.5%
16.0%
16.5%
17.0%
17.5%
18.0%
18.5%
14.5%
15.0%
15.5%
16.0%
16.5%
17.0%
17.5%
18.0%
18.5%
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16
Financial Obligations Ratio-TotalAs a Percent of Disposable Personal Income
Total: Q4 @ 15.4%
13
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Real Personal Consumption ExpendituresBars = CAGR Line = Yr/Yr Percent Change
PCE - CAGR: Q1 @ 0.3%PCE - Yr/Yr Percent Change: Q1 @ 2.8%
Forecast
Real PCE Forecast Consumer spending growth is set to moderate but remain positive throughout the forecast horizon
Real Personal Consumption Expenditures
Source: U.S. Department of Commerce and Wells Fargo Securities
14
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
Appropriate Pace of Policy FirmingTarget Federal Funds Rate at Year-End
March 2017 Median ResponseDecember 2016 Median ResponseSeptember 2016 Median ResponseDecember 2015 Median ResponseFutures Market: April 30
2017 Longer Run2018 2019
Pace of Policy Firming Normalization is underway, another rate hike in June
Appropriate Pace of Policy Firming
Source: Federal Reserve Board, Bloomberg LP and Wells Fargo Securities
15
2%
4%
6%
8%
10%
12%
2%
4%
6%
8%
10%
12%
94 96 98 00 02 04 06 08 10 12 14 16
U.S. Unemployment RateSeasonally Adjusted
FOMC Central Tendency for Longer Run
Unemployment Rate: Apr @ 4.4%
Unemployment The labor market is steadily firming, the unemployment rate is in line with the FOMCs central tendency target
U.S Unemployment Rate
Source: U.S. Department of Labor, Federal Reserve Board and Wells Fargo Securities
16
0%
4%
8%
12%
16%
20%
24%
0%
4%
8%
12%
16%
20%
24%
94 96 98 00 02 04 06 08 10 12 14 16
Underuse of LaborU-6 Unemployment Rate Components, Seasonally Adjusted
Part-Time for Economic Reasons: Apr @ 3.3%Discouraged and Marginally Attached: Apr @ 0.9%Unemployed: Apr @ 4.4%U-6 Unemployment Rate: Apr @ 8.6%
Unemployment Rates Even the broadest measures of unemployment are roughly in line with prior cycles although part-time for economic reasons remains high
Underuse of Labor
Source: U.S. Department of Labor and Wells Fargo Securities
17
Labor Turnover Job openings appear to be leveling off, while the mix of turnover in the labor market remains healthy
Openings Separations
Source: U.S. Department of Labor and Wells Fargo Securities
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Job OpeningsMillions of Openings, Seasonally Adjusted
Total Job Openings: Feb @ 5.74MThree-Month Moving Average: Feb @ 5.64M 1.0
1.5
2.0
2.5
3.0
3.5
1.0
1.5
2.0
2.5
3.0
3.5
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Quits vs. LayoffsMillions of Workers, SA
Quits: Feb @ 3.08MLayoffs: Feb @ 1.58M
18
0%
1%
2%
3%
4%
5%
6%
0%
1%
2%
3%
4%
5%
6%
97 99 01 03 05 07 09 11 13 15 17
Average Hourly Earningsvs. Atlanta Fed Wage Growth Tracker; YoY % Chg. of 3-MMA
Atlanta Fed Wage Growth Tracker: Mar @ 3.4%
Average Hourly Earnings (Prod. & Supervisory): Apr @ 2.4%
Average Hourly Earnings Wage growth has picked up modestly but remains limited by lower-skilled workers entering the workforce and Baby Boomers beginning to retire
Average Hourly Earnings
Source: Federal Reserve Bank of Atlanta, U.S. Department of Labor and Wells Fargo Securities
19
Inflation Inflation has moved higher but remains below the Feds 2 percent target
Source: U.S. Department of Commerce and Wells Fargo Securities
-2%
-1%
0%
1%
2%
3%
4%
5%
-2%
-1%
0%
1%
2%
3%
4%
5%
92 94 96 98 00 02 04 06 08 10 12 14 16
PCE Deflator vs. Core PCE DeflatorYear-over-Year Percent Change
PCE Deflator: Mar @ 1.8%"Core" PCE Deflator: Mar @ 1.6%
PCE deflator vs. Core PCE Deflator
20
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
$3.5
$4.0
$4.5
$5.0
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
$3.5
$4.0
$4.5
$5.0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Federal Reserve Balance Sheet Trillions
Other: Apr @ $182.8BForeign Swaps: Apr @ $5.1BPDCF & TAFCommercial Paper & Money MarketRepos & Dis. Window: Apr @ $0.1BAgencies & MBS: Apr @ $1,782.5BTreasuries: Apr @ $2,464.4B
Its easier to get into something than to get out of it Donald Rumsfeld
Federal Reserve Balance Sheet
Prior to the 2008, Feds holdings were about $900 of mostly Treasuries
Balance sheet briefly held a diverse selection of financial instruments, such as commercial paper and currency swaps, to help mitigate the liquidity challenges in the financial system.
Current size is roughly $4.5 trillion, comprised mostly of Treasuries and mortgage-backed securities (MBS).
Source: Federal Reserve System and Wells Fargo Securities
21
Front-Loaded Maturity Schedule for Treasuries
More Treasury securities come due in 2018 than any other year
Roughly half the Feds Treasury holdings come due between now and 2020
Right now Fed is still reinvesting as these Treasuries come due, by year end we suspect it will reinvest less than 100% of maturities and eventually let them roll off the balance sheet altogether
Source: Federal Reserve System and Wells Fargo Securities
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47
Maturity Schedule of Fed Treasury HoldingsBy Year of Maturity, Billions of USD
Total Fed Treasury Holdings: $2.4 Trillion
Maturity Schedule of Fed Treasury Holdings
22
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
1 25 49 73 97 121 145 169 193 217 241 265 289 313 337
Maturity Path of Fed MBS HoldingsBillions, Months from Initial Date of Stopping Reinvestments
Fed Holdings of MBS if Reinvestments Stopped
Reinvestment of MBS Will Need to Be Dialed Back Very Gradually
Maturity Path of Fed MBS Holdings
Treasury market is highly liquid, but not MBS
A hypothetical illustration of MBS pre-payments suggests similar front-loaded maturity path for MBS
In order to prevent taper tantrum repeat, Fed will signal this well in advance and likely choose to reinvest a sizable percentage of the maturing MBS assets, smoothing the transition
Source: Federal Reserve System and Wells Fargo Securities
23
Where Fiscal and Monetary Policy Are Intertwined
U.S. Federal Budget Fed Earnings Remitted
Source: U.S. Department of the Treasury, Congressional Budget Office and Wells Fargo Securities
-$1,800
-$1,600
-$1,400
-$1,200
-$1,000
-$800
-$600
-$400
-$200
$0
$200
$400
-$1,800
-$1,600
-$1,400
-$1,200
-$1,000
-$800
-$600
-$400
-$200
$0
$200
$400
00 02 04 06 08 10 12 14 16 18 20 22 24 26
U.S. Federal Budget BalanceBillions of Dollars
Federal Budget Balance: FY 2016 @ -$587.3BCBO Forecast: FY 2027 @ -$1,296.8B
$0
$20
$40
$60
$80
$100
$120
$140
$0
$20
$40
$60
$80
$100
$120
$140
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16
Fed Earnings Remitted to the TreasuryBillions of Dollars, 12-Month Moving Sum
Earnings Remitted: Feb @ $89.4 Billion
Like it or not, Feds large holdings currently help reduce the budget deficit
With rising deficits and trouble finding the funding for policy proposals, reduced remittances to the Treasury cannot be ignored
Fed earnings remitted to the Treasury in past year add up to roughly $90 billion
Without it, last years fiscal budget deficit would have been 16 percent larger
24
Housing After a very slow start, we see single-family homebuilding steadily gaining momentum over the next few years Apartment construction is showing signs of topping out but should remain near recent levels
Source: U.S. Department of Commerce and Wells Fargo Securities
0.0
0.3
0.6
0.9
1.2
1.5
1.8
2.1
2.4
0.0
0.3
0.6
0.9
1.2
1.5
1.8
2.1
2.4
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20
Housing StartsMillions of Units
Multifamily StartsMultifamily ForecastSingle-Family StartsSingle-Family Forecast
Forecast
Housing Starts
25
U.S. Homeownership Rate at Multi-Decade Low The long slide in the homeownership rate may have finally ended. The recovery in homeownership is likely to be protracted due to a combination of cyclical and structural factors
Source: U.S. Department of Commerce and Wells Fargo Securities
62%
63%
64%
65%
66%
67%
68%
69%
70%
62%
63%
64%
65%
66%
67%
68%
69%
70%
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16
U.S. Homeownership RatePercent
U.S. Homeownership Rate: Q4 @ 63.7%
U.S. Homeownership Rate
26
House Price to Income Ratios Above Long-Term Averages In many areas around the country, affordability challenges remain a big roadblock to owning a home
Source: Zillow and Wells Fargo Securities
0
1
2
3
4
5
6
7
8
9
10
0
1
2
3
4
5
6
7
8
9
10
Uni
ted
Sta
tes
Los
Ang
eles
San
Fra
ncis
co
San
Die
go
New
Yor
k
Riv
ersi
de
Sea
ttle
Bos
ton
Sea
ttle
Mia
mi
Den
ver
Phoe
nix
Was
hing
ton,
DC
Phoe
nix
Tam
pa
Dal
las
Phila
delp
hia
Min
neap
olis
Chi
cago
Hou
ston
Atla
nta
St.
Lou
is
House Price-to-Income Ratio in Large MetrosRatio of Median Home Price to Median Household Income
Historic Avg. (1985-99)Q4 2016
House Price-to-Income Ratio in Large Metros
27
50
100
150
200
250
300
50
100
150
200
250
300
05 06 07 08 09 10 11 12 13 14 15 16 17
Commercial Property Price IndexIndex
Apartment: Feb @ 278.9Retail: Feb @ 175.0Industrial: Feb @ 184.4Office - CBD: Feb @ 279.4Office - Suburban: Feb @ 151.3
Property Prices: CBD, Suburbs Differ High valuations have caught the Feds attention
Commercial Property Price Index
Source: RCA and Wells Fargo Securities
28
50
100
150
200
250
300
50
100
150
200
250
300
05 06 07 08 09 10 11 12 13 14 15 16 17
Commercial Property Price IndexIndex 2000 = 100, All Property Types
Major Markets: Feb @ 267.2Non-Major Markets: Feb @ 178.9
Property Prices: Major/Non-Major Market Splits Valuations have grown the fastest in major markets
Commercial Property Price Index
Source: RCA and Wells Fargo Securities
29
U.S. Forecast
Wells Fargo U.S. Economic Forecast
2014 2015 2016 2017 20181Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
Real Gross Domestic Product 1 0.8 1.4 3.5 2.1 0.8 2.9 2.6 2.3 2.4 2.6 1.6 2.1 2.5Personal Consumption 1.6 4.3 3.0 3.5 1.1 2.7 2.5 2.4 2.9 3.2 2.7 2.5 2.7
Inflation Indicators 2
PCE Deflator 0.9 1.0 1.0 1.4 2.0 1.9 2.0 2.0 1.5 0.3 1.1 2.0 2.2Consumer Price Index 1.1 1.1 1.1 1.8 2.7 2.4 2.5 2.4 1.6 0.1 1.3 2.5 2.4
Industrial Production 1 -1.3 -0.7 0.8 0.8 2.2 3.2 2.4 2.4 3.1 -0.7 -1.2 1.8 2.4Corporate Profits Before Taxes 2 -6.6 -4.3 2.1 9.3 3.8 3.6 3.2 3.1 5.9 -3.0 -0.1 3.4 2.9Trade Weighted Dollar Index 3 89.8 90.6 90.0 95.8 94.0 96.3 97.0 99.3 78.4 91.1 91.6 96.6 97.4Unemployment Rate 4.9 4.9 4.9 4.7 4.7 4.6 4.6 4.5 6.2 5.3 4.9 4.6 4.5Housing Starts 4 1.15 1.16 1.14 1.25 1.26 1.24 1.26 1.27 1.00 1.11 1.17 1.26 1.35
Quarter-End Interest Rates 5
Federal Funds Target Rate 0.50 0.50 0.50 0.75 1.00 1.25 1.50 1.50 0.25 0.27 0.52 1.31 1.88Conventional Mortgage Rate 3.69 3.57 3.46 4.20 4.20 4.29 4.45 4.46 4.17 3.85 3.65 4.35 4.5310 Year Note 1.78 1.49 1.60 2.45 2.40 2.55 2.72 2.75 2.54 2.14 1.84 2.61 2.84
Forecast as of: April 12, 20171 Compound Annual Growth Rate Quarter-over-Quarter2 Year-over-Year Percentage Change3 Federal Reserve Major Currency Index, 1973=100 - Quarter End4 Millions of Units5 Annual Numbers Represent Averages
ForecastActualForecastActual2016 2017
International Developments
31
-1%
0%
1%
2%
3%
4%
5%
-1%
0%
1%
2%
3%
4%
5%
10 11 12 13 14 15 16 17
10-Year Government Bond YieldsPercent
Japan: May-04 @ 0.0%United States: May-04 @ 2.4%Germany: May-04 @ 0.4%United Kingdom: May-04 @ 1.1%
Sovereign Yields Government bond yields have declined across the globe but have jumped since the election
10-Year Government Bond Yields
Source: Federal Reserve Board, IHS Global Insight and Wells Fargo Securities
32
-1.50%
-1.00%
-0.50%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
-1.50%
-1.00%
-0.50%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
2012 2013 2014 2015 2016 2017
3-Month Interbank Offered Rates
Eurozone: May-5 @ -0.33%Denmark: May-5 @ -0.24%Sweden: May-5 @ -0.48%Switzerland: May-5 @ -0.73%
Negative Rates But short-term rates remain firmly negative
3-Month Interbank Offered Rates
Source: Bloomberg LP and Wells Fargo Securities
33
Foreign Purchases of U.S. Securities Capital flows and asset allocation by global investors play a strong role in rate determinations Less appetite for Treasuries growing appetite for Agencies
Source: U.S. Department of the Treasury and Wells Fargo Securities
-$300
-$200
-$100
$0
$100
$200
$300
$400
$500
$600
-$300
-$200
-$100
$0
$100
$200
$300
$400
$500
$600
04 05 06 07 08 09 10 11 12 13 14 15 16 17
Foreign Private Purchases of U.S. Securities 12-Month Moving Sum, Billions of Dollars
Treasury: Feb @ -$25.5 BillionEquity: Feb @ $24.9 BillionAgency: Feb @ $230.6 BillionCorporate: Feb @ $126.0 Billion
Foreign Private Purchases of U.S. Securities
34
-12%
-9%
-6%
-3%
0%
3%
6%
-12%
-9%
-6%
-3%
0%
3%
6%
00 02 04 06 08 10 12 14 16 18
U.K. Real GDPBars = Compound Annual Rate Line = Yr/Yr % Change
Compound Annual Growth: Q1 @ 1.2%Year-over-Year Percent Change: Q1 @ 2.1%
Forecast
U.K. GDP Growth Implications of Brexit have not been as bad as feared
U.K. Real GDP
Source: IHS Global Insight and Wells Fargo Securities
35
-12%
-8%
-4%
0%
4%
8%
-12%
-8%
-4%
0%
4%
8%
2002 2004 2006 2008 2010 2012 2014 2016 2018
Eurozone Real GDPBars = Compound Annual Rate Line = Yr/Yr % Change
Compound Annual Growth: Q1 @ 1.8%Year-over-Year Percent Change: Q1 @ 1.7%
Forecast
Eurozone Real GDP 3+ Years of Uninterrupted Growth
Eurozone Real GDP
Source: IHS Global Insight and Wells Fargo Securities
36
30
35
40
45
50
55
60
65
30
35
40
45
50
55
60
65
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Eurozone Purchasing Managers' IndicesIndex
E.Z. Manufacturing: Apr @ 56.7E.Z. Services: Apr @ 56.4
Eurozone PMIs The Eurozone purchasing managers indices are pointing to continued recovery
Source: Bloomberg LP and Wells Fargo Securities
Eurozone Purchasing Managers Indicies
37
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
00 01 03 05 07 09 11 13 15
ECB Balance SheetTrillions of Euros
ECB Balance Sheet: Apr @ 4.14T
ECB Balance Sheet The ECBs QE program should remain operational through at least March 2017
ECB Balance Sheet
Source: IHS Global Insight and Wells Fargo Securities
38
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
92 94 96 98 00 02 04 06 08 10 12 14 16
Global Export VolumesYear-over-Year Percent Change
Real Exports: Feb @ 2.5%Average 1992-Present: 5.1%
Global Exports Global trade has slowed over the past year
Global Export Volumes
Source: IHS Global Insight and Wells Fargo Securities
39
0%
2%
4%
6%
8%
10%
12%
14%
16%
0%
2%
4%
6%
8%
10%
12%
14%
16%
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Chinese Real GDP ForecastYear-over-Year Percent Change
Year-over-Year Percent Change: Q1 @ 6.9%
WFFcst.
China Real GDP Growth in China has stabilized, but we do not expect it to return to the double-digit growth rates seen in the past
Chinese Real GDP Forecast
Source: Bloomberg LP and Wells Fargo Securities
40
-24%
-20%
-16%
-12%
-8%
-4%
0%
4%
8%
12%
-24%
-20%
-16%
-12%
-8%
-4%
0%
4%
8%
12%
2000 2002 2004 2006 2008 2010 2012 2014 2016
Japanese Real GDPBars = Compound Annual Rate Line = Yr/Yr % Change
Compound Annual Growth: Q4 @ 1.2%Year-over-Year Percent Change: Q4 @ 1.6%
Japanese GDP Mixed track record for Abenomics
Japanese Real GDP
Source: Bank of Japan, IHS Global Insight and Wells Fargo Securities
41
0
50
100
150
200
250
300
350
400
450
0
50
100
150
200
250
300
350
400
450
2000 2002 2004 2006 2008 2010 2012 2014 2016
Japan's Monetary BaseTrillions of Yen
Bank of Japan current policy path
Introduction of QQE
October 2014 announcement of QQE expansion
Japanese Monetary Base The expansion of the monetary base will continue to expand the size of the BoJs balance sheet considerably; the move into negative rates is dangerous and uncharted ground
Japans Monetary Base
Source: Bank of Japan, IHS Global Insight and Wells Fargo Securities
42
60
75
90
105
120
1350.0
2.0
4.0
6.0
8.0
10.0
00 02 04 06 08 10 12 14 16
Japanese Currency Intervention vs. Yen Trillions of Yen, Purchases of Foreign Exchange; JPY per USD
Net FX Purchases/Yen Sales (L)JPY per USD: Mar @ 112.9 (R, Inverted)
Japanese Currency Intervention? Talk of currency intervention is misplaced, in our view
Japanese Currency Intervention vs. Yen
Source: Bank of Japan, IHS Global Insight and Wells Fargo Securities
43
-1.5%
0.0%
1.5%
3.0%
4.5%
6.0%
7.5%
-1.5%
0.0%
1.5%
3.0%
4.5%
6.0%
7.5%
1980 1985 1990 1995 2000 2005 2010 2015
Real Global GDP GrowthYear-over-Year Percent Change, PPP Weights
Period Average
WFForecast
Global GDP Growth 2016 will likely mark the weakest year for global economy since 2009, but we see gradual improvement in coming years OECDs updated forecast: 3.3% in 2017 3.6% in 2018 Real Global GDP Growth
Source: International Monetary Fund and Wells Fargo Securities
44
Global Forecast Growth in the global economy likely will grind closer to long term trend
Source: International Monetary Fund and Wells Fargo Securities
(Year-over-Year Percent Change)
GDP CPI2016 2017 2018 2016 2017 2018
Global (PPP Weights) 3.0% 3.2% 3.3% 3.1% 3.3% 3.6%Global (Market Exchange Rates) 2.7% 3.0% 3.1% 3.1% 3.3% 3.6%
Advanced Economies1 1.8% 2.1% 2.3% 0.7% 2.0% 2.0%United States 1.6% 2.1% 2.5% 1.3% 2.5% 2.4%Eurozone 1.7% 1.8% 2.0% 0.2% 1.7% 1.8%United Kingdom 1.8% 1.8% 1.7% 0.7% 2.3% 2.1%Japan 1.0% 1.3% 0.9% -0.1% -0.1% 0.7%Korea 2.8% 2.6% 2.7% 1.0% 2.1% 1.7%Canada 1.4% 2.2% 1.9% 1.4% 1.8% 2.1%
Developing Economies1 4.2% 4.3% 4.3% 5.5% 4.7% 5.3%China 6.7% 6.3% 5.8% 2.0% 1.6% 2.2%India2 7.9% 7.1% 7.2% 5.0% 4.1% 5.5%Mexico 2.3% 1.2% 1.9% 2.8% 5.5% 4.5%Brazil -3.6% 0.7% 1.9% 8.7% 4.7% 5.1%Russia -0.2% 1.5% 2.1% 7.1% 4.2% 4.5%
Forecast as of: April 12, 20171Aggregated Using PPP Weights 2Forecasts Refer to Fiscal Year
Wells Fargo U.S. Economic Forecast
45
Wells Fargo Securities Economics Group
John E. Silvia john.silvia@wellsfargo.com
Global Head of Research, Economics & Strategy Diane Schumaker-Krieg .diane.schumaker@wellsfargo.com Global Head of Research, Economics & Strategy
Chief Economist
Mark Vitner, Senior Economist mark.vitner@wellsfargo.com
Jay H. Bryson, Global Economist jay.bryson@wellsfargo.com Sam Bullard, Senior Economist sam.bullard@wellsfargo.com Nick Bennenbroek, Currency Strategist nicholas.bennenbroek@wellsfargo.com
Anika R. Khan, Senior Economist anika.khan@wellsfargo.com Eugenio J. Alemn, Senior Economist eugenio.j.aleman@wellsfargo.com Azhar Iqbal, Econometrician azhar.iqbal@wellsfargo.com
Tim Quinlan, Senior Economist tim.quinlan@wellsfargo.com Eric J. Viloria, Currency Strategist eric.viloria@wellsfargo.com
Senior Economists Misa Batcheller, Economic Analyst
misa.n.batcheller@wellsfargo.com
Michael Pugliese, Economic Analyst michael.d.pugliese@wellsfargo.com
Julianne Causey, Economic Analyst julianne.causey@wellsfargo.com
E. Harry Pershing, Economic Analyst edward.h.pershing@wellsfargo.com
Economists Sarah House, Economist sarah.house@wellsfargo.com Michael A. Brown, Economist michael.a.brown@wellsfargo.com
Jamie Feik, Economist jamie.feik@wellsfargo.com Erik Nelson, Currency Strategist erik.f.nelson@wellsfargo.com
Economic Analysts
Administrative Assistants
Wells Fargo Securities Economics Group publications are produced by Wells Fargo Securities, LLC, a U.S broker-dealer registered with the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the Securities Investor Protection Corp. Wells Fargo Securities, LLC, distributes these publications directly and through subsidiaries including, but not limited to, Wells Fargo & Company, Wells Fargo Bank N.A., Wells Fargo Advisors, LLC, Wells Fargo Securities International Limited, Wells Fargo Securities Asia Limited and Wells Fargo Securities (Japan) Co. Limited. Wells Fargo Securities, LLC. ("WFS") is registered with the Commodities Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. Wells Fargo Bank, N.A. ("WFBNA") is registered with the Commodities Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. WFS and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this publication. Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities, LLCs research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm which includes, but is not limited to investment banking revenue. The information and opinions herein are for general information use only. Wells Fargo Securities, LLC does not guarantee their accuracy or completeness, nor does Wells Fargo Securities, LLC assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. Wells Fargo Securities, LLC is a separate legal entity and distinct from affiliated banks and is a wholly owned subsidiary of Wells Fargo & Company 2017 Wells Fargo Securities, LLC.
SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE
Important Information for Non-U.S. Recipients
For recipients in the EEA, this report is distributed by Wells Fargo Securities International Limited ("WFSIL"). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority. The content of this report has been approved by WFSIL a regulated person under the Act. For purposes of the U.K. Financial Conduct Authoritys rules, this report constitutes impartial investment research. WFSIL does not deal with retail clients as defined in the Markets in Financial Instruments Directive 2007. The FCA rules made under the Financial Services and Markets Act 2000 for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. This report is not intended for, and should not be relied upon by, retail clients. This document and any other materials accompanying this document (collectively, the "Materials") are provided for general informational purposes only.
Donna LaFleur, Executive Assistant donna.lafleur@wellsfargo.com
Dawne Howes, Administrative Assistant dawne.howes@wellsfargo.com
mailto:john.silvia@wellsfargo.commailto:diane.schumaker@wellsfargo.commailto:mark.vitner@wellsfargo.commailto:jay.bryson@wellsfargo.commailto:sam.bullard@wellsfargo.commailto:nicholas.bennenbroek@wellsfargo.commailto:anika.khan@wellsfargo.commailto:eugenio.j.aleman@wellsfargo.commailto:azhar.iqbal@wellsfargo.commailto:tim.quinlan@wellsfargo.commailto:eric.viloria@wellsfargo.commailto:alex.v.moehring@wellsfargo.commailto:alex.v.moehring@wellsfargo.commailto:julianne.causey@wellsfargo.commailto:edward.h.pershing@wellsfargo.commailto:sarah.house@wellsfargo.commailto:michael.a.brown@wellsfargo.commailto:jamie.feik@wellsfargo.commailto:erik.nelson@wellsfargo.commailto:erik.nelson@wellsfargo.commailto:erik.nelson@wellsfargo.commailto:erik.nelson@wellsfargo.commailto:erik.nelson@wellsfargo.commailto:erik.nelson@wellsfargo.commailto:erik.nelson@wellsfargo.commailto:donna.lafleur@wellsfargo.commailto:dawne.howes@wellsfargo.com
Rates Outlook Central Bank Policy vs. Political Risk Mike Schumacher | Managing Director, Head of Rate Strategy michael.schumacher@wellsfargo.com | 212-214-5043
Please see page 36 for the rating definitions, important disclosures and required analysts certifications. All estimates/forecasts are as of 5/03/17 unless otherwise stated.
Overview
3
Market Themes
Political risk is at the forefront New U.S. administration, Brexit, lots of European elections
Can anyone reliably forecast political events?
Market implication: Vols should find a bid
Gradual shift from monetary to fiscal policy In late 2016, the ECB, Bank of England and the Fed all
became less accommodative
Market implication: Global long rates should diverge over time
Central Bank Policy
5
Major Central Banks Overall Are Likely to Tighten Policy
Bank of England
The U.K. economy has been surprisingly resilient.
Our economics team expects no change in Bank Rate during 2017.
Bank of Japan
The BoJ may persist in keeping the 10yr JGB yield near zero through 2017.
It is promising to overshoot its inflation target of 2%, but we expect inflation to remain below 0.9% in 2017.
ECB
It has begun tapering.
The Governing Council seems to be losing its appetite for negative deposit rates.
Fed
We expect the Fed to hike twice more in 2017.
We look for the Fed to announce balance sheet reductions late this year.
Source: Wells Fargo Securities, Bloomberg L.P.
6
Monetary Policy Comparison: What a Difference a Year Makes?
Source: Federal Reserve Board, IHS Global Insight, Bloomberg LP and Wells Fargo Securities
March 2016 March 2017
FOMC Projected Number of Hikes 4 3 FOMC Projected Inflation (PCE Deflator) 1.6% 1.9%
Unemployment Rate 4.9% 4.5%
Blue Chip Consensus GDP 2.1% 2.3%
S&P 500 Change (Jan 1 April 10) 0.5% 5.7%
7
The March 15 Fed Rate Hike May Have Caused WIRP-lash
The Fed followed an unusual path to its March 15 tightening. The Fed rarely hikes unless the market probability is 60% one month ahead of the FOMC meeting.
The Fed implemented 25 bps hikes on 27 occasions between 1991 and 2016. The Fed violated the 60% rule only three times.
Is the Fed especially concerned about inflation risk, or did it simply seize an opportunity to tighten?
Source: Wells Fargo Securities, Bloomberg L.P.
Market pricing ahead of the 27 meetings at which the FOMC tightened 25 bps, 1991-2016
Implied probability of 25bps hike
Frequency (%) vs. Trading Days Prior to FOMC
Min Max 60 20 10 5 0 40 15 4 11 4 40 60 0 7 4 0 60 80 4 19 4 11 80 81 70 81 85
The Feds Balance Sheet
9
The Feds Balance Sheet
Do not look for another taper tantrum.
We think Treasury yields will be affected much more by funds rate hikes than balance sheet cuts.
The 5s/10s area of the Treasury curve should flatten, not steepen as it did in the taper tantrum. We think 2s/10s also will flatten.
Source: Federal Reserve Bank of New York, Wells Fargo Securities, Bloomberg L.P.
10
If the Fed Continues 100% Reinvestment, Its Treasury Portfolio Will Roll Off Slowly
Treasury note/bond maturities should be about $200 billion this year, then surge.
The SOMA portfolios Treasury holdings are unlikely to fall below $1 trillion until 2021.
Source: Federal Reserve Bank of New York, Wells Fargo Securities, Bloomberg L.P.
Fed SOMA Treasury notes and bonds Actual holdings for Dec 2016, projections for 2017-2021 Projected monthly Treasury maturities
0
90
180
270
360
450
0
500
1000
1500
2000
2500
2017 2018 2019 2020 2021
Mat
urin
g
Bal
ance
Balance Maturing
0
5
10
15
20
25
30
35
40
Jun-17
Jul-17 Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
Jan-18
Feb-18
Mar-18
Apr-18
May-18
11
We Expect Yields to Rise Far Less Due to a Shrinking Balance Sheet Than in the Taper Tantrum
The Fed is buying fewer bonds
In 2013, the Fed bought $45 billion Treasuries per month, and $524 billion in nominal Treasuries for the year
We expect the Fed to purchase fewer than $200 billion nominal Treasuries this year
The duration of the Feds purchases (and holdings) has shortened dramatically
We estimate $122 billion 10yr equivalents this year, versus $548 billion in 2013
Average duration of Treasuries and MBS in Feds SOMA portfolio, 2012-16
Source: Federal Reserve Bank of New York, Wells Fargo Securities, Bloomberg L.P.
0.0
3.0
6.0
9.0
Jan-12 Oct-12 Jul-13 Apr-14 Jan-15 Oct-15 Jul-16
Total SOMA Treasury Agency MBS
12
In the Taper Tantrum, Yields Rose Fastest in Maturities Where the Fed Bought the Most Bonds
5-10yr Treasury yields jumped more than 120bps. The 2yr yield rose more than 30bps, even though the Fed did not include 2s in its purchase program during 2013.
Defining the starting point of the taper tantrum is a little tricky
May 1, 2013 FOMC statement indicates the committee is prepared to increase or reduce the pace of its purchases
May 21, 2013 When appearing before Congress, Chairman Bernanke notes in the next few meetings, we could take a step down in our pace of purchase
Distribution of SOMA Treasury purchases in 2013 and 2016, and yield changes between May 1 and Sep. 5, 2013
Source: Federal Reserve Bank of New York, Wells Fargo Securities, Bloomberg L.P.
0
30
60
90
120
150
0
30
60
90
120
150
180
2yr 3yr 5yr 7yr 10yr 30yr
Yiel
d c
han
ge
duri
ng t
antr
um
(b
ps)
SO
MA p
urc
has
es (
$ b
illio
n)
2016 purch 2013 purch Yield chg
13
In 2016, the Fed Bought More Than 25% of Agency MBS Issued
SOMA Agency MBS purchases in 2016
Source: Federal Reserve Bank of New York, Wells Fargo Securities, Bloomberg L.P.
% of Gross % of Gross30-year Coupon $ Billion Issuance 15-year Coupon $ Billion IssuanceFannie Mae 3.0 83 33 Fannie Mae 2.0 1 11
3.5 41 32 2.5 16 284.0 4 8 3.0 6 28
Freddie Mac 3.0 60 34 Freddie Mac 2.0 0 83.5 29 33 2.5 10 254.0 2 8 3.0 4 30
Ginnie Mae 3.0 79 333.5 49 274.0 3 6
30-year total 349 29 15-year total 38 2430-year + 15-year 387 27
SOMA purchases SOMA purchases
U.S. Yield Curve
15
Another Sign That the Market Anticipates a Tame Fed Cycle: Little Change in Fed Funds/2s
Forwards suggest that the front end will barely steepen at any point this year.
Front end pricing mirrors the 2004 cycle.
Change in 2yr Treasury vs. Fed funds around tightening cycles, 1994, 1999 and 2004 changes versus levels six months before first hike. We assume the current cycle began in December 2016. 6-12 month data points use OIS forwards.
Source: Wells Fargo Securities, Bloomberg L.P.
-50
0
50
100
150
-6.0 -4.1 -2.3 -0.5 1.4 3.2 5.1 6.9 8.7 10.6
Cum
ulat
ive
chan
ge (
bps)
in
Fed
fund
s/2s
Months relative to first rate hike or starting point1994 1999 2004 2016 Forward
16
We Expect Treasury 2s/5s to Flatten
Forwards imply that 2s/5s will flatten only 3bps by year-end, much less than in previous tightening cycles.
Several factors suggest flatteners will prevail:
If U.S. yields generally remain fairly low, investors may feel compelled to extend.
If the Fed becomes considerably more hawkish, then 2yr/3yr yields should jump.
If the U.S. lowers tax rates on repatriated earnings, we look for corporate Treasuries to sell short-term notes.
Risk: Fed shrinks its balance sheet quite aggressively. Change in Treasury 2s/5s around Fed tightening cycles, 1994, 1999 and 2004 changes versus levels six months before first hike.
We assume the current cycle began in December 2016. 3-12 month data points are forwards.
Source: Wells Fargo Securities, Bloomberg L.P.
-150
-100
-50
0
50
-6.0 -4.1 -2.3 -0.5 1.4 3.2 5.1 6.9 8.7 10.6
Cum
ulat
ive
chan
ge (
bps)
in F
ed
fund
s/2s
Months relative to first rate hike or starting point1994 1999 2004 2016 Forward
17
Treasury 5s/10s: Another Wide Gap Between Forwards and Historical Patterns
The 5s/10s flattener looks appealing per our scenario analysis of fed funds / balance sheet
Forwards price 6bps in flattening through December 2017. The historical norm for the first year of a cycle is at least 25bps.
One big risk is that fiscal policy dramatically worsens the budget deficit.
We assume the current cycle began in December 2016. 3-12 month data points are forwards.
Source: Wells Fargo Securities, Bloomberg L.P.
Change in Treasury 5s/10s around Fed tightening cycles, 1994, 1999 and 2004 changes versus levels six months before first hike.
-100
-75
-50
-25
0
25
-6.0 -4.1 -2.3 -0.5 1.4 3.2 5.1 6.9 8.7 10.6
Cum
ulat
ive
chan
ge (
bps)
in F
ed
fund
s/2s
Months relative to first rate hike or starting point1994 1999 2004 2016 Forward
18
Major Fiscal Stimulus Probably Is the Biggest Risk to Curve Flatteners
Treasury 2s/10s was quite steep when the budget was farthest in the red.
The long end also has been steep when the budget deficit is at least 6% of GDP.
Nonetheless, the usual moderate deficit can correspond to vastly different curve shapes. For deficits of 2-4%, 2s/10s has ranged from roughly flat to more than +250bps.
Treasury 2s/10s and 10s/30s versus U.S. budget surplus/deficit, annual data, 1990-2016
Source: Federal Reserve Bank of New York, Wells Fargo Securities, Bloomberg LP.
-50
0
50
100
150
200
250
300
-12 -10 -8 -6 -4 -2 0 2 4
Cur
ve s
lope
(bp
s)
Budget surplus/Deficit (%)10s/30s 2s/10s
Y = 20.26 + 63.70R2 = 0.42
Y = 7.33x + 32.85R2 = 0.43
19
-$2,000
-$1,500
-$1,000
-$500
$0
$500-$500
$0
$500
$1,000
$1,500
$2,000
00 02 04 06 08 10 12 14 16 18
U.S. Budget Deficit vs. Net Treasury IssuanceBillions of Dollars, Right Axis Inverted
Net Issuance Forecast: 2017 @ $612.54B (Left Axis)Deficit Forecast: 2017 @ -$771.43B (Right Axis)
Forecast
We Expect the Fiscal Bump to Boost Treasury Issuance in 2018
The Federal Deficit & Net Treasury Issuance
Composition of Treasury Issuance
Source: U.S. Department of the Treasury and Wells Fargo Securities
-$500
$0
$500
$1,000
$1,500
$2,000
-$500
$0
$500
$1,000
$1,500
$2,000
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
y pBillions of Dollars
Net Interest-Bearing Issuance: 2017 @ $468.4BNet Treasury Bill Issuance: 2017 @ $144.1B
Forecast
Global Rates and Flows
21
G10 Government Bond Yields Have Reconnected Recently
No major market was close to keeping pace when U.S. yields surged late last year.
Since the end of February, developed market 10yr yields have tracked decently.
In our opinion, the recent strong correlation is part of a flight to quality. We think the era of consistently high correlations that prevailed for years after the financial crisis probably has ended.
Changes in 10yr government bond yields, 2016 2017
Source: Wells Fargo Securities, Bloomberg L.P.
-80
-40
0
40
80
Jan 1 2016 - Nov 8 Nov 8 - Dec 30 Dec 30 - Feb 28 Feb 28 to May 5
Yiel
d ch
ange
(bp
s)
Germany Japan U.K. U.S.
22
China and Japan Flows by Asset Class
China and Japan consistently have increased their holdings of U.S. agencies (largely MBS) over the past few years.
Japanese investors were net sellers of foreign bonds in the first two weeks of the new fiscal year.
Annual flows by asset class
Source: US Treasury, Wells Fargo Securities, Bloomberg L.P.
Through Feb 2017US Treasury US US Corp US Foreign Foreign
Country Securities Notes/Bonds Agencies Bonds Stocks Bonds Stocks2014
China 218 186 26 1 -2 7 0Japan 6 11 0 -11 -9 17 -1
2015China -6 -22 19 0 -5 5 -3Japan -33 -97 31 0 9 21 2
2016China -130 -155 23 1 -4 6 -1Japan 86 -70 92 11 9 31 14
2017China 16 3 13 0 0 0 0Japan -8 -6 0 -1 0 0 -1
23
China: Capital Flows May Offer a Link to Treasury Markets
These data imply that Chinese investors could revert to selling UST in the next few months.
China became a fairly consistent net seller of Treasuries about 9-12 months after it started to experience steady capital outflows in 2014.
Chinas estimated capital flows, 3-mo totals, 2009-2017
Source: Bloomberg L.P, Wells Fargo Securities
-150
-125
-100
-75
-50
-25
0
25
50
75
-400
-300
-200
-100
0
100
200
Aug-
09
Jan-
10
Jun-
10
Nov
-10
Apr-
11
Sep-
11
Feb-
12
Jul-1
2
Dec-
12
May
-13
Oct
-13
Mar
-14
Aug-
14
Jan-
15
Jun-
15
Nov
-15
Apr-
16
Sep-
16
Feb-
17
3mo
chan
ge in
Hol
ding
s $ b
il
est c
apita
l flo
ws $
bil
est cap flows (3-mo total)
3 mo TSY flow
24
Big Shift by Japanese Bond Investors Beginning in Late 2016
Out with the old favorites, U.S. and France.
U.S.: Japanese investors reduced their bond holdings in the fourth quarter of 2016, and again in Jan/Feb 2017.
France: holdings fell sharply in Feb. 2017.
Still wary of the U.K.
Germany has become popular. Increased this position during Q4 2016 and early 2017.
Japan net foreign bond purchases by country/region, JPY billion
Source: Japan Ministry of Finance, Wells Fargo Securities, Bloomberg L.P.
Begin Jan-14 Jan-15 Jan-16 Apr-16 Oct-16 Jan-16 1-Jan-17End Dec-14 Dec-15 Mar-16 Sep-16 Dec-16 Dec-16 28-Feb-17
Total 4,516 16,451 9,860 15,391 440 25,691 -3,376US 2,714 15,296 5,957 10,865 -1,296 15,526 -1,891France 2,792 308 1,712 1,972 146 3,830 -1,615Canada 437 450 409 808 95 1,312 28Central & South America 1,809 661 426 -157 549 818 -157Australia 561 579 87 362 315 764 106UK 246 -575 122 501 -115 508 -272Asia 856 760 167 99 136 402 30Netherlands -615 -742 113 -149 240 204 -16Eastern Europe -49 98 -33 8 -18 -42 60Germany -3,553 -1,920 -40 -699 179 -559 720
Swaps and Vol
26
Will Interest Rate Vol Ever Find a Bid ?
Swaption vol has fallen dramatically this year. For many structures, vols are near multi-year lows
Low delivered realized vol explains a portion of the move. Once again, portfolio managers seem torn between deploying cash now, and hoping that yields/spreads will improve in a month or two.
USD swaption volatility, last 12 months
Source: Wells Fargo Securities, Bloomberg L.P.
55
65
75
85
95
5-May-16 5-Jul-16 5-Sep-16 5-Nov-16 5-Jan-17 5-Mar-17 5-May-17
Impl
ied
vol (
bps)
1y10y 3m5y
27
U.S. Yields Have Been Choppy Recently, While Still Inhabiting Normal to Narrow Ranges
Our take is that a major directional move probably will require one of these catalysts:
Sustained shift in Fed policy;
Fiscal policy. Republicans successfully enact stimulative measures, or the plans fail;
European election surprise. U.K. vote takes an odd turn, or Angela Merkel is defeated in Germany.
The daily political to and fro seems to be driving local vol
Treasury yield 40-day ranges, 2015-17
Source: Wells Fargo Securities, Bloomberg L.P.
0
25
50
75
100
30-Jun-15 30-Sep-15 31-Dec-15 31-Mar-16 30-Jun-16 30-Sep-16 31-Dec-16 31-Mar-17
Ran
ge (
bps)
2yr 10yr 30yr
28
U.S. Swap Spreads versus Three-Month LIBOR and General Collateral Repo
2yr and 10yr swap spreads have tracked LIBOR GC repo pretty well (good?) this year. However, they did disconnect toward the end of April.
In 2016, the 2yr swap spread tracked LIBOR GC repo, but the 10yr spread diverged.
3mo LIBOR GC repo, US 2yr and 10yr swap spreads, 2015 - 17
Source: Wells Fargo Securities, Bloomberg L.P.
-30
-20
-10
0
10
20
30
40
50
Jan-15Mar-15May-15 Jul-15 Sep-15Nov-15 Jan-16 Mar-16May-16 Jul-16 Sep-16Nov-16 Jan-17Mar-17May-17
Spr
ead
(bp)
LIBOR - GC 3m Swap 2y Swap 10y
29
USD Swap Spreads Have Diverged from Equities in March-May after Tracking Closely for a While
USD 10yr swap spread versus SPX, 2016-2017 Spread widening early in
2017 confounded conventional seasonal norms Heavy issuance usually
leads to narrower spreads Asset-liability managers may
be partly responsible for spread widening Insurers: big post-election
equity rally boosted surplus buffers for variable annuities
Corporate pensions: may look to monetize hedges before yields rise
These factors suggest diminished need to hedge in swaps and swaptions
Source: Wells Fargo Securities, Bloomberg L.P.
y = 0.001x - 15.294R = 0.001-20
-15
-10
-5
0
1,800 2,000 2,200 2,400
10yr
swap
spre
ad (b
ps)
S & P 500
Jan - Oct 2016 Nov-Dec 16
Jan-17 Feb-17
Mar-17 Apr-May 17
30
USD 3mo LIBOR Seems Very Low versus 1mo LIBOR
The spread has narrowed substantially as banks shift their funding mix in response to money market reform Overseas issues Repo
We think it will increase notably in the next 3-6 months.
LIBOR basis and 2yr swap spread, May 2016 May 2017
Source: Wells Fargo Securities, Bloomberg L.P.
0
10
20
30
40
May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17
bp
1m vs 3m (1y tenor) 3m vs 6m (1y tenor) 2y swap spread
c
cc
8.9
16.3
Appendix
32
Balance Sheet Reduction Could top $100 Billion 10-Year Treasury Equivalents in 2018
We expect Treasury to auction about $250 billion 10-year notes in 2017. If the Fed moves aggressively, its reductions could equate to more than 50% of a full years supply of 10s in 2018.
The SOMA portfolio holds over $400 billion in Treasuries that mature next year.
Projected change in 10yr Treasury equivalents for various balance sheet reduction strategies
Source: Federal Reserve Board, Wells Fargo Securities, Bloomberg L.P.
Reinvestment % scenarioBeginning Slow Moderate Aggressive
Apr-17 100 100 100Sep-17 100 100 75Dec-17 100 100 50Jun-18 100 75 25Dec-18 75 50 0Jun-19 50 25 0
Annual % reinvestment2017 100 100 922018 99 85 352019 61 36 0
Balance sheet reduction in 10yr Treasury equivalents2017 0 0 92018 3 36 1562019 85 140 219
33
Quite a Few FOMC Members Expect the Fed Funds Rate to Reach 3.00% in 2019
Appropriate Pace of Policy Firming
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
Target Federal Funds Rate at Year-End
March 2017 Median ResponseDecember 2016 Median Response
2017 Longer Run2018 2019
Source: Federal Reserve Board, Bloomberg LP and Wells Fargo Securities
34
U.S. Interest Rate Outlook
Wells Fargo U.S. Interest Rate Forecast
Source: Federal Reserve Board and Wells Fargo Securities
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4QQuarter End Interest Rates
Federal Funds Target Rate 0.50 0.50 0.50 0.75 1.00 1.25 1.50 1.50 1.50 1.75 2.00 2.253 Month LIBOR 0.63 0.65 0.85 1.00 1.15 1.50 1.75 1.75 1.75 2.00 2.25 2.50Prime Rate 3.50 3.50 3.50 3.75 4.00 4.25 4.50 4.50 4.50 4.75 5.00 5.25Conventional Mortgage Rate 3.69 3.57 3.46 4.20 4.20 4.29 4.45 4.46 4.47 4.48 4.55 4.623 Month Bill 0.21 0.26 0.29 0.51 0.76 1.02 1.30 1.40 1.45 1.50 1.75 2.026 Month Bill 0.39 0.36 0.45 0.62 0.91 1.19 1.45 1.56 1.60 1.66 1.92 2.181 Year Bill 0.59 0.45 0.59 0.85 1.03 1.35 1.65 1.80 1.85 1.90 2.10 2.312 Year Note 0.73 0.58 0.77 1.20 1.27 1.75 2.05 2.15 2.20 2.26 2.41 2.565 Year Note 1.21 1.01 1.14 1.93 1.93 2.10 2.40 2.46 2.49 2.52 2.66 2.8010 Year Note 1.78 1.49 1.60 2.45 2.40 2.55 2.72 2.75 2.76 2.78 2.86 2.9430 Year Bond 2.61 2.30 2.32 3.06 3.02 3.18 3.44 3.54 3.56 3.58 3.67 3.76
Forecast as of: April 12, 2017
2016 2017
2018ForecastActual
35
Performance of Wells Fargo Rate Strategy Trade Recommendations
Trade suggestions since Oct 2015, when we began publishing the Rates Explorer.
3-May-17 Total Up Down Hit Rate (%)Open 5 3 2 60Closed 22 14 8 64Total 27 17 10 63
3-May-17Open 5/3/2017 13:21 Trade Level Gain /Type Curve area or Sector Market Position Par Date Units Initial Current Loss Target Stop Loss Initial CurrentVol Gamma US Hedge near-term political volatility Equal notional 2-Feb-17 bp 41 0 -41 121 60 2.47 2.29Inflation Intermediate/Long US 5/30 breakeven steepener Risk weight 20-Mar-17 bp 9 24 17 27 0 2.50 2.29Inflation Intermediate US Switch to the "New" 5y Sector via Jan-2022 Risk weight 3-Apr-17 bp 22 17 6 27 0 2.32 2.29Rate curve intermediate US Treasury 5s/10s flattener Dur weight 19-Apr-17 bp 47 47 0 7 67 1.84 2.29Rate curve front US Spreads, 1mo/3mo LIBOR basis widener, 1y1y tenor Outrigh 19-Apr-17 bp 10 9 -1 18 5 2.21 2.29
Closed Trade Level Gain / CloseType Curve area Market Position Par Date Units Initial Closed Loss Date Initial @ closeRate curve front US Steepener. 6mo forward 1s/2s 100 29-Oct-15 bp 29 28 -1 4-Jan-16 2.17 2.21Rate curve long end US Flattener. Long 2.5 2/45 vs. 2.0 8/25 Dur weight 29-Oct-15 bp 81 85 -4 4-Feb-16 2.17 1.85Vol US Vol surface flattener. Long 6m2y, short 6m10y 100 20-Nov-15 bp 11 19 -8 9-Feb-16 2.26 1.71Relative value US Relative value. Long 3y versus 2y and 5y Dur weight 21-Dec-15 bp -7 -18 12 9-Feb-16 2.19 1.71Vol US Payer spread. 6m3y, ATM vs. 50bp OTM $673 million 20-Jan-16 $mln 2.99 2.00 -0.99 9-Feb-16 2.19 1.71Relative value US Curve/Relative value. Short 5y versus long 2y and 10 Dur weight 29-Feb-16 bp -8 -3 5 24-Mar-16 1.73 1.88Vol US Tail Risk/Vol - Brexit hedge Equal notional 14-Mar-16 bp 128 133 5 4-Apr-16 1.95 1.76Inflation US Inflation. Long 50% 5y Bei vs 100% 5/10 RY flattener Risk weight 21-Jan-16 bp 0 50 50 21-Apr-16 2.03 1.88Rate curve front US Front end steepener. EDM6 vs. EDM7 Equal notional 9-Feb-16 bp 12 28 16 19-Apr-16 1.71 1.79Vol US Buy gamma. 6m10y at the money straddle 100 19-Apr-16 bp 432 450 18 24-Jun-16 1.79 1.50Vol US Vol. Buy fwd vol: 6mo fwd 2y5y option DV01-weighted 23-Feb-16 bp 275 307 32 24-Jun-16 1.79 1.50Vol US Buy 6m2y ATM/-25 Receiver Spread 100 10-May-16 bp 19 20 1 18-Jul-16 1.75 1.56Rate curve intermediate US Flattener. Long 2.25 11/25 vs. 1.25 12/18 Dur weight 4-Jan-16 bp 94 81 13 9-Sep-16 2.17 1.68Inflation US Inflation, 5/10 breakeven steepener Dur weight 30-Jun-16 bp 5 6 1 28-Sep-16 1.47 1.54Relative value US Basis, short 2y Treasury/OIS in Dec-2018 Risk weight 28-Sep-16 bp 18 20 -2 26-Oct-16 1.54 1.79Rate curve long end US Treasury 10s/30s steepener Dur weight 9-Nov-16 bp 81 68 -13 18-Nov-16 1.84 2.35Rate curve front US Spreads, 1-mo/3-mo LIBOR basis widener, 1-yr teno Outright 9-Sep-16 bp 23 24 1 22-Nov-16 1.67 2.31Rate curve front US Front end steepener. EDZ6 vs. EDZ7 Equal notional 19-Apr-16 bp 24 46 22 13-Dec-16 1.79 2.47Rate curve front US Steepener. Long 0.75 4/18 vs. 0.875 4/19 Dur weight 2-May-16 bp 14 18 4 3-Apr-17 1.87 2.34Inflation US Inflation, TIPS Rel Value. Switch to 7/25 from 1/26 Dur weight 23-May-16 bp -3 -7 4 3-Apr-17 1.84 2.34Relative value US Long "Fed convexity". Buy US 1y2y, 3y3, sell 1y5y Risk weight 2-Jun-16 bp 134 120 -14 3-Apr-17 1.81 2.34Rate curve intermediate US Treasury 3s/10s flattener Dur weight 9-Nov-16 bp 90 90 0 19-Apr-17 1.84 2.21
Level 10yr Treasury
10yr Treasury
Source: Wells Fargo Securities, Bloomberg L.P.
36
Disclosure Appendix
Additional information is available on request.
Analysts Certification
The research analyst(s) principally responsible for the report certifies to the following: all views expressed in this research report accurately reflect the analysts personal views about any and all of the subject securities or issuers discussed; and no part of the research analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the research analyst(s) in this research report.
Important Disclosures Relating to Conflicts of Interest and Potential Conflicts of Interest
Wells Fargo Securities does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities research analysts receive compensation that is based on and affected by the overall profitability of their respective department and the firm, which includes, but is not limited to, investment banking revenue. Wells Fargo Securities may sell or buy the subject securities to/from customers on a principal basis or act as a liquidity provider in such securities.
Wells Fargo Securities Fixed Income Research analysts interact with the firms trading and sales personnel in the ordinary course of business. The firm trades or may trade as a principal in the securities or related derivatives mentioned herein. The firms interests may conflict with the interests of investors in those instruments.
About Wells Fargo Securities
Wells Fargo Securities is the global brand name for the capital markets and investment banking services of Wells Fargo & Company and its subsidiaries, including but not limited to Wells Fargo Securities, LLC, a U.S. broker-dealer registered with the U.S. Securities and Exchange Commission and a member of NYSE, FINRA, NFA and SIPC, Wells Fargo Prime Services, LLC, a member of FINRA, NFA and SIPC, Wells Fargo Bank, N.A., Wells Fargo Securities Asia Limited, a Hong Kong Incorporated investment firm licensed and regulated by the Securities and Futures Commission to carry Types 1, 4, 6 and 9 regulated activities and Wells Fargo Securities International Limited, a U.K. entity investment firm authorized and regulated by the Financial Conduct Authority. The Wells Fargo Securities legal entity that takes responsibility for the production of the Product is the legal entity which the first named author is employed by. Non-US analysts may not be associated persons of Wells Fargo Securities, LLC. and therefore may not be subject to FINRA Rule 2242 restrictions on communications with subject company, public appearances and trading securities by the analysts, but will be subject to their own local regulatory requirements.
Notice to U.S. Investors
Unless prohibited by the provisions of Regulation S of the 1933 Act, this material is distributed in the U.S., by Wells Fargo Securities, LLC, which takes responsibility for its contents in accordance with the provisions of Rule 15a-6 and the guidance thereunder, under the U.S. Securities Exchange Act of 1934. Any transactions in securities identified herein may be effected only with or through Wells Fargo Securities, LLC.
Important Information for Non-U.S. Clients
EEA
The securities and related financial instruments described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. For recipients in the EEA, Wells Fargo Securities International Limited (WFSIL) disseminates Research which has been approved for the purposes of Section 21 of the Financial Services and Markets Act 2000 (the Act). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority. For the purposes of Section 21 of the Act, WFSIL does not deal with retail clients. The FCA rules made under the Financial Services and Markets Act 2000 for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. This report is not intended for, and should not be relied upon by, retail clients.
37
Disclosure Appendix (contd)
Australia
Each of Wells Fargo Securities, LLC, Wells Fargo Securities Asia Limited and Wells Fargo Securities International Limited is exempt from the requirements to hold an Australian financial services license in respect of the financial services it provides to wholesale clients in Australia. Wells Fargo Securities, LLC is regulated under U.S. laws, Wells Fargo Securities Asia Limited is regulated under Hong Kong law, and Wells Fargo Securities International Limited is regulated under U.K. law, all of which differ from Australian laws. Any offer or documentation provided to Australian recipients by Wells Fargo Securities in the course of providing the financial services will be prepared in accordance with the laws of the United States, Hong Kong or U.K. and not Australian laws.
Hong Kong
This report is issued and distributed in Hong Kong by Wells Fargo Securities Asia Limited (WFSAL), a Hong Kong incorporated investment firm licensed and regulated by the Securities and Futures Commission ("SFC") to carry on types 1, 4, 6 and 9 regulated activities (as defined in the Securities and Futures Ordinance (Cap. 571 of The Laws of Hong Kong), the SFO). This report is not intended for, and should not be relied on by, any person other than professional investors (as defined in the SFO). Any securities and related financial instruments described herein are not intended for sale, nor will be sold, to any person other than professional investors (as defined in the SFO). The author or authors of this report may or may not be licensed by the SFC. Professional investors who receive this report should direct any queries regarding its contents to Mark Jones at WFSAL (email: wfsalresearch@wellsfargo.com ).
Japan
This report is distributed in Japan by Wells Fargo Securities (Japan) Co., Ltd, registered with the Kanto Local Finance Bureau to conduct broking and dealing of type 1 and type 2 financial instruments and agency or intermediary service for entry into investment advisory or discretionary investment contracts. This report is intended for distribution only to professional investors (Tokutei Toushika) and is not intended for, and should not be relied upon by, ordinary customers (Ippan Toushika). The ratings stated on the document are not provided by rating agencies registered with the Financial Services Agency of Japan (JFSA) but by group companies of JFSA-registered rating agencies. These group companies may include Moodys Investors Services Inc, Standard & Poors Rating Services and/or Fitch Ratings. Any decisions to invest in securities or transactions should be made after reviewing policies and methodologies used for assigning credit ratings and assumptions, significance and limitations of the credit ratings stated on the respective rating agencies websites.
Published reports and additional disclosure information are available at www.wellsfargoresearch.com.
This report is for your information only and is not an offer to sell, or a solicitation of an offer to buy, the securities or instruments named or described in this report. Interested parties are advised to contact the Wells Fargo entity in their local jurisdiction with which they deal, or the entity that provided this report to them, if they desire further information or if they wish to effect transactions in the security discussed in this report. The information in this report has been obtained or derived from sources believed by Wells Fargo Securities, to be reliable, but Wells Fargo Securities does not represent that this information is accurate or complete. Certain text, images, graphics, screenshots and audio or video clips included in this report are protected by copyright law and owned by third parties (collectively, Third Party Content). Third Party Content is made available to clients by Wells Fargo under license or otherwise in accordance with applicable law. Any use or publication of Third Party Content included in this report for purposes other than fair use requires permission from the copyright owner. Certain website links included in this publication are not maintained, controlled or operated by Wells Fargo Securities. Wells Fargo Securities does not provide the products and services on these external websites and the views expressed on these websites do not necessarily represent those of Wells Fargo Securities. Please review the applicable privacy and security policies and terms and conditions for the website you are visiting. Credit Strategists focus on investment themes across the credit markets and sectors. Any discussion within a Credit Strategy report of specific securities is not intended to provide a fundamental analysis of any individual company described therein. The information provided in Credit Strategy reports is subject to change without notice, and investors should not expect continuing information or additional reports relating to any security described therein. Any opinions or estimates contained in this report represent the judgment of Wells Fargo Securities at this time, and are subject to change without notice. For the purposes of the U.K. Financial Conduct Authority's rules, this report constitutes impartial investment and substantive research. Each of Wells Fargo Securities, LLC, and Wells Fargo Securities International Limited is a separate legal entity and distinct from affiliated banks. Copyright 2017 Wells Fargo Securities, LLC.
This report was prepared by Wells Fargo Securities, LLC.
2017 Financial Institutions Balance Sheet Strategy Conference Bank Regulatory Update
2
Timeline of the Great Recession and U.S. Intervention
Real GDP growth, quarterly
"Our capital position at the moment is strong. - Former Lehman Brothers CFO Ian Lowitt, five days before the firm filed for bankruptcy
Source: U.S. Treasury.
0.5%
3.6%3.0%
1.7%
-1.8%
1.3%
-3.7%
-8.9%
-6.7%
-0.7%
1.7%
3.8%Feb. 2009
Financial Stability Plan announced Recovery Act signed
Housing programs announced
Dec. 12, 2007Fed establishes first liquidity facility and
currency swap lines with other central banks
Mar. 2008Bear Stearns collapses
Jul. 7, 2008FDIC intervenes in
IndyMac Bank
Oct. 3, 2008TARP financial stabilization package enacted
Jan. 2Q 2009President Obama
takes office
2007 2008 2009Mar. 3, 2009
TALF program launched to help revive credit markets
Mar. 23, 2009PPIP program announced to help revive mortgage financial market
Sept. 2008Fannie Mae and Freddie Mac
conservatorship Lehman Brothers bankruptcy AIG stabilization effort
3
Primary Drivers of Bank Failures: Insufficient Capital and Liquidity
Cash, Cash Equivalents, and Treasuries as % of Total Assets
As evidenced by a continuing stream of scholarship, many factors contributed to the unsustainability and fragility of the pre-crisis financial system. But the inadequacy of regulation and supervision was clearly among them. Large banking firms had insufficient levels of high-quality capital; excessive amounts of short-term, wholesale funding; too few high-quality, liquid assets; and inadequate risk measurement and management systems. Former Federal Reserve Governor Daniel Tarullo (12/02/16)
Tangible Common Equity / Tangible Assets
Source: SNL Financial.
22.8% 22.8% 22.8% 22.9%
7.0% 7.7% 5.6% 5.2%
16.6% 15.9% 16.2% 16.1%
2005 2006 2007 2008
U.S. Banks $50bn
7.9% 8.0% 7.9%7.3%
6.9% 7.2%7.6%
6.9%
4.9% 4.7%4.1%
3.5%
2005 2006 2007 2008
U.S. Banks $50bn
4
Bank
Recommended