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US Comment Tuesday, September 3rd, 2013

Steven Ricchiuto US Chief Economist


212-209-9432 steven.ricchiuto@us.mizuho-sc.com

Upcoming Key Events


Tues. 09/03 @ 10:00 am Click here to enter text. Wed. 09/04 @ 7:50 am @ 8:30 am August ISM Steves Number is: 53 vs. 55.4 Street Number is: 54 Street Range is: 52 to 55.5 Steves Number is: 0.0% vs. -0.6% Street Number is: 0.3% Street Range is: -0.7% to 0.8% Same store sales rose by 0.2% in the 24 Aug. week for a 1.95 year-over-year Steves Number is: -38b vs. -34.5b Street Number is: -38.7b Street Range is: -40b to -37b Speaks on the economy and the monetary policy in Oregon Release prior to September policy deliberations

July Construction Spending

ICSC Sales

July Trade Deficit

@1 12:30 pm @ 2:00 pm

San Francisco Fed president Williams

Beige Book

@ 8:00 pm

Minneapolis Fed President Kocherlakota

Speaks on the economy and monetary policy in Wisconsin Steves Number is: 12mu vs. 12.09mu Street Number is: 12.2mu Street Range is: 12.0mu to 12.3mu Steves Number is: 175k vs. 200k Street Number is: 184k Street Range is: 150k to 225k Steves Number is: 335k vs. 331k Street Number is:330k Street Range is: 325k to 345k Steves Number is: 1.6% vs. 0.9% Street Number is:1.4% Street Range is: 0.9% to 1.5% Steves Number is:0.8% vs. 1.4% Street Number is:1% Street Range is: 0.8% to 1.4% Speaks on the economy and monetary policy in Wisconsin

@ 3:00 pm

Domestic Auto Sales

Thur. 09/05 @ 8;15 am

August ADP

@ 8:30 am

Unemployment Claims ( 08/31 week)

Revised Q2 Productivity

Revised Q2 Unit Labor Cost

@ 9:00 am

Minneapolis Fed President Kocherlakota

This document is NOT a research report under the legal requirements in any country or jurisdiction designed to promote the independence of investment research and is NOT a product of a fixed income research department. This document has been prepared for institutional clients, sophisticated investors and market professionals only. This communication has been produced by and for the primary benefit of a trading desk. It is not investment research nor considered impartial in relation to the activities of this trading desk. Please see the important conflict disclosures that appear at the end of this report for information concerning the role of trading desk strategists.

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US Comment Tuesday, September 3rd, 2013


Upcoming Key Events
Thur. 09/05 @ 10:00 am @ 11:00 am Fri.09/06 @ 8:00 am @ 8:30 am July Factory Orders Steves Number is: -3% vs. 1.5% Street Number is: -3.5% Street Range is:-55 to -0.5% 3-year note, 10-year note and 30-year bond

Treasury Announcement

Chicago Fed President Evens

Speaks on the economy and monetary policy in South Carolina Steves Number is: 175k vs. 161k Street Number is: 180k Street Range is: 95k to 230k Steves Number is: 7.4% vs. 7.4% Street Number is: 7.4% Street Range is: 7.3% to 7.5% Steves Number is:54.5 vs. 56 Street Number is: 55 Street Range is: 53.5 to 55.7 Speaks on the economy and monetary policy in Omaha

August Payroll Employment

August Unemployment Rate

@ 10:00 am

August Non-mfg ISM

@ 1:30 pm

Kansas city Fed President George

Commentary
TrackingSideways:Thedomesticeconomyunderpreformedexpectationsduringthefirst halfoftheyearwithaveragequarterlygrowthofjust1.4%,orafullhalfapercentbelow expectationsatthebeginningoftheyear.AccordingtotheBlueChipConsensusthis undershoothashadlittleeffectonexpectationsforthesecondhalfortheyearasaverage quarterlygrowthisprojectedtobe2.6%.Thisoptimismisalsopresentintheconsensus forecastofa3.5%fourthquarteroverfourthquarteraccelerationin2014.Ourmacro forecastcallsformoremoderategrowth.Specifically,weareprojectingbetween1.5%and 2%ineachofthenextsixquarters.Thismoremodestrecoveryreflectsourviewthatthe economyisstillworkingoffexcessleverageandthebalancesheetrestructuringalreadywell underwayhasreducedthedownsideskewtotherisksconfrontingtheeconomy.However, thestillhighlevelofnonperformingloansonthebankingindustrysbalancesheetsuggest thattheeconomywillremainanchoredtothe1.5%to2%growthtrajectory,especiallynow thatlongterminterestratesareadjustingtoalessaccommodativemonetarypolicyprofile. Asbanksworkdowntheirnonperformingloanbalances,theirwillingnesstomakenew commitmentswillexpandbeyondthemostcreditworthyborrowers.Butaslongas companiesarefocusedoncostcuttinginsteadofexpandingrevenue,thebackupinrates willlimittheeconomysabilitytoacceleratetoaselfsustaininggrowthtrajectory. TaperingIsTightening:Themakersofdomesticmonetarypolicyaresetonendingtheir experimentwithquantitativeeasing(QE)astheperceivedcostsareseenasoutweighting thebenefits.Thebenefitsofsmoothingthehouseholdsectorsbalancesheetrestructuring areseenasoutweightedbythecosts.ThecostsofQEarelargelyfinancial.Investorsare seenasmorelikelytomakedecisionsbasedontheavailabilityofcheapfinancingrather thanthestraightforwardeconomicsoftheinvestment.Assuch,themembersofthepolicy

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US Comment Tuesday, September 3rd, 2013


makingcommitteehavebecomesensitivetotherisksofinflatinganotherroundoffinancial marketbubbles.ThetaperingisseenbytheFOMCasreducingaccommodationbecause theydonotintendtoeitherreducethestockoflongtermdebttheyhavepurchasednordo theylooktoraisethelevelshorttermratesforanextendedperiod.Weseethisassimplya matterofsemantics.OncetheFedexecutedoperationtwistandusedQE3todrivedown longtermyieldstheyalteredtheirpolicytoincludetheslopeoftheyieldcurve.TaperingQE willleadtoasteepercurveandthusatightermonetarypolicy.Thepaceoftaperingis currentlyseenasgradualandpotentiallystretchingoutoveraninemonthperiod.However, theselectionofanewFedChairmancouldeasilyalterthisprocessandskewstherisksof policytowardmoreratherthanlesstightening.Abackupinlongtermratestoward3%is anotherconsiderationunderlyingourforecastofasidewaystracingeconomy. DeflationRisk:Asluggishglobaleconomysuggestsagreaterriskofimportingdeflationthan inflationpressuresaccumulating.Disinflationaryglobalpressuresandabelowtrend economysupportourcallforareturnto1.5%yieldonthe10yearoncetheconsensus forecastforasecondhalfaccelerationfailstomaterializeandonlyafteryieldsfailtomove muchabove3%.Thebearcaseforyieldswellabove3%isbasedontheexplosioninthe Fedsportfolio,however,thismonetaristargumentrequiresthevelocityofmoneyto stabilizeandthenacceleratewhichseemsunlikelyinaworldwhereregulatorsareafter bankstosharplyincreasetheircapitalbase.

Disinflation pressures accumulating

Source: Mizuho Securities USA Inc.

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Trading Desk Commentary: US HY Tuesday, September 03, 2013 HY Weekly Comment: Ready, set, where do we go...
.

John Novak, CFA Corporate Bond Strategy (High Yield)


212-205-7523 john.novak@us.mizuho-sc.com

Ready, set, where do we go..


Although the meteorological calendar mercifully grants us a few more weeks of summer, the capital markets have already turned the page toward fall as September opened with a fresh slate of deal news, a growing new issue calendar, and the anticipation of busier days and weeks ahead. After a moribund few weeks, we appreciate the signs of renewed life in the capital markets. In high yield, perhaps whats most notable as we flip the page on the calendar is how little has actually changed since the summer began. HY index spreads are 26 basis points wider from May 24 (the Friday before Memorial Day), but basically unchanged from the following Friday, June 3. Of course, yields have risen with the 10 year US Treasury, but spreads have remained stable through the period. Most importantly, the primary questions facing investors at the end of May remain top of mind as we begin September: Is the global economy strong enough for the Fed to taper? When will the Fed taper? What will the taper look like once it begins? Will the economy be able to handle the impact of higher rates? What will happen to spreads if rates rise? Where will investors funds flow?

While pages could be (and have been) written about each of these issues, it seems clear that the last few months have done little to resolve these questions. In fact, it seems the trajectory of rates and the global economy has grown more uncertain in recent weeks given the mixed macro data out of the US, Europe, and Asia; the impact of the Syrian-situation, and renewed concerns about the US debt-ceiling. Given that economic and geopolitical backdrop, US high yield seems neither particularly cheap nor rich at current levels. On a spread-basis, we are approximately 60 basis points off the lows seen in mid-May while the index is roughly 134 bps wider on a yield basis (4.98% YTW in mid-May vs. 6.32% YTW on Friday). At 6.32% YTW, one could find pockets of higher-yielding assets in the market (EM, mortgage REITs), but todays levels in US high yield do not seem widely out of step when one considers the expectations for stable corporate credit fundamentals, a benign default environment, and spreads that are still wellwide of 52-week tights, not to mention historical lows reached in 2006.

This document is NOT a research report under the legal requirements in any country or jurisdiction designed to promote the independence of investment research and is NOT a product of a fixed income research department. This document has been prepared for institutional clients, sophisticated investors and market professionals only. This communication has been produced by and for the primary benefit of a trading desk. It is not investment research nor considered impartial in relation to the activities of this trading desk. Please see the important conflict disclosures that appear at the end of this report for information concerning the role of trading desk strategists.

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Trading Desk Commentary: US HY Tuesday, September 03, 2013

Table 1: Recent High Yield Spread Performance


31-Dec-12 HY (OAS) 531 BB (OAS) 374 BB (OAS) 513 CCC (OAS) 966 Yield UST 10yr 1.75 SPX 1426.19 VIX 18.02 9-May-13 423 304 404 751 1.81 1626.67 13.13 24-May-13 445 321 429 774 2.11 1649.60 13.99 3-Jun-13 476 344 464 822 2.11 1640.42 16.28 Change from August 31, 2013: 5-Jul-13 30-Aug-13 31-Dec-13 9-May-13 24-May-13 504 474 -57 51 29 370 347 -27 43 26 492 461 -52 57 32 859 824 -142 73 50 2.73 2.78 103 97 67 1631.89 1632.97 14.89 17.01

Source: Bloomberg; Mizuho Securities USA Inc.

Fund Flows in Focus


Given our view that spreads are likely to remain relatively stable in the nearterm, we anticipate a healthy resurgence of new issuance with a combination of refi activity, recaps, and M&A/LBO financings expected in the coming weeks. As a result, fund flows will remain a key focus for investors. This summer brought news of the single-week records for both HY inflows and outflows according to Lipper with several weeks of outflows and inflows in excess of $2 billion. While fund flows have are difficult to anticipate, we expect continued fund flow volatility given the range of existing macro-concerns, questions around rates, and the relative performance of equities and other asset classes.

Table 2: High Yield Fund Flows

Source: Lipper; Bloomberg; Mizuho Securities USA Inc.

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Trading Desk Commentary: US HY Tuesday, September 03, 2013


This Weekly in the weeks ahead
As we initiate publishing of this weekly, we wanted to spend a few sentences outlining what to expect in the weeks ahead. First, on non-holiday weeks, we will be publishing the weekly on Monday afternoons. Second, we expect the piece will involve a mix of general market commentary, thematic ideas, and some deeper diver credit analyses. Importantly, we envision this document as a complement to the notes on more time-sensitive topics (earnings, events, etc) that we publish throughout the week on Bloomberg. Finally, we look forward to connecting with our clients and hope the piece will evolve with the help of your feedback and our interaction over time.

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September 3, 2013

Mizuho Securities

Credit Market Weekly


Debt Capital Markets
General Commentary Primary Calendar Outlook for September Mizuho is expecting a significant uptick in new issue activity, with $90bn of IG supply forecast for the Month of September. Issuance volume is likely to come in waves this September, as borrowers seek to navigate around a number of key data releases, a pivotal FOMC meeting, and religious holidays. This weeks activity is likely to be largely concentrated in the Tuesday-Wednesday window, as borrowers remain sensitive to Thursdays Rosh Hashanah holiday and Fridays critical employment report (the last payroll number before September 18th Fed meeting). In general, we also expect the calendar to be front-loaded for September, with many issuers looking to raise capital ahead of the Fed meeting, assuming conditions are accommodating. These predictions were made prior to the announcement over the weekend by Verizon with regards to the 45% of Verizon Wireless it intends to purchase from Vodafone. This deal could have a profound effect on deal volumes. Remember the largest corporate bond deal in history was the $17bn sold earlier this year by Apple Inc. (Aa1/AA+). Increased M&A activity is further demonstrated as we get word on Monday morning that Microsoft is buying Nokias handset unit for $7.2bn. Benchmark Rate Outlook for September Mizuho believes the upward momentum in Treasury yields will continue ahead of the September Fed meeting, with the 10-year Treasury likely to test the 3% mark in the coming weeks. Recent economic numbers have been generally supportive of an initial Fed tapering announcement this month. Moreover, lingering uncertainty over who will succeed Bernanke will continue to act as an overhang in the Treasury market, limiting any potential rallies. However, we think the likely move to 3% will represent the near-term peak in rates and will be followed by a gradual migration to the low 2% range later this year. Catalysts for the move lower in rates in Q4 include weaker-thanexpected economic data and a renewed commitment to accommodative policy by the Fed that follows. Credit Spread Outlook for September Mizuho expects credit spreads to remain generally range bound in September. While favorable market technicals and fundamentals could be used to argue that spreads have room to narrow, we believe the myriad uncertainties (i.e. Fed tapering, Bernanke succession plan, Syria, and the budget debate) will act as a counterbalance in the near term. 5-Year Basis Swaps
Basis /US$ /US$ /US$ Rate (66) (26) (10) 30 Days 0.1 (2.5) (1.8)
2.75 2.70 Mon Tue Wed Thu Fri 10Y UST 30Y UST 3.70 3.65 2.80 3.75

Upcoming Economic Events Tuesday Wednesday ISM Manufacturing MBA Mortgage Applications Trade Balance Thursday Initial Jobless Claims ADP Employment Factory Orders Friday Change in Nonfarm Payrolls Unemployment Rate US Treasury Yields (10-Year and 30-Year)
2.85 3.80

US Treasuries Tenor
2 Year 5 Year 10 Year 30 Year

Yield 0.40 1.64 2.78 3.70

Sw ap Spread 16 17 20 2

LIBOR Tenor
1 Month 3 Month 6 Month

Rate 0.18 0.26 0.39

30 Days (0.003) (0.007) (0.003)

SEE IMPORTANT DISCLAIMER ON LAST PAGE

September 3, 2013

Mizuho Securities

Weekly Investment Grade New Issue Summary


Date Issuer Coupon Maturity 3L+15 08/28/15 Spread 3L+15 Par Amount 250 Moody/S&P A2/A Price 100.000 Yield 0.409 Sector Diversified Financial Services Aug-27 Caterpillar Financial

Weekly High Yield New Issue Summary


Date Issuer Coupon Maturity Spread Par Amount Moody/S&P Price Yield Sector

Weekly Sovereign/Supranational USD New Issue Summary


Date Issuer Coupon Maturity 3L+8 1.125 3.750 0.625 1.750 03/18/16 12/15/16 10/20/16 09/04/15 09/04/18 Spread 3L+8 36 108 24 21 T-bill flat Par Amount 300 3,000 300 1,250 3,500 250 Moody/S&P Aaa/AAA Aaa/AAA Aa3/A+ Aa1/AA+ Aaa/AAA Aa1/AAA Price 100.000 99.981 105.767 99.987 99.952 100.000 Yield 0.353 1.131 1.845 0.632 1.760 0.025 Sector Sovereign Multi-National Banks Sovereign Multi-National Sovereign Aug-29 Kommunalbanken Aug-28 European Investment Bank Aug-28 Export-Import Bank of Korea Aug-28 Swedish Export Credit Aug-27 International Finance Corp Aug-27 Overseas Private Investment

T-bill flat 07/15/25

Weekly Emerging Markets New Issue Summary


Date Issuer Coupon 1.250 1.625 Maturity 09/26/16 03/26/19 Spread n/a MS+72 Par Amount USD Equiv 200 200 216 216 Currency CHF CHF Moody/S&P A1/A A1/A+ Region LatAm Asia Sector Financial Corporate Aug-29 Banco De Credito E Inversiones Aug-27 Korea Western Power

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Trading Desk Commentary: LatAm Credit, Tuesday, September 03, 2013 Latin American Credit Commentary
John Haugh LatAm Credit Strategy
212-205-7713 john.haugh@us.mizuho-sc.com

The Week Ahead


Issuance: Even with the shortened holiday week, several Latin American companies announced their intention to issue new bonds, dependent on market conditions. We highlight a few names below. JBS USA (Ba3/BB/BB-): JBS USA plans to issue US$400mn of senior notes due 2021 and US$400mn in term loans, and to use the proceeds to refinance their 11.625% senior notes due 2014 (US$700mn). Marfrig (B2/B/B): Marfrig announced its intention to issue senior notes due 2021 out of Marfrig Holdings (Europe) B.V. Marfrig plans to use the proceeds from the offering to fund the tender offer of the 9.625% senior notes due 2016 and the repayment of other outstanding indebtedness. Office Depot Mexico: Office Depot Mexico (ODM), the Mexican and Latin American office supplies retailer own by Grupo Gigante, plans to issue senior notes (terms and size to be determined). ODM plans to use the proceeds from the offering to provide an shareholder loan to Grupo Gigante, which in turn will use the amount to prepay a portion of a bridge loan used to acquire the remaining 50% of ODM that Grupo Gigante didnt own. Offshore Drilling Holding (NR/BB/BB): Offshore Drilling Holding (ODH) plans to issue US$950mn of senior secured notes to refinance existing debt at its Centenario and Bicentenario subsidiaries, including RDS Ultra-Deepwaters tender offer for its 11.875% Senior Secured Notes due 2017 (US$270mn). Earnings: Although earnings season is mostly behind us, we have a few stragglers reporting later this week. IMPSA and Aralco plan to release earnings and host conference calls on Friday, September 6th. Funds Flow Data: According to EPFR, EM dedicated bond funds reported an th outflow of US$2.013bn for the week ending August 28 an increase compared with the outflows of US$1.29bn reported for a week earlier. Outflows in local currency increased to US$1.16bn, while hard currency funds saw an outflows of US$454mn.

CSN Event Risk Remains High


On September 2, 2013, ThyssenKrupp denied reports (in German newspaper Frankfurter Allgemeine Zeitung) that it was abandoning its plan to divest its Steel Americas business. In fact, a ThyssenKrupp spokesman said in that the company is in very advanced talks with the leading bidder which several press outlets (WSJ, Reuters, Bloomberg, Debtwire) continue to speculate is CSN. Although CSN bonds have performed well over the past month, we believe that the outperformance is unwarranted considering the potential event risks

This document is NOT a research report under the legal requirements in any country or jurisdiction designed to promote the independence of investment research and is NOT a product of a fixed income research department. This document has been prepared for institutional clients, sophisticated investors and market professionals only. This communication has been produced by and for the primary benefit of a trading desk. It is not investment research nor considered impartial in relation to the activities of this trading desk. Please see the important conflict disclosures that appear at the end of this report for information concerning the role of trading desk strategists. mizuhosecurities.com 1

Trading Desk Commentary: LatAm Tuesday, September 03, 2013


that remain and the companys deteriorating credit profile. In the end, we believe CSNs debt should lag its Brazilian peers for the following reasons: 1) ThyssenKrupp Assets: Unconfirmed press reports continue to speculate that CSN remains a potential suitor for ThyssenKrupps stake in CSA (Companhia Siderurgia do Atlantico) which includes steel mills in Rio de Janeiro, Brazil and Alabama, US. 2) Namisa Put: CSN continues to negotiate a put option it has with its Namisa joint venture partners for the remaining 40% stake in Namisa that it does not already own. CSN expects a resolution to these negotiations by year end, but has not given much guidance on the progress. 3) 2Q13 earnings were uninspiring: Although 2Q13 Ebitda was higher than 1Q13, it remains near its two year lows. Net leverage worsened LTM net debt to Ebitda worsened to 3.92x for 2Q13, compared to 3.75x for 1Q13, and 2.89x for 2Q12.

Cemex Announces Asset Swap Transactions


On August 28, 2013, Cemex announced a series asset swap transactions with Holcim which Cemex believes will result in a US$20mn to US$30mn increase in Ebitda beginning in 2014. Cemex expects to close these transactions by year end 2013. The details of the transactions are the following: 1) Cemex plans to acquire Holcims operations in the Czech Republic which includes one cement plant (cement capacity of 1.1 million tons, clinker capacity of 0.9 million tons), four aggregates quarries and 17 ready-mix plants. 2) Cemex plans to divest its assets in the western part of Germany to Holcim which includes one cement plant and two grinding mills (total cement capacity of 2.5 million tons, clinker capacity of 0.9 million tons), one slag granulator, 22 aggregates quarries and 79 ready-mix plants. 3) Cemex and Holcim plan to combine cement, ready-mix and aggregates operations in Spain Cemex will have a 75% controlling interest over the combined entity. 4) Holcim will pay Cemex 70mn Euros in cash. We view the transaction positively as its acretive to earnings as Cemex further solidifies its position in Europe. Since 2009, Cemex has taken numerous steps to strengthen its capital structure and improve its debt amortization schedule. As of June 2013, Cemex had approximately US$746mn in cash and equivalents.

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