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AgendaFOREIGNHOLDINGSOFUSTREASURIESANDTREASURYYIELDSXxxNovember2012STRICTLYPRIVATEANDCONFIDENTIALTerryBeltonACACIndicatescertifyinganalyst.
Seelastpageforanalystcertificationandimportantdisclosures.
RYYIELDSTermpremiumestimatesfromarbitrage-freepricingmodelshavesignificantmeasurementerrors;theytendtoattributemostofthevariabilityininterestratestochangesintermpremium5YforwardOISvs.
Kim-Wrightexpected5Yforwardspot;%5YforwardOISvs.
Kim-Wrightexpected5Yforwardspot;%FOREIGNHOLDINGSOFUSTREASURIESANDTREASUR1RYYIELDSFOMCrateguidancehashadalargeimpactonforwardsbutlittleimpactonshortrateexpectationsderivedfromarbitrage-freepricingmodelsKim-Wrightexpectedshortratevs.
forwardOISaroundFOMCrateguidanceKim-Wrightexpectedshortratevs.
forwardOISaroundFOMCrateguidance5-yearTreasuryyieldsvs.
Kim-Wrightestimateof5-yeartermpremium;%5-yearTreasuryyieldsvs.
Kim-Wrightestimateof5-yeartermpremium;%FOREIGNHOLDINGSOFUSTREASURIESANDTREASURBusinessdaysaroundFOMCmeetingswhererateguidancewasextended**includes8/9/11,1/25/12,9/13/12WouldadvisecautionininterpretingtermpremiumestimatestooliterallyEconometricmodelsoftermpremiummayneedtocontrolforgrowth/inflationexpectationsandotherfactorsthatpredominantlyinfluenceshortrateexpectationsFailuretoproperlyaccountfordecliningshortrateexpectationssince2009haspushedmodelbasedtermpremiumestimatessignificantlynegative2RYYIELDSEstimatesofyieldimpactofforeignbuyingaresmallerthantheyappearAveragemonthlyforeignpurchasesofUSTversusmonthlyTreasurysupplyAveragemonthlyforeignpurchasesofUSTversusmonthlyTreasurysupplyEstimatedimpactofFedLSAPEstimatedimpactofFedLSAP406080100120TsysupplyForeignpurchasesStudyDateyieldimpactHamiltonandWu201120KrishnamurthyandVissing-Jorgensen201120D'AmicoandKing(QE1)201135FOREIGNHOLDINGSOFUSTREASURIESANDTREASUR$100bninmonthlypurchasesismorethan5timesmonthlysupplyofTreasuriesduringperiodstudiedEstimatesimplyanincreaseofforeignpurchasesduring2002-2007equaltototalsupplywouldhaveloweredyieldsonly9bpTheseestimatesarewellunderonehalftheestimatedimpactfromQE;Fedbuyinghasrangedfrom50%ofmonthlysupplyinQE1toalmost100%ofmonthlysupplyinQE2020402002-20072007-20123RYYIELDSDisclaimerConflictofInterest:Thisresearchcontainstheviews,opinionsandrecommendationsofJ.
P.
Morganresearchanalysts.
J.
P.
Morganhasadoptedresearchconflictofinterestpolicies,includingprohibitionsonnon-researchpersonnelinfluencingthecontentofresearch.
ResearchanalystsstillmayspeaktoJ.
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Morgantradingdeskpersonnelinformulatingviews,opinionsandrecommendations.
Tradingdesksmaytrade,orhavetraded,asprincipalonthebasisoftheresearchanalysts'viewsandresearch.
Therefore,thisresearchmaynotbeindependentfromtheproprietaryinterestsofJ.
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Morgantradingdeskswhichmayconflictwithyourinterests.
Asageneralmatter,J.
P.
Morganand/oritsaffiliatestradeasprincipalinconnectionwithmakingmarketsinfixedincomesecuritiesdiscussedinresearchreports.
AnalystCertification:Theresearchanalyst(s)denotedbyan"AC"onthecoverofthisreportcertifies(or,wheremultipleresearchanalystsareprimarilyresponsibleforthisreport,theresearchanalystdenotedbyan"AC"onthecoverorwithinthedocumentindividuallycertifies,withrespecttoeachsecurityorissuerthattheresearchanalystcoversinthisresearch)that:(1)alloftheviewsexpressedinthisreportaccuratelyreflecthisorherpersonalviewsaboutanyandallofthesubjectsecuritiesorissuers;and(2)nopartofanyoftheresearchanalyst'scompensationwas,is,orwillbedirectlyorindirectlyrelatedtothespecificrecommendationsorviewsexpressedbytheresearchanalyst(s)inthisreport.
Valuation&Methodology:InJ.
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Morgan'screditresearch,weassignaratingtoeachissuer(Overweight,UnderweightorNeutral)basedonourcreditviewoftheissuerandtherelativevalueofitssecurities,takingintoaccounttheratingsassignedtotheissuerbycreditratingagenciesandthemarketpricesfortheissuer'ssecurities.
Ourcreditviewofanissuerisbaseduponouropinionastowhethertheissuerwillbeableserviceitsdebtobligationswhentheybecomedueandpayable.
Weassessthisbyanalyzing,amongotherthings,theissuer'screditpositionusingstandardcreditratiossuchascashflowtodebtandfixedchargecoverage(includingandexcludingcapitalinvestment).
Wealsoanalyzetheissuer'sabilitytogeneratecashflowbyreviewingstandardoperationalmeasuresforcomparablecompaniesinthesector,suchasrevenueandearningsgrowthrates,margins,andthecompositionoftheissuer'sbalancesheetrelativetotheoperationalleverageinitsbusiness.
Analysts'Compensation:Theresearchanalystsresponsibleforthepreparationofthisreportreceivecompensationbaseduponvariousfactors,includingthequalityandaccuracyofresearch,clientfeedback,andoverallfirmrevenues.
RatingsSystem:J.
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Morganusesthefollowingsector/issuerportfolioweightings:Overweight(overthenextthreemonths,therecommendedriskpositionisexpectedtooutperformtherelevantindex,sector,orbenchmark),Neutral(overthenextthreemonths,therecommendedriskpositionisexpectedtoperforminlinewiththerelevantindex,sector,orbenchmark),andUnderweight(overthenextthreemonths,therecommendedriskpositionisexpectedtounderperformtherelevantindex,sector,orbenchmark).
J.
P.
Morgan'sEmergingMarketresearchusesaratingofMarketweight,whichisequivalenttoaNeutralrating.
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14RYYIELDSDisclaimerCountryandRegionSpecificDisclosuresU.
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