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March 9, 2017

Tighten up

• Expectations for US fiscal policy and ongoing central bank asset purchases have pushed valuations higher in many fixed income markets. Spreads in global corporate credit and emerging market debt has tightened significantly over the last 12 months, with some sectors approaching their 2014 post-crisis lows.

• Though near the highs of the year, long-dated US Treasury yields have been largely range-bound since December. Our base-case view remains that US tax cuts and regulatory actions will boost growth and inflation, with UST yields moving higher. Though not likely until we see confirmation of actual policy.

• Recent ECB announcement suggests rate volatility in the Eurozone will rise, as tapering and the declining need for stimulus is discounted. Political risks are also expected to build, especially as we move closer to the April 23 French presidential election.

• Short-term US rates are likely to remain under pressure. Following a series of hawkish FOMC member speeches Fed futures have repriced and imply a 100% probability for a rate hike on March 15, with 2-year yields reaching their highest levels since 2009. We continue to favor hedging floating-rate liabilities and look for opportunities in US high yield variable-rate bank loans.

Figure 1. Long term market performance views1 Figure 2. Market performance, year-to-date (local currency, %)

Source: Citi Private Bank as of March 9, 2017. 1) Long-term views are meant to express our confidence in the asset classes performance versus a relative benchmark over the next 12 to 18 months. Outperform implies a positive view, while underperform implies a negative view. A neutral view implies our confidence is neither positive nor negative.

Source: Bloomberg Barclays Indices; Merrill Lynch as of March 9, 2017. Light blue indicates total return on benchmark indices. Dark blue indicates total return on sub-indices. Past performance is no guarantee of future results.

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Kris Xippolitos Head of Global Fixed Income Strategy +1-212-559-1277 kris.xippolitos@citi.com

Joseph Kaplan Fixed Income Strategy +1-212-559-3772 joseph.kaplan@citi.com

Bond Market Monthly March 9, 2017 2

Market performance views and recommendations1

Sectors Long-term view2 Focus recommendations

Developed market (DM) core sovereigns Underperform

US Treasury rates to remain range-bound as markets await confirmation of potential fiscal policy; We remain neutral UK on Brexit uncertainty; Underweight

low yielding core Eurozone (EZ) sovereigns and Japan

EU periphery sovereigns3 Underperform Remain underweight EZ periphery on heightened political risk, most notably in France and Italy where spreads (to German Bunds) are likely to remain volatile

Emerging market debt External Outperform The relative value proposition remains compelling, especially in Latin America and

certain parts of Asia. We favor Brazil corporates in energy and materials, Argentina sovereigns and quasi sovereigns, local Indonesia and India government debt Local Outperform

Inflation-linked debt Outperform Though base-effects from oil may fade, breakevens can potentially widen further. Still favor US TIPS vs nominal UST. Prefer UK-linkers vs. Gilts as a hedge against

higher post-Brexit inflation

Mortgage-related debt Neutral Remain constructive on non-agency RMBS though the pace of home price

appreciation has slowed; Yields still compelling and may offer portfolio diversification

High grade corporate bonds Neutral Valuations have become less compelling, though still offer relative value versus other high-quality assets; Favor energy, construction materials and bank sub debt

High yield bonds/loans Outperform Would consider reducing significant overweights in HY bonds; though

fundamentals are solid and relative value exists; Variable-rate bank loans offer better relative value, as yields vs. HY bonds have compressed

Hybrid debt securities4 Neutral Techinicals are dominant, though market is currently susceptible to pull-backs; Would reduce overweights; Favor US fixed-to-floating rate structures

Municipal bonds Outperform Valuations remain relatively attractive and technicals are supportive; Value in 15-20yr maturities though we favor barbell strategies to help mitigate rate volatility

Source: Citi Private Bank Global Fixed Income Strategy as of March 9, 2017. 1) Views are in the context of a fixed-income only portfolio, 2) Long-term views are meant to express our confidence in the asset classes performance versus a relative benchmark over the next 12 to 18 months. Outperform implies a positive view, while underperform implies a negative view. A neutral view implies our confidence is neither positive nor negative, 3) Ireland, Italy, Portugal, and Spain. 4) Hybrids are securities that generally combine both debt and equity characteristics, and can include preferred stock, fixed-to-floating rate bonds or other convertible debt.

Figure 3. Global fixed income and select equity index returns, year-to-date (local currency, %)

Source: Bloomberg Barclays Indices, Merrill Lynch as of March 9, 2017. Light blue indicates an equity index. **Global Agg Index is benchmark global fixed income index. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.

Past performance is no guarantee of future results

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Bond Market Monthly March 9, 2017 3

Asset class update – Developed market rates

Figure 4. Long US yields have remained stable since December Figure 5. Global uncertainties keep long-term US rates well-bid

Source: The Yield Book as of March 8, 2017. Source: The Yield Book as of March 8, 2017.

Past performance is no guarantee of future results.

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US interest rates • On February 28, President Trump’s joint address to Congress reminded markets of his big spending promises,

including tax reform and a $1 trillion infrastructure program. This helped bring long-term US Treasury (UST) rates back toward the highs for the year. Still, uncertainties over the size and timing of these promises (as well, as other foreign political risks) have essentially kept long-dated UST yields range-bound since last November’s US elections (Fig. 4). Our base-case view remains that US tax cuts (corporate and individual) and regulatory actions will boost growth and inflation, with Treasury yields moving higher. Though we reiterate, without any confirmation of actual policy, its unlikely long-dated yields can rise meaningfully from current levels.

• On the other hand, short-term US rates are likely to remain under pressure. Following a series of hawkish FOMC member speeches (including Chair Yellen), Fed Futures have significantly repriced and now imply a 100% probability for a rate hike on March 15 (from 25% last month). This has fueled the UST yield curve to flatten, with 2-year yields reaching their highest levels since June 2009. In our view, we expect this dynamic to persist as markets discount additional rate hikes later this year.

• 3-month LIBOR has now reached 1.1%, a rise of 50bp over the last 12 months. Though the impacts on US dollar funding from money-market reforms are now behind us, LIBOR is expected to rise further, along with higher Fed Funds. Citi economists project 3-month LIBOR to reach 1.5% by the end of 2017, though risks are building which could push levels even higher. As such, we continue to recommend hedging floating-rate liabilities.

• Yield curve: In normal US economic cycles, stronger growth and higher inflation typically translates to a steeper UST curve, followed by tighter Fed policy. Today, tighter policy is occurring while growth and inflation prospects are improving. Though the curve has steepened some over the last 6 months, the removal of monetary accommodation should detract from potential growth, pushing the curve flatter over time. Similar to how the US yield curve has behaved in every tightening cycle in our history.

• This does not mean certain parts of the UST curve can’t move independent to this view. For example, since last August the difference between 2-year and 10-year Treasury yields widened (or steepened), as potential Trump policies provoked markets to discount higher inflation. On the other hand, the spread between 10 and 30-year Treasury yields narrowed (or flattened), as political risks and foreign demand kept long-rates relatively well-bid (Fig. 5). These divergent reactions can create tactical opportunities. Indeed, long-end steepeners could benefit from any follow through on the possible issuance of ultra-long term US debt.

• US TIPS: Since eclipsing 200 basis points last December, 10-year US TIPS (Treasury Inflation Protected Securities) breakeven spreads have largely moved sideways. Still, TIPS have outperformed UST by 75bp year-to-date (YTD) as headline CPI continues to rise. We expect headline inflation to rise further in coming months, as base-effects from rising oil prices peak. Though TIPS valuations appear fully valued, breakevens could widen more and we’d expect further outperformance versus nominal UST. Though base-effects should fade, we also like TIPS as a hedge against potential US trade disruption. In some scenarios, trade disruption could result in higher domestic inflation and lower growth.

Bond Market Monthly March 9, 2017 4

Asset class update – Developed market rates

Figure 6. Markets are not pricing in EZ break-up risk Figure 7. UK Gilt spreads to UST could widen further

Source: Haver Analytics as of March 8, 2017. Source: Haver Analytics as of March 8, 2017. Past performance is no guarantee of future results

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European and UK rates • Eurozone rates: Despite higher yield levels, we remain underweight Eurozone (EZ) rate markets. Economic

data has improved some, though the region remains encapsulated by political risks (i.e., France, Italy), re-emerging debt sustainability issues (i.e., Greece), and a central bank bond purchase program that’s moving closer to its end. Indeed, the recent March 9 ECB policy announcement implied further stimulus was less likely, as economic projections were modestly revised higher. EZ sovereigns have now lost 2.0% YTD, with maturities 20+ years falling 6.0%.

• Though the eventual end of ECB QE will be debated more frequently over the coming quarters, monthly bond purchases should suppress yields. The removal of purchase limitations on bonds below the ECB’s deposit rate has steepened yield curves and pushed short-term rates deeper into negative territory. As such, 2-year German Bunds reached a historic low of -95 basis points in late February, while 1-year Italian sovereigns now yield -0.25%. Even France, the worst performing EZ country this year, has benefitted. Short-term maturities have declined a modest 50bp this year, while 30-year French government bonds have fallen a more severe 5.6%.

• As a result of ECB QE, the net supply of EZ government bonds remains negative. That said, a significant technical market driver is expected to be challenged later this year, as the pace of ECB purchases is set to decline. Starting in April, the ECB will lower their monthly purchases to €60 billion, from €80 billion (See December 8 European Strategy bulletin). Issuer limits under the program could coerce the central bank to taper even further next year or possibly sooner. This would push periphery spreads wider and flatten yield curves as negative yielding bonds lose a significant indiscriminate buyer. The ECB may already be close to issuer limits in some countries. Indeed, Portugal has seen their monthly purchases of government bonds decline 30% over the last few months and may only be a few billion euros below the ECB’s 33% issuer limit threshold.

• In France, polling updates and headlines over scandals have driven recently spread volatility. Still, our base-case is for National Front leader Marine Le Pen to win the first round of elections on April 23, and lose in the second round to Emmanuel Macron on May 7. Of course, as we’ve learned in the UK and US, polls can be misguiding. Though EZ sovereign spreads (to Bunds) have widened, current valuations are not priced for a re-emergence of Eurozone break-up concerns, unlike 2011 (Fig. 6).

• UK rates: We maintain our neutral duration view, despite some improvements in the projected future net issuance of Gilts. Overfunding in the 2016-2017 fiscal year could allow the Bank of England to carry forward funds and reduce issuance for 2017-2018. Citi economists project the possibility that net issuance could be as low as £30 billion, the lowest issuance for Gilts since 2007-2008. While this is supportive for Gilt yields, we note that the Bank of England has also concluded buying Gilts in their latest QE program (though still buying sterling non-financial corporates, and reinvesting proceeds from maturing Gilt assets).

• According to CPB’s European strategist Jeffrey Sacks, we expect the UK government to trigger Article 50 of the Lisbon Treaty later this month. This will initiate the UK’s two-year exit process from the European Union. In our view, it’s still too early to have strong directional convictions on Gilt yields. Though yield spreads versus UST have reached all-time highs, it’s quite possible to see this gap widen further (Fig. 7). With uncertainties over trade agreements to persist and increasing support regarding amendments granting parliament Brexit veto power, volatility should become more frequent. As such, tactical opportunities are likely to arise.

Bond Market Monthly March 9, 2017 5

Asset class update – Emerging markets

Figure 8. EM yields one standard deviation below their average Figure 9. Despite higher valuations, EM debt still offers value

Source: Bloomberg Barclays Indices as of March 8, 2017. Source: The Yield Book, Bloomberg Barclays Indices as of March 8, 2017.

Past performance is no guarantee of future results

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Emerging markets • Emerging fixed income markets continue to improve, both in external and US dollar (USD) denominated debt,

as the majority of regions/countries shake-off the post-US election sell off. Though recent oil price weakness has pushed up volatility, stronger commodity prices, improvements in current accounts and a lower reliance on US dollar financing have helped many EM countries become more resilient to global shocks.

• According to EPFR data, foreign flows have now been positive for eight straight weeks, as investors remain comfortable adding risk. This has helped push USD EM spreads tighter, with sovereigns and corporates now roughly 10bp from their respective 2010 post-crisis lows. As such, USD EM sovereigns have gained 3.0% this year, with local EM markets generating 4.4% returns (in unhedged USD terms).

• We remain overweight, though the fundamental value across the EM universe has been squeezed. Not only has spreads (to UST) collapsed by 170bp over the last 12 months, index yields are now one-full standard deviation below their long-term average (Fig. 8). Local markets offer more attractive yield opportunities, though investors may need to navigate periods of higher FX volatility. Still, when compared to other global fixed income markets, EM bonds still offer attractive relative value (Fig. 9).

• In our view, a large risk to EM debt markets would be the implementation of a “Border Adjustment Tax” (BAT). In the event of a border tax, EMFX can be pushed weaker (as the US dollar strengthens) and dollar spreads would widen. That said, in February’s Quadrant, we argue the disruptions from elements of the current proposal make it unlikely to be passed without significant adjustment.

• Latin America region: The best performing EM region. LatAm USD sovereigns have gained 4.1% YTD, as spreads fully retrace the post-US election widening. Local markets have gained over 8.0%. We maintain our high conviction in local Brazilian debt (+10.0% YTD), as favorable central bank policies and exceptionally high carry is likely to fuel further inflows. The rally in Argentina sovereigns (USD) has slowed (1.9% YTD), though we still find value in corporates. Specifically quasi-sovereigns, regional governments and energy-related issuers. Local Mexico debt looks attractive, but we remain cautious. We will revisit once we gain clarity over a possible US border tax. Higher inflation does imply better values in inflation-linked debt.

• Asia region: Local Indonesia bonds (our highest regional conviction) has gained 4.2% YTD, with 10-year yields falling 35bp to 7.4%. As long as global markets remain risk-on, the positive macro environment, relative currency stability and high carry will attract further inflows. An aggressive Fed or USD strength may limit performance, though unlikely to induce a severe sell-off. We remain constructive on local India debt, despite the central bank’s surprise move to keep policy rates on hold. As a result, the rupee weakened and 10-year local yields spiked 50bp. While the macro backdrop has become less certain, valuations are attractive and could provide support against further economic downside.

• CEEMEA region: Local Russia sovereigns have gained 6.7% YTD, though predominately from FX appreciation. Still, the local curve remains inverted and short-term rates above 9.0% look attractive, in our view. Though sanctions remain a deterrent for investment, any future removal would likely provide a positive catalyst for local bonds, or at the least, the ruble.

Bond Market Monthly March 9, 2017 6

Asset class update – Corporate credit

Figure 10. US HY valuations have become less attractive Figure 11. Yields between HY bonds and loans have compressed

Source: Bloomberg Barclays Indices as of March 8, 2017. Source: Bloomberg Barclays Indices, S&P as of March 8, 2017.

Past performance is no guarantee of future results

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High yield debt • US high yield (HY) corporates continues to outperform, generating over 2.2% in the first two months of 2017.

Risk appetite remains strong and well-supported by higher equities, stable oil prices, solid 1Q earnings and expectations over potential tax cuts and infrastructure spending. Across credit quality, Triple-C issuers have outperformed, gaining 4.8% YTD. Single and Double-B rated issuers have gained 1.5% and 1.9%, respectively.

• Some weakness in oil prices has cheapened valuations over recent days, though we still think the US high yield market trades rich. Index spreads tightened an additional 35bp in February and, at one point, stood a mere 25bp wide off its 2014 post-crisis lows. Index yields have moved back toward the highs for the year, though are only 100bp above its all-time low (June 2014) (Fig. 10).

• Still, the fundamental and technical environment remains conducive for additional gains this year. New issuance has picked up, though issuers have focused on refinancing and balance sheet liquidity. Default rates have begun to fall, with February ending at 4.4%, down from 5.1% at the end of 2016. With the energy sector seeing fewer defaults as oil prices recover, we’d expect default rates to decline further. More important, the universe of higher yielding alternatives continues to narrow, fueling demand for HY. Bottom line, while investors with substantial HY overweights may consider taking some profits at current levels, high yield still offers decent relative value. As such, we remain overweight and look for cheaper valuations to increase exposure.

• US HY variable-rate bank loans: As projected in our outlook, YTD returns in bank loans have trailed HY bonds this year (1.2% vs. 2.2%). As markets remain “risk-on”, we’d expect bonds to continue to outperform loans. That said, expectations for multiple Fed rate hikes have risen, with LIBOR rates edging higher. Indeed, 3-month LIBOR has reached 1.1%, its highest level since 2009 (Note: HY bank loans pay coupons that adjust to LIBOR). This will likely fuel additional inflows, supporting valuations.

• Meanwhile, the yield differential between bonds and bank loans has compressed. With the difference in benchmark yields less than 50bp, the relative value proposition in the bank loan market has increased (Fig. 11). Despite limitations in price appreciation from callability, HY bonds are likely to suffer more in the event of a pull-back in risk. We maintain our high conviction in the US bank loan market and continue to expect the asset class to generate between 5-6% over the next 12 months.

• European HY: Euro HY has gained roughly 1.7% YTD driven by negative interest rates policies and the lack of any meaningful new supply. Spreads have fallen 550bps since their peak in 2016, though still remain slightly wide to their 2014 tights. On the other hand, yields reached 3.5% last month, which is a new all-time low. While valuations are less compelling we remain constructive as positive technical factors remain in place.

• An attractive alternative to European HY bonds is European HY bank loans. Similar to the US loan market, these securities offer floating rate coupons and are higher in capital structure. Meaning, in the event of default, bank loan holders get paid first. More importantly, yields are more attractive (~5.0%) than those of euro HY bonds. This premium reflects the European senior loan market’s relatively smaller size and lesser accessibility. Though we don’t expect a rise in short European rates any time soon, floating rates and limited available supply should help dampen price volatility. European bank loans have 1.4%, YTD.

Bond Market Monthly March 9, 2017 7

Asset class update – Corporate credit

Figure 12. US IG corporate spreads now through euro IG Figure 13. Euro IG well-supported by ECB bond purchases

Source: Bloomberg Barclays Indices as of March 8, 2017. Source: The Yield Book as of March 8, 2017.

Past performance is no guarantee of future results

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Investment grade corporates and preferreds • US IG (investment grade) corporates: US IG corporate bond spreads continue to grind tighter, as stable long-

term Treasury rates and strong investor risk appetite drives persistent inflows. Index spreads tightened 10bp in February to 110bp and has since fallen 100bp over the last 12 months. Indeed, USD IG credit is now trading tighter than euro credit for the first time since 2014 (Fig. 12). Similar to UST, IG corporate yields have tracked sideways since December, with benchmarks yielding 3.4%.

• Spread compression has offset some rate drag this year, with broader IG gaining 0.2% YTD. Investor concerns over higher US rates have led to subtle outperformance in 3-7 year maturities, with corporate curves steepening. To no surprise, heightened risk appetite has fueled performance in BBB-rated corporates, which has gained 50bp this year. Despite this, the rally in high quality HY bonds has been more pronounced, narrowing the BBB/BB spread to 130bp. This relationship was as wide as 375bp last year.

• While US IG corporates should remain a core fixed income holding, valuations are much less attractive. Returns are still unlikely to be meaningful in 2017, as performance could suffer from higher UST yields. We would maintain our neutral duration bias and place a stronger focus on sector views.

• Sector views: The energy sector has outperformed over the last 12-months and remains one of the cheapest IG sectors, with pipelines and refiners offering the best values. Higher oil prices and deregulation are expected to be drivers of further outperformance. US banks trade in-line with the overall benchmark, but should still benefit from higher US rates, any incremental steepness in the yield curve and some relaxing of regulations under Trump. Construction and building materials also offer value relative to the broader IG market, as positives surrounding potential infrastructure spending boost investor confidence should support tighter spreads.

• Euro IG corporates: Valuations remain unappealing for global investors, as 10% of the euro IG market has a negative yield and two-thirds are yielding less than 1.0%. This has hampered year to date returns, with euro credit roughly flat for the year. That said, spread volatility is likely to remain insulated from ECB QE purchases, where the central bank is buying roughly €8 billion in non-bank corporates every month (Fig. 13). Any further acceleration in political risks, particularly the upcoming French Presidential elections, could be a catalyst for widening, especially in the periphery. We remain cautious, though we’d look to take advantage of any market dislocations that may occur following the election results.

• US Preferreds: After finishing 2016 with a near-zero total return, US preferreds have gained roughly 3.5% in 2017. With long-term interest rates relatively stable over the last month – and the curve flatter – US preferreds have benefited from price appreciation and higher carry. Similar to many other credit markets, yields are now much less attractive. Indeed, fixed-to-floating rate structures with higher LIBOR spreads barely yield above 5.0% (to their first call date). While we remain invested, we’d consider taking some profits on over-weighted positions.

• Significantly strong market technicals remains US preferreds best characteristic. The lack of new issuance has exacerbated the rally in the secondary market, and will likely remain supportive. Indeed, net supply is expected to decline 20% this year, after falling 20% last year. We continue to favor fixed-to-floating rate structures (over fixed perpetuals) issued by US banks. Preferably securities that exhibit relatively wider back-end spread. Or, the additional yield over LIBOR rates, in the event the security is not called by the issuer at its first call date.

Bond Market Monthly March 9, 2017 8

Asset class update – US municipals

Figure 14. Muni curves have steepened in recent months Figure 15. Taxable-equivalent yields remain above corporates

Source: Bloomberg Barclays Indices as of March 8, 2017. Source: Bloomberg as of March 8, 2017.

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• With cheaper valuations coming into 2017, coupled with the “January effect”, US municipal bonds have outperformed Treasuries by 90bps YTD (+0.75% vs -0.15%). Risk-on sentiment boosted by the potential of fiscal stimulus has also fueled outperformance in low quality issuers, with HY munis gaining 3.0%. This has even exceeded the YTD performance of taxable HY corporate bonds (+2.2%).

• Within IG, performance in shorter-dated munis has been fueled by investors shortening duration and

positioning for higher US interest rates. Bonds within the 3-7 year maturity range have gained roughly 1.5% YTD, outperforming long bonds by roughly 120bps. This has also pushed muni curves steeper as the yield difference between these two buckets has widened by 60bps since July, to around 140bp currently (Fig. 14).

• With the January effect now behind us, the technical environment could potentially become a bit more volatile.

Historically, municipal issuance in March is higher than January and February as municipalities finalize their budgets and debt requirements. Along with increased expectations for higher US rates, positive net supply could overcome demand in the near-term, driving yield ratios (vs. UST) higher. Indeed, over recent weeks, we have already seen yield ratios rise and spreads becoming a bit cheaper.

• Despite the fact that mutual bond fund flows typically lag market performance, we have seen some divergence

in this relationship. Though munis have outperformed UST this year, we have witnessed outflows in muni funds over recent weeks. In our view, this is possibly more to do with the increase in political rhetoric over US tax reform. As we’ve previously written, the anticipated reduction in individual income tax rates is unlikely to have a meaningful impact on the demand for US munis. While the relative proposition versus taxable corporates would narrow, its unlikely munis would not be a better option for high income US investors (Fig. 15).

• While we remain cautious on long-duration exposures, value can still be found between 15-20 years to

maturity. Therefore we would recommend barbell strategies, where portfolios package long-term muni holdings with shorter maturities. This allows investors to take advantage of the long-term relative value while limiting the degree of interest rate volatility. Moreover, if rates do rise, shorter term bonds that mature would likely be reinvested back at higher rates, potentially adding to portfolio performance.

• Short-end outperformance and a steeper US muni curve have also increased the value proposition in possible extension swaps. Though each individual swap opportunity is unique, average Single-A muni yields suggest investors can pick-up roughly 80bp in yield, by extending from 3-years to 7-years. Or, 130bp out to 10-years.

Bond Market Monthly March 9, 2017 9

Fixed income tactical asset allocations

Figure 16. Fixed income allocation – Risk Level 1 Core Positions

Developed sovereign continues to be the largest

underweight at -4.1%. Developed high yield bond has the largest overweight at +2.2% followed by developed corporate investment grade at 1.5% overweight position.

EM fixed income remains at a small overweight position of 0.4% with both Latin America and Asia debt in overweight positions.

Figures in brackets are the difference versus the strategic benchmark � Cash

� Global fixed income

� Hedge funds

� Equities

Source: Citi Private Bank Global Investment Committee, February 16, 2017.

* Risk level 1 is designed for investors who have a preference for capital preservation and relative safety over the potential for a return on investment. These investors prefer to hold cash, time deposits and/or lower risk fixed income instruments.

Strategic = benchmark; tactical = the Citi Private Bank Global Investment Committee’s current view; and active = the difference between strategic and tactical.

Figure 17. Fixed income sovereign tactical allocation (Level 3)** Figure 18. Fixed income credit tactical allocation (Level 3)**

Source: Citi Private Bank Global Investment Committee, February 16, 2017. Source: Citi Private Bank Global Investment Committee, February 16, 2017.

**Risk Level 3 is designed for investors with a blended objective who require a mix of assets and seek a balance between investments that offer income and those positioned for a potentially higher return on investment. Risk Level 3 may be appropriate for investors willing to subject their portfolio to additional risk for potential growth in addition to a level of income reflective of his/her stated risk tolerance. Strategic = benchmark; tactical = the Citi Private Bank Global Investment Committee’s current view; and active = the difference between strategic and tactical.

Opinions expressed herein may differ from the opinions expressed by other businesses or affiliates of Citigroup, Inc., and are not intended to be a forecast of future events, a guarantee of future results or investment advice, and are subject to change based on market and other conditions. In any case, past performance is no guarantee of future results, and future results may not meet our expectations due to a variety of economic, market and other factors. Further, any projections of potential risk or return are illustrative and should not be taken as limitations of the maximum possible loss or gain.

Cash (0.0%), 6.0%

Developed national,

suprational and regional(-4.1), 56.7%

Developed investment

grade (1.5%), 21.6%

Developed high yield

(2.2%), 8.7%

Emerging market debt (0.4%), 7.0%

2.0

4.6

0.1 0.2

1.5

6.7

1.1

3.5

2.32.0

0.2 0.1

1.4

4.9

0.9

4.2

0

1

2

3

4

5

6

7

8

EM Japan Asiaex. JP

Nordic UK Cont.Europe

Canada US

GIC

Lev

el 3

Ass

et A

lloca

tion Strategic

Tactical

0.4

1.6

2.1

4.5

0.8

2.9

2.1

5.5

0

2

4

6

Europehigh yield

UShigh yield

EuropeIG Corp

USIG Corp

GIC

Lev

el 3

Ass

et A

lloca

tion

Strategic

Tactical

Bond Market Monthly March 9, 2017 10

Government bond benchmark yield curves

Figure 19. Germany, Japan, UK, US government yield curves Figure 20. US government bond yield curve

Source: Bloomberg. Source: Bloomberg. Figure 21. German government bond yield curve Figure 22. UK government bond yield curve

Source: Bloomberg. Source: Bloomberg.

Figure 23. Japan government bond yield curve Figure 24. Australia government bond yield curve

Source: Bloomberg. Source: Bloomberg. Figures as of March 7, 2017. All forecasts are expressions of opinion and are subject to change without notice and are not intended to be a guarantee of future events. Past performance is no guarantee of future events. Real results may vary.

-1

0

1

2

3

4

0 5 10 15 20 25 30

Yiel

d (%

)

Year to Maturity

USUKJapanGermany

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

0 5 10 15 20 25 30

Yiel

d (%

)

Years to Maturity

CurrentOne Year Ago12mo Forecast (1Q '18)Forwards (1 Year)

-1.0

-0.5

0.0

0.5

1.0

1.5

0 5 10 15 20 25 30

Yiel

d (%

)

Years to Maturity

CurrentOne Year Ago12mo Forecast (1Q '18)Forwards (1 Year)

0.0

0.5

1.0

1.5

2.0

2.5

0 5 10 15 20 25 30

Yiel

d (%

)

Years to Maturity

CurrentOne Year Ago12mo Forecast (1Q '18)Forwards (1 Year)

-0.50

-0.25

0.00

0.25

0.50

0.75

1.00

1.25

0 5 10 15 20 25 30

Yiel

d (%

)

Years to Maturity

CurrentOne Year Ago12mo Forecast (1Q '18)Forwards (1 Year)

1.5

2.0

2.5

3.0

3.5

0 5 10 15

Yiel

d (%

)

Years to Maturity

CurrentOne Year Ago12mo Forecast (1Q '18)Forwards (1 Year)

Bond Market Monthly March 9, 2017 11

Long-term historical government bond yields

Figure 25. US government bond yield Figure 26. German government bond yield

Source: Bloomberg. Source: Bloomberg.

Figure 27. UK government bond yield Figure 28. Japan government bond yield

Source: Bloomberg. Source: Bloomberg.

Figure 29. 10yr US Treasury spread to German Bunds Figure 30. 10yr UK Gilt spread to German Bunds

Source: Bloomberg. Source: Bloomberg. Figures as of March 7, 2017.

0

3

6

9

12

15

18

'62 '67 '72 '77 '82 '87 '92 '97 '02 '07 '12 '17

Yiel

d (%

)

10yr US Treasury yield(current: 2.39%)Long-term average (6.29%)

STD+1

STD-1

-2

0

2

4

6

8

10

'89 '91 '94 '96 '99 '01 '04 '06 '09 '11 '14 '17

Yiel

d (%

)

10yr German Bund yield (current: 0.21%)Long-term average (4.43%)STD+1STD-1

0

2

4

6

8

10

12

14

'89 '91 '94 '96 '99 '01 '04 '06 '09 '11 '14 '17

Yiel

d (%

)

10yr UK Gilt yield (current: 1.15%)Long-term average (5.41%)STD+1STD-1

-2

0

2

4

6

8

10

'87 '90 '93 '95 '98 '01 '03 '06 '09 '11 '14 '17

Yiel

d (%

)10yr Japan JGB yield (current: 0.06%)Long-term average (2.38%)STD+1STD-1

-150

-100

-50

0

50

100

150

200

250

300

'89 '91 '94 '96 '99 '01 '04 '06 '09 '11 '14 '17

Spre

ad (b

p)

10yr US Treasury spread to German Bunds (current: 218bp)Long-term average (38bp)STD+1STD-1

-50

0

50

100

150

200

250

300

350

400

450

'89 '91 '94 '96 '99 '01 '04 '06 '09 '11 '14 '17

Spre

ad (b

p)

10yr UK Gilt spread to German Bunds (current: 94bp)Long-term average (97bp)STD+1STD-1

Bond Market Monthly March 9, 2017 12

Long-term historical corporate bond yields Figure 31. US investment grade corporate yield Figure 32. US high yield corporate yield

Source: Bloomberg Barclays Indices. Source: Bloomberg Barclays Indices. Figure 33. European investment grade corporate yield Figure 34. European high yield corporate yield

Source: Bloomberg Barclays Indices. Source: Bloomberg Barclays Indices. Figure 35. EM (USD) sovereign yield Figure 36. EM (USD) corporate yield

Source: Bloomberg Barclays Indices. Source: Bloomberg Barclays Indices. Figures as of March 7, 2017.

0

3

6

9

12

15

18

'73 '77 '81 '86 '90 '95 '99 '03 '08 '12 '17

Yiel

d (%

)

US IG corp yield (current: 3.26%)Long-term average (7.64%)STD+1STD-1

4

6

8

10

12

14

16

18

20

22

24

'87 '89 '92 '95 '98 '00 '03 '06 '08 '11 '14 '17

Yiel

d (%

)

US HY corp yield (current: 5.58%)Long-term average (10.29%)STD+1STD-1

0

2

4

6

8

'99 '02 '05 '08 '11 '14 '17

Yiel

d (%

)

Euro IG corp yield (current: 0.79%)Long-term average (3.83%)STD+1STD-1

0

4

8

12

16

20

24

28

'99 '02 '05 '08 '11 '14 '17

Yiel

d (%

)

Euro HY corp yield (current: 3.55%)Long-term average (9.58%)STD+1STD-1

4

6

8

10

12

'03 '05 '07 '09 '11 '13 '15 '17

Yiel

d (%

)

EM (USD) sovereign yield (current: 5.11%)Long-term average (6.31%)STD+1STD-1

0

5

10

15

20

25

'03 '05 '07 '09 '11 '13 '15 '17

Yiel

d (%

)

EM (USD) corporate yield (current: 4.44%)Long-term average (6.91%)STD+1STD-1

Bond Market Monthly March 9, 2017 13

Long-term historical corporate bond spreads Figure 37. US investment grade corporate spread Figure 38. US high yield corporate spread

Source: Bloomberg Barclays Indices. Source: Bloomberg Barclays Indices. Figure 39. European investment grade corporate spread Figure 40. European high yield corporate spread

Source: Bloomberg Barclays Indices. Source: Bloomberg Barclays Indices. Figure 41. EM (USD) sovereign spread Figure 42. EM (USD) corporate spread

Source: Bloomberg Barclays Indices. Source: Bloomberg Barclays Indices. Figures as of March 7, 2017.

0

100

200

300

400

500

600

700

'89 '92 '94 '97 '99 '02 '04 '07 '09 '12 '14 '17

Spre

ad (b

p)

US IG corp spread (current: 115bp)Long-term average (134bp)STD+1STD-1

0

200

400

600

800

1000

1200

1400

1600

1800

2000

'94 '96 '98 '01 '03 '05 '07 '10 '12 '14 '17

Spre

ad (b

p)

US HY corp spread (current: 363bp)Long-term average (520bp)STD+1STD-1

0

50

100

150

200

250

300

350

400

450

500

'00 '03 '06 '08 '11 '14 '17

Spre

ad (b

p)

Euro IG corp spread (current: 124bp)Long-term average (132bp)STD+1STD-1

0

500

1000

1500

2000

2500

'00 '03 '06 '08 '11 '14 '17

Spre

ad (b

p)

Euro HY corp spread (current: 345bp)Long-term average (630bp)STD+1STD-1

100

200

300

400

500

600

700

800

900

1000

'03 '05 '07 '09 '11 '13 '15 '17

Spre

ad (b

p)

EM (USD) sovereign spread (current: 290bp)Long-term average (325bp)STD+1STD-1

0

250

500

750

1000

1250

1500

1750

2000

'03 '05 '07 '09 '11 '13 '15 '17

Spre

ad (b

p)

EM (USD) corporate spread (current: 264bp)Long-term average (421bp)STD+1STD-1

Bond Market Monthly March 9, 2017 14

Long-term historical corporate bond spread comparisons Figure 43. US BB corp spread to BBB corp Figure 44. Euro BB corp spread to BBB corp

Source: Bloomberg Barclays Indices. Source: Bloomberg Barclays Indices.

Figure 45. EM Asia (USD) IG credit spread to US Gov/Credit Figure 46. EM Asia (USD) HY credit spread to US HY

Source: Bloomberg Barclays Indices. Source: Bloomberg Barclays Indices. Figures as of March 7, 2017.

0

100

200

300

400

500

600

'94 '97 '99 '02 '05 '08 '11 '14 '17

Spre

ad (b

p)

US BB corp spread to BBB corp (current: 105bp)Long-term average (167bp)STD+1STD-1

0

200

400

600

800

1000

1200

'00 '03 '05 '07 '10 '12 '14 '17

Spre

ad (b

p)

Euro BB corp spread to BBB corp (current: 124bp)Long-term average (253bp)STD+1STD-1

75

100

125

150

175

200

225

250

'10 '11 '12 '13 '14 '15 '17

Spre

ad (b

p)

EM Asia (USD) IG credit spread less USgov/credit spread (current: 81bp)Long-term average (128bp)

STD+1

STD-1

-350

-250

-150

-50

50

150

250

350

'10 '11 '12 '13 '14 '15 '17

Spre

ad (b

p)

EM Asia (USD) HY credit spread less USHY spread (current: -19bp)Long-term average (-19bp)

STD+1

STD-1

Bond Market Monthly March 9, 2017 15

Fixed income market returns Figure 47. Fixed Income index returns (local currency,

%)

Index YTD Last 12m Last 3m Last 1m Yield Duration Broad Aggregate Indices Global Agg (local currency) -0.5 0.5 0.1 -0.4 US Agg Bond -0.1 0.7 0.3 -0.7 2.74 6.03 European Agg -1.3 0.0 -0.4 -0.3 0.64 6.52 Developed Sovereign Debt Global (local currency) -0.9 -0.7 -0.2 -0.4 1.10 7.81 US Treasury -0.3 -1.6 0.0 -0.8 1.85 6.10 US Agency 0.1 0.0 0.2 -0.4 1.93 3.97 German Bunds -1.0 -0.2 0.1 -0.5 -0.23 7.67 UK Gilts 0.4 6.3 2.9 0.8 1.07 12.28 Japan JGBs -0.6 -0.9 -0.6 0.2 0.14 10.15 Portugal -0.6 -0.6 0.5 0.7 5.08 3.07 Italy -2.7 -3.1 -1.2 -0.5 1.44 6.91 Ireland -1.8 -0.2 -0.5 -0.2 0.29 6.52 Spain -1.9 0.9 -1.0 -0.5 0.99 6.99 Inflation-linked Sovereign Debt Global I-Linked (local currency) -0.5 6.7 0.7 -0.9 -0.68 12.57 US I-Linked -0.1 2.2 0.3 -0.9 2.48 5.66 US Municipals US Municipals 0.6 -0.2 0.9 -0.4 2.58 6.64 Emerging Markets EM (Hard Currency) Sovereign 2.6 8.8 3.4 0.1 5.24 7.03 EM LatAm 3.2 12.5 4.4 0.2 6.47 7.92 EM Asia 2.3 6.4 2.6 -0.4 4.03 7.84 EM EMEA 2.3 6.8 2.9 0.2 4.71 6.10 EM (Local) Govt, hedged USD 0.7 1.7 1.1 -0.1 5.04 5.57 EM LatAm 2.2 6.4 2.6 0.1 8.46 4.00 EM Asia -0.8 0.4 -1.5 -0.2 4.03 6.76 EM EMEA 0.2 -3.9 0.6 0.1 6.00 5.02 Securitized debt US MBS -0.4 -0.1 -0.2 -0.6 3.02 5.08 US CMBS 0.2 1.6 0.3 -0.7 2.89 5.49 US ABS 0.2 1.2 0.2 -0.1 1.97 2.25 High Grade Corporate Debt USD Corporates 0.2 4.8 1.2 -0.5 3.44 7.29 EUR Corporates 0.0 3.6 0.7 0.0 0.90 5.27 GBP Corporates 1.2 12.8 3.6 1.1 2.46 8.40 High Yield Corporate Debt USD High Yield 2.2 17.9 2.8 0.3 5.86 4.05 EUR High Yield 1.8 11.2 2.8 0.7 3.62 4.17 Asia (USD)High Yield 2.9 13.5 2.9 0.7 5.08 3.07 S&P/LSTA Leveraged Loan 1.3 11.6 1.9 0.7 Hybrid debt S&P US Variable Rate Preferred Index (F2F) 3.9 8.7 5.6 0.1 S&P US Fixed Rate Preferred Index 3.0 4.6 3.5 -0.7

Source: The Yield Book, Bloomberg Barclays Indices, S&P as of March 9, 2017. Past performance is no guarantee of future results. Real results may vary.

Bond Market Monthly March 9, 2017 16

US bond market fund flows, by asset class Figure 48. Total net assets – bonds & money markets Figure 49.Total net assets – bonds & equity

Source: Investment Company Institute. Source: Investment Company Institute. Figure 50. Total net assets – IG, HY corps., Gov’t debt Figure 51. Total net assets – municipal bonds

Source: Investment Company Institute. Source: Investment Company Institute. Figure 52. Monthly net flows – high grade bonds Figure 53. Monthly net flows – high yield bonds

Source: Investment Company Institute. Source: Investment Company Institute. Figures as of January 31, 2017.

1.5

2.0

2.5

3.0

3.5

4.0

'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Trill

ions

($)

BondsMoney Markets

1

2

3

4

5

2

3

4

5

6

7

8

9

10

'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Trill

ions

($)

Trill

ions

($)

Equity (LHS)Bonds

100

150

200

250

300

350

400

450

500

600

800

1000

1200

1400

1600

1800

'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Bill

ions

($)

Bill

ions

($)

Investment Grade Bonds (LHS)High Yield BondsGovernment Bonds

100

150

200

250

300

350

400

450

500

'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Bill

ions

($)

Municipals (State)Municipals (National)

-30

-20

-10

0

10

20

30

'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Bill

ions

($)

-20

-15

-10

-5

0

5

10

15

'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Bill

ions

($)

Bond Market Monthly March 9, 2017 17

Broad bond market fund flows, by country Figure 54. Cumulative fund flows – US and Canada Figure 55. Cumulative fund flows – Switzerland vs. UK

Source: EPFR. Source: EPFR. Figure 56. Cumulative fund flows – Core Europe Figure 57. Cumulative fund flows – Europe

Source: EPFR. Source: EPFR. Figure 58. Cumulative fund flows – Periphery Europe Figure 59. Cumulative fund flows – Japan

Source: EPFR. Source: EPFR. Figures as of March 7, 2017.

-5

0

5

10

15

20

25

30

35

40

45

-100

0

100

200

300

400

500

600

700

800

900

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Billio

ns ($

)

Billio

ns ($

)

US (LHS)

Canada

-8

-4

0

4

8

12

16

20

'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Billio

ns ($

)

SwitzerlandUK

-10

-5

0

5

10

15

20

'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Billio

ns ($

)

FranceGermanyAustriaNetherlandsBelgium

-2

0

2

4

6

8

10

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Billio

ns ($

)DenmarkFinlandNorwaySweden

-10

-5

0

5

10

15

20

'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Billio

ns ($

)

IrelandPortugalSpainItaly

-4

-2

0

2

4

6

8

10

12

14

16

18

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Billio

ns ($

)

Japan

Bond Market Monthly March 9, 2017 18

Broad bond market fund flows, by country Figure 60. Cumulative fund flows – Asia ex. Japan Figure 61. Cumulative fund flows – EM Asia

Source: EPFR. Source: EPFR. Figure 62. Cumulative fund flows – EM Asia Figure 63. Cumulative fund flows – Russia, S. Africa, Turkey

Source: EPFR. Source: EPFR. Figure 64. Cumulative fund flows – EMEA Figure 65. Cumulative fund flows – Latin America

Source: EPFR. Source: EPFR. Figures as of March 7, 2017.

-4

-2

0

2

4

6

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Billio

ns ($

)

AustraliaHong KongSingaporeNew Zealand

-2

-1

0

1

2

3

4

5

6

7

-20

0

20

40

60

80

100

'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Billio

ns ($

)

Milli

ons

($)

Taiwan (LHS)ChinaIndiaSouth Korea

-2

0

2

4

6

8

10

'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Billio

ns ($

)

IndonesiaMalaysiaPhilippinesThailand

-2

0

2

4

6

8

10

12

14

'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Billio

ns ($

)RussiaSouth AfricaTurkey

-2

-1

0

1

2

3

4

5

6

7

'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Billio

ns ($

)

Czech RepublicEgyptHungaryPoland

-4

-2

0

2

4

6

8

10

12

14

16

'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Billio

ns ($

)

ChileColombiaMexicoPeruBrazil

Bond Market Monthly March 9, 2017 19

Asset allocation definitions Asset classes Benchmarked against

Global equities MSCI All Country World Index, which represents 48 developed and emerging equity markets. Index components are weighted by market capitalization. Global bonds Bloomberg Barclays Multiverse (Hedged) Index, which contains the government -related portion of the Multiverse Index, and accounts for approximately

14% of the larger index. Hedge funds HFRX Global Hedge Fund Index, which is designed to be representative of the overall composition of the hedge fund universe. It comprises all eligible

hedge fund strategies; including but not limited to convertible arbitrage, distressed securities, equity hedge, equity market neutral, event driven, macro, merger arbitrage and relative value arbitrage. The strategies are asset-weighted based on the distribution of assets in the hedge fund industry.

Commodities Dow Jones-UBS Commodity Index, which is composed of futures contracts on physical commodities traded on US exchanges, with the exception of aluminum, nickel and zinc, which trade on the London Metal Exchange (LME). The major commodity sectors are represented including energy, petroleum, precious metals, industrial metals, grains, livestock, softs, agriculture and ex-energy.

Equities

Developed market large cap

MSCI World Large Cap Index, which is free-float adjusted and weighted by market capitalization. The index is designed to measure the equity market performance of the large cap stocks in 23 developed markets. Large cap is defined as stocks representing roughly 70% of each market’s capitalization.

US Standard & Poor’s 500 Index, which is a capitalization -weighted index that includes a representative sample of 500 leading companies in leading industries of the US economy. Although the S&P 500 focuses on the large cap segment of the market, with over 80% coverage of US equities, it is also an ideal proxy for the total market.

Europe ex UK MSCI Europe ex UK Large Cap Index, which is free-float adjusted and weighted by market capitalization. The index is designed to measure large cap stock performance in each of Europe’s developed markets, except for the UK.

UK MSCI UK Large Cap Index, which is free-float adjusted and weighted by market capitalization. The index is designed to measure large cap stock performance in the UK.

Japan MSCI Japan Large Cap Index, which is free-float adjusted and weighted by market capitalization. The index is designed to measure large cap stock performance in Japan.

Asia Pacific ex Japan

MSCI Asia Pacific ex Japan Large Cap Index, which is free-float adjusted and weighted by market capitalization. The index is designed to measure the performance of large cap stocks in Australia, Hong Kong, New Zealand and Singapore.

Developed market small and mid-cap

MSCI World Small Cap Index, which is a capitalization-weighted index that measures small cap stock performance in 23 developed equity markets.

Emerging market MSCI Emerging Markets Index, which is free-float adjusted and weighted by market capitalization. The index is designed to measure equity market performance of 22 emerging markets.

Bonds

Global Aggregate Index

Bloomberg Barclays Global Aggregate Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers.

US Aggregate Bond Index

Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency).

Pan-European Aggregate Index

Bloomberg Barclays Pan-European Aggregate Index tracks fixed-rate, investment-grade securities issued in the following European currencies: Euro, British pounds, Norwegian krone, Danish krone, Swedish krona, Czech koruna, Hungarian forint, Polish zloty, and Slovakian koruna. Inclusion is based on the currency of the issue, and not the domicile of the issuer. The principal asset classes in the index are Treasuries, Government-Related, Corporate and Securitised, which include Pfandbriefe, other covered bonds and asset-backed securities.

Developed sovereign Citi World Government Bond Index (WGBI), which consists of the major global investment grade government bond markets and is composed of sovereign debt, denominated in the domestic currency. To join the WGBI, the market must satisfy size, credit and barriers-to-entry requirements. In order to ensure that the WGBI remains an investment grade benchmark, a minimum credit quality of BBB–/Baa3 by either S&P or Moody's is imposed. The index is rebalanced monthly.

Emerging sovereign Citi Emerging Market Sovereign Bond Index (ESBI), which includes Brady bonds and US dollar -denominated emerging market sovereign debt issued in the global, Yankee and Eurodollar markets, excluding loans. It is composed of debt in Africa, Asia, Europe and Latin America. We classify an emerging market as a sovereign with a maximum foreign debt rating of BBB+/Baa1 by S&P or Moody's. Defaulted issues are excluded.

Inflation-Linked Citi World Inflation-Linked Securities Index (WorldILSI) coverage includes the United States, Japan, France, Germany, Greece, Italy, Sweden, and the United Kingdom. It measures the returns of the inflation-linked bonds with fixed-rate coupon payments that are linked to an inflation index.

Supranationals Citi World Broad Investment Grade Index (WBIG)—Government Related, which is a subsector of the WBIG. The index includes fixed rate investment grade agency, supranational and regional government debt, denominated in the domestic currency. The index is rebalanced monthly.

Securitized Citi World Broad Investment Grade Index (WBIG)—Securitized, which is a subsector of the WBIG. The index includes global investment grade collateralized debt denominated in the domestic currency, including mortgage -backed securities, covered bonds (Pfandbriefe) and asset -backed securities. The index is rebalanced monthly.

Corporate investment grade

Citi World Broad Investment Grade Index (WBIG)—Corporate, which is a subsector of the WBIG. The index includes fixed rate global investment grade corporate debt within the finance, industrial and utility sectors, denominated in the domestic currency. The index is rebalanced monthly.

Corporate high yield

Bloomberg Barclays Global High Yield Index is a multi-currency flagship measure of the global high yield debt market. The index represents the union of the US High Yield, the Pan-European High Yield, and Emerging Markets (EM) Hard Currency High Yield Indices.

Municipal Bloomberg Barclays Municipal Bond Index is a broad-based benchmark that measures the investment grade, US dollar-denominated, fixed tax-exempt bond market. The index includes state and local general obligation, revenue, insured, and pre-refunded bonds

Preferred/Hybrid Bank of America (BofA) Merrill Lynch Fixed Rate Preferred Securities Index tracks the performance of fixed rate US dollar denominated preferred securities issued in the US domestic market.

Bond Market Monthly March 9, 2017 20

Asset allocation definitions CDS

CDX North America Inv Grade

Markit CDX North American Investment Grade Index consists of CDS levels for the most liquid north American entities with investment grade credit ratings.

CDX North America High Yield

Markit CDX North American High Yield Index consists of CDS levels for the most liquid north American entities with high yield credit ratings.

CDX North America High Vol

Markit CDX North American Investment Grade High Volatility Index consists of CDS levels for the most liquid north American entities with investment grade credit ratings and higher volatility.

Markit MCDX Municipal Index

The Markit MCDX index is a credit index consisting of municipal single name CDS.

iTraxx Europe Index Inv Grade

The benchmark Markit iTraxx Europe index comprises CDS levels of 125 equally-weighted European names.

iTraxx Europe Crossover Index

The Markit iTraxx Crossover index comprises CDS levels for the 75 most liquid sub-investment grade entities.

iTraxx Europe Senior Financial

The Markit iTraxx Europe Senior Financials Index consists of twenty-five (25) financial entities from the Markit iTraxx Europe index referencing senior debt.

iTraxx SOVX Western Europe

The Markit iTRaxx SovX Western Europe index consists of 15 equally weighted Western European sovereign CDS constituents.

iTraxx Japan Inv Grade

The Markit iTraxx Japan Investment Grade Index consists of fifty (50) of the most liquid Japanese entities with investment grade credit ratings as published by Markit

iTraxx Asia ex-Japan Inv Grade

The Markit iTraxx Asia ex-Japan Investment Grade Index consists of forty (40) of the most liquid Asian entities with investment grade credit ratings as published by Markit

CDX Emerging Markets

The Markit CDX Emerging Markets Index is composed of 14 sovereign CDS issuers. All entities are domiciled in three regions: (i) Latin America, (ii) Eastern Europe, the Middle East and Africa, and (iii) Asia.

Other miscellaneous definitions European Additional Tier 1

European Additional Tier 1 capital (or Contingent Convertibles or CoCo's) are subordinated securities that qualify as Tier 1 capital under Basel III capital requirements.

LIBOR The London Inter bank Offered Rate (LIBOR is the average of interest rates estimated by each of the leading banks in London that it would be charged were it to borrow from other banks. Libor rates are calculated for 5 currencies and 7 borrowing periods ranging from overnight to one year and are published each business day

Euribor The Euro Interbank Offered Rate (Euribor) is a daily reference rate, published by the European Money Markets Institute, based on the averaged interest rates at which Eurozone banks offer to lend unsecured funds to other banks in the euro wholesale money market (or interbank market).

Bond Market Monthly March 9, 2017 21

Notes

Bond Market Monthly March 9, 2017 22

Disclosures In any instance where distribution of this communication (“Communication”) is subject to the rules of the US Commodity Futures Trading Commission (“CFTC”), this communication constitutes an invitation to consider entering into a derivatives transaction under US CFTC Regulations §§ 1.71 and 23.605, where applicable, but is not a binding offer to buy/sell any financial instrument. This Communication is prepared by Citi Private Bank (“CPB”), a business of Citigroup Inc. (“Citigroup”), which provides its clients access to a broad array of products and services available through Citigroup, its bank and non-bank affiliates worldwide (collectively, “Citi”). Not all products and services are provided by all affiliates, or are available at all locations. CPB personnel are not research analysts, and the information in this Communication is not intended to constitute “research”, as that term is defined by applicable regulations. 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A copy of the booklet can be obtained upon request from Citigroup Global Markets Inc., 390 Greenwich Street, 3rd Floor, New York, NY 10013 or by clicking the following link: http://www.theocc.com/components/docs/riskstoc.pdf, http://www.theocc.com/components/docs/about/publications/november_2012_supplement.pdf If you buy options, the maximum loss is the premium. If you sell put options, the risk is the entire notional below the strike. If you sell call options, the risk is unlimited. The actual profit or loss from any trade will depend on the price at which the trades are executed. The prices used herein are historical and may not be available when you order is entered. Commissions and other transaction costs are not considered in these examples. Option trades in general and these trades in particular may not be appropriate for every investor. Unless noted otherwise, the source of all graphs and tables in this report is Citi. 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Persons who come into possession of this document are required to inform themselves of, and to observe such restrictions. Citi accepts no liability whatsoever for the actions of third parties in this respect. Any unauthorized use, duplication, or disclosure of this document is prohibited by law and may result in prosecution. The information set out herein may be subject to updating, completion, revision, verification and amendment and such information may change materially. Citigroup, its affiliates and any of the officers, directors, employees, representatives or agents shall not be held liable for any direct, indirect, incidental, special, or consequential damages, including loss of profits, arising out of the use of information contained herein, including through errors whether caused by negligence or otherwise. In the US, brokerage products and services are provided by Citigroup Global Markets Inc. (“CGMI”), member SIPC. Accounts carried by Pershing LLC, member FINRA, NYSE, SIPC. CGMI and Citibank, N.A. are affiliated companies under the common control of Citigroup. Outside the US, brokerage products and services are provided by other Citigroup affiliates. Investment Management services (including portfolio management) are available through CGMI, Citibank, N.A. and other affiliated advisory businesses. This document is for informational purposes only and the views expressed in this document by the Global Investment Committee. Bonds are affected by a number of risks, including fluctuations in interest rates, credit risk and prepayment risk. In general, as prevailing interest rates rise, fixed income securities prices will fall. Bonds face credit risk if a decline in an issuer’s credit rating, or creditworthiness, causes a bond’s price to decline. High yield bonds are subject to additional risks such as increased risk of default and greater volatility because of the lower credit quality of the issues. Finally, bonds can be subject to prepayment risk. When interest rates fall, an issuer may choose to borrow money at a lower interest rate, while paying off its previously issued bonds. As a consequence, underlying bonds will lose the interest payments from the investment and will be forced to reinvest in a market where prevailing interest rates are lower than when the initial investment was made.

Bond Market Monthly March 9, 2017 23

Alternative investments referenced in this report are speculative and entail significant risks that can include losses due to leveraging or other speculative investment practices, lack of liquidity, volatility of returns, restrictions on transferring interests in the fund, potential lack of diversification, absence of information regarding valuations and pricing, complex tax structures and delays in tax reporting, less regulation and higher fees than mutual funds and advisor risk. Asset allocation does not assure a profit or protect against a loss in declining financial markets. Mortgage-backed securities (“MBS”), which include collateralized mortgage obligations (“CMOs”), also referred to as real estate mortgage investment conduits (“REMICs”), may not be suitable for all investors. There is the possibility of early return of principal due to mortgage prepayments, which can reduce expected yield and result in reinvestment risk. Conversely, return of principal may be slower than initial prepayment speed assumptions, extending the average life of the security up to its listed maturity date (also referred to as extension risk). Additionally, the underlying collateral supporting non-Agency MBS may default on principal and interest payments. In certain cases, this could cause the income stream of the security to decline and result in loss of principal. Further, an insufficient level of credit support may result in a downgrade of a mortgage bond's credit rating and lead to a higher probability of principal loss and increased price volatility. Investments in subordinated MBS involve greater credit risk of default than the senior classes of the same issue. Default risk may be pronounced in cases where the MBS security is secured by, or evidencing an interest in, a relatively small or less diverse pool of underlying mortgage loans. MBS are also sensitive to interest rate changes which can negatively impact the market value of the security. During times of heightened volatility, MBS can experience greater levels of illiquidity and larger price movements. Price volatility may also occur from other factors including, but not limited to, prepayments, future prepayment expectations, credit concerns, underlying collateral performance and technical changes in the market. Real Estate Investment Trusts (REITs) are subject to special risk considerations similar to those associated with the direct ownership of real estate. Real estate valuations may be subject to factors such as changing general and local economic, financial, competitive, and environmental conditions. REITs may not be suitable for every investor. Dividend income from REITs will generally not be treated as qualified dividend income and therefore will not be eligible for reduced rates of taxation. The indexes are unmanaged. 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Factors affecting commodities generally, index components composed of futures contracts on nickel or copper, which are industrial metals, may be subject to a number of additional factors specific to industrial metals that might cause price volatility. These include changes in the level of industrial activity using industrial metals (including the availability of substitutes such as man-made or synthetic substitutes); disruptions in the supply chain, from mining to storage to smelting or refining; adjustments to inventory; variations in production costs, including storage, labor and energy costs; costs associated with regulatory compliance, including environmental regulations; and changes in industrial, government and consumer demand, both in individual consuming nations and internationally. Index components concentrated in futures contracts on agricultural products, including grains, may be subject to a number of additional factors specific to agricultural products that might cause price volatility. These include weather conditions, including floods, drought and freezing conditions; changes in government policies; planting decisions; and changes in demand for agricultural products, both with end users and as inputs into various industries. The information contained herein is not intended to be an exhaustive discussion of the strategies or concepts mentioned herein or tax or legal advice. Readers interested in the strategies or concepts should consult their tax, legal, or other advisors, as appropriate. In Hong Kong, this document is issued by CPB operating through Citibank, N.A., Hong Kong branch, which is regulated by the Hong Kong Monetary Authority. 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ASIA PACIFIC

EUROPE & MIDDLE EAST

LATIN AMERICA

NORTH AMERICA

HONG KONG CHANNEL ISLANDS BRAZIL UNITED STATES Hong Kong St. Helier, Jersey Rio de Janeiro Beverly Hills, CA Orange County, CA 852–2868–8688 44–1534–608–010 55–21–4009–8905 213–239–1927 650–329–7060 INDIA ISRAEL Sao Paulo Boca Raton, FL Palm Beach, FL Bangalore Tel Aviv 55–11–4009–5848 561–368–6945 800–494–1499 91–80–4144–6389 972–3–684–2522 LATAM OFFICES IN US Boston, MA Palo Alto, CA Mumbai MONACO Houston, TX 617–330–8944 415–627–6330 91–22–4001–5282 Monte Carlo 713–966–5102 377–9797–5010 Chicago, IL Philadelphia, PA New Delhi Miami, FL 312–384–1450 267–597–3000 91–124–418–6695 SPAIN 305–347–1800 Madrid Dallas, TX Phoenix, AZ SINGAPORE 34–91–538–4400 New York, NY 214–880–7200 602–667–8920 Singapore 212–559–9155 65–6227–9188 SWITZERLAND Denver, CO San Francisco, CA Geneva MEXICO 303–296–5800 415–627–6330 41–58–750–5000 Mexico City 52–55–22–26–8310 Greenville, DE Seattle, WA Zurich 302–298–3720 888–409–6232 41–58–750–5000 Monterrey 52–81–1226–9401 Greenwich, CT Short Hills, NJ UNITED ARAB EMIRATES 800–279–7158 973–921–2400 Abu Dhabi 971–2–494–3200 Houston, TX

832–667–0500 Washington, DC High Net Worth

Dubai 202–776–1500 971–4–604–4644 Los Angeles, CA

213–239–1927 Law Firm 202-220-3636

UNITED KINGDOM London Miami, FL Westport, CT 44–207–508–8000 866–869–8464 203–293–1922 New York, NY CANADA 212–559–9470 Montreal 514–393–7526 Asia 212–559–9155 Toronto 416–947–5300

Latin America 212–559–9155 Vancouver 604–739–6222

Published March 9, 2017