JPM Credit Outlook 3/7

www.morganmarkets.com

North America Credit Research07 March 2014

Credit Market Outlook & StrategyUS High Grade Strategy & CDS Research

US High Grade Strategy & CDS Research

Eric Beinstein AC

(1-212) 834-4211

[email protected]

Dominique D. Toublan

(1-212) 834-2370

[email protected]

Miroslav Skovajsa

(1-212) 834-5154

[email protected]

Harpreet Singh

(1-212) 834-7591

[email protected]

Meghana J. Chugani

(1-212) 834-3220

[email protected]

J.P. Morgan Securities LLC

See page 33 for analyst certification and important disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

High Grade StrategyA remarkable week with Russia/Ukraine, an S&P500 record high, huge HG bonds supply, a 31bp swing in UST yields, and HG bond spreads stable at YTD tights. The strength of the HG bond market in the face of lower UST yields last week and the heavy supply is notable. This week, we review the supply and spread trends. Also we discuss reasonable adjustments to pre-crisis spread levels and conclude that adding 10bp to the 105bp pre-crisis ex-EM spread average is a fair reflection of changes in duration and composition since then. This puts the current ex-EM spread of 121bp less than 10bp above the adjusted pre-crisis level.

Credit DerivativesiBoxx Loan TRS was launched recently and trading is picking up. Mandatory SEF trading started a week ago and has not affected trading volumes. ISDA published the new credit derivatives definitions and is seeking feedback on the frequency of single-name CDS rolls. CDX indices are slightly tighter on the week, after a whipsaw reaction on the increased risk in Ukraine. Spreads remain tight and werecommend hedging with options. The HY iBoxx TRS has significantlyoutperformed its underlying bonds. European HY and Financials have outperformed. Credit underperformance vs Equities continued this week. Equity tranches performed in line with the index but correlation declined.

FeaturesOn Bloomberg investors can choose between different reference Treasury yield curves to calculate a corporate bond G-spread. We discuss the differences. iBoxx Loan TRS has started trading and is already gaining traction as a tactical long and short product on the asset class.

Trade Recommendation and Trade TrackerWe recommend an option hedge: buy one CDX.IG September 60bp put option and sell two CDX.IG September 75bp put options and receive 5c per $100 upfront. Since our last publication, our Trade Tracker is up by $23,207. Over the last twelve months, performance is up by $1,914,612 (+19% ROI / +145% IRR).

Chart of the week: Adding 10bp to the pre-crisis ex-EM spread average of 105bp is a fair adjustment for the longer duration and lower financial weight today. Current ex-EM spreads are less than 10bp above this adjusted pre-crisis level

Source: J.P. Morgan

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JULI ex-EM Spread

Pre-crisis average

Adjusted pre-crisis level

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Current level: 121bp

Pre-crisis average:105bp

Adjusted pre-crisis level: 115bp

Credit Market Outlook & StrategyCredit Market Outlook & StrategyCredit Market Outlook & Strategy

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Eric Beinstein(1-212) [email protected]

Table of contents

Outlook and Summary

High Grade Strategy.............................................................................................................................. 3

Credit Derivatives................................................................................................................................ 11

Feature

Reference curve to calculate G spread .............................................................................................. 18

iBoxx Loan TRS................................................................................................................................... 20

Trade Recommendation

Trade Recommendation...................................................................................................................... 22

Trade Tracker....................................................................................................................................... 25

High Grade Analytics

Sector recommendations.................................................................................................................... 27

New bond issuance ............................................................................................................................. 28

JULI sector statistics and performance ............................................................................................. 30

Credit Derivative Analytics

CDS-bond basis across buckets ........................................................................................................ 31

US economic calendar ........................................................................................................................ 36

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Summary and Outlook

High Grade Strategy

There are multiple signs of strength in the HG bond market over the past few weeks. We discuss them below. Near term we believe low yields and significant supply limit spread tightening opportunity unless UST yields rise meaningfully. The strength of demand despite these yields and spreads, improving credit fundamentals, ourexpectation of higher UST yields and the potential that future supply lessens point to tighter spreads down the road, however.

1. 10yr UST yields were near an eight month low until mid-week, down 31bp YTD, and yet spreads are unchanged at the YTD low of 133bp. The total return for HG credit is now 2.6% YTD, higher than our original full year 2014 expectation of 1%, yet there continues to be investor buying rather than profit taking. JPM is forecasting UST yields end 2014 at 3.4%. If this proves correct HG bond total returns will be negative from now until year end. Our expectation of higher UST yields is near consensus, so it is interesting how the supply/demand dynamic in HG credit is not heavily driven by total return expectations. If/when UST yields rise as we expect it will likely bring in more yield buyers, and also contribute to long-end curve flattening again. The 10s30s curve has steepened a few basis points to 17bp, close to the 18bp YTD high reached on Feb 12. The all-in-yield in the long-end is now below 5% for the first time since June. We continue to expect higher UST yields and strong demand from pension funds for long duration bonds to make this curve flatter as the year progresses, repeating what happened in 2H13.

Exhibit 1: HG bond spreads are now at their YTD low of 133bp Exhibit 2: HG all-in-yields are now at 3.96% driven by a 31bp decline in UST 10yr yields YTD

Source: J.P. Morgan

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Exhibit 3: The 10s30s curve has steepened 3bp YTD to 17bp. We believe higher UST yields will lead to a flatter curve going forward

Exhibit 4: The 30yr all-in-yield is now lower than 5% for the first time since June, when the 10s30s started to flatten

Source: J.P. Morgan

2. Significant supply readily absorbed. In February supply was $82bn and yet dealers were still net sellers to investors of $2.5bn of bonds. Over the first three days in March supply has been $46bn, about half the typical March average of $90bn, and yet spreads are unchanged. YTD supply is now $211bn which is running ahead of the $186bn of last year and $195bn of 2012. It remains to be seen how much of this supply has been brought forward from later in the year given the very favorable issuance conditions.

Exhibit 5: YTD there has been significant monthly supply Exhibit 6: 2014 YTD supply is now already running ahead of last year

Source: J.P. Morgan

The rolling 2 week supply is now $75.1bn. Since 2012 there have been seven previous two week periods when supply was at or above $60bn. The peak short term supply period was in September last year at $95bn, driven by Verizon. If we look at spreads one week and two weeks after these seven periods there is no pattern that suggests heavy supply is followed by weaker markets. In 4 of the 7 periods spreads were tighter one week later and in three they were wider. There is a similar outcome when looking at spreads two weeks later. This highlights how supply is driven by demand, rather than being a cause for less future demand. That said, our index was wider than 150bp in each of these prior seven periods, compared to 133bp today. Also, yields now at 3.96% are lower than in any of these prior heavy supply periods. We therefore believe that, at current valuations, the heavy supply is likely to limit near term spread performance.

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Monthly supply$bn2013: $919

2014F: $900

2011: $752

2012: $928

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Exhibit 7: Two week rolling HG bond supply compared to HG bond spreads. There has been little correlation between spreads and supply over the past few years

Source: J.P. Morgan

3. EM HG bond spreads unwound almost all their YTD spread widening relative to US HG bonds. EM HG spreads are just 7bp wider YTD vs. US HG credit. They are now 116bp above US HG, as reported in our daily report EM vs US HG Relative Value Report (link) so near the low end of the 108-132bp YTD range. This is quite surprising given that EM growth forecasts continue to be cut and are now below US growth estimates for the large EM economies. US 2014 growth is estimated at 2.6%, while Russia (1.8%), Brazil (1.5%) and Turkey (1.9%) have lower growth forecasts. Also the issues in Ukraine and Russia have been quickly forgotten by markets. The strength of demand for EM highlights the still prevalent search for risk and the mindset of investors to look for opportunities in credits that widen.

Exhibit 8: EM vs US HG bond spreads are just 7bp wider YTD, so near the low end of the 108-132bp range YTD range

Source: J.P. Morgan

YTD HG bond spreads are following stocks rather than being driven by UST yield trends. Stocks are at a record and this has been more important for spreads than the low UST yields. This is in part explained by the solid 4Q credit metric developments. We discussed these trends in CMOS last week and will publish the full 4Q13 credit metric report next week. Revenue, EBITDA, net leverage and other metrics all showed improvement q/q. Solid growth figures out of Europe QTD even as US growth is a little softer point to further stabilization and potential improvement in credit metrics this quarter.

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Rolling 2wk issuance

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EM discountbp

https://jpmm.com/research/content/GPS-1339810-0

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How tight could spreads go?

With spreads hovering near YTD and post-crisis tights we believe it is prudent to ask how far away spreads are from pre-crisis levels. Before the credit crisis HG spreads traded in a consistent range of 90bp to 120bp averaging 105bp. This implies that there is plenty room for further tightening from the current level of 121bp (exEM). However, the HG market has changed significantly since then. It is now over a year longer in duration, has fewer Financial and more EM bonds. Combined, these changes add about 10bp to the pre-crisis spreads, making the pre-crisis adjusted level about 115bp. This is less than 10bp tighter than today.

If we include EM in our analysis the adjustment is 15bp (5bp larger) because of the greater proportion of EM today than before the crisis. This leads to a pre-crisis level of 120bp, which is about 15bp tighter than the current overall index level of 133bp.

Exhibit 9: Adding 10bp to the pre-crisis spread average of 105bp is a fair adjustment for the longer duration and lower financial weight today. Current spreads are less than 10bp above this adjusted pre-crisis level.

Source: J.P. Morgan

There have been four main changes to the market since before the crisis.

1) The proportion of Financials has fallen from about 40% before the crisis to about 30% currently. Financials were trading tighter than Non-Financials before the crisis. This means that they were pushing the overall index spread tighter. As their weight in the index is smaller now, that effect would have been smaller. Hence we adjust the pre-crisis level higher. In this case by about 4bp.

2) The composition of ratings has changed as well. Financials are significantly lower rated than they were before the crisis and Non-Financials are marginally higher rated. We exclude the effect of Financial downgrades from this analysis because one can argue that Financial ratings were too high before the crisis and are now more properly rated. We would rather err on the conservative side.

The rating quality of Non-Financials has improved slightly, with 6% fewer BBBs, 4% more As, and 4% more AAs. The improvement is partly due to issuance by high quality names that did not have outstanding bonds before the crisis. Overall, this effect decreases the pre-crisis spread by about 4bp.

3) The strongest effect is by far the increase in the average life and duration of the index. Index duration has increased by more than a full year from 6.0 to 7.2 now, with the long end duration increasing from 11.6 to 13.2 years. Both Financial and Non-Financial duration increased significantly: 5.1 to 5.7 for Financials and 6.5 to 7.9 for Non-Financials. The increase in index duration adds 11bp to pre crisis spread (7bp for Financials and 13bp for Non-Financials).

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JULI ex-EM Spread

Pre-crisis average

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Current level: 121bp

Pre-crisis average:105bp

Adjusted pre-crisis level: 115bp

7



4) The US HG market now contains 11% of EM bonds compared to only 4% before the crisis. Using our EM/DM model we establish the 'normal' discount that EM bonds trade wider than their non-EM counterparts of the same maturity, rating and sector. For this we use the average discount between 2011 and 2012 when it was stable around 65bp and the EM portion of the USD HG market was well established. Using this discount and the 8% increase in the proportion of EM bonds we adjust the pre-crisis spread 5bp higher.

Exhibit 10: The ‘normal’ EM discount to non-EM bonds of the same maturity, rating, and

sector is about 65bp

Source: J.P. Morgan

The four effects are summarized in the table below.

Exhibit 11: We believe pre-crisis spreads should be adjusted 10bp wider in order to compare them to the current exEM level. This is becausethe HG market now has more Non-Financial and EM bonds, Non-Financials are higher rated, and the overall market is over a year longer in duration than before the crisis.

Share of the market Duration Spread2006 Current Difference 2006 Current Difference Effect

1) Sector adjustmentFinancials 42% 31% -10%Non-Financials 58% 69% +10% +4bp

2) Rating adjustmentNon-Financials AAA 2% 1% -1%

AA 6% 9% +4%A 33% 37% +4%BBB 59% 53% -6% -4bp

3) Maturity adjustmentJULI 3yr 21% 24% +3% 2.1 2.2 +0.1

5yr 24% 22% -3% 3.8 3.9 +0.17yr 17% 13% -4% 5.1 5.6 +0.410yr 17% 17% -0% 6.8 7.3 +0.530yr 21% 26% +5% 11.6 13.2 +1.6 +11bp

Combined (excluding EM) +11bp

4) EM adjustment 'Normal' EM discount to DMEM proportion 4% 11% +8% 65bp +5bp

Combined (including EM) +16bp

Source: J.P. Morgan

The 5s7s curve has reached its tightest level in over a year

The 5s7s curve has flattened 6bp YTD and 22bp since the start of 2013 as the 7yr spread is now at its tightest level since the start of 2013. Currently both the Financials and the Non Financials 5s7s curves are 20bp steep. However, the Non

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EM discount to non-EM

'Normal' discount

EM discount to non-EM, bp

2011-12 average:65bp

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Financials curve is now at its flattest level since the start of 2013 while the Financials 5s7s curve is now 4bp steeper than its flattest level in mid December.

The Financials 5s7s curve has flattened by just 1bp YTD. After steepening by 4bp in January and flattening 1bp in Feb, it has flattened by 3bp in the last 3 days. On the other hand, Non Financials have caught up with Financials recently as the curve flattened by 8bp YTD with 5bp flattening in Feb and 2bp in the last 3 days. The 5s10s curve has also flattened by 2bp YTD with the Financials curve flattening 6bp while the Non Financials 5s10s flattening by 2bp respectively.

The outperformance of the 7yr point was expected, as the 7s10s curve was quite flat and the 5s7s quite steep, resulting in an attractive roll down the curve for 7yr bonds.

Exhibit 12: At 21bp, the 5s7s curve is now the tightest since the start of 2013

Exhibit 13: The Non-Financials 5s7s curve is now also the flattest since 2013

Source: J.P. Morgan

US Economic Summary

The discussion on the effect of abnormally cold weather affecting the economic data has been continuing for some time now. Recently our economists published Focus: “Re-heating indicators on ice” where they revisited their analysis on the potential of abnormally cold weather affecting the economic indicators with many of the monthly indicators already reported for January. It appears that the colder-than-normal temperatures accounted for only a small portion of the weakness in many of the January reports but the effect may be somewhat larger in February economic data.

Employment data declined, manufacturing bounced back, non-manufacturing disappointed while Markit PMI increased.

Employment

Initial jobless claims for the week of March 1 declined 26,000 to 323,000 after increasing 15,000 to 349,000 in the previous President’s Day holiday week. These swings may reflect the difficulty in seasonally adjusting for the holiday, and the average of the two weeks is very close to the prior trend. The four-week average of 336,500 is near the middle of its narrow range seen over the past eight weeks. The stability of the claims data may dispel some of the concerns occasioned by yesterday's nonmanufacturing ISM report. Continuing claims for the week of February 22 declined 8,000 to 2.907mn from a sharply downward-revised prior level. The insured unemployment rate was unchanged at 2.2%.

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Exhibit 14: Initial Jobless claims declined last week Exhibit 15: ISM Manufacturing bounced back while ISM Non-manufacturing disappoints

Source: J.P. Morgan

Manufacturing and Non-Manufacturing

The February ISM manufacturing survey recouped about a third of the big decline that occurred the prior month, rising 1.9 points to 53.2. The January decline looked implausibly steep, and the recovery today to a level consistent with moderate expansion in factory activity looks more reasonable. The details were generally in line with the broad message of a rebound, but to levels below where they were in December. Also reported this morning, the final print of the February Markit manufacturing PMI revised higher to 57.1 from 56.7 in the preliminary reading. After running a fair bit below the ISM for much of 2013, the PMI has now been stronger for the last two months. Averaging over the various manufacturing surveys -- none of which is particularly reliable -- the most likely outcome is for continued moderate expansion in factory output.

The February non-manufacturing ISM fell 2.4 points to 51.6, well below expectations and the lowest reading since early 2010. The disappointment sends a cautionary signal about the amount of momentum in the economy, and among the details by far the most concerning was the almost-nine-point plunge in the employment index to 47.5, the biggest one-month fall since late 2008, and one that accounts for almost all of the decline in the headline index. The harsh weather probably exerted a temporary depressing effect on the number.

Inflation

For perhaps a glass half-full view of the service economy, the new Markit services PMI printed at 53.3 in February, up from the 52.7 in the flash estimate, but still below the 56.7 reading from January. The short history of this series makes it difficult to assess how accurately this measure reflects economic activity.

Consumer Sentiment

The University of Michigan consumer sentiment index was revised up from 81.2 to 81.6 between the preliminary and final February reports, coming in little changed from the final figures reported for January (81.2) and December (82.5). Most other sentiment measures that we track have also not changed much lately despite the recent weakening in many other economic reports. The Michigan survey’s main inflation expectations measures continued to trend sideways through some ups and downs in the monthly figures.

Construction Spending

Construction spending rose 0.1% in January, a modest gain but better than expectations, and December spending was revised up a fair bit from 0.1% to 1.5%.

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Private residential construction spending rose 1.1% in January, while private non-residential spending fell 0.2%, the first decline since last June. Public construction spending slipped 0.8%, though was revised up significantly in December. Construction is the most weather-sensitive sector of the economy; so, the modest increase in January construction came as a surprise.

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Summary and Outlook

Credit Derivatives

The iBoxx Loan TRS started trading a couple of weeks ago. This TRS allows investors to take long or short views on a diversified loan index. It is the latest addition to the iBoxx TRS family, which only covered bonds so far. See Feature on p.20.

Mandatory SEF trading for certain Credit Derivatives started a week ago. Trading volumes have not been affected by the transition and a vast majority of trades is now going through SEFs.

ISDA published the new credit derivatives definitions, launched a new website SwapsInfo and is seeking feedback on the frequency of single-name CDS rolls.

CDX indices are slightly tighter on the week, after a quick whipsaw reaction on the increased risk in Ukraine. Spreads remain tight and we recommend hedging with options as implied volatility is also close to its recent lows. See the trade recommendation on p.22.

The HY iBoxx TRS has significantly outperformed its underlying bonds in the last few weeks. This is likely due to the strong inflows into the asset class recently which have not been met by a surge in issuance.

European HY and Financials have outperformed European Non-Fins and the US markets, in line with our expectations. The current levels are getting closer to what we think is fair.

CDS and bonds traded about in line this week, and we believe that CDS-bond basis is about fair in both HG and HY.

Credit underperformance vs Equities continued this week, however the longer term perspective indicates they are in line.

Equity tranches performed in line with the index even as correlation declined.

Mandatory SEF trading has started

Effective Wednesday, February 26th 2014, certain mandated Index CDS products were required to be traded on a Swap Execution Facility (SEF) and cannot be traded bilaterally with US persons. There are exceptions such as trades above block size and trades not subject to mandatory clearing. The instruments in question are CDX.IG, CDX.HY, iTraxx Main and iTraxx Xover; 5y tenor; at any time, the then-current on-the-run series and the preceding series that was replaced by the current one. It is noteworthy that this list of swaps is a subset of those swaps that are subject to the CFTC’s mandatory clearing requirements. For a more detailed discussion on SEFs, see link for a detailed discussion and link to recent update.

The introduction of SEF trading does not seem to have had any measurable impact on the trading volumes. According to SDR and to Markit data, the average trading volumes since last Wednesday are about in line with the average YTD trading volumes. Furthermore, we have no anecdotal evidence of investors finding it difficult to trade on Monday, which was a high liquidity day driven by the situation in Ukraine.

CDX Indices Level 1w change

IG (bp) 62.3 -2.25HY($) 108.2 0.4HY(bp) 306 -9

Theoretical 1w changeIG (bp) 63.4 -2HY($) 108.2 0.3HY(bp) 305 -7

Basis 1w changeIG (bp) -1.1 0HY($) 0.0 0.1HY(bp) 1.2 -2

iBoxx TRSTRS Yield (%) 1w change (bp)IG 3.89 4HY 5.04 -11

iBoxx Yield (%) 1w change (bp)IG 3.92 3HY 5.27 -1

Basis Yield (bp) 1w change (bp)IG -3 2HY -23 -10

CDS-Bond Basis (bp)Bond PECS 1w change

IG 74 0HY 274 -24

CDS Spread 1w changeIG 63 -1HY 238 -20

Basis 1w changeIG -11 -1HY -37 4

Source: J.P. Morgan

http://emaillink.jpmorgan.com/t/AQ/AARFRw/AAiIuA/Sy4EkA/DKs/ADfgZA/AQ/00dl


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Exhibit 1: Markit trading volumes since January 1, 2014

Source: Markit. 5-day rolling average

Furthermore, a very large amount of CDX.IG and CDX.HY trades went through the SEFs. Taking into account the reported trading volumes by Bloomberg, GFI, ICAP, ICESwap, TradeWeb and MarketAxxess, we find that about 80% of all the CDX.IG and CDX.HY trades went through the SEFs since last Wednesday. However, note that this number includes both trades executed on a SEF platform and trades executed off the SEF, e.g. voice trades, i.e. it includes both Required Transactions and Permitted Transactions, as both type of transactions have to be reported througha SEF, independent of how the trade was executed.

Exhibit 2: So far, more than 80% of the index volumes have gone through SEFsDate CDX.IG CDX.HY26-Feb-14 79% 85%27-Feb-14 87% 94%28-Feb-14 49% 54%3-Mar-14 89% 96%4-Mar-14 97% 92%Average 80% 84%

Source: SDR, Bloomberg, GFI, ICAP, TradeWeb, ICESwap, MarketAxxess

ISDA’s new Credit Derivatives definitions, SwapsInfo and feedback on single-name CDS roll

The International Swaps and Derivatives Association, Inc. (ISDA) published a revised version of the 2003 ISDA Credit Derivatives Definitions, in the biggest overhaul in the credit derivatives market since the Big Bang and Small Bang protocols in 2008/2009 (link).

These changes will be implemented during the September 2014 roll date. The new definitions will only apply if parties reference them in their trade documentation for new trades, or agree to amend the documentation for existing transactions via the use of a protocol.

ISDA also launched SwapsInfo (link) to aggregate, collate and distribute CDS and Interest Rate Derivatives data from its Trade Information Warehouse, SDR and ODRF reporting service. The website provides information on daily pricing, volumes, trade counts and notionals outstanding. This information can be seen through the charts available on the website or can be downloaded as well.

On Monday March 3 2014, ISDA sent out a survey asking for feedback on switching to six month rolls for single name CDS. The survey has been sent through the ISDA distribution list. Please contact John Pucciarelli ([email protected]) to participate.

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For more detail, see CD player (link) and the research note from

the European team (link).



http://www.swapsinfo.org/

http://www2.isda.org/newsroom/press-releases/

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Marginally tighter despite Ukraine

The CDX indices are tighter on the week, as the increase in Ukraine risk only led to a short-lived weakness. CDX.IG is 1bp tighter on the week at 62bp, while CDX.HY is 1bp/$0.03 more expensive at 308bp/$108.1. Note that both indices are trading relatively close to the value implied by their underlying CDS, with IG 1bp rich and HY 1bp/$0.03 cheap. Altogether, IG has somewhat outperformed HY this week, but the moves have not been that large.

As shown in the Exhibits below, both CDX.IG and CDX.HY are trading at multi-year tights. Still, HY is trading much closer to its all-time tights compared to CDX.IG. We believe that this is justified with the low default expectations for the next few years that particularly matter for HY and because global macro risks remain elevated which matters more for HG than for HY. We therefore believe that HG and HY are about fairly priced here, given the current environment.

Nevertheless, risks remain in this market and the CDX indices are likely to quickly react to any spike in this risk, given how tight spreads are at this point. We believe that hedging long risk bond portfolios is a little expensive now, but that hedging with options is attractive. We discuss this below, together with a trade recommendation on p. 22.

Exhibit 3: CDX.IG keeps on trading close to its recent multi-year tights, but still significantly wider than its all-time tights

Exhibit 4: CDX.HY is also at multi-year tights, but trades much closer to its all-time tights than CDX.IG

Source: J.P. Morgan

Hedging with CDX options look attractive, as implied volatility declines

Implied volatility declined this week after increasing on Ukraine concerns. Implied volatility for CDX.IG and CDX.HY decreased by 1% over the past week to 43%. Implied volatility continued to decline as markets rallied, reaching 42% on Friday but increased on Monday to 45% as Ukraine news caused some concerns among investors.

Implied volatility skew increased by 1% for both CDX.IG and CDX.HY to reach 13% and 14% respectively. Implied volatility skew has remained at high levels despite markets stabilizing, highlighting continued investor interest in tail hedges. We recommend a trade on p. 22 which takes advantage of the higher skew while hedging against a long term sell off in spreads due to Emerging Market concerns, particularly turmoil in Ukraine and fears of a slowdown in China.

About $30.6bn traded in IG options this week and $7.8bn in HY, compared to $29.1bn and $10.1bn last week, respectively.

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Exhibit 5: Implied volatility declined this week after increasing on Ukraine concerns

Exhibit 6: Implied volatility skew increased over the past week

Source: J.P. Morgan

iBoxx HY TRS is expensive compared to its underlying bonds

iBoxx HG TRS underperformed its bonds this week while HY TRS outperformed the NAV significantly as its premium increased. HY TRS has returned 3% YTD compared to a 2% return from its HG counterpart. HG TRS underperformed its bonds by 2bp this week, and it is now trading 3bp/18c expensive to its NAV at 3.89%. HY TRS outperformed its bonds by 10bp, and it is now trading 23bp/81c expensive to its NAV at 5.04%.

This week HY TRS premium reached the levels last seen in October 2013. This is likely driven by the strong inflows into HY bond funds, which have not been met by a pick-up in issuance. We do not expect the premium to sustain at these levels as the higher premium makes it an attractive short. Investors looking to hedge themselves after the recent rally and decline in yields should find this level attractive, either by itself or as a relative value play against the more recent Loan TRS. We discuss the Loan TRS in further detail on p. 20.

Exhibit 7: HG iBoxx TRS underperformed its bonds this week Exhibit 8: HY iBoxx TRS outperformed its bonds this week

Source: J.P. Morgan

Credit continues to underperform Equity from a linear perspective

CDX.IG tightened by 1bp and CDX.HY tightened by 3bp this week while S&P moved up by 23pts. If we were to assume a linear relationship between the credit and equity indices this would seem like a huge move. However, as we have pointed out in our previous publications, we do not believe that this relationship is linear, especially around current levels which are at dragging the relationship into new territory.

33%

38%

43%

48%

53%

58%

63%


CDX.IG Implied Vol, 3m

CDX.HY Implied Vol, 3m

5%

7%

9%

11%

13%

15%


IG Skew HY Skew

3.3

3.5

3.7

3.9

4.1

4.3

4.5

Mar-13 Jun-13 Sep-13 Dec-13 Mar-14

iBoxx IG

HG TRS

yield

4.50

5.00

5.50

6.00

6.50

7.00


iBoxx HY

HY TRS

yield

15




Source: J.P. Morgan

Specifically looking at CDX.HY vs S&P 500 relationship, Exhibits 11 and 12 show the stark difference between the two approaches. Exhibit 11 assumes a quadratic relationship which explains the moves over the last two years much better than the linear relationship in Exhibit 12. We believe that the quadratic perspective is a better relationship to look at because it makes sense intuitively as well. As markets rally spreads face a floor of zero spreads while equities can continue to increase infinitely. Another important aspect specific to the CDX indices is that as markets continue to grind tighter, increasing investor hedging needs exert pressure on CDX indices preventing them from rallying as much as S&P. The two relationships are so different in their conclusion at this point that while the quadratic relationship suggests CDX.HY is 4bp too tight, the linear relationship suggests that CDX.HY is 57bp too wide.


Source: J.P. Morgan

European HY and Financials keep on outperforming

iTraxx Xover and iTraxx Sen Fins have been the best performers YTD across all the CDS indices. In particular, Xover has outperformed CDX.HY and Sen Fins has outperformed CDX.IG. On the other hand, iTraxx Non-Fins has performed about in line with CDX.IG. This is what we expected in our 2014 Outlook and was justified by the differences in the differential in economic growth acceleration between Europe and the US and by the underperformance of these two markets on the back of the European sovereign crisis. We believe that the relative value between the indices is approaching what we think is fair.

On the week, iTraxx Main is 2bp tighter at 71bp which is in line with the CDX.IG move on the week (using 10am NYT levels on Thursday), iTraxx Sen Fins tightened by 5bp to 84bp and iTraxx Non-Fins tightened by 1bp at 67bp. Finally, Xover tightened by about 12bp to 254bp, while HY was only 4bp tighter at 304bp.

1450

1550

1650

1750

1850

55

65

75

85

95

Feb-13 May-13 Aug-13 Nov-13 Feb-14

CDX.IG (bp - lhs)

S&P500 (pts - rhs inv)

1450

1550

1650

1750

1850

275

325

375

425

475

Feb-13 May-13 Aug-13 Nov-13 Feb-14

CDX.HY (bp - lhs)

S&P500 (pts - rhs inv)

y = 0.0012x2 - 4.4674x + 4,461.3808R² = 0.9485

250

350

450

550

650

750

850

1200 1300 1400 1500 1600 1700 1800 1900 2000

CDX.HY

S&P 500

y = -0.66x + 1,496.78R² = 0.89

250

350

450

550

650

750

850

1200 1300 1400 1500 1600 1700 1800 1900 2000

CDX.HY

S&P 500

16



Exhibit 13: iTraxx Xover keeps on outperforming CDX.HY Exhibit 14: iTraxx Sen Fins has outperformed CDX.IG

Source: J.P. Morgan

Bonds are about in line with their CDS, both at the bond by bond level and at the index level

Bonds and CDS are trading in line. We don’t expect this to change. HG bonds have marginally underperformed their CDS this week, by 1bp, and they are now trading about 11bp wide to their CDS. On the other hand, HY bonds have outperformed their CDS, by about 4bp, and are now trading 37bp wide to their CDS. We consider that these CDS-bonds basis values are fair, given the difference in trading costs between CDS and bonds.

The same conclusion is reached when looking at the indices. Both CDX.IG and CDX.HY are trading about in line with their respective bond indices. If anything, CDX.HY is trading a little wide to the JPM HY Domestic bond index, by about 10bp, but this is not significant, statistically speaking.

Exhibit 15: CDS-bond basis has been quite stable in both HG and HY

Exhibit 16: JULI and CDX.IG also seem to be trading about in line

Source: J.P. Morgan

-50

-25

0

25

50

75

100

250

350

450

550

650

Jan-13 Apr-13 Jul-13 Oct-13 Jan-14

Difference (rhs)CDX.HY (lhs)iTraxx Xover (lhs)

0

50

100

150

50

100

150

200

Jan-13 Apr-13 Jul-13 Oct-13 Jan-14

Difference (rhs)CDX.IGiTraxx Sen Fin

-80

-60

-40

-20

0

-30

-20

-10

0

Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14

(bp)HG CDS-bond basis (lhs)

HY CDS-bond basis (rhs)

(bp)

60

85

110

130

180

230

Jan-12 Jul-12 Jan-13 Jul-13 Jan-14

JULI spread (lhs)

CDX.IG spread (rhs)

17



Equity tranches trade in line with the index while correlation declines

Equity tranches trade in line with the index even as correlation declined. Equity tranches tightened by 2% over the past week trading in line with the index, which tightened 3.5bp to 61.5bp. Correlation declined by 2% over the past week to 50.5%, nearing its YTD low seen in mid-January. Correlation has been unable to break significantly below 50%.

Exhibit 17: Tranches traded in line with the index over the past week Exhibit 18: Correlation declined by 2% over the past week and is near its YTD low

Source: J.P. Morgan

45

65

85

105

125

25%

35%

45%

55%

65%

Mar 13 Jun 13 Sep 13 Dec 13 Mar 14

CDX.IG S9 10y 0-3% upfronts, lhs

CDX.IG S9 10y index, rhs

40%

45%

50%

55%


CDX.IG S9 10y 0-3% correlation

18



Feature

Which reference curve to calculate G-spread?

On Bloomberg investors can choose between different reference Treasury yield curves to calculate a corporate bond G-spread. The choice of curve does not impact a bond’s spread to its benchmark, as this is based on the on the run curve points, no matter which curve is chosen. The choice of curve does impact the G-spread (spread over interpolated Treasury), however.

Two popular choices of Treasury curves on Bloomberg are the I25 and I111 curves. The I25 curve only uses “on-the-run” Treasuries (10 points used, based on the most recently auctioned bills and notes: 1m, 3m, 6m, 1y, 2y, 3y, 5y, 7y, 10y and 30y), while the I111 uses a combination of on- and off-the-run Treasuries (17 points used, with the most recently auction bills and notes used for the 1m, 3m, 6m, 1y, 2y, 3y, 5y, 7y, 10y and 30y points, and with the “off-the-run” notes and bonds with the closest maturity to the 4y, 6y, 8y, 9y, 15y, 20y and 25y).

The difference between the two curves is not always small and depends on the premium for on-the-run bonds paid by Treasury market investors. This is shown in the three Exhibits below. The current curves are shown in Exhibit 1. They are on top of each other below 10y, but not between 10y and 30y, as I25 linearly interpolate between the Treasuries, while the I111 takes more points into account. The difference is up to about 25bp around the 20y point. However, looking back, either during the crisis or before the crisis, the I111 was “bumpy” at different maturity points, especially around the 10y maturity. These bumps are present in the I111 curve because an on-the-run bond is used to determine the 10y point, while off-the-run bonds are used to determine the 9y and 15y points.

Exhibit 1: The I25 and I111 treasury curves on 2/28/14



Source: J.P. Morgan

Historically, the on-the-run/off-the-run premium has fluctuated. It is about 5bp now for the 10y, which is similar to the 2006 average, but was about 15bp on average in 2003. The situation is similar for the 5y and 30y basis between on- and off-the-run Treasuries, but with less volatility.

0

1

2

3

4

0 5 10 15 20 25 30

I111

I25

0

1

2

3

4

0 5 10 15 20 25 30

I111

I25

1

2

3

4

5

0 5 10 15 20 25 30

I111

I25

19



Exhibit 4: Basis between on and off-the-run 10yr tsy bonds



Source: J.P. Morgan

Exhibit 7: Basis between on and off-the-run 10yr tsy bonds since 2011



Source: J.P. Morgan

We prefer the I25 curve because it is based on on-the-run bonds and is more stable over time. The I111 curve can develop bumps that lead to kinks in the corporate bond G-spread curve. Furthermore, rates hedging is often done with on-the-run Treasuries only, so an on-the-run based Treasury curve looks more appropriate. This is particularly true below 10yrs. The argument for using I111 is stronger for off the run long end bonds such as 20yr bonds, however, as the difference between the two curves is most pronounced around this part of the curve usually, and holders of 20yr corporate bonds may choose to hedge with 20yr Treasuries. Still, we believe that I25 is the simpler and more stable choice.

0

10

20

30

40

50

60

70

80


10y Basis

bp

-25

-15

-5

5

15

25


5y Basisbp

-20

-10

0

10

20

30


30y Basisbp

0

5

10

15

Jan-11 Jan-12 Jan-13 Jan-14

10y Basis

bp

-4

-2

0

2

4

6

8


5y Basisbp

-4

0

4

8


30y Basisbp

20



Feature

iBoxx Loan TRS trading gaining traction as a tactical long and short product on the asset class

TRS in iBoxx Liquid Leveraged Loan index started trading a couple of weeks agoand activity has been significant for a new product. We look at some performance comparisons.

For bonds, HG and HY iBoxx TRS have been trading for some time and have been regularly used by market participants to express macro long or short views on the market, especially in HY. iBoxx Loan TRS is based on the same construction, but follows the returns of a loan index (see link to the iBoxx TRS Handbook and see linkto an overview of iBoxx TRS). However, the loan TRS is singular, due to the absence of a liquid LCDX market. This positions the iBoxx Loan TRS as a predominant hedging product and tactical long/short instrument for the loan market.

The limited history we have for the product indicates that the index has been trading close to its underlying index. The loan TRS began trading with a premium to its NAV as the long demand pushed the index lower, however it has normalized since then and now trades close to its NAV. This is in contrast to the HY TRS premium which reached almost 1% this week and still trades at a significant premium.

Exhibit 1: Loan and HY TRS premiums have moved in opposite directions and could present attractive relative value trades

Source: J.P. Morgan

The iBoxx Liquid Leveraged Loan index also closely tracks the underlying market benchmark. Exhibit 3 shows the high correlation between the iBoxx Liquid Leveraged Loan index and the JPMorgan Liquid Loan index. Since the Loan TRS is tied to this iBoxx index, the Loan TRS is expected to track the benchmark index closely as well. The premium/discount on the TRS makes the other side of the trade more attractive, making it difficult to sustain long periods of deviation from its NAV.Finally, the TRS level converges to the iBoxx NAV as it approaches expiry, as the TRS is at NAV at expiry.

-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1-Jan 8-Jan 15-Jan 22-Jan 29-Jan 5-Feb 12-Feb 19-Feb 26-Feb 5-Mar

LN TRS premium/discount to NAV (%)

HY TRS premium/discount to NAV (%)



21



Exhibit 2: iBoxx Loan index follows the benchmark index very closely Exhibit 3: The correlation is near 100% over the last six years

Source: J.P. Morgan

65

75

85

95

105

115

125

135

145

155

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

JPMorgan Liquid Loan Index

iBoxx Liquid Leveraged Loan Index y = 1.1188x - 7.1053R² = 0.9977

65

75

85

95

105

115

125

135

145

155

65 75 85 95 105 115 125 135 145

iBoxx Liquid Leveraged Loan Index

JPMorgan Liquid Loan Index

22



Trade Recommendation

Cheap hedge with attractive time value:CDX.IG 1x2 September put spread

We recommend buying one CDX.IG September 60bp put option and selling two CDX.IG September 75bp put options, receiving 5c per $100 of notional upfront.

CDX.IG has rallied recently and trades close to its multi-year tights. Softer US payroll data along with concerns on Ukraine and fears of a slowdown in Chinawarrants some kind of hedging. We like this hedge because it pays $5k upfront for $10mm notional on the 60bp put, offers an attractive time value profile if spreads are unchanged and an attractive profile in case of a mild selloff. These kinds of hedges have performed well in the past as we discussed in our Hedging with CDX Optionspiece.

Exhibit 1: Trade Recommendation: Buy a 60bp September CDX.IG put and sell a 75bp put option sized 1:2

Strike Maturity Buy/Sell NotionalsPrice

(cents) $ PremiumIndex+10bp

Index-10bp

Vol+5%

Vol-5%

Skew+5%

Skew-5%

3m Time Value

CDX.IG21 5y 60bp 17-Sep-13 Buy Puts $10,000,000 62 -$62K +$37K -$30K +$3K -$3K $0K $0K -$20K

CDX.IG21 5y 75bp 17-Sep-13 Sell Puts $20,000,000 33.5 +$67K -$54K +$37K -$9K +$8K -$9K +$8K +$35K

Total +$5K -$16K +$7K -$6K +$5K -$9K +$8K +$15KSource: J.P. Morgan

Exhibit 2: The strategy loses money only if the index trades wider than 91bp at the option expiry

Source: J.P. Morgan

The trade is bearish in nature and makes money if the index trades below 91bp at expiry which means the breakeven is 30bp away from the current level. The maximum payoff is 67c if the index trades at 75bp at option expiry in September. The index has traded within this range since early 2013, including during the May-June selloff (on a risk and roll adjusted basis). Coincidentally, the cushion offered by this trade is equal to the spread widening observed during the Treasury selloff –From 62bp on 8th May to 92bp on 24th June (risk and roll adjusted levels). A selloff similar to this is probably the worst case scenario for current Emerging Market concerns. Furthermore, since Series 21 will no longer be the hedging instrument of choice post roll on March 20, this trade will not be as adversely impacted in the event of a large selloff. However, the trade still faces MtM risk from spread, volatility and skew moves, which we discuss below.

-0.75

-0.50

-0.25

0.00

0.25

0.50

0.75

50 55 60 65 70 75 80 85 90 95 100

6-Mar-14

9-May-14

14-Jul-14

17-Sep-14

$

67c

60bp

91bp

75bp


23



Exhibit 3: The index has not traded wider than 92bp since January 2013

Source: J.P. Morgan

Finally, we believe that it might be attractive to exit the trade before expiry, depending on what happens. For instance, if CDX.IG trades at 75bp by July, we think one should exit and take profits. The risk to this trade is that spreads get wider very quickly and the time value is insufficient to compensate the PnL due to widening in the index. Also note that this trade is a hedge only up to 91bp and the investors are long risk beyond that point.

Implied volatility for both CDX.IG and HY has declined by over 9% as markets rebounded post the recent selloff end January and is currently at 42.5% for both indices. Implied volatility spiked to 45% on Monday on Ukraine concerns before declining thereafter. Implied volatility skew, however, has remained high as tail hedges remain bid due to tail risk concerns. This makes the trade more attractive and is the reason for the trade paying 5c upfront. In Exhibit 1 we show the trade sensitivities to sudden changes in spread, volatility and skew. The trade we propose takes advantage of this situation and makes money if volatility declines and if skew flattens. The trade also makes money if spreads tighten. However, these scenarios measure sensitivities to sudden changes in spread volatility and skew as they are today. What these sensitivities mask is the impact of time passing by and how that impacts the PnL of the trade. Another reason why we like this trade is the time value profile which we discuss in the next section.

Exhibit 4: Implied volatility has declined sharply since the recent selloff

Exhibit 5: Implied volatility skew continues to be at elevated levels leading to more expensive Out of the Money options and hence making it attractive to sell these options

Source: J.P. Morgan.

50

60

70

80

90

100

Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14

CDX.IG Risk 'n Roll

91bpbp

33%

38%

43%

48%

53%

58%

63%


CDX.IG Implied Vol, 3m

CDX.HY Implied Vol, 3m

5%

7%

9%

11%

13%

15%


IG Skew HY Skew

24



Exhibit 2 shows the payoff profile for the trade at expiry (blue line) and at different points in time (black and grey lines). At expiry, the trade makes money if the index trades tighter than 91bp whereas it loses money only if the index trades wider than91bp at the September expiry. This payoff profile is particularly attractive as a hedge because it does not lose money if the index rallies but due to its convexity; it makes a decent amount of money in a selloff.

Apart from the expiry payoff profile, the time value profile for the trade is also attractive. The dashed grey line shows the payoff profile as of today and also reinforces the spread sensitivity shown in Exhibit 1. The time value of the trade is shown by how the payoff profile moves from the dashed grey line today to the solid grey line till May and into the black line by mid July. The reason why time value for this trade is attractive is that if the index remains in a tight range or continues to rally, the investors will have the option to exit the trade before expiry with a profit. This can be seen in Exhibit 2 as both the grey and black lines are in the money for the index spread tighter than 80bp.

25



Trade Tracker

Our Trade Tracker highlights all the trades since the inception that have beenintroduced and/or closed in one of our publications, including but not limited to CMOS. Note that the performance of these trades reflects bid/ask spreads but is only indicative. We track the history of all of these trades in CMOS, even if no new trades are introduced or closed that week.

We recommend buying one CDX.IG September 60bp put option and selling two CDX.IG September 75bp put options.

Since our last publication, our Trade Tracker is up by $23,207. Over the last twelve months, performance is up by $1,914,612 (+19% ROI / +145% IRR).

Exhibit 1: Open trades: summary and mark-to-market

Source: J.P. Morgan. Note: Trade levels as of day before publication date. 1 B/S - Buying or Selling protection for CDS trading in upfront terms and for its coupon; the opposite if the CDS is trading

in Price terms; if the instrument is not a CDS and is based on price then B and S refer to buying and selling the instrument. 2 Not'l - this is in millions. 3 Change - this is the change since we last

published the Trade Tracker.

Entry

Trade Description Date B/S1 Not'l2 Description Entry Current Absolute Change

6-Jun-13 B 1.48 VZ 8.75 11/01/2018 13326 12824 23,585 (1,565)

6-Jun-13 S 2 VZ 1.1 11/01/2017 9863 9892 (22,424) 5,488

1,160 3,923

6-Jun-13 B 1.773 RIG 6 03/15/2018 11383 11205 48,845 (11,259)

6-Jun-13 S 2 RIG 2.5 10/15/2017 10094 10143 (47,598) 9,414

1,247 (1,846)

4-Sep-13 S 10 Buy CDX.HY S20 5y protection 10413 10910 (750,528) (40,972)

4-Sep-13 B 48 Sell CDX.IG S20 5y protection 10078 10192 790,173 48,454

39,646 7,482

22-Jan-14 B 1 SLB 4.2 21 10470 10589 16,813 12,640

22-Jan-14 B 0.943 Sw ap rate to bond maturity date 0 -129 (14,813) 1,611

22-Jan-14 B 1.16 SLB 3/20/19 CDS -334 -300 2,586 (226)

4,586 14,026

22-Jan-14 B 1 GS 5.25 21 10925 11078 21,394 (4,955)

22-Jan-14 B 0.917 Sw ap rate to bond maturity date 0 -135 (15,076) 1,679

22-Jan-14 B 1.23 GS 3/20/19 CDS -46 -38 (463) (227)

5,855 (3,503)

29-Jan-14 S 5 CDX IG S9 10y 3-7 Tranche -400 -600 124,306 26,736

29-Jan-14 B 5 CDX HY S19 5y 15-25 Tranche -750 -900 (99,306) (23,611)

25,000 3,125

Open Total 77,494 23,207

Closed Total 1,837,118

Portfolio Total 1,914,612

Long risk CDX.IG S9 10y 3-7 tranche vs short risk CDX.HY S19 5y

15-25 tranche

VZ High-Price vs Low -Price

RIG High-Price vs Low -Price

Buy CDX.HY protection against CDX.IG

SLB 5y CDS v s 7y bond flattener

GS 5y CDS v s 7y bond flattener

P&LTrade Leg Spreads/Prices

26



Exhibit 2: Closed trades: summary and mark-to-market

Source: J.P. Morgan.

Entry Exit Trade Trade Trade

Trade Description Date Date P&L description P&L ROI IRR

Trades closed prior to 5-Mar-13 2,466,259

Long HY call option v s short HY put option 20-Feb-13 11-Mar-13 Taking profits on trade 296,000 30% 14461%

SWY 17 / 16 High-Price vs Low -Price 20-Feb-13 19-Mar-13 Taking profits on trade 34,998 17% 785%

SWY negative CDS-bond basis package 24-Apr-13 6-Jun-13 Taking profits on trade 11,778 12% 157%

SPG 19 / 18 High-Price v s Low -Price 20-Feb-13 6-Jun-13 Taking profits on trade 21,968 13% 50%

CA negative CDS-bond basis package 24-Apr-13 6-Jun-13 Taking profits on trade 22,007 22% 441%

KR 17 / 17 High-Price vs Low -Price 20-Feb-13 6-Jun-13 Taking profits on trade 22,127 13% 51%

Long Sep 13 TRS v s short CDX.IG and 5y Tsy 10-Apr-13 6-Jun-13 Taking profits on trade 71,015 28% 396%

D High-Price vs Low -Price 6-Jun-13 10-Jul-13 Taking profits on trade 19,300 19% 565%

HAL High-Price v s Low -Price 6-Jun-13 24-Jul-13 Taking profits on trade 25,722 26% 470%

C High-Price vs Low -Price 6-Jun-13 24-Jul-13 Taking profits on trade 35,838 36% 927%

Sell HY August Strangle 19-Jun-13 24-Jul-13 Taking profits on trade 111,000 15% 322%

CDX.IG S9 7-10% tranche 7s10s flattener 17-Apr-13 24-Jul-13 Taking profits on trade 145,833 29% 159%

Buy CDX.HY protection against iTrax x Xover 17-Jul-13 24-Jul-13 Taking profits on trade 264,943 88% 21538185715877300%

Long CDX IG S20 1x2 September put spread 24-Apr-13 7-Aug-13 Taking profits on trade 43,500 15% 60%

BAC High-Price vs Low -Price 6-Jun-13 11-Sep-13 Taking profits on trade 24,338 24% 127%

TITIM High-Price v s Low -Price 6-Jun-13 11-Sep-13 Taking profits on trade 44,344 44% 298%

Buy CDX.IG November 1x 2 put spread 23-Sep-13 23-Oct-13 Did not perform as expected. Ex iting trade w ith a loss (4,100) -1% -8%

Sell HY December Strangle 6-Aug-13 23-Oct-13 Taking profits on trade 110,000 16% 98%

Long risk CDX.HY S15 5y 15-25 tranche vs Short risk CDX.HY S15 5y index13-Mar-13 13-Nov-13 Taking profits on trade 79,906 11% 16%

Long risk CDX.HY S21 5y 15-25 tranche vs Short risk CDX.HY S21 5y index 17-Oct-13 8-Jan-14 Taking profits on trade 106,250 14% 79%

CDX.HY February Risk Reversal 5-Nov -13 8-Jan-14 Taking profits on trade 264,000 26% 280%

Sell IG January put option and buy March put 28-Oct-13 27-Jan-14 Did not perform as expected. Ex iting the trade about flat 5,500 1% 2%

CPB 5y CDS v s 7y bond flattener 22-Jan-14 27-Jan-14 Taking profits on trade 25,326 25% 1435363538%

DDR negativ e CDS-bond basis package 24-Apr-13 29-Jan-14 Taking profits on trade 6,436 6% 8%

CAH negativ e CDS-bond basis package 24-Apr-13 29-Jan-14 Taking profits on trade 9,396 9% 12%

VZ 5y CDS v s 7y bond flattener 22-Jan-14 29-Jan-14 Taking profits on trade 39,692 40% 3712820760%

Total 1,837,118 19% 145%

27




Sector recommendations

There were no changes to our sector recommendations this week.

Exhibit 1: JULI ex EM sector recommendationsAnalyst Date Index Portfolio Difference Spread Spread Spread change vs JULI

Sector Analyst Recommendation of Rec Weight Weight Current Change 30d Since30d initiated

Large US Banks - Sen HC Kabir Caprihan Overweight 3/29/13 9.2% 12.2% +3.0% 106 -13 -4 -17Diversified Media Michael Pace Overweight 4/14/11 2.3% 3.8% +1.5% 146 -4 5 -1Utilities HoldCos Susan Voorhees Overweight 1/25/12 2.5% 3.5% +1.0% 135 -6 3 -4Life Insurance Arun Kumar Overweight 1/23/13 2.2% 3.2% +1.0% 140 -11 -2 -25UK Banks Kabir Caprihan Overweight 1/23/13 2.0% 3.0% +1.0% 150 -6 3 -26REITs Mark Streeter Overweight 10/29/13 2.2% 3.2% +1.0% 125 -13 -5 -6Metals/Mining Brian Turner Overweight 11/19/13 2.5% 3.5% +1.0% 185 -19 -11 -9Large US Banks - Sub OC Kabir Caprihan Overweight 3/29/13 0.4% 0.9% +0.5% 100 -8 0 -11Business/ConsServices Virginia Chambless Overweight 6/16/11 0.8% 1.3% +0.5% 137 -4 4 21Tobacco Virginia Chambless Overweight 8/8/12 1.2% 1.7% +0.5% 135 -2 7 18Airlines/EETCs Mark Streeter Overweight 2/8/12 0.1% 0.6% +0.5% 140 -29 -21 -101Paper/Packaging Tarek Hamid Overweight 2/8/12 0.6% 1.1% +0.5% 156 -6 3 -9Japanese Banks Kabir Caprihan Overweight 1/7/14 0.8% 1.3% +0.5% 88 -8 1 -18Pipelines/Midstream Svetlana Goldenberg Neutral 11/19/13 3.1% 3.1% 0.0% 160 -5 3 3P&C Insurance Arun Kumar Neutral 10/15/13 1.9% 1.9% 0.0% 132 -10 -1 -1Cable/Satellite Mike Pace Neutral 7/24/13 2.6% 2.6% 0.0% 148 -50 -41 -33Energy Svetlana Goldenberg Neutral 1/28/13 7.9% 7.9% 0.0% 121 -9 0 2Large US Banks - Sub HC Kabir Caprihan Neutral 3/29/13 1.7% 1.7% 0.0% 176 -18 -10 -20Core European Banks Kabir Caprihan Neutral 1/25/12 3.4% 3.4% 0.0% 128 -14 -5 -102Finance Companies Kabir Caprihan Neutral 6/8/10 4.2% 4.2% 0.0% 113 -10 -1 -20Food/Drug Retail Virginia Chambless Neutral 10/12/11 1.3% 1.3% 0.0% 128 -2 6 75Regional US Banks Kabir Caprihan Neutral 1/18/12 3.0% 3.0% 0.0% 92 -9 0 -50Utilities Power Gencos Susan Voorhees Neutral 5/15/12 0.2% 0.2% 0.0% 196 -16 -7 48Automotives Eric Selle Neutral 9/11/13 2.4% 2.4% 0.0% 102 -8 0 28Domestic Telecoms Brian Turner Neutral 11/19/13 4.1% 4.1% 0.0% 154 -7 2 -7Yankee Telecoms Brian Turner Underweight 7/24/13 1.8% 1.3% -0.5% 161 -7 2 -34Canadian Banks Kabir Caprihan Underweight 1/23/13 1.2% 0.7% -0.5% 44 -5 4 12Freight Mark Streeter Underweight 8/8/12 0.6% 0.1% -0.5% 106 -5 3 30Consumer Products Virginia Chambless Underweight 8/8/12 1.0% 0.5% -0.5% 90 -4 5 42Railroads Mark Streeter Underweight 8/8/12 1.1% 0.6% -0.5% 113 -2 7 23Aerospace/Defense Virginia Chambless Underweight 8/8/12 1.6% 1.1% -0.5% 99 -4 4 19Healthcare/HMOs Brett Gibson Underweight 5/8/13 1.8% 0.8% -1.0% 119 -3 6 5Australia/NZ Banks Kabir Caprihan Underweight 6/19/13 1.3% 0.3% -1.0% 90 -3 5 7Manufacturing Virginia Chambless Underweight 8/8/12 2.7% 1.7% -1.0% 90 -4 4 44Chemicals Brian Turner Underweight 1/23/13 1.8% 0.8% -1.0% 122 -8 1 14Non-Food Retail Virginia Chambless Underweight 8/8/12 2.7% 1.7% -1.0% 101 -4 4 37Utilities OpCos Susan Voorhees Underweight 10/10/12 4.2% 3.2% -1.0% 97 -2 7 12Food/Beverages Virginia Chambless Underweight 8/8/12 4.6% 3.6% -1.0% 101 -4 5 30Technology Brian Turner Underweight 2/8/12 4.8% 3.8% -1.0% 96 -11 -2 46Pharmas/Medical Products Brett Gibson Underweight 10/12/11 6.0% 4.5% -1.5% 93 -3 5 86Portfolio 100% 100% 0.0% 123 0JULI ex-EM 121

Note: Yankee Telecoms: The ratings here cover USD bonds only. Our US Telecom analyst Brian Turner covers only USD bonds from these issuers, while Andrew Webb in our London group

covers the credit as a whole. On any company the rating on USD bonds from Brian Turner may differ from the rating assigned by Andrew Webb.

Source: J.P. Morgan

28




New bond issuance

Exhibit 1: High Grade corporate bond issuance ($ mn)

Gross Issuance Redemptions2014 F 2014 YTD 2013 2014 F 2014 YTD 2013

Unguaranteed 900,000 192,055 918,506 504,382 137,549 456,460Financials 315,000 84,175 334,862 239,273 66,481 210,754Non-Financials 585,000 107,880 583,645 265,109 71,068 245,705

Domestic 560,000 119,225 587,015 320,114 86,259 301,902Yankee 340,000 72,830 331,491 184,268 51,290 154,557Memo: Yankee EM 100,000 9,680 83,630 30,520 4,720 13,824

Fixed 760,000 162,605 782,036 390,669 1,200 380,216Floating 140,000 29,450 136,470 113,714 0 76,243

Financials 315,000 84,175 334,862 239,273 66,481 210,754Domestic 160,000 46,625 178,932 140,775 34,776 121,037Yankee 155,000 37,550 155,930 98,499 31,705 89,717Memo: Yankee EM 25,000 3,800 17,780 10,140 1,220 3,190

Non-Financials 585,000 107,880 583,645 265,109 71,068 245,705Domestic 400,000 72,600 408,083 179,339 51,484 180,865Yankee 185,000 35,280 175,561 85,769 19,584 64,840Memo: Yankee EM 75,000 5,880 65,850 20,380 3,500 10,634

Memo: Eurodollar Issuance - 12,956 73,461 23,181 2,331 25,647

Note: Issuance data includes MTNs, 144A, and Yankees with minimum maturity of 13 months. 2014 Forecasts last updated 11/20/2013.

Source: Thomson Financial, Bloomberg, and J.P. Morgan. Data as of Wednesday.

Exhibit 2: Unguaranteed HG corporate bond issuance by sector ($ mn)

Gross Issuance Redemptions2014 F 2014 YTD 2013 2014 F 2014 YTD 2013

Banks 258,000 75,425 269,234 178,918 50,526 148,876US banks 110,000 40,175 123,359 87,769 20,071 66,009Yankee Banks 148,000 35,250 145,875 91,149 30,455 82,867Memo: European Banks 55,000 16,700 54,925 54,074 23,950 38,872

Finance Companies 26,000 5,050 31,033 35,551 9,580 35,958Insurance 31,000 3,700 34,595 24,804 6,375 25,920Basic Industries 50,000 3,450 50,650 21,375 3,000 19,486Capital Goods 24,000 4,550 19,200 18,220 4,885 25,225

Diversified 10,000 1,330 8,100 3,900 2,750 9,700Energy 100,000 15,000 105,080 35,717 9,559 28,735Retail 20,000 900 29,747 9,646 3,450 10,200Consumer 85,000 20,050 91,500 46,178 16,350 41,615Healthcare/Pharma 62,000 11,750 54,231 31,300 9,250 18,039Media/Entertainment 21,000 3,700 22,100 11,850 2,300 7,950Property/Real Estate 29,000 5,500 18,250 11,497 1,865 7,583Technology 58,000 17,600 47,250 21,450 2,025 19,685Telecoms 52,000 5,700 71,335 21,355 5,100 22,635Transportation 19,000 5,850 16,180 7,374 3,082 6,291Utilities 55,000 12,500 50,022 25,248 7,452 28,562

Note: Issuance data includes MTNs, 144A, and Yankees with minimum maturity of 13 months. 2014 Forecasts last updated 11/20/2013.

Source: Thomson Financial, Bloomberg, and J.P. Morgan. Data as of Wednesday.

29



Exhibit 3: Gross issuance ($ bn) Exhibit 4: Net issuance ($ bn)

Note: Issuance data as of Wednesday

Source: Thomson Financial, Bloomberg, and J.P. Morgan

Exhibit 5: List of new issues over the past two weeks

Issue Date Ticker Issuer Moody S&PPrincipal

Amt Coupon Maturity Industry Spread1

3/4/2014 MUFG BK TOKYO-MITSUBISHI UFJ Aa3 A+ 1,000 1.200 % 3/10/2017 BANK +55

3/4/2014 MUFG BK TOKYO-MITSUBISHI UFJ Aa3 A+ 850 FRN 3/10/2017 BANK L+41

3/4/2014 MUFG BK TOKYO-MITSUBISHI UFJ Aa3 A+ 1,000 2.300 % 3/10/2019 BANK +80

3/4/2014 MUFG BK TOKYO-MITSUBISHI UFJ Aa3 A+ 750 3.750 % 3/10/2024 BANK +108

3/4/2014 MUFG BK TOKYO-MITSUBISHI UFJ Aa3 A+ 400 4.700 % 3/10/2044 BANK +108

3/05/2014 CG CARLYLE HOLDINGS II FIN (TAP) NR A- 200 5.625 % 3/30/2043 FINANCE +170

3/5/2014 HPT HOSPITALITY PROP TRUST Baa2e BBB 350 4.650 % 3/15/2024 REIT +200

3/5/2014 PPL PPL CAPITAL FUNDING INC Baa3e BBB- 350 3.950 % 3/15/2024 UTILITY +130

3/5/2014 PPL PPL CAPITAL FUNDING INC Baa3e BBB- 400 5.000 % 3/15/2044 UTILITY +138

3/5/2014 TXN TEXAS INSTRUMENTS INC A1e A+ 250 0.875 % 3/12/2017 TECHNOLOGY +25

3/5/2014 TXN TEXAS INSTRUMENTS INC A1e A+ 250 2.750 % 3/12/2021 TECHNOLOGY +70

3/5/2014 XLNX XILINX INC A3 A- 500 2.125 % 3/15/2019 TECHNOLOGY +70

3/5/2014 XLNX XILINX INC A3 A- 500 3.000 % 3/15/2021 TECHNOLOGY +95

3/5/2014 UNS TUCSON ELECTRIC POWER CO Baa1e BBB 150 5.000 % 3/15/2044 UTILITY +140

3/5/2014 F FORD MOTOR CREDIT CO LLC Baa3e BBB- 1,100 2.375 % 3/12/2019 AUTO +93

3/5/2014 F FORD MOTOR CREDIT CO LLC Baa3e BBB- 650 1.064 % 3/12/2019 AUTO L+83

3/5/2014 HSBC HSBC HOLDINGS PLC A3e A- 2,000 4.250 % 3/14/2024 YANKEE BANK +165

3/5/2014 HSBC HSBC HOLDINGS PLC A3e A- 1,500 5.250 % 3/14/2044 YANKEE BANK +170

3/5/2014 CBAAU COMMONWEALTH BANK AUST Aa2e AA- 1,000 FRN 3/13/2017 YANKEE BANK +38

3/5/2014 CBAAU COMMONWEALTH BK AUSTR NY Aa2e AA- 1,250 1.125 % 3/13/2017 YANKEE BANK +50

3/5/2014 CBAAU COMMONWEALTH BK AUSTR NY Aa2e AA- 1,250 2.250 % 3/13/2019 YANKEE BANK +73

3/5/2014 T AT&T INC A3e A- 400 FRN 3/11/2019 TELECOM L+67

3/5/2014 T AT&T INC A3e A- 1,100 2.300 % 3/11/2019 TELECOM +77

3/5/2014 T AT&T INC A3e A- 1,000 3.900 % 3/11/2024 TELECOM +125

3/5/2014 JPM JPMORGAN CHASE & CO Ba1 BBB 1,000 6.125 % CAPITAL BANK NA

3/5/2014 MCK MCKESSON CORP Baa2 A- 400 FRN 9/10/2015 HEALTHCARE L+40

3/5/2014 MCK MCKESSON CORP Baa2 A- 700 1.292 % 3/10/2017 HEALTHCARE +60

3/5/2014 MCK MCKESSON CORP Baa2 A- 1,100 2.284 % 3/15/2019 HEALTHCARE +75

3/5/2014 MCK MCKESSON CORP Baa2 A- 1,100 3.796 % 3/15/2024 HEALTHCARE +110

3/5/2014 MCK MCKESSON CORP Baa2 A- 800 4.883 % 3/15/2044 HEALTHCARE +125

Source: Thomson Financial, Bloomberg, and J.P. Morgan, as of 5-Mar-14

0

20

40

60

80

100

Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14

Fixed Floating$ bn

-40

-20

0

20

40

60

80

Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14

Fixed Floating$ bn

30



JULI sector statistics and performance

Size Average I- Spread(Treasury) bp Portfolio Spread(Treasury) bp Total return (%) Duration change

Num Size (%) Yield Crnt 7d 30d 90d ytd Crnt 7d 30d 90d ytd 7d 30d 90d ytd Dur 7d 30d 90d ytdJULI 5,101 4,360 3.96 114 0 -9 -15 -3 133 -1 -10 -16 -2 0.0 0.7 3.1 2.6 7.0 0.1 0.0 0.2 0.2

JULI EM 651 499 11.5% 4.63 214 0 -20 -11 2 236 -3 -23 -10 4 0.2 1.5 2.5 2.2 5.7 0.1 0.1 0.0 0.0JULI ex EM 4,450 3,860 88.5% 3.89 101 1 -8 -15 -3 121 0 -8 -16 -2 0.0 0.6 3.2 2.7 7.2 0.1 0.0 0.2 0.2

AAA 47 39 0.9% 3.59 55 1 -3 -12 -6 69 0 -3 -12 -2 0.1 0.3 3.2 2.9 8.4 -0.1 -0.2 0.3 0.4AA 353 393 9.0% 3.30 62 2 -4 -9 0 81 0 -5 -10 2 0.0 0.3 2.2 2.0 6.4 0.2 0.2 0.3 0.3A 1,904 1,671 38.3% 3.71 85 0 -7 -12 -2 102 -1 -7 -12 0 0.0 0.5 2.9 2.5 7.3 0.1 0.0 0.2 0.3

BBB 2,797 2,256 51.7% 4.25 146 0 -12 -19 -4 165 0 -13 -20 -3 0.0 0.9 3.5 2.9 6.9 0.0 0.0 0.1 0.23-yr 1,250 1,045 24.0% 1.21 67 2 -7 -12 -6 70 1 -9 -15 -8 0.0 0.3 0.8 0.7 2.2 0.1 0.0 0.0 0.15-yr 1,008 930 21.3% 2.21 91 2 -8 -15 -4 94 1 -9 -16 -6 -0.1 0.4 1.5 1.6 3.9 0.0 0.0 -0.1 0.07-yr 643 579 13.3% 3.30 128 -3 -13 -23 -5 133 -2 -14 -24 -5 0.0 0.8 3.0 2.8 5.5 0.0 0.0 0.0 0.0

10-yr 944 753 17.3% 3.89 141 -2 -13 -19 -3 142 -2 -12 -20 -3 0.0 0.9 3.8 3.3 7.2 0.0 0.0 0.0 0.030-yr 1,256 1,052 24.1% 4.92 155 -1 -10 -15 -1 150 -1 -9 -15 1 0.0 1.2 6.8 5.1 13.2 0.0 0.0 0.3 0.3

Financials 1,275 1,366 31.3% 3.60 112 1 -10 -13 -1 133 0 -12 -15 0 0.0 0.7 2.3 1.9 5.5 0.1 0.0 0.2 0.2Non Financials 3,826 2,993 68.7% 4.08 115 0 -9 -16 -4 133 -1 -9 -16 -3 0.0 0.7 3.5 3.0 7.7 0.0 0.0 0.2 0.2

US Banks 384 556 12.8% 3.48 94 0 -11 -14 1 118 0 -12 -15 4 -0.1 0.6 2.3 1.7 5.6 0.0 -0.1 0.2 0.2Yankee Banks 477 477 10.9% 3.41 136 4 -10 -11 -1 162 1 -14 -15 -1 -0.1 0.7 1.8 1.6 4.3 0.1 0.1 0.2 0.2

Finance Companies 157 172 4.0% 3.63 94 1 -8 -10 0 114 0 -9 -12 3 0.0 0.6 2.5 2.1 6.2 0.0 0.0 0.1 0.2Life Insurance 131 85 2.0% 4.28 117 -3 -12 -18 -10 140 -3 -11 -18 -8 0.1 0.9 4.0 3.6 8.0 0.0 0.0 0.2 0.2P&C Insurance 125 75 1.7% 4.07 122 1 -8 -15 -4 134 -1 -10 -16 -5 0.0 0.7 3.5 3.2 7.5 0.1 0.1 0.2 0.2

Bldg Mat / Cstrction 10 7 0.2% 3.33 118 -4 -15 -10 -19 143 -5 -11 -8 -16 0.2 0.6 1.9 2.8 4.6 0.0 -0.1 -0.3 -0.3Chemicals 118 77 1.8% 4.02 126 3 -6 -8 1 141 1 -8 -11 1 0.0 0.7 3.1 2.9 7.3 0.0 0.0 0.1 0.2

Metals/Mining 144 128 2.9% 4.81 178 -2 -21 -25 -2 208 -3 -24 -27 -3 0.2 1.9 4.6 3.3 7.7 0.0 0.0 0.2 0.2Paper/Packaging 42 27 0.6% 4.24 150 -2 -13 -23 -11 163 -2 -10 -25 -9 0.1 0.8 4.2 3.6 7.1 0.0 0.0 -0.1 0.0

Capital Goods 228 161 3.7% 3.65 82 1 -6 -12 -2 94 1 -5 -11 -1 -0.1 0.3 3.0 2.8 7.6 0.0 0.0 0.0 0.1Food/Drug Retail 81 52 1.2% 4.08 117 1 -3 -17 -7 134 -1 -4 -16 -5 0.0 0.4 3.2 2.9 7.7 0.1 0.0 0.0 0.1Non-Food Retail 124 106 2.4% 3.99 92 0 -5 -12 -1 104 -1 -5 -11 3 0.0 0.4 3.7 2.9 8.7 0.0 -0.1 0.1 0.1

Food/Beverages 226 189 4.3% 3.69 91 0 -5 -11 -3 107 -1 -5 -12 -2 0.0 0.3 2.8 2.6 7.1 0.0 0.0 0.2 0.3Tobacco 49 46 1.1% 4.17 111 0 -5 -16 -6 135 1 -3 -13 -1 -0.1 0.4 3.1 2.6 8.2 0.0 -0.1 -0.2 -0.2

Consumer Products 64 37 0.9% 3.52 78 0 -6 -11 -5 90 -3 -5 -12 -5 0.2 0.4 2.9 3.0 7.1 0.0 0.0 0.2 0.2Leisure 23 10 0.2% 3.54 133 -1 -12 -31 -19 146 -2 -12 -32 -19 0.0 0.7 3.5 3.4 5.5 0.0 -0.1 -0.1 -0.1

Services 51 34 0.8% 4.05 130 -1 -7 -27 -18 143 -2 -6 -26 -14 0.1 0.5 3.9 3.5 7.1 0.0 0.0 0.0 0.1Automotive 110 98 2.3% 2.94 83 3 -8 -11 0 102 -1 -11 -15 -3 0.0 0.5 1.8 1.6 4.4 0.0 0.0 0.1 0.1

Healthcare/HMOS 108 70 1.6% 3.98 101 3 -4 -13 -2 119 2 -2 -12 0 -0.2 0.2 3.2 2.8 7.8 0.0 0.0 0.1 0.2Pharma 247 236 5.4% 3.76 79 2 -3 -11 -1 95 0 -3 -12 1 -0.1 0.2 3.1 2.6 8.0 0.3 0.2 0.3 0.4

Cable/Satellite 83 98 2.3% 4.40 128 1 -42 -52 -29 148 -2 -50 -61 -38 0.0 4.2 7.8 6.4 8.5 0.2 0.4 0.6 0.5Div Media 127 94 2.2% 4.39 130 0 -7 -17 -3 149 0 -6 -17 -3 0.0 0.5 4.2 3.5 8.6 -0.1 -0.1 0.2 0.2

REITs 162 85 2.0% 3.45 115 1 -10 -23 -15 131 3 -8 -22 -12 0.1 0.8 3.0 3.1 5.6 0.1 0.0 0.0 0.1Technology 195 188 4.3% 3.48 81 0 -10 -19 -4 97 -1 -10 -19 -3 0.0 0.6 3.0 2.5 6.7 0.0 0.0 0.1 0.1

Domestic Telecoms 96 156 3.6% 4.47 129 2 -7 -18 7 154 1 -7 -19 10 -0.1 0.6 4.4 2.4 8.6 0.0 0.0 0.0 0.0Yankee Telecoms 92 99 2.3% 4.35 144 1 -15 -20 -5 168 -1 -15 -19 -3 0.0 1.1 3.5 2.8 7.1 0.1 0.1 0.3 0.3

Transportation 134 80 1.8% 4.12 114 -3 -8 -19 -9 124 0 -5 -16 -5 0.0 0.4 3.8 3.4 8.5 0.1 0.0 0.4 0.4

Energy 465 427 9.8% 4.23 138 0 -10 -11 0 155 -1 -10 -10 2 0.0 0.8 3.0 2.6 7.4 0.0 0.0 0.0 0.1Utilities 557 296 6.8% 4.17 114 -2 -6 -15 -6 119 -2 -5 -14 -4 0.2 0.5 4.2 3.8 9.0 0.0 0.0 0.1 0.2

Source: J.P. Morgan, as of 5-Mar-14

31



HG CDS-bond basis across bucketsAvg Avg Avg PECs1 Avg Interp. CDS2 Avg CDS-bond Basis3 Basis as %

# Bonds Rating Tenor Current1w

Ago1m Ago Current

1w Ago

1m Ago Current

1w Ago

1m Ago CDS Spread

HG Portfolio 1233 A 4.22 74 74 81 63 64 72 -11 -10 -9 -17%

Avg Basis by IndustryBasic Materials 66 A 4.35 110 111 122 111 111 124 1 0 1 1%Consumers/Retails 98 A 4.52 64 64 62 59 61 59 -5 -3 -4 -9%Energy 76 A 4.61 72 75 82 62 66 73 -10 -10 -9 -16%Financials 248 A 3.88 73 73 82 67 67 81 -6 -6 -1 -10%

Banks 133 A 3.83 75 75 86 67 68 82 -8 -8 -3 -12%Diversified Financials 40 A 3.71 54 53 61 61 61 75 7 8 14 11%Insurance 75 A 4.26 81 82 87 69 69 81 -13 -13 -7 -18%REITS 67 A 3.75 86 88 98 78 80 87 -8 -8 -11 -10%

Healthcare and Pharma 122 A 4.34 56 54 57 41 41 40 -15 -13 -17 -38%Media 85 BBB 4.30 85 86 109 59 62 83 -26 -24 -26 -44%Technology 58 A 3.97 64 60 70 58 58 65 -6 -2 -4 -10%Telecom 42 A 3.67 80 77 83 61 60 67 -19 -17 -16 -32%Utilities 39 A 4.21 99 99 101 74 75 68 -25 -24 -33 -34%

Avg Basis by RatingAAA 4 AAA 5.58 16 18 16 21 17 16 5 -1 0 24%AA 67 AA 3.83 33 32 33 33 33 34 0 1 1 1%A 388 A 4.13 50 49 55 44 45 50 -6 -4 -5 -13%BBB 774 BBB 4.34 92 93 102 77 78 89 -15 -14 -13 -20%

Avg Basis by Tenor18M-4Y 346 A 2.66 40 39 44 30 29 34 -10 -10 -10 -33%4Y-6Y 355 A 4.93 67 66 73 52 53 62 -15 -13 -11 -29%6Y-8Y 224 A 6.67 93 93 103 85 87 97 -8 -6 -6 -9%8Y-10.25Y 308 A 8.01 108 110 117 100 102 110 -8 -8 -7 -8%

1. Par Equivalent CDS Spread (PECs) can be thought of as Z-spread, adjusted for the dollar price issues, day-count convention and other convention differences between the cash bond and the CDS

markets. 2. Interpolated CDS is CDS spread interpolated to the bond maturity date. 3. CDS-bond basis is defined as Interpolated CDS less Par Equivalent CDS Spread.

For more information on CDS-bond basis, please refer to the Credit Derivatives Handbook, published on Dec 1, 2006 (available on www.morganmarkets).

Source: J.P. Morgan, as of 5-Mar-14

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Previous Featured ArticlesArticles Date Articles DateCDX IG Index Roll 21-Feb-14 JPMorgan US Daily Index (JUDI) 14-Dec-12Client Survey 21-Feb-14 2013 HG bond issuance forecast 16-Nov-12High Price/Low Price 7-Feb-14 Client survey 16-Nov-12Revenue Analysis 31-Jan-14 Index total return swaps 2-Nov-12EM Roundup 24-Jan-14 CDS and CDX liquidity update 2-Nov-12Client Survey 24-Jan-14 Cross-currency opportunities 2-Nov-12Client Survey 13-Dec-13 Credit curves 2-Nov-122014 issuance forecasts 22-Nov-13 CDS-Bond basis 26-Oct-12Credit curves 22-Nov-13 Credit Investor Survey 19-Oct-12Single Name CDS curves 15-Nov-13 Short duration update 19-Oct-12CDX Tranches 15-Nov-13 Trading activity update 28-Sep-12Credit Client Survey 15-Nov-13 CDX.HY Series 19 Tranche Roll 28-Sep-12Comparing EM corporate bonds to EM sovereign bonds 1-Nov-13 LCDX Series 19 Roll 28-Sep-12Update on SEFs and Credit Derivatives Trading 1-Nov-13 Spread valuation of premium bonds 21-Sep-12Total Return Swaps 1-Nov-13 CDX.HY Series 19 Roll 21-Sep-12CDS/CDX liquidity update 25-Oct-13 CDX.IG Series 19 tranches 21-Sep-12Ratings Trends 25-Oct-13 Global CDS Indices: 21-Sep-12Credit client survey 18-Oct-13 Access to the primary market has enhanced returns 14-Sep-12Bond ownership study 18-Oct-13 Credit Investor Survey 07-Sep-12SEFs Trading and Credit Derivatives 18-Oct-13 CDX roll preview 07-Sep-12CDX.HY roll 27-Sep-13 Updated issuance forecast 07-Sep-12Rating trends 20-Sep-13 CFTC clearing timeline published 07-Sep-12Credit client survey 20-Sep-13 New EM Corporate CDX Indices 07-Sep-12CDX.HY rolls 20-Sep-13 Sector recommendation changes 10-Aug-12Global CDX rolls 20-Sep-13 CDS-Bond basis 10-Aug-12Hedging with CDX options 13-Sep-13 Pension fund changes and long end demand 29-Jun-12CDX.IG Roll 13-Sep-13 Credit Investor Survey 22-Jun-12CDX Options 13-Sep-13 Markit’s iBoxx TRS 15-Jun-12CDX Roll 6-Sep-13 P&C Insurance portfolio review 15-Jun-12Inflows in Short duration funds 6-Sep-13 Comparing Straddle Breakevens across asset classes 15-Jun-12Credit client survey 8-Aug-13 JULI Total and Excess Returns 8-Jun-12Corporate bond market liquidity 8-Aug-13 Debt Tenders 8-Jun-12Credit Investor Survey 12-Jul-13 Ford as a HG credit 31-May-12Short Duration funds beneficiaries of outflows from long duration funds 12-Jul-13 New daily highlight identifying the steepest and flattest bond curves 11-May-12Issuance forecast revised 29-Jun-13 Corporate Issuance review 4-May-12CDX.IG Futures 6-Jun-13 April and YTD JULI index review 4-May-12Investor Survey 6-Jun-13 Insurance portfolio analysis 20-Apr-12Sub under attack 17-May-13 Pension Funds 20-Apr-12New HG CDS Curve Report 10-May-13 JPM’s FRNI index 20-Apr-12Life Insurance Portfolio Analysis 10-May-13 Credit Investor Survey 13-Apr-12Credit Investor Survey 10-May-13 LCDX Index roll 30-Mar-12Overview of short-term bond fund strategies 10-May-13 Credit Investor Survey 23-Mar-12High Grade Bond Coverage and Rating Report 2-May-13 Bond Ownership Trends 23-Mar-12From Short Term Strategy 26-Apr-13 Mutual Funds 23-Mar-12Expensive European Bonds 12-Apr-13 CDX.HY and LCDX rolls 23-Mar-12Credit Client Survey 12-Apr-13 CDX.IG and CDX.HY Rolls 16-Mar-12Duration 05-Apr-13 Liquidity 09-Mar-12Pension 05-Apr-13 CDX rolls 09-Mar-12Liquidity 05-Apr-13 TRACE: what’s included? 24-Feb-12CDS liquidity 05-Apr-13 Sector recommendations 10-Feb-12CDX.HY roll 22-Mar-13 Bank Bond Curves 27-Jan-12From Short Term Strategy 22-Mar-13 Relative value in Bank capital structure 27-Jan-12EM vs Non-EM 15-Mar-13 EUR-denominated bonds of US issuers vs matching USD bonds 20-Jan-12CDX.IG roll 15-Mar-13 Mutual Fund Data in Review 20-Jan-12CDX.HY roll 15-Mar-13 2011 HG Review 06-Jan-12Credit Investor Survey 15-Mar-13 Make Whole Calls 06-Jan-12CDX roll preliminary preview 01-Mar-13 EM vs DM Corporate 06-Jan-12Corporate Credit ETF Handbook published 22-Feb-13 Corporate Pension Funding 08-Dec-11From Short-Term Strategy 22-Feb-13 Insurance Companies Asset Allocations 08-Dec-11Investor survey 08-Feb-13 Credit Investor Survey 08-Dec-11Canadian banks downgraded 01-Feb-13 Credit Events and Impact on Index Products 08-Dec-11Sector recommendation changes 25-Jan-13 Demand for HG bonds 04-Nov-11Short Term 25-Jan-13 CDS market liquidity 04-Nov-11Curve model 11-Jan-13 HG bond market liquidity 04-Nov-11Credit Investor Survey 11-Jan-13 CDX Tranches 28-Oct-11Short-term markets 11-Jan-13 HG Bond Market Liquidity 21-Oct-11Credit Client Investor Survey 14-Dec-12 CDS-bond basis 21-Oct-11

Source: J. P. Morgan

36



US Economic Calendar

Monday Tuesday Wednesday Thursday Friday

10 Mar

Philadelphia Fed President Plosser speaks in Paris (6:15am)

11 Mar

NFIB survey (7:30am) Feb JOLTS (10:00am) Jan Wholesale trade (10:00am) Jan

Auction 3 year note $30 bn

12 MarQSS (10:00am) 4Q Federal budget (2:00pm) Feb

Auction 10 year note (r) $21 bn

13 MarInitial claims (8:30am) w/e Mar 8 Retail sales (8:30am) Feb Import prices (8:30am) Feb Business inventories (10:00am) Jan

Auction 30 year bond (r) $13 bnAnnounce 10 year TIPS (r) $13 bn

14 Mar

PPI (8:30am) Feb Consumer sentiment (9:55am) Mar prelim

17 Mar

Empire State survey (8:30am) Mar TIC data (9:00am) Jan Industrial production (9:15am) Feb NAHB survey (10:00am) Mar

18 Mar

CPI (8:30am) Feb Housing starts (8:30am) Feb

FOMC meeting

19 MarCurrent account (8:30am) 4Q

FOMC statement and projections (2:00pm) and press conference (2:30pm)

20 MarInitial claims (8:30am) w/e Mar 15 Existing home sales (10:00am) Feb Philadelphia Fed survey(10:00am) Mar Leading indicators (10:00am) Feb Auction 10 year TIPS (r) $13 bnAnnounce 2 year note $32 bnAnnounce 2 year FRN (r) $13 bnAnnounce 5 year note $35 bnAnnounce 7 year note $29 bn

21 Mar

24 MarManufacturing PMI (8:58am) Mar flash

25 MarS&P/Case-Shiller HPI (9:00am) Jan FHFA HPI (9:00am) Jan New home sales (10:00am) Feb Consumer confidence (10:00am) Mar Richmond Fed survey (10:00am) Mar Auction 2 year note $32 bnPhiladelphia Fed President Plosser speaks in New York (7:00pm)

26 Mar

Durable goods (8:30am) Feb Services PMI (8:58am) Mar flash

Auction 2 year FRN (r) $13 bnAuction 5 year note $35 bn

27 MarInitial claims (8:30am) w/e Mar 22 Real GDP (8:30am) 4Q final Pending home sales (10:00am) Feb KC Fed survey (11:00am) Mar

Auction 7 year note $29 bn

28 Mar

Personal income (8:30am) Feb Consumer sentiment (9:55am) Mar final

31 Mar

Dallas Fed survey (10:30am) Mar

1 AprManufacturing PMI (8:58am) Mar final ISM manufacturing (10:00am) Mar Construction spending(10:00am) Feb Light vehicle sales Mar

2 Apr

ADP employment (8:15am) Mar Factory orders (10:00am) Feb

3 Apr

Initial claims (8:30am) w/e Mar 29 International trade (8:30am) Feb Services PMI (8:58am) Mar final ISM nonmanufacturing(10:00am) Mar Announce 3-year note $30bnAnnounce 10-year note (r) $21bnAnnounce 30-year bond (r) $13bn

4 Apr

Employment (8:30am) Mar

JPM Credit Outlook 3/7

Documents

Transcript of JPM Credit Outlook 3/7