Main Themes 1. The Set – Up: Understanding the Factors Driving Monetary Policy 2. What is “Normal Fed Policy” with Inflation Low? 3. What will the next tightening cycle look like? 4. How do different portfolios react to changing rates?
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Main Themes
1. The Set – Up: Understanding the Factors Driving Monetary Policy
2. What is “Normal Fed Policy” with Inflation Low?
3. What will the next tightening cycle look like?
4. How do different portfolios react to changing rates?
What Should “Normal” Fed Policy Look Like?
2
l Monetary policy in the next cycle will be different
l Spurred by the desire to end crisis policy and get off the zero bound while still remaining accommodative.
l Unlike traditional monetary policy which is driven by the need to reduce inflationary pressures mounting from a steamy economy.
l Traditional: - Fed tightens, the economy slows and inflation falls. - Long term rates look past the tightening to the next slow down and the curve
flattens.
l Next Cycle: - Fed Funds Rates held below the level implied by the Fed’s progress toward the
dual mandate. - Bringing the rate up to neutral.
The Next Cycle
3
l Phase 1: Begin to End Crisis Policy- Desire to Get off the Zero Bound - Cautious Do No Harm Mantra - Crisis Headwinds and Low Inflation. - Still Accommodative: Real Fed Funds rate of zero would not be achieved for 15
to 22 months at a pace of every other meeting and every third meeting if inflation is running at 1.5%.
- Fed messaging challenge should increase surrounding tighter is not tight. - Flexible Fed - may pause
l Phase 2: Normalize to the target rate implied by progress toward the achievement of the dual mandates.
- Likely to be dictated by inflation as employment is expected to reach the natural rate based on the broad measures by 2017.
- Tightening may be back loaded - years of crisis accommodation followed by a very gradual initial pace.
Conditions for FOMC to Begin Normalization Process
l Progress Toward Fed Dual Mandate - Maximum Employment - Price Stability and Moderate Long term Yields
l Fed believes that the U.S. recovery is on solid ground and that as maximum employment is achieved, inflation should follow.
l Problems - Inflation is falling despite improvement in labor markets. - But, wages are a lagging indicator and the Fed believes in long monetary policy lags. - How can they be reasonably certain inflation will return to 2%?
Falling Unemployment
Wage Pressure Inflation
Inflation has yet to materialize.
Falling Unemployment has yet to Translate into Higher Wages
l Change in employment compensation has not increased with the decline in unemployment. The lack of wage inflation is helping to hold down Core PCE (ex food/energy).
Because, Maximum Employment has not yet been Achieved
l What is maximum employment? Nonaccelerating inflation rate of unemployment (NAIRU) – Rate of unemployment that is compatible with a stable rate of inflation – about 5.4%
l U3 = # of unemployed as % of labor force = 5.50% as of February 2015.
l U6 = Total unemployed, plus marginally attached to the labor fore, plus total employed part time for economic reasons = 11% as of February 2015.
Source: BMO CM, Bloomberg
FOMC Wants to see Labor Market Slack Continue to Fall
l FOMC is focused on the long term unemployed and those who are working part-time, but would prefer to be working full time.
l The difference between total unemployed as a % of labor force and the total including those marginally attached or employed part time for economic reasons is still elevated at 5.5% vs. a long term median of 4.10%. If the current trend continues, it should take another 12 to 18 months for this to narrow to the median.
Source: BMO CM, Bloomberg
Timing of Liftoff Depends on Inflation
l Inflation is too low: Running Below 2% Target and Falling
l FOMC must be “reasonably confident” that over the medium term inflation will move back to the 2% objective. Continued improvement in labor markets will improve Fed’s confidence. BMO sees the unemployment ending 2015 at 4.9% and 2016 at 4.6%.
l Fed expects inflation to decline further in the near term due to the reduction in oil prices and the effects of the rise in the foreign exchange value of the dollar on import prices. But, they expect these influences to be temporary.
Source: BMO CM, Bloomberg
When will inflation stabilize?
l We expect September Liftoff
l December FOMC Minutes – “With lower energy prices and the stronger dollar likely to keep inflation below target for
some time, it was noted that the Committee might begin normalization at a time when core inflation was near current levels, although in that circumstance participants would want to be reasonably confident that inflation will move back toward 2 percent over time.”
– Core inflation was near 1.40% when the Fed met on December 16-17th. It fell to 1.33% in January.
l When should inflation stabilize? – BMO expects core CPI to fall until June at 1.1% YoY, stabilize mid-summer and then
begin to creep up in September based on slower appreciation of USD, mid-recovery in oil prices and some wage inflation.
– Core CPI to end the 2015 at 1.4% and 2016 at 1.9%.
l Will the Fed begin to normalize with inflation falling? – Probably not. – Risk of tightening to early and choking off the recovery is greater than the risk of
tightening later and sparking some inflation and/or financial market instability.
Listening to the Fed: Timing and Pace of Tightening
10
Timing of First Tightening
l No tightening for at least the next couple of meetings.
l Does not have to be at a meeting with a scheduled press conference.
l Most participants expect to begin normalization in 2015, but no preset time.
l Monetary policy lags are long.
l Might begin normalization at a time when core inflation is near current levels.
l FOMC will need to be “reasonably confident” that inflation will move back up to 2% before beginning to normalize.
l In December, 88% of the FOMC expected 2015 liftoff. The Fed’s outlook in January was “broadly similar to that at the time of its December meeting….”
Pace of Next Tightening
l Will not be at a measured pace.
l Will depend on the evolution of the economic data.
l Path of normalization is anticipated to be relatively gradual.
l Will not necessarily be in 25 bp increments.
l “We would probably not like to repeat a sequence in which there was a measured pace and 25 basis point moves at every meeting.”
l Fed expects 3.75% by the end of 2017 vs. fed funds futures at 2.10%.
l How do they get there? Really slow in the beginning followed by some late 50 bp clips? Do they start and stop? How many pauses? This will be difficult to price. The Fed is unlikely to react to every data point, but the market will.
What does the FOMC expect?
Evolution of FOMC Summary of Economic Projections
Source: BMO CM, FOMC
Longer Run Trimmed
Weighted Avg.Jan-‐12 4.20Apr-‐12 4.23Jun-‐12 4.17Sep-‐12 4.12Dec-‐12 4.08Mar-‐13 4.04Jun-‐13 4.04Sep-‐13 3.98Dec-‐13 3.91Mar-‐14 3.90Jun-‐14 3.78Sep-‐14 3.80Dec-‐14 3.77
11
Most Committee Members Expect at Least +75 bp for YE 2015
FOMC Members Expectations for Year-End 2015
Source: BMO CM, FOMC 12
Dislocation - Fed Messaging vs. Market Pricing
13
Fed Expectations vs. Market
Source: BMO CM, FOMC, Yields as of 2/26/15
l Front-End of the yield curve is most sensitive to Fed liftoff.
l Market pricing is well below FOMC expectations.
l Market is priced to a very gradual cycle. Is the risk that the Fed moves slower than the market is expecting, or faster?
Market Tends to Underprice Fed
14 Source: FOMC. Note: Expectations were based on fed funds and eurodollar futures, with an allowance for term premia and other adjustments.
l At the time of the 1st tightening in June 2004, the market was pricing a fed funds rate of 3.50% for June 2005, which was the rate realized. This was consistent with a 25 bp increase at each meeting over the course of the year.
l A full 12 months into the cycle in June 2005, the market was pricing a fed funds rate of 3.70% versus the 5.25% that was realized for June 2006.
Fed Funds Futures vs. Realized Rate in 2004-2006 Cycle
Fair Value for Front-End Yields if Market Shifts Expectations
Source: BMO CM, Bloomberg Note: Calculator holds 2s5s at 94 bp and 2s10s at 147 bp as we assume the change in pricing of fed funds expectations occurs instantaneously. As of March 6,, 2015 15
Spot OIS RateSpot UST Yield Dec-‐15 Sep-‐15 Jun-‐15 Dec-‐15 Sep-‐15 Jun-‐15
1yr 0.38 0.26 0.18 0.31 0.50 -‐19 -‐7 122yr 0.80 0.72 0.59 0.75 0.95 -‐21 -‐5 153yr 1.16 1.13 1.08 1.33 1.58 -‐8 17 425yr 1.63 1.69 1.53 1.69 1.90 -‐9 6 2710yr 2.14 2.25 2.07 2.23 2.43 -‐7 9 29
Scenario 2: 25 bp every other mtg to 3%1yr 0.38 0.26 0.18 0.31 0.50 -‐19 -‐7 12
2yr 0.80 0.72 0.59 0.78 1.00 -‐21 -‐2 203yr 1.16 1.13 1.06 1.26 1.49 -‐10 11 345yr 1.63 1.69 1.53 1.72 1.94 -‐9 9 3110yr 2.14 2.25 2.07 2.26 2.48 -‐7 12 34
Scenario 1: 25 bp every other to 1.25%, 6M pause, +25 bp Every Mtg to 3%
First Tightening Date
Implied Spot OIS Rate Change in Spot OIS Rate
BMO Implied Rates Calculator
l What would happen to yields if the market immediately priced a change in expectations for the timing of the fist tightening and the pace of the cycle?
Timing and Pace = Data Dependent
Source: BMO CM, Bloomberg Note: Month End Data 16
l Last Ease – June 2003, 1st Tightening – June 2005, Last Tightening – June 2006
Non-Farm Payroll Changes vs. Changes in 2yr and 10yr UST Yields
So, what do you do?
17
1. Understand the factors driving rates and spreads now.
2. How do different portfolios perform when interest rates change?
3. How to position your portfolio based on your expectations for interest rates in the context of safety, liquidity and yield?
#1: What are the factors driving yields right now?
18
l U.S. yields have disconnected from the U.S. economic data and are trading well below Fed projections.
l Money market reform is driving demand for front-end T-bills and discount notes.
l Basel 3 liquidity needs are driving bank demand for Treasury notes 5 years and under.
l Foreign investors are buying across the Treasury curve due to favorable yields vs. other sovereign alternatives and expectations for continued USD strength. (10yr bunds are at an all time low of 0.30% vs. 10yr UST at 1.97%)
Too Much Cash Chasing Too Few Bonds
19
2FRN 2 3 5 7 10 30 5 TIPS 10 TIPS 30 TIPS TotalFY2014 $123 ($55) ($42) $5 $348 $153 $168 $35 $42 $23 $800FY2015 $158 ($90) ($103) ($72) $318 $167 $148 $29 $46 $23 $625FY2016 $33 ($48) ($83) ($18) $131 $173 $135 $12 $45 $23 $403
Estimated Net UST Issuance
l GSE outstandings have fallen by $771 bn from 2010 through Feb. 2015
l Net UST issuance is still positive, but declining as deficit narrows.
Net GSE Issuance Gross GSE Issuance
Source: BMO CM, FNMA, FHLMC, FHLB, FFCB
But, SSA Issuance is Increasing
20
Gross IBRD, IFC, IADB Issuance by Type Gross IBRD, IFC, IADB Issuance by Issuer
Source: BMO CM, IBRD, IFC, IADB
Fed & Foreign Reserve Managers Lead Demand
Source: BMO CM, Fed 21
l Fed holdings and Foreign Custody holdings represent 54% of the Treasury notes and bonds outstanding.
l Fed owns 31% of the Treasury market in maturities in 2020 and longer.
l Long End: 2040-2044
l Fed holdings and STRIPS total $496 bn or 50% of outstanding Treasuries.
l This leaves $491 bn available for all other investors.
Fed & Foreign Custody Holdings as % of UST
Tsy Outstandings After Fed Purchases and STRIPS Fed Holdings vs. Tsy Outstandings by Maturity Year
Domestic Investors – Buyer on the Margin
Source: BMO CM, Fed Flow of Funds as of 12/11/14. (Next release: March 12, 2015) Note: Quarterly Data is Annualized
Net Flows into US Treasury Notes/Bonds (ex bills) Annual & Quarterly
22
$ Bn 2011 2012 2013 2014 Q1-‐Q3 Avg Q1:14 Q2:14 Q3:14Rest of World 418 576 407 387 367 493 299Domestic (Ex Fed) 259 439 -‐151 184 -‐359 569 340Federal Reserve 642 21 543 331 499 310 184Total 1,319 1,036 799 902 508 1,373 824
Rest of World as % of Total 32% 56% 51% 43% 72% 36% 36%
Who are the Largest Domestic Holders of Bills/Notes/Bonds?
Source: BMO CM, Fed Flow of Funds 23
Net Flows UST – Domestic (Ex Fed)
1) US Chartered Depository Institutions, Banks in US Affiliates, Foreign Banking Offices in the US, Holding Companies, Credit unions
2) Money Market, Mutual Funds, Closed End Funds, ETFs 3) GSEs, ABS Issuers, Nonfinancial Business, Property-Casualty and Life Insurance, Private Pension
2011 2012 2013 Q1:13 Q2:13 Q3:13 Q4:13 Q1:14 Q2:14 Q3:14
Household Sector -‐230 211 -‐192 -‐257 -‐101 -‐102 -‐307 -‐321 -‐387 45
Mutual Fund(2) 194 137 81 271 8 96 -‐51 -‐2 -‐141 206
Banking Institutions(1) -‐40 56 -‐27 -‐50 -‐115 -‐65 124 176 195 207State and Local Govt (Ex retirement) -‐32 46 -‐15 37 8 -‐89 -‐14 1 -‐42 -‐18
Broker Dealers 89 63 -‐110 -‐124 -‐94 33 -‐257 -‐64 -‐59 -‐65Federal, State/Local Retirement 35 31 26 8 -‐13 -‐371 479 33 116 74
All Other (3) 53 3 22 17 64 58 -‐49 49 35 62
Total 70 548 -‐214 -‐100 -‐244 -‐440 -‐74 -‐128 -‐283 512
Large Bank Portfolios Shift to UST
24
l Disclosure levels vary, but JPM, Citi, and GS and State Street are compliant with the fully phased-in minimum requirement as of Q3:14.
l For example, Citi reported LCR under U.S LCR of 111% as of 9/30/14 vs. 127% for Basel Committee LCR.
l Citi reported $42 bn of HQLA in excess of net outflows ($416.4 bn in HQLA, $374.5 bn in net outflows).
Source: BMO CM, FDIC, Financial Institution Quarterly Earnings Reports
Large Bank Portfolio Holdings Large Bank UST Holdings $ Billion 2013 2014 Chg
Cash & Cash Equivalents 1,417 1,569 152
US Treasuries 103 291 187
US Agencies 30 24 -7
Municipal 115 127 11
Agency MBS 648 653 5
Non-Agy MBS 48 37 -11
CMBS 62 70 7
ABS 86 74 -12
Structured Products 59 71 13
Other 257 222 -36
Total 2,826 3,137 311
$ Billion2013 US
Holdings2014 UST Holdings 2014 Total Change
JPM 7 13 5
BAC 6 67 61
WFC 0 61 60
C 69 110 41
USB 3 3 1
PNC 4 5 1
BK 15 23 8
STT 0 10 10
Total 103 291 187
LCR = High Quality Liquid Assets Total Net Cash Outflows
≥ 100%
Why the big shift to UST?
Source: BMO CM, Federal Reserve, European Banking Act
Level Haircuts/Caps What Qualifies as High Quality Liquid Assets
Level 1
• No Haircut or Caps • Cash and Central Bank Reserves • 0% Basel II Risk-weighted sovereigns that have not
restructured debt in the last 5 years • 0% Basel II risk-weighted Supranational Institutions (IMF, ECB,
EC, multilateral development banks)
Level 2A
• 15% haircut and are capped at 40% of a bank’s HQLA stock
• FNMA, FHLMC, and FHLB debt and MBS • 20% Basel II risk-weighted sovereign entities or multilateral
development banks not included in Level 1 assets with an explicit guarantee from a sovereign entity or central bank (e.g. KfW, RENTEN, etc.)
Level 2B • 50% haircut and are
capped at 15% of a bank’s HQLA stock
• Highly liquid, investment grade non-financial corporate debt • Highly liquid, publicly traded common equity shares included in
the S&P 500
Not HQLA
• Covered bonds • Municipal bonds (as of now) • Financial corporates • Non-AGY RMBS • ABS • Gold
25
Are Banks Done Shifting Assets
Source: BMO, Basel Committee
l Optimization is likely within the buckets.
l As of Q3, JP Morgan held 66% of its HQLA portfolio in cash, with very low returns.
l Bank of America held $255 bn of US agency securities representing 59% of the total $429 bn HQLA portfolio. Given that level 2 assets are capped at 40%, Bank of America owned $81 bn of US agency securities that are not counted for HQLA in excess of the level 2 cap..
26 Source: BMO CM, Bank Financials
#2: How do different portfolios react to rate changes?
27
l 5 portfolios with 3yr maturity 1. Laddered UST bullet portfolio – quarterly ladder 2. Barbell UST bullet portfolio – 2 securities: a 6m and a 3yr 3. Callable agency portfolio laddered – quarterly ladder by maturity date 4. Step-up agency portfolio laddered – laddered by step up date for 1st 18 months and
maturity date for remaining 18 months. 5. Floating Rate portfolio laddered – quarterly by maturity date
Source: BMO CM, Yield Book as of 2/27/15
5 Sample Portfolios
Type Description Price Coupon YTM YTC Effective Duration
Effective Convexity
Libor OAS
Laddered Bullet 3yr ladder 100.02 0.59 0.51 0.51 1.56 0.04 -22 Barbell Bullet 50% in 6m, 50% in 3yr 100.11 0.63 0.53 0.53 1.66 0.05 -22 Callable Laddered by Maturity 100.03 0.62 0.74 0.74 0.80 -1.48 -13
Step-up Laddered by Step Up Date and Maturity 100.01 0.57 1.30 0.45 0.57 -2.01 -15
Floater Laddered by Maturity Date 100.07 0.27 0.31 0.32 0.12 0.04 -7
Which Portfolio Outperforms if Rates Stay the Same?
28
l Barbell portfolio – only has 2 bonds - 9/30/15 maturity and a 12/15/17 maturity.
l Benefits from the steepness of the yield curve between the 2yr and 3yr.
l A 3yr UST yields 40 bp more than a 2yr Treasury. As the 3yr rolls down the curve and becomes a 2yr, its price appreciates and the investor continues to earn the original yield which is 95 bp in this case.
Source: BMO CM, Bloomberg, Yield Book 12m Horizon, Parallel, Instantaneous Shift, 2/27/15
TRR % No Change in Yields 12M Horizon Effective Duration: No Change in Yields
Which Portfolio Outperforms if Rates Fall?
29
l Bullet portfolios outperform callables. Barbell bullet portfolio performs the best because it has the highest duration.
l Laddered bullet portfolio rolls down the curve with about 1/3rd rolling off over the 12 months. In one year, the duration is 0.73, so it participates to a lesser degree in the rally. At the 12m horizon, the barbell only has one bond left – a 2yr and the other half is reinvested at the 3m rate. Callable portfolios get called, so the entire portfolio is reinvested at the lower 3m rate.
Source: BMO CM, Yield Book. 12m Instantaneous Rate Forward Curve as of 2/27/15
TRR % -50 bp Shift Down in Yields 12M Horizon Effective Duration: -50 bp
Which Portfolio Outperforms if Rates Rise?
30
l Floaters outperform bullets and callables – lowest duration and yields rise with rates.
l Step-up outperforms the fixed coupon callable portfolio – lowest duration as bonds are still called despite the back up allowing reinvestment at higher yields.
Source: BMO CM, Yield Book. 12m Instantaneous Rate Forward Curve as of 2/27/15
TRR % for a Parallel Shift Up 50 bp in Yields Horizon Effective Duration: Parallel +50 bp Shift
#3: Portfolio Positioning without a Crystal Ball
31
Source: BMO CM, Yield Book
l Blended portfolio offers some protection against falling rates and rising rates.
l 3yr Final: 31% bullet, 23% floater, 15% step, and 31% fixed callable
Type Description Coupon YTM YTC Eff Dur Eff Cnvx Libor OAS
Laddered Bullet 3yr ladder 0.59 0.51 0.51 1.56 0.04 -22
Barbell Bullet 50% in 6m, 50% in 3yr 0.63 0.53 0.53 1.66 0.05 -22
Callable Fixed Cpn Laddered by Maturity 0.62 0.74 0.74 0.80 -1.48 -13
Callable Step-up Laddered by Step Up Date and Maturity 0.57 1.30 0.45 0.57 -2.01 -15
Floater Laddered by Maturity Date 0.27 0.31 0.32 0.12 0.04 -7
Blended 31% bullet, 23% floater, 15% step, 31% fixed callable 0.70 0.72 0.43 0.91 -0.36 -17
Total Rate of Return of Blended Portfolio
32
Source: BMO CM, Yield Book
l Blended portfolio gives up some upside and downside and offers a more stable return profile.
Horizon Effective Duration of Blended Portfolio
33
Source: BMO CM, Yield Book
l Blended portfolio has a duration at the 12M horizon that is more stable than the callables, but lower than the duration of the bullets.
What happens when rates stay the same?
34
Source: BMO CM, Yield Book
TRR % No Change in Yields 12M Horizon Effective Duration: No Change in Yields
How does the Blended Portfolio compare when rates fall?
35
Source: BMO CM, Yield Book
TRR % -50 bp Shift Down in Yields 12M Horizon Effective Duration: -50 bp
How does the Blended Portfolio compare when rates rise?
36
Source: BMO CM, Yield Book
TRR % +50 bp Shift Up in Yields 12M Horizon Effective Duration: +50 bp
Summary
37
l We expect the FOMC to begin to normalize in September 2015.
l The Fed has an idea of what they expect the pace to look like and they are forward looking(monetary policy lag). We do not think that starting to normalize and then stopping is desirable despite Fed speak about flexibility.
l Market is priced to a very gradual pace. Is the risk even more gradual or less gradual?
l Maturities 5yrs and under are especially sensitive to the timing and pace of Fed liftoff. The longer end is being held down by demand that outweighs supply and is also at risk of re-pricing if employment growth continues and wage pressures emerge.
l It is very difficult to know what an uncertain future may bring with regard to Fed policy and yields.
l Therefore, a blended portfolio works to limit the downside risk and offers an acceptable risk/reward tradeoff.
Disclaimer
This material has been prepared with the assistance of employees of Bank of Montreal (“BMO”) who are involved in derivatives sales and marketing efforts. Accordingly, it should be considered to be a solicitation of derivatives business generally and not a research report that reflects the views of disinterested research analysts. Notwithstanding the foregoing, this material should not be construed as an offer or the solicitation of an offer to sell or to buy or subscribe for any particular product or services (including, without limitation, any commodities, securities or other financial instruments). We are not soliciting any specific action based on this material. It is for the general information of our clients. It does not constitute a recommendation or a suggestion that any investment or strategy referenced herein may be suitable for you. It does not take into account the particular investment objectives, financial conditions, or needs of individual clients. Nothing in this material constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your unique circumstances, or otherwise constitutes an opinion or a recommendation to you. BMO is not providing advice regarding the value or advisability of trading in commodity interests, including futures contracts and commodity options or any other activity which would cause BMO or any of its affiliates to be considered a commodity trading advisor under the U.S. Commodity Exchange Act. BMO is not undertaking to act as a swap advisor to you or in your best interests and you, to the extent applicable, will rely solely on advice from your qualified independent representative in making hedging or trading decision. This material is not to be relied upon in substitution for the exercise of independent judgment. Any recipient of these materials should conduct its own independent analysis of the matters referred to herein, together with its qualified independent representative, if applicable. The recipient should seek advice based on its particular circumstances from its own independent financial, tax, legal, accounting and other professional advisors (including, without limitation, its qualified independent representative, if applicable). These materials are confidential and proprietary to, and may not be reproduced, disseminated or referred to, in whole or in part without the prior consent of BMO. Information presented in this material has been obtained or derived from sources believed by BMO to be reliable, but BMO does not guarantee their accuracy or completeness. BMO assumes no responsibility for verification of the information in these materials, no representation or warranty is made as to the accuracy or completeness of such information and BMO accepts no liability whatsoever for any loss arising from any use of, or reliance on, these materials. BMO assumes no obligation to correct or update these materials. These materials do not contain all information that may be required to evaluate any transaction or matter and information may be available to BMO and/or its affiliates that is not reflected herein. “BMO Capital Markets” is a trade name used by the BMO Investment Banking Group which includes the wholesale arm of Bank of Montreal and its subsidiaries BMO Nesbitt Burns Inc. in Canada, BMO Capital Markets Corp. in the U.S. and BMO Capital Markets Ltd. in the U.K. “Nesbitt Burns” is a registered trademark of BMO Nesbitt Burns Corporation Limited, used under license. “BMO (M-bar rounded symbol) Capital Markets” is a trade-mark of Bank of Montreal, used under license.
This material is prepared by the BMO Capital Markets GKST Inc. (“BMOGKST”) Sales and Trading Desk for distribution to BMOGKST clientele and is not a research product. The views expressed in this report accurately reflect the analyst’s personal views. No part of the analyst’s compensation is or will be directly or indirectly related to any specific recommendations or views. This material is intended for the private use of the institutional investor to whom it was sent. The opinions, estimates and projections contained herein are those of BMOGKST as of the date hereof and are subject to change without notice. BMOGKST endeavors to ensure that the contents herein have been compiled or derived from sources that we believe are reliable and contain information and opinions which are accurate and complete. However, BMOGKST makes no representation or warranty, express or implied in respect thereof, takes no responsibility for any errors and omissions which may be contained herein and accepts no liability whatsoever for any loss (whether direct or consequential) arising from any use of or reliance on this report or its contents. Information may be available to BMOGKST, which is not reflected herein. This report is not to be construed as an offer or solicitation to buy or sell any security. This material is not a complete analysis of all material facts respecting any issuer, industry or security or of your investment objectives, parameters, needs or financial situation, and therefore is not a sufficient basis alone on which to base an investment decision. BMOGKST and its affiliates may have positions (long or short), and effect transactions or make markets, in securities mentioned herein, or provide advice or loans to, or participate in the underwriting or restructuring of the obligations of, issuers mentioned herein. Moreover, the BMOGKST trading desk may have acted on the basis of this material. The information contained herein is as of the date and time referenced above and BMOGKST does not undertake any obligation to update such information. BMOGKST is a subsidiary of BMO Financial Corp., which is a subsidiary of Bank of Montreal. BMOGKST is affiliated with BMO Harris Bank NA. BMO Capital Markets is a trade name used by BMO Financial Group for the wholesale banking businesses of Bank of Montreal, BMO Harris Bank N.A, (Member FDIC), BMO Ireland Plc, and Bank of Montreal (China) Co. Ltd. and the institutional broker dealer businesses of BMO Capital Markets Corp. (Member SIPC), BMO Nesbitt Burns Securities Limited (Member SIPC) and BMO Capital Markets GKST Inc. (Member SIPC) in the U.S., BMO Nesbitt Burns Inc. (Member Canadian Investor Protection Fund) in Canada, Europe and Asia, BMO Capital Markets Limited in Europe, Asia and Australia and BMO Advisors Private Limited in India. “Nesbitt Burns” is a registered trademark of BMO Nesbitt Burns Corporation Limited, used under license. “BMO Capital Markets” is a trademark of Bank of Montreal, used under license. "BMO (M-Bar roundel symbol)" is a registered trademark of Bank of Montreal, used under license. ® Registered trademark of Bank of Montreal in the United States, Canada and elsewhere. TM Trademark Bank of Montreal
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