National Pension and Institutional Investor Summit Understanding Treasury Inflation Protected Securities Kirk Brown, CFA American Beacon Advisors December 3, 2009 1

Treasury Inflation Protected Securities Large Cap Value Fund Treasury Inflation Protected Securities (“TIPS”) – What are they? TIPS were first issued by the U.S. Treasury in 1997 TIPS are U.S. government guaranteed bonds that protect investors from rising inflation as they guarantee investors a real rate of return above inflation Similarities with nominal Treasuries Issued by the U.S. Treasury Backed by the full faith and credit of the U.S. government Coupon rate fixed at time of issuance Coupon payment paid on a semi-annual basis Coupon payment is calculated as a fixed percentage of principal (however, principal fluctuates with inflation / deflation) Differences from nominal Treasuries Principal fluctuates daily based on changes in the Consumer Price Index (CPI-U1), lagged 3 months Provide protection from deflation as redemption is at the greater of the inflation adjusted principal or original par amount Coupon rate represents the real rate of return required by investors at the time of issuance Coupon payments rise/fall with inflation/deflation as the fixed coupon rate is applied to a growing/falling principal balance TIPS cash flows are more back-end loaded as their real coupons are lower but their principal grows with inflation 1 CPI-U: the nonseasonally adjusted U.S. City Average All Items Consumer Price Index for All Urban Consumers, published by the Bureau of Labor Statistics of the U.S. Department of Labor 2

Treasury Inflation Protected Securities Large Cap Value Fund Treasury Inflation Protected Securities (“TIPS”) – Components of Return While both TIPS and nominal Treasuries are sensitive to changes in real rates, their exposures differ with respect to changes in expected inflation, the inflation risk premium, and realized inflation. Return Component Compensation for… Component of TIPS Return Component of Nominal Treasury Return Expected Inflation Losing purchasing power due to future inflation No Yes Real Yield Time value of money Inflation Risk Premium Bearing the risk of inflation Realized Inflation Losing purchasing power due to inflation shocks The important issue driving TIPS performance versus nominal Treasuries is the performance of realized inflation relative to expected inflation, as any inflation risk premium is typically small. Nominal Treasury Return = Real Yield + Expected Inflation + Inflation Risk Premium TIPS Return = Real Yield + Realized Inflation 3

Treasury Inflation Protected Securities Large Cap Value Fund Treasury Inflation Protected Securities (“TIPS”) – Break-Even Analysis The break-even inflation rate is the difference in yield between a TIPS and a nominal Treasury of the same maturity. The break-even inflation rate is the inflation rate at which an investor would be indifferent to holding a TIPS or a nominal Treasury, of equal maturities. TIPS outperform nominal Treasuries when the realized inflation rate, during the remaining maturity of the TIPS, (i.e., CPI-U) is greater than the implied “break-even” inflation rate at the time of purchase TIPS underperform nominal Treasuries when the realized inflation rate, during the remaining maturity of the TIPS, (i.e., CPI-U) is less than the implied “break-even” inflation rate at the time of purchase Realized Inflation Over Next Five Years Example: the yield on a 5-year nominal Treasury is 4.0% and the real yield on a 5-year TIPS is 3.0%. Therefore, the break-even inflation rate is approximately 1%. 1% 2% 3% 4% 5% 10% 0% +1% +2% +3% +4% +9% -1% +8% -2% +7% -3% +6% -4% +5% TIPS outperform Nominal Nominal Treasuries outperform TIPS TIPS = Nominal Treasuries Break-Even Inflation Rate 4.0% -- 3.0% = 1.0% Nominal Treasury Yield TIPS Real Yield Break-Even Inflation Rate Note: For simplicity, the analysis ignores compounding. 4

Treasury Inflation Protected Securities Large Cap Value Fund 0.28 Coupon / Real Return Inflation Return Principal Return 1.48 0.27 Period: T1 T2 T3 T4 T5 Inflation Rate: 3% -2% -2% 2% 4% 30 -0.32 0.9 1,000 49.36 TIPS Mechanics TIPS Coupon Rate = 3% Maturity = 5 Years Principal = $1,000 Maturity Value A B C D E F G H I J Year Real Return / Coupon Rate Original Principal Real Return/ Coupon Pmt Inflation Inflation Adj. Principal Principal Difference Inflation Return Pmt Principal Return Inflation Return (B * C) (1+E) * FT-1 (F – C) (B * G) 1 3% $1,000 $30.00 $1,030.00 +0.90 2 -2% $1,009.40 $9.40 +0.28 3 $989.21 -$10.79 -0.32 4 2% $1,008.99 $8.99 +0.27 5 4% $1,049.36 $49.36 +1.48 $1,000.00 Total $150.00 $2.61 $1,201.97 Note: For simplicity, the analysis assumes annual, rather than semi-annual TIPS interest payments. 5

Treasury Inflation Protected Securities Large Cap Value Fund Period: T1 T2 T3 T4 T5 Coupon Return Principal Return 40 1,000 Nominal Treasury Mechanics Nominal Treasury Coupon Rate = 4% Maturity = 5 Years Principal = $1,000 Maturity Value Year Coupon Rate Original Principal Coupon Return Pmt Principal Return 1 4% $1,000 $40.00 2 3 4 5 $1,000.00 Total Payments $200.00 $1,200.00 Note: For simplicity, the analysis assumes annual, rather than semi-annual nominal Treasury interest payments. 6