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BONDS NEWSLETTER

No. 19 | 3 Quarter 2010

Resurrection of the long-termrate-control policy


Dr. Thorsten Polleit, Barclays Capital, elaborates on the high degree of correlation between Swiss interest rates and rates in the major currency regions as well as the central banks attempts to overcome the crises.
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New Market Maker: Barclays Capital Switzerland


With its teams in Zurich, Geneva and Lugano, Barclays Capital intends in the coming months to broaden its competency even further as an advisory partner to its Swiss clients who have financing needs in all areas of the international capital markets, as well as to afford issuers access to a wide currency spectrum and extensive investor base particularly in terms of the CHF Bond Segment.
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Turnover

For the period January through September 2010, total turnover and the number of bond trades declined moderately: in CHF bonds, turnover eased versus the comparable prior-year period by 5.7% to CHF 121 billion (number of transactions: 11.7%). For the same period, turnover in international bonds fell by 56.6% to CHF 2.8 billion (number of transactions: 32.9%). The yield on ten-year Swiss Confederation bonds hit a record low of 1.03% on 25 August 2010 (daily close as per the SNB: 1.11%) but climbed back to 1.37% by the end of September (year-end 2009: 1.97%).

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Resurrection of the long-term-rate-control policy


Due to its openness to capital flows, the Swiss bond market is closely tied to happenings in the international fixed income arena. While Swiss long-term interest rates have traditionally been much lower than those in other major currency areas, nevertheless, a high correlation between long-term Swiss rates and long-term yields in other regions can be observed. Especially the US can be said to play a rate leadership role in this regard. In the credit market crisis, the US Federal Reserve (Fed) resorts to an unusual monetary policy by opting to exert a direct influence on long-term interest rates. To that purpose, it buys government bonds and mortgage-backed securities. This quantitative easing approach which in the meantime is now also being pursued in, for instance, the euro area, the UK and Japan, particularly through the repurchase of government bonds has been conducted in a similar manner already in earlier years, as a glance at the annals of US monetary policy reveals. In WWII, the US financed its military outlays mainly through borrowing. In order to keep the interest costs low for both the public and private sectors, in 1942 the Fed was instructed by the US administration to peg the interest rate on short-term government paper at around 0.38 % and at roughly 2.5 % on long-term Treasuries. This essentially constituted a minimum-price policy or as it were, a ratecontrol policy for bonds. However, because the amounts used for repurchasing bonds increased strongly, the money supply in the US also surged. This resulted in higher inflation at a pace that exceeded the nominal going market interest rates (see chart below). Thus by means of this direct rate-control policy, which was not abrogated until March 1951 (Treasury-Fed Accord), the US government deleveraged itself at the cost of money holders and, above all, to the detriment of bondholders: They were confronted with negative real returns.

US consummer price inflation (%) versus long-term interest rates (%), 19401950 20

Dr. Thorsten Polleit, Chief German Economist at Barclays Capital, Frankfurt Thorsten Polleit joined Barclays Capital in October 2000 and works in the European Economics team. His research effort focuses on European economic and political developments. Before that, he worked for ABN AMRO in London, Amsterdam and later, as Chief German Economist, in Frankfurt. Thorsten Polleit holds a diploma in economics and was awarded a doctorate in 1996. He lectures at the universities of Bayreuth and Duisburg-Essen, and in 2003 he was appointed honorary professor for economics at Frankfurt School of Finance & Management. He is an Adjunct Scholar of the Ludwig von Mises Institute, Auburn, US Alabama.

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-5 40 41 42 43 44 45 46 47 48 49 50 51
Sources: Federal Reserve Bank of St. Louis, Robert Shiller, own calculations

CPI rate of change

Long-term US interest rates

Bonds NEWSLETTER | No. 19 | 3 Quarter 2010

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When attempting to counteract financial and economic crises and simultaneously spur domestic demand, governments regularly succumb to the siren song of running credit financed spending programs, thereby increasing public debt (sometimes drastically so). However, sooner or later, investors come to the point where they will only buy the burgeoning mass of government debt if they earn a higher return. If from the investor standpoint that return is too little, however, demand will ultimately decline. In this instance, central banks have no other choice than to buy up government paper and in return issue additional amounts of money. Moreover, with its ongoing quantitative easing policy, the US is actually forcing the hand of policy makers in other currency regions to adopt the same approach. And as soon as inflation in the US starts to rise, even as interest rates are maintained at artificially low levels, this will presumably cause fixed income rates in other economies to go up. At latest then, those central banks will also be compelled to buy back bonds if they wish to keep interest rates low.

Thus for savers, a continuation of the minimum-price policy for bonds would most likely prove (once again) to be bad news. Artificially suppressed market yields not only heighten the threat that scarce resources will be misallocated, they could also be a harbinger of monetary depreciation which, over the medium term, has proven to be extremely detrimental to economic growth and hence also to employment. History has taught us that the financing public debt by means of central bank printing presses leads to higher inflation be it with or without interest rate controls. And because governments and the public at large tend to be inclined to view an increase in the money supply as the lesser of two evils in their attempts to overcome economic crises, a renaissance of globally higher inflation rates represents a threat scenario that cannot be simply dismissed out of hand. Even if this scenario fails to unfold over the short term, vigilance should be the order of the day for fixed income investors.

Bonds NEWSLETTER | No. 19 | 3 Quarter 2010

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New Market Maker: Barclays Capital Switzerland


We are pleased to welcome Barclays Capital Switzerland as new market maker in the CHF Bond Market. As a globally leading universal bank with historical roots in Great Britain, Barclays Capital with its 145,000 employees caters to the needs of more than 49 million private clients and institutional investors in more than 50 countries throughout the world. Since its beginnings in the investment banking field in Switzerland almost ten years ago, Barclays Capital offers its clients a continuously expanding range of products and advisory services. Today, the financing and risk management of all equity, currency, interest rate and commodity exposure represents the companys key focal point. In the areas of global bonds, interest rates and foreign exchange, Barclays holds a globally leading position. With its Swiss teams in Zurich, Geneva and Lugano, Barclays Capital intends in the coming months to broaden its competency even further as an advisory partner to its Swiss clients who have financing needs in all areas of the international capital markets, as well as to afford issuers access to a wide currency spectrum and extensive investor base particularly in terms of the CHF Bond Segment. The Swiss clientele institutional investors and private banks, as well as companies and public entities expect a foreign universal bank with worldwide presence to offer tailor-made, individualized solutions on a global scale. Team:
Head of Markets Switzerland Swiss Franc Bond Trading Swiss Franc Bond Trading

Kuno Kennel +41 44 204 51 60 kuno.kennel@barcap.com

Beda Emmenegger (Head) +41 44 204 51 40 beda.emmenegger@barcap.com

Jonathan Shaw +41 44 204 51 38 jonathan.shaw@barcap.com

Swiss Franc Syndicate

Credit Sales

Credit Sales

Martin Meili (Head) +41 (0)44 205 51 32 martin.meili@barcap.com

Urs Bnziger (Head) +41 (0)44 204 51 25 urs.banziger@barcap.com

Reto Meyer +41 (0)44 204 51 31 reto.meyer@barcap.com

Credit Sales

Credit Sales

Credit Sales

Ralph Birkenmeier +41 (0)44 204 51 72 ralph.birkenmeier@barcap.com

Patrick Chopard +41 (0)44 204 51 37 patrick.chopard@barcap.com

Nikolas Mannio +41 (0)44 204 51 92 nikolas.mannio@barcap.com

Bonds NEWSLETTER | No. 19 | 3 Quarter 2010

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The three most active companies


Sell side (Q3/2010)

Turnover EUR 290,980,784 Head Fixed Income and Credit Head Eurobond Trading Head Eurobond Sales Hanspeter Haag Raffaele Carmine Kenny Chandler +41 (0)44 293 67 02 +41 (0)44 293 66 02 +41 (0)44 293 66 10

Turnover EUR 71,480,200 Trading & Advisory Fixed Income Trading & Advisory CH Bonds Trading & Advisory Eurobonds Philipp Alena Pascal Brki Ursula Schneider Daniel Plattner Simon Keel +41 (0)58 283 57 70 +41 (0)58 283 57 70 +41 (0)58 283 57 00 +41 (0)58 283 73 40 +41 (0)58 283 73 40

Turnover EUR 37,499,024 Head of Global SSA Trading Head of Swiss Franc Trading Emanuel Brefin Beda Emmenegger +44 (207) 7739084 +41 (0)44 205 51 40

Bonds NEWSLETTER | No. 19 | 3 Quarter 2010

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The three most active companies


Buy side (Q3/2010)

Turnover EUR 96,445,325 Head Fixed Income and Credit Head Eurobond Trading Head Eurobond Sales Hanspeter Haag Raffaele Carmine Kenny Chandler +41 (0)44 293 67 02 +41 (0)44 293 66 02 +41 (0)44 293 66 10

Turnover EUR 63,048,849 Head Fixed Income Secondary IRP Trading Head Fixed Income Secondary Credit Trading Urs Beeler Daniel Gut +41 (0)44 335 78 83 +41 (0)44 333 65 55

Turnover EUR 40,333,829 Head Fixed Income Trading non CHF Armin Bischofberger +41 (0)44 239 50 40

Bonds NEWSLETTER | No. 19 | 3 Quarter 2010

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Turnover CHF bonds


SIX Swiss Exchange-listed CHF bonds (government, sovereign, corporate etc., Swiss and non-Swiss issuers)

CHF mn 25,000 20,000 15,000 10,000 5,000 0 09/2008 10/2008 11/2008 12/2008 01/2009 02/2009 03/2009 04/2009 05/2009 06/2009 07/2009 08/2009 09/2009 10/2009 11/2009 12/2009 01/2010 02/2010 03/2010 04/2010 05/2010 06/2010 07/2010 08/2010 08/2010 09/2010 09/2010

Turnover international bonds


SIX Swiss Exchange-listed and non-listed bonds (including all types of international bonds in all currencies except CHF)

EUR mn 1,000 800 600 400 200 0 09/2008 10/2008 11/2008 12/2008 01/2009 02/2009 03/2009 04/2009 05/2009 06/2009 07/2009 08/2009 09/2009 10/2009 11/2009 12/2009 01/2010 02/2010 03/2010 04/2010 05/2010 06/2010 07/2010

Bonds NEWSLETTER | No. 19 | 3 Quarter 2010

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Turnover international bonds


Most traded currencies (last 16 months)
Turnover (in millions) of all types of international bonds, calculated per currency in the original currency
Date 06/2009 07/2009 08/2009 09/2009 10/2009 11/2009 12/2009 01/2010 02/2010 03/2010 04/2010 05/2010 06/2010 07/2010 08/2010 09/2010 EUR 394.70 569.45 168.58 142.71 132.27 112.42 89.39 102.95 96.89 91.15 82.16 107.40 91.62 87.36 56.70 56.26 USD 189.53 226.98 90.52 140.34 573.40 67.60 68.20 68.08 86.45 127.01 57.88 72.11 76.09 78.30 56.11 59.74 GBP 23.10 22.14 7.57 15.46 11.99 7.18 13.88 9.77 7.60 7.74 7.30 6.95 5.01 7.64 7.92 13.08 AUD 63.19 35.68 66.44 54.90 58.06 100.90 51.72 109.51 62.45 55.02 44.62 51.91 59.21 76.94 40.59 33.50 CAD 6.48 8.07 5.55 5.64 1.93 1.76 2.58 1.38 1.44 2.09 2.59 2.93 4.64 4.06 1.92 7.23 15.43 7.35 HUF 156.11 980.30 49.64 539.45 51.70 90.09 32.36 98.83 77.65 290.96 78.29 31.16 35.54 ISK 203.35 16.52 9.27 36.12 27.69 23.73 19.08 164.36 43.31 51.32 26.44 64.77 38.25 7.87 22.36 66.84 NOK 74.13 254.50 30.03 40.38 68.39 26.50 38.75 59.71 118.19 122.34 126.60 149.96 114.25 90.77 78.27 68.03 NZD 15.93 58.92 24.69 27.75 14.20 22.14 18.50 16.51 22.69 16.82 22.53 19.68 13.02 9.98 12.01 15.17 SEK 20.79 27.52 2.40 9.50 20.81 2.32 6.59 7.92 7.20 14.10 9.65 13.77 7.18 13.67 16.29 6.63 TRY 2.73 2.27 14.58 2.86 2.20 2.22 1.09 2.52 3.73 5.27 3.00 5.61 0.82 0.94 2.54 2.94 ZAR 23.38 11.10 24.72 30.48 16.64 15.68 19.42 20.87 23.02 34.33 16.36 13.95 17.15 6.72 24.38 21.36

Bonds NEWSLETTER | No. 19 | 3 Quarter 2010

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Number of trades international bonds


Most traded currencies (last 16 months)
Number of trades of all types of international bonds per trading currency
Date 06/2009 07/2009 08/2009 09/2009 10/2009 11/2009 12/2009 01/2010 02/2010 03/2010 04/2010 05/2010 06/2010 07/2010 08/2010 09/2010 EUR 3,618 4,376 2,659 3,153 2,850 2,189 1,751 2,285 2,093 2,057 1,794 2,143 1,830 1,730 1,183 1,198 USD 1,133 1,178 919 1,343 1,178 853 684 763 573 835 593 754 826 654 480 548 GBP 399 614 287 680 491 260 574 388 306 302 335 219 160 154 133 231 AUD 610 587 1,207 1,112 1,215 2,034 1,100 2,483 1,562 1,491 1,194 1,171 1,361 1,800 945 722 CAD 116 118 110 131 56 49 60 48 35 46 51 67 91 108 42 205 9 3 HUF 20 17 8 16 12 10 8 19 18 67 18 6 5 ISK 33 14 9 35 18 26 16 33 33 38 17 30 25 5 9 33 NOK 141 114 117 186 344 132 157 320 510 643 514 586 504 424 405 305 NZD 350 1,349 487 707 316 428 426 365 502 377 575 384 308 267 251 396 SEK 38 25 17 28 20 15 21 27 31 63 36 36 28 67 68 31 TRY 23 23 40 34 33 16 13 27 41 42 40 37 20 26 19 36 ZAR 66 44 66 83 67 55 66 70 105 128 50 42 60 43 90 102 Total 6,547 8,459 5,926 7,508 6,600 6,067 4,876 6,828 5,809 6,089 5,217 5,475 5,218 5,278 3,634 3,810

Bonds NEWSLETTER | No. 19 | 3 Quarter 2010

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SIX Swiss Exchange Listed international bonds

Valor 2266757 2266763 2287149 2318991 2319106 2332843 2427680 2439019 2441720 2466292 2467032 2476226 2545131 2598510 2691640 2746638 2774739 2896430 2900915 2919139 3184737 3542821 3542825 3571392 3572561 3603417 3756936 3922883 4285588 10532585 10540524 10572639 2407820 10892026 2922365 11226294 3132009

ISIN XS0229097034 XS0229097208 XS0230955642 US225407AA34 XS0233620235 US515110AP96 XS0242939394 XS0243733127 US515110AR52 XS0246205495 US05961HAB42 XS0247168130 XS0252915813 US515110AT19 XS0267147881 XS0271772559 US515110AU81 US515110AV64 XS0285182266 XS0286686356 US515110AX21 CH0035428215 CH0035428256 XS0332748077 US22546CAL28 XS0334534699 US515110AY04 XS0356908086 US515110AZ78 CH0105325853 XS0451748080 US515110BA19 XS0241241180 US515110BB91 XS0287015787 XS0503131461 XS0303241615

Short Name CS VAR 09/20-15 CS 3.125 09/14/12 EXIMUK 6.8 10/12 CITKIE8 11/06/15 CITKIE8 11/06/15 RENTEN4.875 11/15 PRBANK Var 02/16 EXIMUK 8.4 02/16 RENTEN4.875 02/11 BIC Var 03/16-11 BIC Var 03/03/16 PFG Float 03/11 ABB4.625 06/06/13 RENTEN5.25 07/11 EXIMUK7.65 09/11 CITMOS 5.064 16 RENTEN5 11/08/16 RENTEN5.125 02/17 PRBANK8 02/06/12 DEXGRP2.375 02/12 RENTEN5.25 07/12 KFW Float 11/10 KFW Float 11/10 CITKIE8.25 11/12 CITKIE8.25 11/12 NADRA9.375 12/17 RENTEN3.25 03/13 NADRAFloat 04/18 RENTEN4.125 07/13 PPHNSW4 10/15 ZURNVX3.25 09/13 RENTEN1.875 09/12 CS 3.625 01/18 RENTEN 3.125 07/15 FIUKR 11 12/14 EXIMUK 3.375 04/15 VABANK 10.5 06/14

Name CRED SUISSE GP FIN (US) CRED SUISSE GP FIN (US) CSFB INTL (EXIM UKRAINE) CRED SUISSE (CITY KYIV) CRED SUISSE (CITY KYIV) (LPN) LANDWIRTSCH. RENTENBANK STANDARD BK (PRIVATBANK) (LPN) CS INTL (EXIM UKRAINE) (LPN) LANDWIRTSCH. RENTENBANK BANCO INDUSTR E COM BANCO INDUSRIAL E COMERC PRINCIPAL FIN GLOBAL FND ABB INT FINANCE LTD LANDWIRTSCH. RENTENBANK CSFB (EXIM UKRAINE) (LPN) DRESDNER (CITY OF MOSCOW) (LPN) LANDWIRTSCH. RENTENBANK LANDWIRTSCH. RENTENBANK UK SPV CREDIT FINANCE PL DEXIA CREDIT LOCAL LANDWIRTSCH. RENTENBANK KFW KFW CRED SUISSE (CITY KYIV) (LPN) CRED SUISSE (CITY KYIV) (LPN) DCM GLOBAL FINANCE LANDWIRTSCH. RENTENBANK DCM GLOBAL FINANCE LANDWIRTSCH. RENTENBANK PETROPLUS FINANCE LTD ZURICH FIN LUXEMBOURG SA LANDWIRTSCH. RENTENBANK CRED SUISSE GP FIN (GRN) LANDWIRTSCH. RENTENBANK STANDARD BANK (1ST UKR) BIZ FIN PLC (UKREXIMBANK VAB FINANCE NO 1 PLC

Currency EUR EUR USD USD USD USD USD USD USD USD USD GBP EUR USD USD EUR USD USD USD EUR USD EUR USD USD USD USD USD USD USD USD USD USD EUR USD USD USD USD

Maturity 14.09.20 14.09.20 04.10.12 06.11.15 06.11.15 16.11.15 09.02.16 09.02.16 14.02.11 03.03.16 03.03.16 30.03.11 06.06.13 15.07.11 07.09.11 20.10.16 08.11.16 01.02.17 06.02.12 23.02.12 02.07.12 26.11.10 26.11.10 26.11.12 26.11.12 05.12.17 15.03.13 10.04.18 15.07.13 16.10.15 30.09.13 24.09.12 23.01.18 15.07.15 31.12.14 27.04.15 14.06.14

(Not including the list of SIX Swiss Exchange-registered programmes)

Possibilities for Eurobond listing:

With the revised SIX Swiss Exchange Listing Rules for bonds, the SIX Swiss Exchange is positioning itself as an attractive, recognised platform for international bonds. The SIX Swiss Exchange Listing Rules include for instance the possibility to accept various accounting standards as well as to incorporate by reference certain specific documents of the issuer in the listing prospectus.
Further information on this topic can be found at:

www.six-exchange-regulation.com/regulation/listing_rules_en.html

Bonds NEWSLETTER | No. 19 | 3 Quarter 2010

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Contact
Ueli Goldener Head of Fixed Income Product Sales T +41 (0)58 854 2878 F +41 (0)58 854 2476 ueli.goldener@six-group.com

Disclaimer
SIX Swiss Exchange Ltd None of the information contained herein constitutes an offer to buy or sell a financial instrument that is traded on SIX Swiss Exchange Ltd. SIX Swiss Exchange Ltd is liable neither for the completeness and accuracy of the information given, nor for any loss incurred as a result of action taken on the basis of information provided in this or any other SIX Swiss Exchange Ltd publication. SIX Swiss Exchange Ltd expressly reserves the right to alter prices or product composition at any time. SIX Swiss Exchange Ltd is a joint-stock company under Swiss law. It operates a securities exchange which is licensed and supervised by the Financial Market Supervisory Authority FINMA. SIX Swiss Exchange Ltd is a stock exchange recognised in France, Italy, the Netherlands and the United Kingdom. It may also operate in Austria, Finland, Germany, Sweden, Belgium and Luxembourg. SIX Group, SIX Swiss Exchange, SPI, Swiss Performance Index (SPI), SPI EXTRA, SPI ex SLI, SMI, Swiss Market Index (SMI), SMI MID (SMIM), SMI Expanded, SXI, SXI LIFE SCIENCES, SXI Bio+Medtech, SLI, SLI Swiss Leader Index, SBI, SBI Swiss Bond Index, VSMI and SWX Immobilienfonds Index are registered or deposited trademarks of the SIX Group Ltd or of SIX Swiss Exchange Ltd, and their usage is subject to licence. SIX Swiss Exchange Ltd, October 2010

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Bonds NEWSLETTER | No. 19 | 3 Quarter 2010

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