US Research Quarterly 2012-05-22 SIFMA

7/31/2019 US Research Quarterly 2012-05-22 SIFMA

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RESEARCH REPORT

RESEARCH QUARTERLY

1Q 2012


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RESEARCH QUARTERLY RESEARCH REPORT | 1Q | 2012

i

The Securities Industry and Financial Markets Association (SIFMA) prepared this ma-terial for informational purposes only. SIFMA obtained this information from multiplesources believed to be reliable as of the date of publication; SIFMA, however, makesno representations as to the accuracy or completeness of such third party information.SIFMA has no obligation to update, modify or amend this information or to otherwisenotify a reader thereof in the event that any such information becomes outdated, inac-curate, or incomplete.

SIFMA brings together the shared interests of hundreds of securities firms, banks andasset managers. SIFMA's mission is to support a strong financial industry, investor op-portunity, capital formation, job creation and economic growth, while building trustand confidence in the financial markets. SIFMA, with offices in New York and Wash-ington, D.C., is the U.S. regional member of the Global Financial Markets Association(GFMA). For more information, visitwww.sifma.org.

TABLE OF CONTENTS

Table of Contents ..................................................................................................................................

Capital Markets Overview ................................................................................................................... 2

Municipal Bond Market ....................................................................................................................... 3

Treasury Market .................................................................................................................................... 5

Federal Agency Debt Market .............................................................................................................. 7

Funding and Money Market Instruments ......................................................................................... 8

Mortgage-Related Securities ................................................................................................................ 9

Asset-Backed Securities and CDOs ................................................................................................. 10

Corporate Bond Market ..................................................................................................................... 11

Equity and Other Markets ................................................................................................................. 13

Derivatives ........................................................................................................................................... 16Primary Loan Market ......................................................................................................................... 17


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2

0

100

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600

T re as ur y( 1) F ed er al A ge nc y( 1) M un ic ip al (1 ) M or tg ag e- Re la te d A ss et -B ac ke d C or po ra t e( 1) E qu it y

$ Billions

(1) Includes long-term issuance onlySource: Thomson Reuters, U.S. Treasury, U.S. Federal Agen cies

Issuance in U.S. Capital Markets2011:Q1 vs. 2012:Q1

Q1'11

Q1'12

Issuance Highlights - Year-Over-Year

$ Billions 2012:Q1 2011:Q1

Y-o-Y %

Change* 2012

Treasury (1) 562.9 550.2 2.3% 562.9

Federal Agency (1) 152.4 177.0 -13.9% 152.4

Municipal (1) 78.2 47.9 63.3% 78.5

Mortgage-Related 486.6 466.5 4.3% 486.5Asset-Backed 45.8 30.1 52.1% 45.8

Global CDO 3.3 1.6 103.4% 3.3

Corporate (1) 402.8 361.6 11.4% 402.8

Equity 59.3 76.2 -22.2% 59.3

* Percent c hange between 2012:Q1 and 2011:Q1

Quarter-Over-Quarter

$ Billions 2012:Q1 2011:Q4

Q-o-Q %

Change*

Treasury (1) 562.9 448.8 25.4%

Federal Agency (1) 152.4 163.7 -6.9%

Municipal (1) 78.2 101.1 -22.7%

Mortgage-Related 486.5 459.4 5.9%

Asset-Backed 45.8 30.5 50.4%

Global CDO 3.3 5.1 -36.4%

Corporate (1) 402.8 193.1 108.6%

Equity 59.3 31.5 88.4%

* Percent c hange between 2012:Q1 and 2011:Q4(1) Includes long-term issuance only

CAPITAL MARKETS OVERVIEW

Total Issuance Rose to $1.78 Trillion in First Quarter 2012Securities issuance totaled $1.78 trillion in the first quarter of 2012, a 24.8 percent and 4.5 percent increase, respectively, quarter-over-quarter (q-o-q) andyear-over-year (y-o-y).

Although 2012 began with strong gains in equity market indices, the first quarter closed with renewed concerns over Eurozone sovereign woes, a negativecredit outlook of the banking industry, and mixed economic data. According tothe the Bureau of Economic Analysis, the U.S. gross domestic product (GDP)increased by 2.2 percent in the first quarter of 2012, down from 3.0 percengrowth in 4Q11.

Total gross issuance of Treasury bills and coupons, including cash management bills, was $1.99 trillion in 1Q12, 14.1 percent above the $1.75 trillion issued in 4Q11 but a 3.2 percent decrease from 1Q11s $2.06 trillion.

Federal agency long-term debt issuance was $152.4 billion in the first quarter, a6.9 percent and 13.9 percent decline, respectively, from 4Q11 and 1Q11.

Municipal issuance volume totaled $78.5 billion in the first quarter of 2012, decline of 22.3 percent from 4Q11, but an increase of 64.0 percent from1Q11. Refundings dominated issuance in the first quarter as issuers sought totake advantage of the exceptionally low rates in the municipal market.

Issuance of mortgage-related securities, including agency and non-agencypassthroughs and collateralized mortgage obligations, totaled $486.5 billion inthe first quarter, a 5.9 percent and 4.3 percent increase, respectively, from4Q11 and 1Q11. Non-agency commercial-backed mortgage securities issuance picked up again in the first quarter, bringing down agency share of issuance slightly (98.5 percent from 98.7 percent in 4Q11).

Asset-backed securities (ABS) issuance totaled $45.8 billion in the first quarte

of 2012, an increase of 50.4 percent and 52.1 percent, respectively, from 4Q1and 1Q11. Global funded collateralized debt obligation (CDO) issuance totaled $5.2 billion for 1Q12, an increase of 17.8 percent from 4Q11 and dou

ble the amount issued in 1Q11.

Total corporate bond issuance totaled $402.9 billion in 1Q12, a 111.7 percent increase from thprior quarter and 11.4 percent up y-o-y. Both high yield (HY) and investment grade (IG) issuancepicked up dramatically q-o-q.

Total equity issuance increased by 88.4 percent to $59.3 billion in 1Q12. The number of deals increased as well; in 1Q12, the number of equity deals rose to 281, up 56.1 percent from 180 deals in4Q11.


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0%

20%

40%

60%

80%

100%

120%

0

50

100

150

200

250

300

350

400

450

2011 2012

2004 2005 2006 2007 2008 2009 2010 2011 Q1

$ Billions

Source: Thomson Reuters, SIFMA

Taxable vs. T ax-Exempt Issuance2004 - 2012:Q1

BAB

Taxable

AMT

Tax-Exempt

Taxable Percentage of Municipal Issuance (right)

0

100

200

300

400

500

600

2011 2012

2004 2005 2006 2007 2008 2009 2010 2011 Q1

$ Billions

1Includes maturities of 13 months or lessSource: Thomson Reuters

Short-1 and Long-Term Municipal Issuance2004 - 2012:Q1

Short-Term

Long-Term

0.6

0.8

1.0

1.2

1.4

1.6

1.8

Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11

% Yield

Source: Bloomberg, MMA

Municipal GO AAA and 10-Yr Treasury RatioApr. 2005 - Mar. 2012

0

5

10

15

20

25

30

08:Q1 08:Q3 09:Q1 09:Q3 10:Q1 10:Q3 11:Q1 11:Q3

$ Billions

1Includes both dealer-to-dealer and customer-to-dealer transactions.Source: Municipal Securities Rulemaking Board

Average Daily Trading Volume of Municipal Securities1

2008:Q1 -2012:Q1

MUNICIPAL BOND MARKET

According to Thomson Reuters, long-term municipal issuance volume, including taxable and tax-exempt issuance, totaled $78.2 billion in the first quarter of2012, a 15.1 percent decline from the prior quarter ($92.1 billion), but an increase of 66.6 percent from 1Q11 ($46.9 billion). Refundings were a substan

tial portion of the issuance in the first quarter; with 47.0 percent of all issuancderived from refunding, compared to 30.2 percent in 4Q11 and 29.2 percenin 1Q11. Direct loans/placements may have continued to take supply out ofthe market as well.

Tax-exempt issuance totaled $71.3 billion in 1Q12, a decline of 12.0 percent qo-q but an increase of 84.4 percent y-o-y ($38.7 billion). Due to the expirationof most Congressional-authorized programs in 2011, taxable issuance declinedto $5.7 billion in 1Q12, a drop of 34.0 percent and 23.5 percent, respectivelyq-o-q ($8.7 billion) and y-o-y ($7.5 billion). Alternative minimum tax (AMTissuance totaled $1.1 billion in 1Q12, down 53.1 percent q-o-q ($2.3 billion)but up 46.6 percent y-o-y ($1.1 billion).

By use of proceeds, general purpose issuance led issuance totals in 1Q12($23.2 billion), followed by primary & secondary education ($15.2 billion), water and sewer facilities ($11.1 billion), and higher education ($9.2 billion).

Yields, Inflows and Total ReturnRatios of 10-year tax-exempt AAA general obligation (GOs) and similarmaturity Treasuries continued to remain steady in the first quarter, ending a96.6 percent, while shorter-term ratios continued its decline to 134.1 percen(from 173.1 percent end-December 2011) as flight-to-safety demand fo

Treasuries subsided.

With negative net supply putting pressure on the demand side, yields in themunicipal market continued to rally to new lows in the first quarter, returning2.08 percent on a total return basis, compared to 2.11 percent in 4Q11 and

0.29 percent in 1Q11. Taxables such as Build America Bonds (BABs) also con-tinued to enjoy another strong quarter, returning 3.08 percent on a total returnbasis in the first quarter, compared to 1.96 percent in A- to AAA-rated corpo-rates.

According to the Investment Company Institute (ICI), first quarter inflow intolong-term municipal mutual funds was $16.4 billion, compared to $9.5 billioninflow in the 4Q11 and $19.4 billion of outflow in 1Q11.

Trading ActivityAverage daily trading activity increased q-o-q in 1Q12 to $10.9 billion, a 4.percent increase from 4Q11 ($10.5 billion traded daily), but a 6.7 percent decline y-o-y ($11.8 billion traded daily in 1Q11).1 The average number of trade

increased slightly q-o-q (an increase of 2.1 percent), but plummeted y-o-y (adecline of 17.7 percent).

Government UpdateThe Obama Administration released its fiscal 2013 proposal, which containedseveral provisions relating to municipal securities. such as the capping of taxpreferences of the individual tax filer to 28 percent and the extension of BAB

with expanded uses and at a lower subsidy rate (30 percent in 2013 and 28 per

1 Based on averaging daily values reported on EMMAs market activity; like FINRA Trace, values reported in annulyearbooks will always be higher as daily values reported do not include all market activity.


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cent thereafter)2. The tax preference was examined by the Joint Committee on Taxation, which estimated that the cap would raise $520 billion over 10 years,3 In late March, the U.S. Department ofthe Treasury issued a report on infrastructure investment, which promoted the benefits of infrastructure investment and recommended the use of previously successful financing strategies (i.eBABs) and the creation of a national infrastructure bank (also promoted in the fiscal 2013 budget)4

According to the Nelson A. Rockefeller Institute, 4Q11 state tax receipts showed growth of 3.percent y-o-y.5 While growth was seen in sales tax (2.4 percent) and personal income tax (4.2 percent), corporate income tax revenue declined by 9.0 percent. Local governments, however, nowfeeling the effects of the housing market decline, saw revenue from taxes decline 1.0 percent y-o-ydue in part to their heavy reliance on property tax revenues. The report noted that due to differ-ences in funding, services largely reliant on local government revenue, such as education and publisafety, would be under severe fiscal pressure for some time.

2 US Department of the Treasury, General Explanations of the Administrations Fiscal Year 2013 Revenue Proposals(Green Book), February 2012. Several other municipal-related provisions were also included, such as allowing currentrefundings, loosening arbitrage restrictions on state and local governments, eliminating the private activity bond (PAB)usage test, etc.3 Joint Committee on Taxation, Estimated Budget Effects of The Revenue Provisions Contained in the PresidentsFiscal year 2013 Budget Proposal, March 14, 2012.4 US Department of the Treasury, Council of Economic Advisors, A New Economic Analysis of Infrastructure Invest-ment, March 23, 2012.5 Nelson A. Rockefeller Institute of Government Report: State Revenue Report: Tax Revenues Surpass Previous peakBut Growth Softens Once Again, April 19, 2012.


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0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2,600

1Q'08 3Q'08 1Q'09 3Q'09 1Q'10 3Q'10 1Q'11 3Q'11 1Q'12

$ Billions

Source: U.S. Treasury

Quaterly Gross Issuance of U.S. Treasury Securities2008:Q1 - 2012:Q1

TIPS

Coupons

CMBs

Bills

(300.00)

(150.00)

0.00

150.00

300.00

450.00

600.00

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12

$ Billions


Net Issuances of Tr easury Marketable DebtJan. 2008 - Mar. 2012

Net Coupon Issuance (Notes and Bonds only)

Net Issuance (including CMBs)

Net Issuance (excluding CMBs)

0

500

1,000

1,500

2,000

2,500

2011 2012

2003 2004 2005 2006 2007 2008 2009 2010 2011 YTD

$ Billions


Gross Issuance of U.S. Treasury Marketable Coupon Securities2003 - 2012:Q1

0

100

200

300

400

500

600

700

800

900

1Q'08 3Q'08 1Q'09 3Q'09 1Q'10 3Q'10 1Q'11 3Q'11 1Q'12

Quaterly Summary of Bill, Coupon, and TIPS Issuance2008:Q1 - 2012:Q1

CMBs 4-week Bills

1 3-w ee k Bil ls 2 6-w ee k Bi ll s

5 2-w ee k Bil ls 2 -ye ar Note s

3 -yea r N otes 5 -ye ar N ote s

7 -yea r N otes 1 0-ye ar N ote s

30 -ye ar Notes TIPS

$ Billions


TREASURY MARKET

Issuance of U.S. Treasury Securities IncreasesTotal gross issuance of Treasury bills and coupons, including cash management bills (CMBs), was $1.99 trillion in 1Q12, 14.1 percent above the $1.75trillion issued in 4Q11 but a 3.2 percent decline from 1Q11s issuance of

$2.06 trillion. Total first quarter net issuance of U.S. Treasury securities, including CMBs, increased to $401.2 billion, up 29.4 percent from the previous quarters $310.0 billion and more than double the $265.2 billion issued in 1Q11

The 1Q12 issuance of $401.2 billion in net marketable debt was 9.6 percenbelow the Treasurys January 1Q12 borrowing estimate of $444 billion.

Excluding CMBs, total net issuance stood at $361.2 billion in 1Q12, a 20.4percent increase from $300.0 billion in the prior quarter. CMB issuance quadrupled in 1Q12 to $40.0 billion from the post-crisis low of $10.0 billion in4Q11.

Approximately $563.7 billion in Treasury coupons plus Treasury InflationProtected Securities (TIPS) were issued in the first quarter, 24.9 percent abovethe $451.2 billion issued in the prior quarter and 1.7 percent above year-agoissuance of $554.51 billion. Treasury mentioned in its February Quarterly Refunding Statement that it had taken a number of steps over the past two yearto improve liquidity in the TIPS market; Treasury remained pleased with thedemand for inflation protection and expected to continue to gradually increasegross issuance of TIPS to $150 billion in 2012.6

Excluding TIPS, total gross issuance of Treasury marketable coupon securitiewas $563.2 billion, a 25.5 percent increase from $448.9 billion issued in 4Q1and 2.4 percent higher than the $550.2 billion issued in 1Q11.

Net coupon issuance for the first quarter of 2012 was $247.3 billion, 7.4 percent below 4Q11s $267.0 billion and down 27.1 percent y-o-y. Net couponissuance has been declining steadily since 1Q10, when it stood at $433.2 billion

for a cumulative decline of 42.9 percent through 1Q12.

Gross issuance of bills, including CMBs, was $1.43 trillion in 1Q12, a 10.2percent increase from last quarters $1.30 trillion but a 5.2 percent decline from$1.51 trillion issued during the same year-ago period.

At its last meeting, the Treasury Borrowing Advisory Committee continued toconsider adding Floating Rate Notes (FRNs) to Treasurys offerings. TheCommittee endorsed pursuing this option, but reached no concensus on anappropriate reference rate. The Treasury will continue to study this option, bunoted that system limitations prevented roll-out before 2013.

6 See US Treasurys February 2012 Quarterly Refunding Statement.


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100

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800

2 00 3:Q1 2 00 4:Q1 2 00 5:Q1 2 00 6:Q1 2 00 7:Q1 2 00 8:Q1 2 00 9:Q1 2 01 0:Q1 2 01 1:Q1 2 01 2:Q1

$ Billions

1Primary dealer activitySource: Federal Reserve Bank of New York

Average Daily Trading Volume of Treasury Securities1

2003:Q1 - 2012:Q1

0

1

2

3

4

5

6

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

% Yield

Note: Since December 2008, the rate has been 0 - 0.25%Source: Federal Reserve

Treasury Yields and Target Fed Fund RateJan. 2003 -Mar. 2012

2-yr Treasury

10-yr Treasury

Fed Funds Target

Trading Volume Increases Over 6 PercentAfter lower trading activity in 4Q11, the average daily trading volume increased, parallel with trading activity in other debt instruments in the first quar-ter of 2012. Daily trading volume of Treasury securities by primary dealeraveraged $544.4 billion in the first quarter, compared to $529.4 billion in theprior quarter (6.2 percent increase) and $603.3 billion in 1Q11 (9.8 percendrop).

Treasury Yields IncreaseAfter a very unstable second half of 2011, the U.S. economy showed smalsigns of improvement in 1Q12. The unemployment rate fell to 8.2 percent inMarch, a three-year low, the U.S. Consumer Price Index increased 2.7 percenon yearly bases in March, down from 3.0 percent in December 2011, consumespending increased by 0.3 percent in March, and the Conference Board Lead-ing Economic Index increased by 0.3 pecent March pointing to a small improvement in the U.S. economy. On March 13, 2012 the Federal Reserve indicated that the economic activity was expanding moderately. The Fed agreed: tokeep the target Fed Funds rate at 0-0.25 percent at least through late 2014, ex-tended from mid-2013; to continue extending the average maturity of its secu

rities holdings; and to continue reinvesting principal payments from its MBSholdings to support conditions in the mortgage market.

Treasury yields in 1Q11 increased both on the front-end and back-end of thcurve. Two-year yields increased to 0.33 percent from 0.25 percent in 4Q11five-year yields increased to 1.04 percent from 0.84 percent and 10-year yieldrose to 2.22 percent from 1.87 percent. Looking ahead, primary dealers polled

by SIFMA forecast benchmark two-year Treasury yields to decrease slightly going forward throughthe third quarter of 2012, while the yields of five-year and 10-year Treasuries are expected to firsincrease further in 2Q12 but then decrease to decrease in 3Q12.7

7 See SIFMA Government Forecast 2Q12.


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0

200

400

600

800

1,000

1,200

1,400

2011 2012

2004 2005 2006 2007 2008 2009 2010 2011 Q1

$ Billions

1Excludes maturities of one year or less* Beginni ng in 2004, Sallie Mae has been excluded due to privatization

Sources: FHLB, FNMA, FHLMC, SLMA, TVA, FCS

Long-Term Federal Agency Debt Issuance1

2004 -2012:Q1

0

20

40

60

80

100

120

2011 2012

2004 2005 2006 2007 2008 2009 2010 2011 Q1

$ Billions

1Primary dealer activitySources: FRBNY

Average Daily Trading Volume of Federal Agency Securities1

2004 - 2012:Q1

Coupons

Discount Notes

FEDERAL AGENCY DEBT MARKET

Agency LT Debt Issuance Continues to DeclineFederal agency long-term debt (LTD) issuance was $152.4 billion in the firstquarter, a 6.9 percent and 13.9 percent decline, respectively, from 4Q11 ($163.7billion) and 1Q11 ($177 billion). Overall, average daily trading volume of

agency securities (coupons and discount notes) increased in the first quarter to$42.3 billion, compared to the $37.6 billion daily average traded in the prioquarter. More generally, the federal agencies continued to move to long-termdebt funding structure and continued to reduce short-term debt outstandings.

The 12 Federal Home Loan Banks (FHLBs) issued $66.5 billion in LTD in thfirst quarter, increases of 100 percent and 34.6 percent, respectively, from4Q11 ($33.2 billion) and 1Q11 ($49.4 billion). A little more than $725.9 billionin short-term debt (STD), generally in the form of discount notes, was issuedin 1Q12, an increase of 80.6 percent q-o-q and a decline of 57.6 percent y-o-y

Total FHLB bonds outstanding were $476.3 billion as of March 31, 5.0 percenbelow the $501.7 billion outstanding at the end of the fourth quarter and downnearly 13.6 percent y-o-y from $551.2 billion. Discount notes outstanding experienced a decline to $181.7 billion at end-March 2012 from end-Decembe2011 ($190.2) and end-March 2011 ($184.4 billion).

Fannie Maes1Q12 gross debt issuance, both STD and LTD, totaled $104.7billion, down 23.1 percent and 24.9 percent, respectively, from 4Q11 ($136.2billion) and 1Q11 ($139.5 billion). STD issuance declined to $45.2 billion, 26.5. percent drop q-o-q and down 48.5 percent y-o-y, whereas LTD issuancof $59.5 billion was down by 20.5 percent q-o-q but up 14.5 percent y-o-y. Aof quarter end, Fannie Mae had $110.9 billion STD and $583.6 billion LTD

outstanding.

Freddie Macs first quarter gross debt issuance totaled $130.6 billion, a 14.4 percent decrease from4Q11 ($152.6 billion) and a 30.9 percent decrease from 1Q11 ($189.1 billion).

Total Farm Credit System bond issuance totaled $93.8 billion as of March 31, 2012, and total deboutstanding ended the first quarter at $184.9.0 billion.

Primary dealers polled by SIFMA in the Second Quarter Government Forecast survey expectedgross coupon issuance for the four largest Federal agencies (FHLB, Fannie Mae, Freddie Mac, andthe Farm Credit Systems) to be $195 billion for the second quarter of 2012.8 By agency, gross coupon issuance was expected to be $48 billion for Fannie Mae, $50 billion for Freddie Mac, $75 billionfor the FHLBs, and $22 billion for the Farm Credit System.

8 See SIFMAs U.S. Government Forecast 2Q12


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0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2011 2011 2012

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Q1 Q4 Q1

$ Billions

Note: Data include corporate securities.Source: Federal Reserve Bank of NY

Financing by U.S. Government Securities DealersAverage Daily Amount Outstanding2002 - 2012:Q1

Reverse Repurchases

Repurchases

0.00

0.05

0.10

0.15

0.20

0.25

0.30

Jan-10 Aug-10 Mar-11 Oct-11

Percent

Sources: The Depository Trust & Clearing Corpora tion

DTCC GCF Repo IndexTM

Jan. 2010 - Mar. 2012

Treasuries

Agency

MBS

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

$ Billions

Sources: Federal Reserve, SIFMA estimates

Outstanding Money Market Instruments2002 - 2012:Q1

Large Time Deposits

Commercial Paper

0

1

2

3

4

5

6

Ma r-0 6 Oct- 06 Ma y- 07 D ec-0 7 Ju l- 08 Feb -09 Sep -09 Ap r- 10 N ov-10 Jun -1 1 Ja n- 12

Percent

Sources: Federal Reserve

Financial & Nonfinancial Commercial Paper 3-Month Interest RatesMar. 2006 - Mar. 2012

Nonfinancial CP

Financial CP

FUNDING AND MONEY MARKET INSTRUMENTS

Total Repurchase Activity Falls9The average daily amount of total outstanding repurchase (repo) and reversrepo agreement contracts decreased to $4.84 trillion in 1Q12. This representa 2.6 percent decrease from 4Q11s average of $4.90 trillion and a 0.5 percen

decrease y-o-y.Daily average outstanding repo transactions totaled $2.7 trillion in 1Q12, down1.8 percent from 4Q11s $2.75 trillion. Reverse repo transactions averagednearly $2.13 trillion outstanding in the first quarter, a 3.6 percent decrease from4Q11 and a 1.3 percent decrease y-o-y.

Treasuries, Agency, and MBS Repo Rates RiseIn 1Q12, the DTCC General Collateral Finance (GCF) Repo Index rates increased for Treasuries, agency debt and MBS. The repo rate for Treasuries (30year and less) increased to 0.187 percent from 0.080 percent in 4Q11, foagencies to 0.203 percent from 0.091 percent, and for MBS to 0.224 percenfrom 0.117 percent.

Total MMI Outstanding FallsThe outstanding volume of total money market instruments (MMI), includingcommercial paper (CP) and large time deposits, stood at $2.59 trillion at theend of the first quarter in 2012, 1.2 percent below the $2.62 trillion in 4Q1and a 11.7 percent decrease y-o-y.CP outstanding totaled approximately $994billion, a 2.6 percent increase from $969 billion in 4Q11, yet a 12.0 percendecrease y-o-y. Large time deposits totaled $1.6 trillion in 1Q12, a decrease of3.4 percent from 4Q11 and an 11.5 percent decrease from $1.8 trillion in1Q11.

Financial and Nonfinancial CP 3-Month Interest Rates RiseInterest rates for financial and nonfinancial CP rose in the first quarter of 2012

The financial CP rate was 0.20 percent at the end of 1Q12, 2 basis points (bpshigher than the 0.18 percent in 4Q11, but 3 bps lower than 1Q11s 23 bps

The rate for nonfinancial CP rose to 0.18 percent in 1Q12, which represents 4 bps increase from 4Q11s 0.14 percent, but a 5 bps decrease from 1Q110.23 percent.

9 As a reminder, repo data is that provided by the primary dealers only:http://www.newyorkfed.org/markets/gsds/search.cfm . For a breakdown of tri-party repo data, please refer to the Feder-al Reserve Bank of New Yorks Tri-party Repo Reform website here:http://www.newyorkfed.org/tripartyrepo/margin_data.html.


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0

500

1000

1500

2000

2500

2011 2012

2004 2005 2006 2007 2008 2009 2010 2011 Q1

$ Billions

Sources: Federal Agencies, Dealogic, Thomson Reuters

Issuance of Mortgage-Related Securities2004 - 2012:Q1

Agency -Other

Agency MBS/CMO

Non-Agency MBS

0

100

200

300

400

500

600

700

800

2011 2012

2004 2005 2006 2007 2008 2009 2010 2011 Q1

$ Billions

Sources: Bloomberg, Dealogic, Thomson Reuters

Issuance of Non-Agency Mortgage-Backed Securities2004 - 2012:Q1

RMBS CMBS

0

500

1000

1500

2000

2500

2004 2005 2006 2007 2008 2009 2010 2011 2012YTD

$ Billions

Sources: Loan Performa nce, Fitch Ratings, Moody's, S&P, SIFMA, Thomson Reu tersIn 2011Q1, ABS outstandings were revised and certain securities in non -agency were

moved to ABS categories. Numbers have been restated to reflect changes.

U.S. Non-Agency Securities Outstanding2004 - 2012:Q1

RMBS

CMBS

0

50

100

150

200

250

300

350

400

2011 2012

2004 2005 2006 2007 2008 2009 2010 2011 Q1

$ Billions

Source: Federal Reserve Bank of NY

Average Daily Trading Volume of Agency Mortgage-BackedSecurities 2004 - 2012:Q1

MORTGAGE-RELATED SECURITIES

Mortgage-Related MarketIssuance of mortgage-related securities, including agency and non-agencypassthroughs and collateralized mortgage obligations (CMOs), totaled $486.5billion in the first quarter of 2012, a 5.9 percent and 4.3 percent increase, re

spectively, from 4Q11 ($459.4 billion) and 1Q11 ($466.5 billion). Non-agenccommercial-backed mortgage securities (CMBS) issuance picked up again inthe first quarter, reducing the agency share of issuance slightly to 98.5 percenfrom 98.7 percent in 4Q11. Non-agency residential mortgage issuance continues to remain relatively quiet, with two deals coming from Redwood Trust (Se-quoia Mortgage Trust 2012-1 and 2012-2), the only issuer in the non-agencymarket since 2009.

Agency IssuanceAgency mortgage-related issuance totaled $479.0 billion in 1Q12, an increasof 5.6 percent and 5.9 percent, respectively from 4Q11 ($453.5 billion) and1Q11 ($452.2 billion). The slight increase was largely due to increased issuancfrom Fannie Mae.

Trading ActivityAverage daily trading of agency MBS, including passthroughs, CMOs, andTBA, was $305.3 billion in 1Q12, up 25.5 percent from 4Q11. Average dailtrading of non-agency CMBS and RMBS were $2.9 billion and $3.2 billionrespectively, in 1Q12, an increase of 53.3 percent and 130.3 percent from4Q11.

Notably, the Federal Reserve began auctioning the assets of Maiden Lane II inthe first quarter, selling down the entire portfolio by the end of February. TheMaiden Lane II portfolio, acquired during the financial crisis from various sub-sidiaries of AIG, was comprised primarily of non-agency subprime, alt-A andoption ARM securities as of the end of 2011.10

Non-Agency Issuance and OutstandingNon-agency issuance totaled $7.5 billion in 1Q12, an increase of 27.0 percenfrom 4Q11 ($5.9 billion), but a decrease of 15.7 percent from 1Q11 ($8.9billion). Issuance continued to remain predominantly from the CMBS spaceOutstandings continued to decline, with an estimated $1.4 trillion outstandingat end-March, a decline of 3.5 percent from 4Q11.

Legacy CMBS BBB continued to see a drop in price (to 14.78 end-March from15.34 end-December on CMBX.BBB) while CMBS AAA saw a small rise (to94.38 from 92.89 on CMBX.AAA). On the other hand, new CMBS spreadhave tightened significantly since end-December, with the TRX.II narrowingby 30 bps at end-March from end-December.

Government UpdateIn early February, Iowa Attorney General Tom Miller announced a $25 billionnational joint federal-state accord over mortgage foreclosure abuses and fraud

The settlement requires servicers to commit a minimum of $17 billion directlyto borrowers through national homeowner relief effort options; $3 billion toan underwater mortgage refinancing program; $5 billion to states and the fed-eral government; and an independent monitor to ensure mortgage servicecompliance.

10 See Maiden Lane Transations for more detail.


11/20


10

0

100

200

300

400

500

600

700

800

2011 2012

2004 2005 2006 2007 2008 2009 2010 2011 Q1

$ Billions

Source: Thomson Reuters, SIFMA

Issuance of Asset-Backed Securities2004 - 2012:Q1

Auto, $25.71B

Credit Cards, $5.54B

Equipment, $4.53B

Home Equity,

$0.55B

Manufactured

Housing, $0.00B

Other, $7.37B

Student Loans,

$2.12B

ABS Issuance by Major Types of Credit2012:Q1

Source: ThomsonReuters, SIFMA

0

5

10

15

20

25

08:Q1 08:Q3 09:Q1 09:Q3 10:Q1 10:Q3 11:Q1 11:Q3 12:Q1

$ Billions

Source: Thomson Reuters

Global CDO Issuance by T ransaction Structure2008:Q1 - 2012:Q1

Market Value

Synthetic Funded

Cash Flow & Hybrid

High Yield Bonds,

0.00B, 0%

High Yield Loans,

1.86B, 57%

Investment Grade

Bonds, 0.00B, 0%

Mixed Collateral,

0.00B, 0%

Other, 0.00B, 0%

Other Swaps, 0.00B,

0%

Structured Finance,

1.40B, 43%

Global CDO Issuance by Underlying Collateral2012:Q1

Source: ThomsonReuters

ASSET-BACKED SECURITIES AND CDOS

Asset-Backed Market & CDOAsset-backed securities (ABS) issuance totaled $45.8 billion in the first quarteof 2012, an increase of 50.4 percent and 52.1 percent, respectively, from 4Q1and 1Q11. Auto continues to lead issuance totals, with $25.7 billion sold (54.1

percent of total issuance in 1Q12).Esoteric ABS issuance continued to remain relatively robust in the first quarter

with the second highest issuance total in 1Q12 ($8.2 billion, representing 17.2percent). The primary market for insurance-linked securities (ILS) also re-mained robust, while some relatively rare asset classes made it to market as wel(e.g., franchise, royalties). Timeshare, cell tower and utility securitizations werealso brought to market.

Both the auto and equipment sectors saw positive net issuance, withoustatndings increasing by 8.8 percent and 21.5 percent, respectively, from4Q11 levels. The remainder of ABS, however, continued to see negative neissuance, with the greatest declines in the structured finance CDO (6.7 per-cent), credit card (3.7 percent) and manufactured housing (3.2 percent) sectors.

Collateralized Debt ObligationsGlobal funded CDO issuance totaled $5.2 billion for 1Q12, an increase of17.8 percent from 4Q11 and double the amount issued in 1Q11. The U.Scollateralized loan obligation (CLO) market declined in 1Q12, with $1.9 billionissued, compared to $4.7 billion in 4Q11 and $410 million in 1Q11.

Trading Activity and Total ReturnTrading activity in ABS and CDOs saw a pick up in the first quarter from thesluggish fourth quarter. Daily trading volumes averaged $1.2 billion and $273.0million respectively, an increase of 25.5 percent and 39.4 percent from 4Q11.

According to Merrill Lynch indices, the total return for ABS and CMBS wa

2.069 percent in 1Q12, up from 1.853 percent in 4Q11 and 1.430 percent in1Q11.


12/20


11

0

200

400

600

800

1,000

1,200

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 YTD2011

YTD2012

$ Billions

1Includes all nonconvertible deb t, MTNs Yankee bonds, and TLGP de bt, but excludes allissues with maturities of one year or less, CDs, and f ederal agen cy debt


Corporate Bond Issuance1

2000 - 2012:Q1

High Yield

Investment Grade

0

100

200

300

400

500

600

700

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Basis Points

Source: Bank of America Merrill Lynch

U.S. Corporate Option Adjusted Spreads to U.S. Treasury - 1-10 YearJan. 2000 -Mar. 2012

AA-AAA Industrial

BBB-A Industrial

0

1

2

3

4

5

6

1-3 3-5 5-7 7-10 10-15 15+

% Yield


U.S. Corporate: AAA - Yield Curves

3/31/2012

3/31/2011

Years to Maturity

1

2

3

4

5

6

7

1-3 3-5 5-7 7-10 10-15 15+

% Yield


U.S. Corporate: BBB - Yield Curves

3/31/2012

3/31/2011

Years to Maturity

S&P US Corporate Rating Actions

2012:Q1 2011:Q4 2011:Q1 2011 2010

Upgrades 77 54 81 293 232

Downgrades 67 111 49 281 175

Source:S&P Fixed Income Research

CORPORATE BOND MARKET

Corporate Bond Issuance Doubles; HY Issuance TriplesTotal corporate bond issuance totaled $402.9 billion in 1Q12, more than double the $190.3 billion issued last quarter and up 11.4 percent y-o-y. As the U.Seconomy continued to recover and worries about European sovereign debt

crisis subsided, issuance of corporate debt increased but the main driver of thejump was due to maturity wall concerns, as well as the maturing debt from the

Temporary Liquidtiy and Guarantee Program (TLGP). The issuance of corporate debt for refinancing purposes jumped over 8 times q-o-q, reaching $126.2billion in 1Q12 from $13.5 billion in 4Q11.

IG bonds issuance doubled in 1Q12 to $311.8 billion from $156.2 billion inthe previous quarter and increased by 12.3 percent from $277.6 billion in1Q11. The was a five-fold increase in IG bonds issued for the purposes ofrefinancing to $80.4 billion, or 25 percent of total issuance. Financial companies remained the leading industry in IG debt issuance and accounted for overhalf (56.7 percent) of the IG bonds issued in 1Q12.

The issuance of HY bonds stood at $91.0 billion in 1Q12, a new record fothe quarterly issuance of HY debt, nearly triple 4Q11s $34.1 billion and 8.4percent higher than $84.0 billion issued in 1Q11. Over half of total HY issuance during the quarter was directed toward refinancing or redeeming otherbonds or notes.11 Demand for HY bonds was exceptionally high in the firstquarter of 2012 due to issuers trying to get ahead of the maturity wall; the issuance of HY bonds for refinancing purposes jumped almost 35 times to $45.7billion from $1.3 billion in 4Q11.

Spreads Tighten; Default Rates Decrease SlightlyAccording to S&P, composite spreads for both IG and HY bonds tightened inthe first quarter of 2012. IG bond spreads finished the quarter at 204 bps, 8.9percent lower than 224 bps at the end of 4Q11 and 14.6 percent below its 5

year moving average of 239 bps. HY bond spreads also narrowed, finishing1Q12 at 625 bps, 13.3 percent lower than 721 bps in 4Q11 and 13.2 percenbelow its 5-year moving average of 720 bps. The cost of HY borrowing decreased significantly from the beginning of October 2011, when the speculative-grade spread reached 830 bps.

S&Ps Global Fixed Income Research reported 25 issuers defaulted worldwidein 1Q12, 15 of which were based in the U.S. This represents a slight quarterlydecrease in U.S. defaults from 19 in the last quarter, but up significantly from1Q11, when only 4 U.S. issuers defaulted. The market remains open to HYissuers, leading to relatively low default rates in 1Q12. The majority of default

were due to a missed interest or principal payment or because of bankruptcyfilings. The U.S. corporate default rate stood at 2.4 percent in 1Q12, up from

2.0 percent in 2011 and is forecasted by S&P to rise to 3.3 percent for full year2012.

In 1Q12 S&P Ratings Services downgraded 67 and upgraded 77 U.S. issuers, asignificant improvement from the previous quarter, when there were 111downgrades versus 54 upgrades.

11 Fitch, Q1 2012 U.S. Leveraged Market Quarterly


13/20


12

0

2

4

6

8

10

12

14

16

18

20

22

Mar-08 J ul -08 N ov -08 Mar-09 J ul -09 N ov-09 Mar-10 J ul -10 N ov -10 Mar-11 J ul -11 N ov -11 Mar-12

$ Billions

Source: FINRA

TRACE Average Daily Trading Volume - Corporate BondsMar. 2008 - Mar. 2012

Convertibles

High Yield

Investment Grade

Trading Volume Increases Sharply in 1Q12According to the FINRA TRACE data, trading volume for IG, HY and convertible bonds (CVs) increased significantly in the first quarter of 2012. IGaverage daily trading volume increased to $13.4 billion, up 39.5 percent from$9.6 billion in 4Q11 but off slightly by 1.0 percent from $13.6 billion in 1Q11HY average daily trading volume rose to $5.5 billion in 1Q12, a 57.1 percenincrease from $3.5 billion in the fourth quarter and 5.2 percent higher than $5.2billion in the same year-earlier period. The average daily trading volume of CVincreased as well. In 1Q12, CVs trading volume stood at $1.1 billion, 11.5 percent above 4Q11s $1.0 billion but 26.4 percent lower than the average trading

volume of $1.5 billion a year ago.

The steep increase in IG and HY bond trading volume was due to subduedtrading in the previous quarter. February 2012 was a particulary active month in corporate bondtrading, with the average daily trading volume of IG bonds increasing to $14.1 billion, 24.5 percenabove the year-to-date average of $11.4 billion and the highest monthly average on record (recorddate back to January 2005). Similarly, the average trading volume of HY in February rose to $6.2billion, 46.6 percent above the year-to-date average of $2.3 billion and highest monthly volumsince January 2010.


14/20


13

500

1,000

1,500

2,000

2,500

3,000

2007 2008 2009 2010 2011 2012

Sources: NASDAQ, S&P

Daily Closing Stock PricesMar. 2007 -M ar. 2012

NASDAQ Composite

S&P 500

0

1,000

2,000

3,000

4,000

5,000

6,000

07:Q1 08:Q1 09:Q1 10:Q1 11:Q1 12:Q1

Millions of Shares

Sources: NASDAQ, NYSE

NASDAQ and NYSE Average Daily Share Volume2007:Q1 - 2012:Q1

NA SDA Q NYSE

0

20

40

60

80

100

120

140

160

180

07:Q1 08:Q1 09:Q1 10:Q1 11:Q1 12:Q1

$ Billions

Sources: NASDAQ, NYSE

NASDAQ & NYSE Average Daily Trading Volume2007:Q1 - 2012:Q1

NASDAQ

NYSE

6

8

10

12

14

16

18

20

2007 2008 2009 2010 2011 2012

Billions of Shares

Source: NYSE

NYSE Short InterestMar. 2007 -M ar. 2012

EQUITY AND OTHER MARKETS

The S&P 500 closed the first quarter at 1,408.47, a 12.0 percent increase fromlast quarter and 6.2 percent up y-o-y. The NASDAQ Composite Index finishedthe first quarter at 3,091.57, an 18.7 percent increase from 4Q11 and an 11.percent increase y-o-y. The Dow Jones Industrial Average (DJIA) increased as

well, finishing 1Q12 at 13,212.04, an 8.1 percent increase q-o-q and 7.2 percenincrease from 1Q11. During the quarter, on February 21, DJIA reached13,000 for the first time since 2008.Equity investors recorded quarterly gains asU.S. economy showed small signs of improvement and the anxiety about theEuropean sovereign debt crisis seemed to fade.

NYSE & NASDAQ Daily Share Volume DropsThe New York Stock Exchanges (NYSE) 1Q12 average daily share volumdecreased to 1.2 billion shares, 14.9 percent below the previous quarters 1.4billion and 23.8 percent below 1.6 billion in 1Q11, and the lowest quarterlyaverage daily share volume on NYSE since 1.18 billion shares in 2Q01. TheNYSEs average daily dollar volume decreased as well. The average dollar volume stood at $36.9 billion in 1Q12, 7.9 percent below the previous quarter

$40.1 billion and a 24.5 percent decrease y-o-y.

NASDAQs average daily share volume stayed flat at 1.8 billion shares in 1Q12but decreased by 12.3 percent y-o-y. The dollar trading volume increased to$54.6 billion in 1Q12, up 10.4 percent from $49.4 billion in the previous quarter but down 2.1 percent from the 1Q11s $55.7 billion.

Short Interest Decreases by Five PercentThe number of shares sold short on the NYSE Group stood at 12.6 billionshares (3.3 percent of total shares outstanding) at the end of 1Q12, down 5.percent from 13.3 billion at the end of last quarter and 2.1 percent 12.9 billionat the end of 1Q11.12 During the quarter, short interest fell to as low as 12.5billion shares, the lowest level since the end of October 2007 when short inter

est was12.4 billion shares.

12 NYSE Group Short Interest Report


15/20


14

0

50

100

150

200

250

300

350

400

0

20

40

60

80

100

120

07:Q1 08:Q1 09:Q1 10:Q1 11:Q1 12:Q1

# of Deals$ Billions


Total Equity Underwriting2007:Q1 - 2012:Q1

Volume ($ Billions)

Deals

0

10

20

30

40

50

60

70

80

0

2

4

6

8

10

12

14

16

18

20

22

24

26

28

07:Q1 08:Q1 09:Q1 10:Q1 11:Q1 12:Q1



"True" IPO - Excluding Closed-End Funds2007:Q1 - 2012:Q1

Volume

Deals

0

50

100

150

200

250

300

0

20

40

60

80

100

120

07:Q1 08:Q1 09:Q1 10:Q1 11:Q1 12:Q1



Secondary Stock Offerings2007:Q1 - 2012:Q1

Volume

Deals

0

500

1,000

1,500

2,000

2,500

3,000

3,500

0

100

200

300

400

500

600

07:Q1 08:Q1 09:Q1 10:Q1 11:Q1 12:Q1


Source: Dealogic

U.S. Mergers and Acquisitions Announced Deals2007:Q1 - 2012:Q1

Volume

Deals

Equity Underwriting Increases by 88 PercentAfter a relatively slow 4Q11, total equity underwriting volume increased by88.4 percent to $59.3 billion in 1Q12, but was still 22.2 percent below th$76.2 billion total in 1Q11 and is 1.4 percent below than the 5-year movingaverage of $60.1 billion.. The number of deals increased as well: there were 281equity underwriting deals, up 56.1 percent from 180 deals in 4Q11.The volumeof equity underwriting increased in 1Q12 as the economy showed small signof recovery.

IPO Volume Decreases, Remains below Five-Year AverageTrue initial public offerings (IPOs), which exclude closed-end mutual fundsdecreased in 1Q12 to $6.6 billion on 47 deals, a 13.2 percent decrease from$7.6 billion and 4.4 percent decrease from 45 deals in the previous quarter. According to Dealogic the leading sector in IPOs in 1Q12 was computers andelectronics, followed by finance and auto/truck sectors. IPO activity remainedsubdued in the first quarter of 2012 as the economic recovery continues at amoderate pace without strong signs of a turnaround. According to the KCSAStrategic Communications 2012 IPO Outlook survey, both institutional andindividual investors are looking for a respite from market turbulence and a re

turn to predictability.13

Secondary Offerings IncreaseSecondary market issuance more than doubled in 1Q12 to $44.8 billion on 19deals from $21.1 billion on 119 deals in 4Q11 (an increase of 112.2 percenand 63.9 percent, respectively). The average deal value for the quarter increasedto $229.5 million from $177.2 million in the previous quarter, a 29.5 percenrise. Despite a large q-o-q increase secondary issuances were down 13.2 percenin dollar volume and 16.7 percent down in number of deals y-o-y.

Announced M&A Volume Decreases by 61 PercentDespite some signs of improving U.S. economy, the investors remained hesitant given the still uncertain economic outlook and lingering worries about the

European sovereign debt crisis. Announced U.S. mergers and acquisition(M&A) volume in 4Q11 stood at $64.0 billion, down 60.7 percent from theprevious quarters $163.0 billion. The number of deals increased by 10.9 percent, rising to 2,674 this quarter from 2,411 in 4Q11, causing the average deasize to fall considerably. Announced M&A volume declined to the lowest quar-terly level since our records started in 1Q00 and stood 75.0 percent below the5-year moving average of $256.1 billion.

According to data from Dealogic, the amount U.S. Inbound M&A ( moneyinvested in U.S. companies by those outside the US through M&A deals) decreased by 30.7 percent to $29.8 billion from $43.0 billion in the previous quarter. On the other hand, the dollar amount U.S. companies invested in othercountries increased;: American firms invested $32.0 billion in deals outside of

the U.S., 29.4 percent above the $24.7 billion in 4Q11.

13 KCSA 2012 IPO Outlook, December 27. 2011.


16/20


15

10

12

14

16

18

20

22

24

2007 2008 2009 2010 2011

Source: S&P

S&P 500 P/E RatioMar. 2007 -M ar. 2012

0

20

40

60

80

100

120

140

160

07:Q1 08:Q1 09:Q1 10:Q1 11:Q1 12:Q1

$ Billions

Source: Dealogic

NASDAQ and NYSE Share Buybacks2007:Q1 - 2012:Q1

NYSE

NASDAQ

0

10

20

30

40

50

60

70

2007 2008 2009 2010 2011 2012

Source: Chicago Board of Options Exchange

SPX Volatility Index (VIX) CloseMar. 2007 - Mar. 2012

0

200

400

600

800

1,000

1,200

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

07:Q1 08:Q1 09:Q1 10:Q1 11:Q1 12:Q1

$ Millions

Source: Pricewaterhouse/Venture Economics/NVCA MoneyTree Survey

Venture Capital Investments in U.S. Companies2007:Q1 - 2012:Q1

Investment

# of Deals

# ofDeals

P/E Ratio Increases, Remains below Five-Year AverageThe S&P 500s P/E ratio averaged 13.9 in 1Q12, up 7.8 percent from the previous quarters average of 12.9 but 12.2 percent below the 5-year average o15.9. The P/E ratios qoq was a reflection on a slightly more stable financialmarkets and small signs of economic recovery in the first quarter of 2012. ThS&P 500s P/E ratio decreased by 9.2 percent y-o-y and is 35.2 percent belowthe quarterly high of 22.1 in 4Q09.

Buybacks Increase on NYSE, Decrease on NASDAQThe volume of corporate share repurchases on NYSE totaled $99.5 billion on104 deals in 1Q12, compared to $69.4 billion on 123 deals in 4Q11. While th

volume of buybacks increased by 43.4 percent, the number of deals declinedby 15.5 percent, translating into a near doubling of the average deal size. Compared to the first quarter of 2011 NYSE share buybacks decreased by 1.1 percent in volume but increased by 20.9 percent in number of deals.

NASDAQs buybacks stood at $31.1 billion in 1Q12, a 12.5 percent decreasfrom 4Q11s $35.5 billion while the number of deals decreased 34.4 percent to82. Compared to 1Q11, NASDAQ share repurchases increased by about 30percent both in volume and number of deals.

CBOE VIX Index Falls 34 PercentThe Chicago Board Options Exchange Volatility Index (VIX) fell by 33.8 percent to 15.5 in the first quarter of 2012 from 23.4 in 4Q11, the lowest monthend value since 16.52 in June 2011. The index has been showing a generadownward trend since the beginning of October 2011. Zacks InvestrmenResearch expects the VIX to remain in the 15 to 25 range with occasionaspikes towards the high end of that range but generally trending towards themid-point and below.

Venture Capital Decreased in 1Q12Venture capitalists invested $5.8 billion in 758 deals in the first quarter of 2012according to the MoneyTree Report from PricewaterhouseCoopers LLP

(PwC) and the National Venture Capital Association (NVCA).14 Quarterly investment activity decreased by 18.3 percent in dollar terms and by 14.7 percenin number of deals compared to the fourth quarter of 2011 when $7.1 billion

was invested in 889 deals. Venture capitalists remained cautious after a disappointing 4Q11 results. According to MoneyTree Report VC funding alsocontinued to decrease due to the industry consolidation and many seed stagecompanies being funded in stealth mode forming a pipeline not yet visible tothe public eye. 15The software industry remained the single largest investmensector in 1Q12 with $1.6 billion in received funding, followed by biotechnology with $0.9 billion.

14 PriceWaterhouseCoopers. Money Tree Report First Quarter 2012 Press Release.15 Ibid.


17/20


16

3,900

3,950

4,000

4,050

4,100

4,150

4,200

4,250

4,300

4,350

460,000

470,000

480,000

490,000

500,000

510,000

520,000

530,000

540,000

550,000

Mar-11 Jun-11 Sep-11 Dec-11 Mar-12

Gross Notional Value of Interest Rate Sw apsMarch 2011 - March 2012

Gross Notional Outstanding

Trade Count (right)

$ Billions Thousands

Source:TriOptima

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000

Callable Swap

Debt Option

CC-Swap Exotic

Option Exotic

Inflation Swap

Swap Exotic

CC-Swap

Cap/Floor

Basis Swap

Swaption

OIS

Gross Notional Value of Interest Rate SwapsMarch 30, 2012

$ Billions

Source:TriOptima

0

50,000

100,000

150,000

200,000

250,000

12/30/11 1/20/12 2/10/12 3/2/12 3/23/12

$ Millions

Source: DTCC

CDS Market Risk Activity By Sector, WeeklyDec. 2011 -M ar. 2012

Utilities TelecommunicationsTechnology Oil & GasIndustrials Health CareGovernment FinancialsConsumer Services Consumer Goods

FX, $63.35T

Interest Rates,

Equities, $5.98T

Commodities,$3.10T

CDS, $28.63T

Unallocated,$42.61T

Gross Notional Amounts Outstanding: OTC DerivativesDec. 201$647.76Trillion

Source:BIS Semiannual OTCDerivatives Statistics (end Dec. 2011)

DERIVATIVES

According to the most recent Bank of International Settlements (BIS) Semiannual Over-the-Counter (OTC) Derivatives Markets Statistics Report (May2012), the gross notional amount outstanding of OTC derivatives totaled$647.8 trillion as of end-December 2011 (down 8.5 percent from end-Jun

2011). Interest rate contracts and other products (unallocated in the BIS reportexperienced decreases, dropping to $504.1 trillion (down 8.9 percent) and $42.6trillion outstanding (down 8.4 percent), respectively. Equity-linked contracts, arelatively small category, saw the largest decrease in gross notional outstandingduring that period, dropping 12.6 percent to $6.0 trillion. Although the grossnotional amount outstanding for all risk categories and instruments decreasedthe gross credit exposure of outstanding OTC derivatives increased from end

June 2011 to end-December 2011, up 31.7 percent to $3.9 trillion.

The Office of the Comptroller of the Currency (OCC) Quarterly Report provides a more recent snapshot, but only of activity in the United States by thlargest U.S. commercial banks and bank holding companies, which is estimatedto represent only 36 percent percent of the total market. According to the

most recent report, the gross notional value of OTC derivatives outstandingheld by the top 25 U.S. bank holding companies was $304.1 trillion in thefourth quarter of 2011 (down 1.2 percent from 3Q11). The net credit exposure basis for the top 25 U.S. bank holding companies, according to theFFIEC, totaled $1.8 trillion (a decrease of 5. Percent from 3Q11).

Interest Rate SwapsAccording to TriOptima data, the gross notional value of outstanding interesrate swaps (IRS) at the end of March was $486.6 trillion, down 2.4 percenfrom end-Decembers $498.5 trillion. Increases in forward rate agreements(FRA), inflation swaps, swaps exotic and cross-currency swaps were offset bydecreases in overnight indexed swaps (OIS) and vanilla IRS. The number ofcontracts outstanding decreased slighlty q-o-q to 4.2 million (down 1.2 per-

cent). Increases in the number of contracts were concentrated in FRA (up 24.7percent) and basis swaps (up 7.8 percent), while decreases were found in OIS(down 11.8 percent), vanilla interest rate swaps (down 3.3 percent) andcap/floor swaps (down 3.3 percent).

Credit Default SwapsAccording to DTCC, the gross notional value outstanding of credit defaulswaps (CDS), including single names, tranches and indices, increased by 2.6percent to $26.55 trillion end-March from $25.88 trillion end-December, budeclined 1.3 percent y-o-y. Single-name CDS outstanding increased on a grossnotional basis by 4.0 percent q-o-q to $15.2 trillion, while on a net notionabasis, the outstanding value increased by 3.6 percent q-o-q to $1.15 trillion.

Though activity was concentrated in sovereign ($252.0 billion) and financia($221.1 billion) reference entities, these sectors saw decreases of 50.6 percenand 35.5 percent, respectively, from 4Q11. The most often referenced entitiebooked by gross exposures were concentrated in European sovereigns, led byItaly ($33.3 billion), Spain ($17.2 billion) and France ($13.8 billion).

Sovereign CDS outstanding decreased on a net notional basis q-o-q for manyEurozone sovereign reference entities, including France, Spain, and Portugal

however, the overall number of outstanding contracts for sovereign referenced entities increasedsince 4Q11, implying further hedging on outstanding exposures. Aside from sovereigns and financials, activity decreased in consumer services to $107.2 billion (down 29 percent q-o-q) and to$115.0 billion in consumer goods (down 4.5 percent q-o-q).


18/20


17

0

500

1,000

1,500

2,000

2,500

3,000

0

200

400

600

800

1,000

1,200

1,400

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q

2009 2010 2011 2012

Deals$ Billions

Source: Dealogic

Global Syndicated Loan Market Volume2009 - 2012:Q1

Investment Grade

Leveraged

No. of Deals

0

50

100

150

200

250

300

350

0

20

40

60

80

100

120

140

160

180

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q

2009 2010 2011 2012

Deals$ Billions

Source: Dealogic

Sponsor Related Loan Market Volume2009 - 2012:Q1

VolumeNo. of D eals

0

5

10

15

20

25

30

35

40

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q

2009 2010 2011 2012

$ Billions

Source: Dealogic

LBO Market Volume2009 - 2012:Q1

Rest of WorldUSA

PRIMARY LOAN MARKET16

Global syndicated loan volume in 1Q12 reached $732.6 billion, the lowest first quarter total since 2010 ($543.4 billion), and a 20 percent decreasfrom 1Q11 volume of $910.9 billion. 1Q12 total loan syndication wathe lowest quarterly volume since 3Q10 ($719.5 billion). Deal activity in

1Q12 fell to 1,943 deals, down 13 percent from 1Q11, while the $377.million average deal size was the smallest since 3Q10.

Regional BreakdownThe Americas accounted for a 55 percent market share of 1Q12 globasyndicated loan volume marking three-consecutive first quarters ogrowth, and accounting for the largest first-quarter share since 1Q03(56.1 percent). Despite a 9 percent decrease in lendingin 1Q12 ($180.4billion), the Asia Pacific region accounted for 25 percent of global quar-terly volume marking the regions highest quarterly proportion since1Q10 (30 percent). EMEA lending ($147.2 billion) accounted for a record-low 20 percent share in 1Q12 compared to the previous low of 25percent set in 2Q02. The 254 EMEA loans signed in 1Q12 were the

lowest number on record and nearly half the 451 signed in 1Q11.

Use of ProceedsRefinancing & Debt Repayment volume accounted for 34 percent oglobal loan volumes in 1Q12, down 16 percentage points from the sameperiod in 2011, and was the lowest first-quarter proportion since 1Q09

when refinancings accounted for 28 percent of quarterly volume. In contrast, loans for General Corporate Purpose and Working Capital combined for 40 percent of total 1Q12 loan volume, a 12 point percentagepoint increase on 1Q11, and the highest first quarter proportion since2008 (34 percent).

Deal Types

Investment grade (IG) loans stood at $462.6 billion in 1Q12, comparedto the $606.6 billion lent during the same period in 2011, and accountedfor 63 percent of 1Q12 global syndicated loan volume; the lowest firstquarter proportion since 1Q07(51 percent), and the third-consecutivefirst-quarter drop since 1Q08 when IG volume accounted for 86 percent

Global leveraged loan volume reached $254.0 billion in 1Q12, a 16 percent decrease on the $302.1 billion borrowed during the same period in2011. Asia-Pacific 1Q12 leveraged loan completion stood at $21.0 billiona 20 percent increase on 1Q11, and the highest quarterly volume totasince 1Q08 ($25.5 billion). European leveraged loan volume, howeverfell to $41.2 billion, compared to the $54.2 billion of lending in 1Q11. USleveraged borrowing also declined in 1Q12, falling to $170.9 billion from

a four-year high of $217.8 billion in 1Q 11.Among corporate borrowers, the technology sector led all industries in1Q12 for the first time on record with a 12 percent share of syndicatedloan volume ($65.5 billion), nearly double the 7 percent share from 1Q11

Among the top ten industries, telecom ($37.1 billion) and healthcare($25.6 billion) saw the largest market share decreases from 1Q11, by 117percent and 63 percent, respectively.

16 The author of the Primary Loan Market discussion is Dennis K. Chung, Dealogic. For any questions, please [email protected].


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Financial Sponsor & LBO Loan VolumeGlobal sponsor-related loan volume totaled $91.5 billion in 1Q12, down 29 percent on the$141.7 billion completed in 1Q11. European sponsor-related loans ($14.4 billion) accountedfor 16 percent of 1Q12 volume, the lowest first-quarter proportion on record. In contrastU.S. sponsor-related loan volume rose to $74.3 billion in 1Q12, accounting for a record 81percent of the quarters sponsor-related loan volume, the highest first quarter U.S. propor-tion on record.

Global leveraged buyout (LBO) loan volume in 1Q12 totaled $17.9 billion, a 44 percent decrease on the $32.0 billion completed in 1Q11. Each of the three world regions experienceda decline in LBO-related loan volumes compared to 1Q11, with the Americas ($6.1 billionand Asia Pacific ($581m) each decreasing 63 percent on the same period 2011 Europe, Middle East, and Africa(EMEA) LBO volume fell to $11.3 billion from $13.8 billion in 1Q11despite having accounted for 62 percent of total 1Q12 global LBO loan volume the regions highest first-quarter proportion of the total since 2006 (63 percent).

Tenors & PricingThe average tenor on a 1Q12 syndicated loan was 4.4 years with an average pricing of 30bps, the longest average maturity and lowest pricing for first quarter loans since 2008 (4.5years, 222 bps). The average pricing on European loans reached 345 bps in 1Q12, the high

est first quarter average margin on record (1Q10: 328bps). The average 1Q12 pricing foU.S. loans was 316 bps, which was below first quarter European loan pricing for the firsttime since 2008.


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Kyle BrandonManaging Director, Director of Research

SIFMA RESEARCH

Charles Bartlett - Vice President, Director of StatisticsSharon Sung Director, Research

Justyna Podziemska Analyst, Research

General Research Contact: [email protected]

SIFMA CAPITAL MARKETS

Joseph Cox Analyst, Capital MarketsTimothy Cummings Analyst, Capital MarketsCraig Griffith Analyst, Capital Markets

Documents

US Research Quarterly 2012-05-22 SIFMA