GLOBAL INVESTMENT STRATEGY, EXECUTION AND RISK MANAGEMENT FOR INSTITUTIONAL INVESTORS

No one will buy 38's.  2^nd richest bond on the curve

Trade:        Sell 4.5% 34 vs buying 4.75% 30(ctd) & 4.75% 38 50x50wtd
                   Tactical 3mo hold to mitigate carry.

Rationale: Playing the Range – Spread at multi-year lows, currently +6.1bps(range ~4.5 – 15bps)
                    Curvature of HC rich relative to slope of 10/20 curve generically, but relationship has been less clear post March Covid event  
                    10y CTD 30s underperformer in Q4 – hedge instrument for many locking in rates into year end, should reverse, 10y CTD cheap in curvature relative to level of rates
                    No imminent impact rolling into and out of DLV Basket, IE long way to go for consideration – range should prevail first before impact of CTD bonds influencing spread

                    APF has exhausted 30s, but only marginal float remains for both 34s and 38s ~2bl
                    3x35s taps this qtr will weigh on 34s  

Risk:            APF exhaust 34s first, similar to pattern of the HC 27s, then 30s.
                    10/20 curve Flattens on risk event,(but see marginal impact to fly as the level already reflects flatter curve)
                    AR Model approach suggest 38s from an RV perspective are richer on the curve and begins to adjust 1-2bps for this.
                    (much of the richness coming from maturity metrics – but when looking at mod duration which we are doing to
                      achieve a more symmetrical distribution of risk along the curve – this is sharply reduced)
                   
Carry&Roll: Negative -.5bps/3mos – would highlight though half of this is coming from the negative roll-down of models input. Looking
                      at it another way, we are using 30/34/38s for symmetry in the distribution of risk along the curve, hence 10/20 curve wider
                      than what Fly implies, if you back out the bond specific roll – you get Neg C&R 1bps/Ann

Entry:         +6.15bps(short belly)
Add:            +4bps
Stop:           +3.25bps
Target:        +11.bp

Carry & Roll – 3mos

Spread below: Gilts 30/34/38(HC) vs 10/20 Gilt Curve – Generic Spline

Graph Below: 30/34/38s LAGGED ONE YEAR.  vs 27/30/34s wtd 55%x45% to maintain Duration Neutral to assess long term
 rolling down of similar structure.

Stephen Creaturo

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