JP Conklin 704-887-9880 office jp.conklin@pensfordfinancial.com www.pensfordfinancial.

com Leveling the Playing Field June 4, 2012 _______________________________________________________________________ This is going to be short and sweet. Not because I spent the weekend on a boat and was too lazy to write it, but because of the lingering motion sickness that is making this computer monitor spin violently. I might have to stick to land and air. The 10 year Treasury yield fell to an all-time low of 1.46% and, as we said in our email last week, we see no reason for a substantial rebound until we have concrete, positive news out of Europe. We believe the most likely cause for a sharp rebound in rates in the near term is a massive, coordinated effort involving at least European nations and potentially a more global effort, to provide a backstop in Europe. On September 27, 2010, the 10 year Treasury was at 2.75%. In the Pensford Letter that week, we wrote A very real possibility of long term rates declining significantly from current levels. The 10T could drive below 2.00% for the first time ever, and possibly even approach 1.00%. We continued, If this sounds outlandish, you might be right. But it doesnt seem as crazy to us as it did a few years ago. And Id wager that theres a better chance of T10 declining 1.00% than of it increasing by 1.00% over the next 9 months Here we sit at sub-1.50% rates on the 10yr with 1.00% within sight. All because European sovereigns appear poised for their own Lehman moment. Soros gave a speech over the weekend saying that Europe basically has three months to figure out a solution before we have another meltdown on our hands. Markets seem to agree, as equities are at year lows and bonds rally. And from the Department of Piling On, NFP came in much weaker than expected, revealing just 69k jobs added last month and a downward revision from last month. The unemployment rate crept up from 8.1% to 8.2%. But lets be honest, all eyes are on Europe right now and a shockingly strong number would not have pushed rates higher. What Happens Now? We believe there is a very aggressive effort behind the scenes to put together a global coordinated effort to provide a backstop to the European sovereigns, particularly Greece, Spain, Portugal, and Italy. Spains 10yr bonds are trading around 6.50%, well above the

reverse Mendoza line of 6.00% that usually implies a pending bailout. Spain announced plans to issue bonds on Thursday June 7th, a move which the Financial Times described as defiant. Dow Jones picked up a story over the weekend that the chiefs of four European institutions are in the process of creating a master plan for the Eurozone, the daily Die Welt reports Saturday, in an advance release of an article to be published Sunday. It adds: Suggestions targeting a fiscal, banking, and political union, as well as structural reforms, are being worked out by EU Council President Herman van Rompuy, EU Commission chief Jose Manuel Barroso, Eurogroup Chairman Jean-Claude Juncker and European Central Bank President Mario Draghi, according to the article. But there is also growing momentum for an ECB rate cut. The European Central Bank may cut interest rates again soon as the Eurozone debt crisis deepens, but it will continue to insist that it is up to governments to find a lasting solution, analysts say, reports AFP. It adds though: ECB watchers predict the central bank -- which will hold its regular policy-setting meeting next week on Wednesday instead of Thursday owing to a public holiday -- will not alter borrowing costs just yet this month. But it could act in July as deepening fears about Greece and possible contagion to other countries push the 17 countries that share the euro back into recession, the analysts predicted. Bottom Line We dont think Europe can wait three months and that an announcement will come out shortly, probably within the next few weeks, providing some sort of coordinated backstop. Germany, against its desire, will be heavily involved and will want some say in fiscal oversight in return. There will be a temporary rebound in rates and equities as a run on banks/sovereigns is avoided, but it will take some time to figure out if the underlying issues are addressed. This Week Very light week for data, but quite a few Fed speeches. But all eyes are on Europe. Spains bond auctions Thursday will be closely monitored for investor sentiment. But would you buy bonds knowing the eurozone has established precedent for moving you down the repayment waterfall if they need to intervene (remember Greek CAC?)? Me neither. We will send out updates as conditions warrant through the week.

ECONOMIC CALENDAR
Economic Data Day Monday Time 9:45AM 10:00AM Tuesday Wednesday 10:00AM 7:00AM 8:30AM 8:30AM 2:00PM Thursday 8:30AM 8:30AM 3:00PM ISM New York Factory Orders ISM Non-Manufacturing Index MBA Mortgage Applications Nonfarm Productivity Unit Labor Costs Fed's Beige Book Initial Jobless Claims Continuing Claims Consumer Credit ICSC Chain Store Sales (YoY) Friday 8:30AM 10:00AM Trade Balance Wholesale Inventories -$49.5B 0.4% 379k 3240k $10.300B 383k 3242k $21.355B 0.6% -$51.8B 0.3% -0.7% 2.2% 0.2% 53.5 Report Forecast Previous 61.2 -1.5% 53.5 -1.3% -0.5% 2.0%

Speeches and Events Day Tuesday Time 7:00AM 2:15PM 7:15PM Wednesday 8:15AM 10:00AM 2:00PM 3:30PM 7:00PM Thursday 10:00AM 12:10PM 1:15PM 3:30PM Friday 8:00PM Fed's Fisher speaks Fed's Bullard speaks on Housing Chicago Fed's Evans speaks to Money Marketeers Fed's Lockhart speaks on Economy Fed's Tarullo testifies on Supervision to Senate Banking Fed Releases Beige Book Economic Survey Fed's Williams speaks on the Economy Fed's Yellen speaks on Economic Outlook Fed's Bernanke testifies to U.S. Lawmakers on Economic Outlook Fed's Lockhart speaks on U.S. Economy Fed's Kocherlakota speaks Federal Reserve Board holds Open Meeting on Bank Capital Fed's Kocherlakota speaks on Economic Theory Ann Arbor, MI Georgia Minneapolis, MN Bellevue, Washington Boston, MA Report Place Fife, Scotland St. Louis, MO New York, NY Fort Lauderdale, FL

Treasury Auctions Day Time Report Size

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