Markus Krygier Senior Global Fixed Income Manager

1. Central Banks in Uncharted TerritoryA Roadmap for Bond Investors Markus KrygierSenior Global Fixed Income Manager 21st May 2009

2. Setting the Scene – Extraordinary Challenges for Policy Makers [R]ecessions associated with financial crises tend to be unusually severe and their recoveries typically slow. Similarly, globally synchronized recessions are often long and deep, and recoveries from these recessions are generally weak. Countercyclical monetary policy can help shorten recessions, but its effectiveness is limited in financial crises. … These findings suggest the current recession is likely to be unusually long and severe and the recovery sluggish. Source: IMF, World Economic Outlook, April 2009 Source: CAAM

3. First line of Central Bank Defence – Interest Rates Converging to Zero! The crisis breaks Source: Bloomberg, CAAM Source: CAAM

4. Second Line of Defence – Quantitative Easing (QE)! • Q: What is quantitative easing? • A: The Bank of England defines QE as follows: • “[As] Bank Rate approaches zero, further reductions are likely to be less effective in terms of the transmission to market interest rates and the impact on demand and inflation. And interest rates cannot be less than zero. • The MPC therefore needs to provide further stimulus to support demand in the wider economy. It boosts the supply of money by purchasing assets like Government and corporate bonds – a policy sometimes known as 'Quantitative Easing'. Instead of lowering Bank Rate to increase the amount of money in the economy, the Bank supplies extra money directly.” Source:http://www.bankofengland.co.uk/monetarypolicy/assetpurchases.htm Source: CAAM

5. Central Bank Assets (% of GDP) BoE’s Cumulative APF Asset Purchases Source: Barclays Capital Source: Bank of England Quantitative Easing – The New Image of Monetary Policy Source: CAAM

6. Q&A about QE • Q: Is quantitative easing bad for government bonds? • A: It depends ….. on whether QE triggers inflation. If it doesn’t trigger inflation it is likely to be mildly bond positive. • Recall: • Nominal Bond yields = Real Bond Yields + Inflation Expectations • Q: Why would QE trigger inflation? • A: Like with any (monetary) stimulus, if withdrawn too late, it will over stimulate the economy and result in inflation pressure. This, however, would qualify as a policy mistake and is not an unavoidable result of QE. It is not more difficult to unwind QE than it is to implement the policy Source: CAAM

7. Source: Bloomberg, CAAM Q&A about QE • Q: Are we close to over-stimulating “the” economy? • A: Far from it. While there are signs that the pace of economic contraction has recently been slowing, most economies are still firmly in recession with disinflationary/deflationary economic slack mounting. Source: CAAM

8. Q&A about QE • Q: Given the overwhelming size of (fiscal and) monetary stimulus, won’t there be a sudden burst of economic activity i.e. a swift V-shaped recovery? Wouldn’t such a V-shaped recovery fan inflation expectations and thus hurt bonds? • A: Unlikely in our opinion. First, policy stimulus is only overwhelming in absolute numbers. Relative to the size of the problem (the deepest recession and the most pronounced financial turmoil since the 1930s ) the stimulus is not overly impressive. Second, history suggests that any recovery will likely be slow and “underwhelming”. Source: CAAM

9. Q&A about QE • Q: For government bonds, inflation seems to be the key to future performance. But what about corporate bonds? • A: Quantitative easing has been part of a strategy to fight the global credit crunch which had resulted in exploding credit spreads. If policies remain sufficiently stimulative, credit spreads will likely tighten back further. Recall: Corporate bond yield = Govt. bond yield + Credit Spread Source: CAAM

10. Where are we going from here? A Roadmap for Bond Markets • Baseline (sluggish recovery with little inflation pressure) • Bond yields will fall further • Strategy: Overweight bonds (prefer Eurozone over US and UK) • Yield curves will flatten • Strategy: Overweight longer maturities • Credit spreads will tighten • Strategy: Overweight Corporate Bonds • Alternative Scenario (V-shaped recovery with burst in inflation expectations) • Bond yields sharply higher (global bond sell-off) • Yield curves will flatten • Credit spreads will tighten sharply Source: CAAM

11. Issued by Crédit Agricole Asset Management (CAAM) London Branch, which is authorised by the Autorité des Marchés Financiers and regulated by the Financial Services Authority for the conduct of investment business in the United Kingdom. This report is for information purposes for professional investors only and is not intended as an offer or solicitation with respect to the purchase or sale of securities. Opinions and estimates may be changed without notice. It may not be copied or distributed to any other person and must not be distributed to retail customers in the UK. Investment in the fund should be made on the basis of the current Prospectus which is available from Crédit Agricole Asset Management (CAAM) London Branch, 41 Lothbury, London, EC2R 7HF. The past performance of investments is not necessarily a guide to future returns. Changes in rates of exchange and other factors may cause the value of an investment to go up or down. Source: CAAM