PRESENTATION TITLECONFIDENTIAL Todays Topic: Is There a Bond Bubble? Minyanville Media, Inc. 1 Our Special Guest: Peter Tchir –Founder of TF Market Advisors. –Author of Minyanvilles Fixed Income Report. –Traded $1 trillion+ in fixed income securities at major investment banks like UBS and RBS. –Regularly sought out by the Wall Street Journal, Financial Times Bloomberg TV for his views on bond issues.

PRESENTATION TITLECONFIDENTIAL /13/2013 Minyanville Media, Inc. 2 What Is a Bubble? An asset class is bubble-like when it can return 20% in a very short time period. This would have defined many asset classes during the financial crisis. Would have periodically picked up other assets that entered bear market territory. We will focus on 10-year US Treasury as our bubble benchmark. Bonds may actually have significant return potential, despite the conventional wisdom that they are in a bubble.

PRESENTATION TITLECONFIDENTIAL /13/2013 Minyanville Media, Inc. 2 Trading Fixed Income for Total Return Since Feb 1 TLT has outperformed SPY (ignoring dividends) and for the entire year has had more volatility to trade. This is just one example of many where Fixed Income can outperform equities over a period but also with trading taken into account. Trading Fixed Income is as important as it is for Equities, even as the S&P 500 Remains Near Record Highs.

PRESENTATION TITLECONFIDENTIAL /13/2013 Minyanville Media, Inc. 2 The US Treasury Market This chart is the total of US Treasury T-Bills and non TIIPS bonds. Many treasuries, particularly longer-dated ones are held in not available for sale accounts to get favorable accounting treatment, so the free float is smaller than many realize.

PRESENTATION TITLECONFIDENTIAL /13/2013 Minyanville Media, Inc. 5 The Market is Accepting NEGATIVE Real Returns The Effective Fed Funds Rate is 0.15%. 3 Month Libor is currently 0.27% and has averaged 0.3% over the past 6 months. 1-Year T-Bills yield 0.11% and 2 year treasuries yield 0.24%. The GDP PCE Deflator (Feds preferred choice) was 1.2% as of January or 1.3% if you look at the Core. CPI was 1.5% and the less volatile Core was 1.9% annualized as of March.

PRESENTATION TITLECONFIDENTIAL /13/2013 Minyanville Media, Inc. 6 An Unusual, But Crucial Chart

PRESENTATION TITLECONFIDENTIAL /13/2013 Minyanville Media, Inc. 7 Holding Down the Front End The Fed has pledged to keep rates low for at least a year, and quite likely longer. If the 1-year yield is 0.12%, what is a fair rate for the 2 year? Earning 0.23% means that the 1-year rate, 1 year forward, is 0.34% –You could buy the 1-year bond and roll it at the end of the year, and to achieve the same return as buying the 2-year now, you would need 0.34% to break even (the 0.11% you forego this year added to the yield on the 2-year) The forward curves are actually reasonably high and account for several potential rate hikes (which given the state of the economic rebound, dont look like they are coming), so the market is pricing in rate hikes.

PRESENTATION TITLECONFIDENTIAL /13/2013 Minyanville Media, Inc. 8 The 10-Year Treasurys Price Sensitivity The 2% Note due 2/15/23 is the on the run treasury So even with what would be a shocking move in 1 year, the loss isnt bubble-like. If yield curve doesnt change, return is 3.6% not the 2% coupon. Pull to par and convexity and curve and carry all help holders of treasury bonds.

PRESENTATION TITLECONFIDENTIAL /13/2013 Minyanville Media, Inc. 9 The Fed Will Fight To Protect the 10-Year Treasury Mortgages price off the 10-year bond so the Fed is heavily incentivized to keep low, and with spreads already artificially tight via Fed mortgage purchases, they need to keep the 10 year-yield under control/ Corporate bonds also price to the 10 year as a benchmark, and while spreads arent back to all-time tights, they have rebounded significantly and all-in yields are moving with treasuries, so again the Fed is incentivized to keep 10-year yields low Why does Dont Fight the Fed apply only to equities when it is treasuries they are actually buying? It doesnt!

PRESENTATION TITLECONFIDENTIAL /13/2013 Minyanville Media, Inc. 10 Thank you for attending! Contact us at with your bond market questions, OR for a special deal on Peter Tchirs Fixed Income Subscribers receive: –Two weekly reports with Peters market commentary. –Exclusive ETF portfolio strategies for conservative, moderate, and aggressive bond investors. –Intraweek updates on important market developments. –14-day free trial, so we are offering a true risk-free asset (get it?). Read more at

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