Fixed Income – Challenges in a low interest rate environment Maurizio Pedrini...

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Fixed Income Challenges in a low interest rate environment Maurizio Pedrini April 2010 Slide 2 Produced by: APX Date: April 2010 Slide 2/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Contents Opportunities and Threats in 2010 Liquidity: Engineered funds Credit-Spreads: TOPS funds Inflation risk: Inflation-linked funds Appendix Slide 3 Produced by: APX Date: April 2010 Slide 3/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Opportunities and Threats in 2010 Slide 4 Produced by: APX Date: April 2010 Slide 4/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Risk/Return Factors in the Fixed Income Asset Class maturity yield credit risk premium liquidity premium real yield inflation premium Slide 5 Produced by: APX Date: April 2010 Slide 5/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. De-leveraging process has just started Source: Arbor Research Slide 6 Produced by: APX Date: April 2010 Slide 6/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Housing market back to normality? Source: San Francisco Fed Slide 7 Produced by: APX Date: April 2010 Slide 7/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. U.S.A. Federal Reserve Assets Have Almost Tripled Last data point: 31.03.2010Source: Datastream, Credit Suisse / IDC Slide 8 Produced by: APX Date: April 2010 Slide 8/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Long Live the Carry Trade! Source: Arbor Research Slide 9 Produced by: APX Date: April 2010 Slide 9/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Social Security Trust Funds Buying nothing but U.S. Treasuries Source: SocialSecurityOnline Slide 10 Produced by: APX Date: April 2010 Slide 10/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. U.S. Treasury Bonds Held by Official Institutions Last data point: 31.12.2009Source: Datastream, Credit Suisse / IDC Slide 11 Produced by: APX Date: April 2010 Slide 11/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Biggest Part of Budget Deficits in Europe is Structural Source: OECD, Credit Suisse Slide 12 Produced by: APX Date: April 2010 Slide 12/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. EMU Sovereigns Indebtedness relative to GDP (%) Source: Credit Suisse, Datastream % Slide 13 Produced by: APX Date: April 2010 Slide 13/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. China Rapid Growth of Monetary Aggregates and Loan Volumes Last data point: 26.02.2010Source: Datastream, Credit Suisse / IDC % Slide 14 Produced by: APX Date: April 2010 Slide 14/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Inflation will Remain Tame in the Short Run Source: Arbor Research Slide 15 Produced by: APX Date: April 2010 Slide 15/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Source: Bloomberg, Credit Suisse / IDCLast data point: 02.04.2010 Expected Changes of Money Market Rates for the Next 12 Months in bp Slide 16 Produced by: APX Date: April 2010 Slide 16/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Opportunities and Threats for 2010 Interest Rates Interest rates are generally on a low level risk of a sudden rise Very steep yield curves mean high opportunity cost of capital Considerable risks in sovereign bonds (Dubai, Greece,) Flexibility of chosen strategy is important (liquidity!) Credit-Spreads Economic recovery helps what happens when government stimulus gets withdrawn? Credit spreads are still at historically attractive levels Focus needs to be on issuer selection Inflation No immediate threat Expansionary monetary policy and rising sovereign debts pose significant risks in the longer term Inflation risk is not sufficiently discounted by the market Slide 17 Produced by: APX Date: April 2010 Slide 17/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Liquidity: Engineered Funds Slide 18 Produced by: APX Date: April 2010 Slide 18/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Traditional vs. Synthetic Fixed Income Funds (Currency Forward) Interest rate swap Synthetic money market Credit risk Currency risk Interest rate risk Traditional bonds Synthetic bonds + portable alpha Credit default swap Instruments and risks Portable alpha Slide 19 Produced by: APX Date: April 2010 Slide 19/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Synthetic Money Market and Portable Alpha Portable Alpha Strategy To enhance this money market return, a small part of the fund (5% to 10%) is invested in a portable alpha strategy This strategy is a mechanical equity index arbitrage strategy which invests in single stocks subject to corporate events (e.g. inclusions/exclusions from an index) and hedges the systematic equity risk with index futures This means that the fund doesn't have any systematic equity risk, only a small additional volatility coming from the excess returns of the portable alpha strategy Synthetic money market Cash is invested in a diversified equity portfolio which is immediately sold forward, so that the investor doesnt hold any equity market risk The money market equivalent return comes from the interest rate implicit in the forward price Slide 20 Produced by: APX Date: April 2010 Slide 20/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Interest Rate Risk and Credit Risk (incl. Counterparty Risk) Interest rate risk: Positioning with respect to the benchmark along the dimensions duration and curve Credit risk is implemented through index CDS (iTraxx) and single name sovereign CDS Diversification Liquidity Credit risk can be quickly eliminated with low transaction costs Counterparty risk is only a fraction of the notional exposure diversified across several counterparties (best execution) subject to limits constantly monitored actively managed Slide 21 Produced by: APX Date: April 2010 Slide 21/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Performance Credit Suisse Fund (Lux) Relative Return Engineered (Euro) Expected returns are no forecast or guarantee for future performance. There is no warranty that the expected return can be achieved. Performance data does not include costs and commissions in connection with the purchase and redemption of fund units. Slide 22 Produced by: APX Date: April 2010 Slide 22/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Performance Credit Suisse Fund (Lux) Relative Return Engineered (Euro), (net) Expected returns are no forecast or guarantee for future performance. There is no warranty that the expected return can be achieved. Performance data does not include costs and commissions in connection with the purchase and redemption of fund units. NAV price in % Slide 23 Produced by: APX Date: April 2010 Slide 23/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Credit Spreads: TOPS Funds Slide 24 Produced by: APX Date: April 2010 Slide 24/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in t