Private and Confidential Ramirez & Co., Inc.

61 Broadway, 29th Floor

New York, NY 10006

(800) 888-4086

July 2016

The Macroeconomic Outlook

Page 2

Political Risk While the US is embroiled in election politics, the unexpected Brexit vote changes the overall political outlook not just for

the UK, but for the rest of Europe. Yet, the markets seem to shrug off Brexit worries

Economic Growth

(US)

(International)

The pace of improvement in labor market conditions slows down in April and May, and picks up in June, with a falling 6M

moving average, but GDP appears to be rising faster than in the first quarter

IMF lowers its global growth forecast, with Brazil, China and Russia taking the bulk of the blame, and Brexit clouds the

horizon

Labor Markets (US)

(International)

Although the unemployment rate declines to a near full-employment level, job gains diminish and the pace of improvement

in the labor market slows—pulling down the Fed’s Labor Market Conditions Index. Real wage growth picks up, yet

productivity remains lackluster

Employment conditions in the Eurozone bifurcate as countries such as Germany shine, whereas Mediterranean-rim

countries exhibit strains

Inflation The FOMC still expects that inflation will rise to its long-run level of 2%, once oil and import prices stop falling

Market, but not survey-based, measures of inflation expectations fall again to lower levels

US goods inflation falls below zero, with services inflation approaching 3%

As the Euro area and Japan move into disinflation, the number of countries experiencing negative rates rises

Monetary Policy

(Fed)

(International)

The Fed’s median projected funds rate for 2016 YE stays constant from March to June at 0.875%, but fails to fall towards the markets’ lowered expectations. However, the number of Fed economists predicting a single rate hike in 2016 rises from one to six. The Fed maintains its policy of rolling over its Treasuries and mortgage-backed securities until normalization is well under way. The ECB takes over from the Fed as the dominant driver of global liquidity

As the ECB overtakes the Fed as the major provider of global liquidity, international capital flows into the US, lowering US bond yields. These developments make it difficult for the Fed to raise rates

Fiscal Policy Consensus is beginning to emerge that fiscal policy needs to overtake monetary policy as the predominant instrument to

lead the world out of its malaise

The Markets

In the beginning of the year, financial market stress indicators reach their third highest level (the 2007-2009 contraction, the 1999-2000 bursting of the TMT bubble) in almost three decades but stabilize as the quarter comes to a close

Flight to safety and negative interest rates drive yields on government bonds to new lows internationally and domestically

The Macroeconomic Roadway

Tailwinds Neutral Headwinds

Page 3

Medial projections one year out suggest about the same level in the 10Y and 30Y rates

Goldman seems bullish on the economy, while Morgan Stanley and Wells Fargo remain bearish

Actual and forecast rates decline significantly in response to the unexpected Brexit vote

Note: JP Morgan reports effective Federal Funds rate Source: Barclays, Citi, Goldman Sachs, JP Morgan; Morgan Stanley, Wells Fargo. Calculations by Ramirez.

US Government Rates Outlook , 3Q16 – 2Q17, July 15, 2016

Morgan Stanley

3Q16 (%) 4Q16 (%) 1Q17 (%) 2Q17 (%)

FF 0.375 0.375 0.375 0.375

2Y - - - -

10Y 1.50 1.25 1.00 1.10

30Y - - - -

Barclays

3Q16 (%) 4Q16 (%) 1Q17 (%) 2Q17 (%)

FF 0.25-0.50 0.50-0.75 0.50-0.75 0.50-0.75

2Y 0.70 0.75 0.80 0.85

10Y 1.50 1.55 1.60 1.65

30Y 2.30 2.35 2.35 2.35

JP Morgan

3Q16 (%) 4Q16 (%) 1Q17 (%) 2Q17 (%)

FF 0.5 0.75 1 1

2Y 0.70 0.90 1.15 1.25

10Y 1.45 1.55 1.70 1.80

30Y 2.20 2.25 2.35 2.40

Wells Fargo

3Q16 (%) 4Q16 (%) 1Q17 (%) 2Q17 (%)

FF 0.5 0.75 0.75 1

2Y 0.66 0.83 0.92 1.13

10Y 1.41 1.50 1.55 1.60

30Y 2.09 2.13 2.17 2.24

Citi

3Q16 (%) 4Q16 (%) 1Q17 (%) 2Q17 (%)

FF 0.5 0.75 0.75 1

2Y 0.70 0.75 0.80 0.85

10Y 1.60 1.60 1.65 1.65

30Y 2.25 2.20 2.20 2.20

Goldman Sachs

3Q16 (%) 4Q16 (%) 1Q17 (%) 2Q17 (%)

FF 0.25-0.50 0.50-0.75 - -

2Y - - - -

10Y 1.60 2.00 - -

30Y - - - -

All (medians)

3Q16 (%) 4Q16 (%) 1Q17 (%) 2Q17 (%)

FF 0.31-0.50 0.50-0.75 0.50-0.75 0.50-1.00

2Y 0.70 0.79 0.86 0.99

10Y 1.50 1.55 1.60 1.65

30Y 2.23 2.23 2.28 2.30

Historical Rates

9/30/2015 12/31/2015 7/15/2016

FF 0.00-0.25 0.25-0.5 0.25-0.5

2Y 0.63 1.05 0.70

10Y 2.04 2.27 1.59

30Y 2.85 3.02 2.30

Ramirez

3Q16 (%) 4Q16 (%) 1Q17 (%) 2Q17 (%)

FF 0.25-0.50 0.25-0.50 0.50-0.75 0.50-0.75

2Y 0.70 0.80 0.90 1.00

10Y 1.65 1.70 1.75 1.80

30Y 2.40 2.45 2.50 2.55

Page 4

Source: Bloomberg

US GDP and its Components, June 2015 – March 2016

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Ma

r-1

6

Dec-1

5

Sep

-15

Jun-1

5

Ma

r-1

5

Dec-1

4

Sep

-14

Jun-1

4

Ma

r-1

4

Dec-1

3

Sep

-13

Jun-1

3

Ma

r-1

3

Dec-1

2

Sep

-12

Jun-1

2

Ma

r-1

2

Dec-1

1

Sep

-11

Jun-1

1

Ma

r-1

1

Dec-1

0

Sep

-10

Jun-1

0

Ma

r-1

0

Dec-0

9

Sep

-09

Jun-0

9

Ma

r-0

9

Dec-0

8

Sep

-08

Jun-0

8

Ma

r-0

8

Dec-0

7

Sep

-07

Jun-0

7

Ma

r-0

7

Dec-0

6

Sep

-06

Jun-0

6

Ma

r-0

6

Dec-0

5

Sep

-05

Co

ntr

ibu

tio

n t

o %

Ch

an

ge

in

GP

D

Consumption Investment

Net Exports Government Expenditures

* The numbers in the text may not match the numbers in the tables, as one pertains to quarter-on-quarter

change and the other year-on-year

GDP increases by 2.4% in 2015, held back by weak net exports and a

negative contribution from inventories. 1Q16 GDP comes in positive

but very weak. US GDP growth expectations in 2016 decline to 1.9% -

2.0%

Consumption grows mildly in Q1, with consumer demand for durable

goods softening

Investment slows sharply in 1Q16 by -1.8%

Government Expenditures grow modestly in Q1, with state and local

spending showing significant improvement

Net Exports show very meek growth in Q1, reversing a significant

negative growth in Q4

Addenda. US real personal disposable income grows by 4.0% in 1Q16,

supported by job gains and declines in oil prices.

Contribution to Change in GDP. Consumption and government

expenditures are the only positive contributors to GDP

06/30/15 09/30/15 12/31/15 03/31/16

Real GDP (QoQ, SAAR) 3.9% 2.0% 1.4% 1.1%

Personal consumption 3.6 3.0 2.4 1.5

Goods 5.5 5.0 1.6 0.1

Durables 8.0 6.6 3.8 (1.6)

Nondurables 4.3 4.2 0.6 1.0

Services 2.7 2.1 2.8 2.1

Gross private domestic investment 5.0 (0.7) (1.0) (1.8)

Fixed investment 5.2 3.7 0.4 (0.4)

Nonresidential 4.1 2.6 (2.1) (4.5)

Structures 6.2 (7.2) (5.1) (7.9)

Equipment 0.3 9.9 (2.1) (8.7)

Intellectual Property Products 8.3 (0.8) (0.2) 4.4

Residential 9.3 8.2 10.1 15.6

Government expenditures & gross investment 2.6 1.8 0.1 1.3

Federal spending 0.0 0.2 2.3 (1.6)

State and local spending 4.3 2.8 (1.2) 3.2

Net exports of goods & services

Exports 5.1 0.7 (2.0) 0.3

Imports 3.0 2.3 (0.7) (0.5)

Addenda

Final sales of domestic product (a)

3.9 2.7 1.6 1.3

Gross domestic income (GDI) (b)

2.2 2.0 1.9 2.9

Gross national product (GNP) (c)

3.9 1.3 1.1 0.2

Disposable personal income 2.6 3.2 3.3 4.0

Contributions to % Change in GDP

Personal Consumption 2.42 2.04 1.66 1.02

Gross Private Domestic Investment 0.85 (0.11) (0.16) (0.29)

Change in Private Inventories 0.02 (0.71) (0.22) (0.23)

Government Consumption and Investments 0.46 0.32 0.02 0.23

Net Exports of Goods and Services 0.18 (0.26) (0.14) 0.12(a) GDP less change in private inventories (b) GDI-GDP = statistical discrepency (c) GDP plus net foreign

payments for US factors of production

Page 5

* Notation: Est. = Establishment Survey by BLS, HH = Household Survey by BLS, DoL = US Department of Labor, BLS = Bureau of Labor Statistics. Source: Bloomberg

US Macroeconomic Indicators , April 2016 – July 2016

The Consumer. Consumption indicators

remain strong to moderate. Housing sector

shows improvement.

The Labor Market. Latest employment data

show volatility with an overall negative trend

Production. Production indicators remain

mixed, with services showing more strength

than manufacturing

Prices. Inflation continues to run below the

Fed’s long-run objective, partly reflecting

declines in energy prices and decreasing

prices of non-energy imports

Market-based measures of inflation remain

low, while survey-based measures of long-

term inflation expectations remain up to 100

basis points higher than the Fed’s 2%

objective

4/30/2016 5/31/2016 6/30/2016 7/31/2016⁽¹⁾ LTM Max LTM Min

State of the Consumer

US Auto Sales (SAAR, mil.) 17.3 17.4 16.6 -- 18.1 16.5

New One Family Houses Sold (SAAR, 000's) 572.0 572.0 592.0 -- 592.0 457.0

Existing Homes Sold (SAAR, mil.) 5.4 5.5 5.6 -- 5.6 4.9

Housing Starts (SAAR , 000's) 1,155.0 1,135.0 1,189.0 -- 1,213.0 1,073.0

Housing Permits (SAAR, 000's) 1,130.0 1,136.0 1,153.0 -- 1,286.0 1,077.0

U. of Mich. Consumer Confidence 89.0 94.7 93.5 89.5⁽²⁾ 94.7 87.2

Conference Board Consumer Confidence 94.7 92.4 97.4 97.3 102.6 92.4

US Pending Home Sales Index (SA, 2001=100) 115.0 110.8 -- -- 115.0 105.4

US Personal Income(SA, MoM%) 0.5 0.2 -- -- 0.5 0.1

US Consumer Spending (SA, MoM%) 1.1 0.4 -- -- 1.1 0.0

US Retail Sales (SA, MoM%) 1.2 0.2 0.6 -- 1.2 (0.5)

Labor Market*

Change in Non-Farm Payroll (SA, 000's), Est. 144.0 11.0 287.0 -- 295.0 11.0

Unemployment (SA, %), HH 5.0 4.7 4.9 -- 5.1 4.7

Unemployed Workers Total (SA, 000's), HH 7,920.0 7,436.0 7,783.0 -- 8,018.0 7,436.0

Unemployed and Part Time (SA, %), HH 9.7 9.7 9.6 -- 10.3 9.6

Labor Participation Rate (SA, %), HH 62.8 62.6 62.7 -- 63.0 62.4

Civilian Labor Force Level (SA, 000's), HH 158,924.0 158,466.0 158,880.0 -- 159,286.0 156,867.0

US Civilian Noninstitutional Population Total (SA, 000's), HH 252,969.0 253,174.0 253,397.0 -- 253,397.0 251,096.0

Employed in Civilian Labor Force, Net Change (SA, 000's), HH (316.0) 26.0 67.0 -- 615.0 (316.0)

ADP National Employment Report (SA , 000's) 149.3 167.6 171.6 -- 287.0 149.3

US Initial Jobless Claims (SA, 000's, weekly )⁽³⁾, DoL 274.0 268.0 270.0 -- 286.0 253.0

US Average Hourly Earnings (SA, YoY%), Est. 2.5 2.5 2.6 -- 2.6 2.3

Employment Cost Index (SA, QoQ%, quarterly ), BLS -- -- -- -- 0.6 0.5

US Avg. Weekly Hr. Worked, Nonfarm Private, Nonsupervisory (SA), Est. 33.6 33.6 33.6 -- 33.8 33.6

Production

US Industrial Production MoM (SA, %) 0.5 (0.3) 0.6 -- 0.6 (1.0)

US Durable Goods New Orders MoM (SA, %) 3.2 (2.3) -- -- 4.8 (3.9)

US Durable Goods New Orders Ex Transportation MoM (SA, %) 0.3 (0.3) -- -- 1.5 (1.5)

ISM Manufacturing PMI (SA, %) 50.8 51.3 53.2 -- 53.2 48.0

ISM Non-Manufacturing PMI (%) 55.7 52.9 56.5 -- 58.3 52.9

Philadelphia Fed Business Outlook Survey (SA, %) (1.6) (1.8) 4.7 (2.9) 12.4 (10.2)

Empire State Manufacturing Survey (SA, %) 9.6 (9.0) 6.0 0.6 9.6 (19.4)

Chicago Purchasing Manager Index (SA, %) 50.4 49.3 56.8 -- 56.8 42.9

Prices

CPI (SA, YoY%) 1.1 1.0 1.0 -- 1.4 0.0

Core CPI (SA, YoY%) 2.1 2.2 2.3 -- 2.3 1.8

PCE Core (SA, MoM%) 0.2 0.2 -- -- 0.3 0.1

PCE Core (SA, YoY%) 1.6 1.6 -- -- 1.7 1.3

U. of Mich. Expected Change in Prices During the Next Year: Median (%) 2.8 2.4 2.6 2.8 2.8 2.4

U. of Mich. Expected Change in Prices During the Next 5-10 Years (%) 2.5 2.5 2.6 2.6 2.7 2.5

US Personal Consumption Expenditures Chain Type (SA, MoM%) 0.3 0.2 -- -- 0.3 (0.1)

US Personal Consumption Expenditures Chain Type (SA, YoY %) 1.1 0.9 -- -- 1.2 0.2

PPI Final Demand (SA, MoM%) 0.2 0.4 0.5 -- 0.5 (0.5)

Case-Shiller Composite-20 City (YoY%) 5.4 5.2 -- -- 5.7 5.0

TIPs Break Even 5Y (daily )⁽⁴⁾ 1.6 1.5 1.4 1.3 1.6 1.1

⁽¹⁾ most recent number for the period 6/30/16 - 7/26/16, ⁽²⁾ preliminary number, ⁽³⁾ For past months numbers are end-of-period; for current month, all available numbers are

listed ⁽⁴⁾ For past months numbers are end-of-period; for current month, most recent number available

Page 6

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2016 2017 2018 Longer Run

Targ

et

Fe

dera

l F

un

ds R

ate

(%

)

March 16, 2016

June 15, 2016

FOMC Outlook, Meeting by Meeting, Sep 2015 – Jun 2016 Outlook on Pace of Policy Firming as of Jun 2016

Source: Federal Reserve; Bloomberg

The Fed’s Dots and the Markets’ Forecasts Fall and Diverge

Option-Implied Probability of Target at Dec 2016 Meeting Various Fed Funds Forecasts* as of Jun 2016

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2016 2017 2018 Longer run

Ta

rge

t F

ed

era

l F

un

ds

Rate

(%

)

9/17/2015

12/16/2015

3/16/2016

6/15/2016

* Primary Dealer Survey is sampled in early June ‘16, whereas other forecasts sampled at the moment of the FOMC’s June 2016 meeting

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Mar-

16

Ju

n-1

6

Sep

-16

De

c-1

6

Mar-

17

Ju

n-1

7

Sep

-17

De

c-1

7

Mar-

18

Ju

n-1

8

Sep

-18

De

c-1

8

Mar-

19

Exp

ecte

d F

ed

Fu

nd

s R

ate

(%

)

Futures-Implied (as of Jul 26) Futures-Implied (as of Jun 16)

Taylor Rule (w/ Fed Forecast) Fed Forecast

Primary Dealers

0

10

20

30

40

50

60

70

80

90

100

1/29/16 2/28/16 3/29/16 4/28/16 5/28/16 6/27/16 7/27/16

Pro

ba

bil

ity (

%)

0.00% - 0.25% 0.25% - 0.50% 0.50% - 0.75% over 0.75%

Page 7

Source: Federal Reserve; Bloomberg

Inflation Indicators

US Wages & Inflation Indicators, Apr 2014 – Jun 2016

U.S. Wage Growth, Jan 2009 – Jul 2016

Inflation measured by core PCE runs

consistently below the Fed’s 2% target

Goods inflation dips below zero, while

services inflation approaches 3%

US Goods & Services , Jun 1989 – Jun 2016

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Yo

Y %

Ch

an

ge

US Avg. Hourly Earnings Empl Cost Index CPI

CPI ex Food/Energy PCE Defl. PCE ex Food/Energy

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

Yo

Y %

Ch

an

ge

US Recessions

US CPI Urban Consumers Services Less Energy Services (SA)

US CPI Urban Consumers Commodities Less Food & Energy (SA)

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

0.6

Jan

-09

Au

g-0

9

Jan

-10

Jul-1

0

Jan

-11

Jul-1

1

Jan

-12

Jul-1

2

Jan

-13

Jul-1

3

Jan

-14

Jul-1

4

Jan

-15

Jul-1

5

Jan

-16

Jul-1

6

Mo

M %

Ch

an

ge

US Avg. Hourly Earnings, Nonsupervisory Private Nonfarm Payrolls (Nom. Dollars, SA)

6-month Geom. MA

Page 8

Source: Bloomberg, FRED

Labor Market Conditions

Fed’s Labor Market Conditions Index, Dec 1989 – Jun 2016

While the unemployment rate gets closer

to full employment, labor conditions

worsen with declines in the six-month

moving average job creation and a

worsening of the Fed’s Labor Markets

Conditions Index

Monthly Payroll Gains, Dec 2012 – Jun 2016

Unemployment Rate, Jan 1994 – Jun 2016

-50

-40

-30

-20

-10

0

10

20

30

40

Dec-8

9

Jan

-91

Fe

b-9

2

Ma

r-93

Ap

r-94

Ma

y-9

5

Jun

-96

Jul-9

7

Au

g-9

8

Se

p-9

9

Oct-

00

Nov-0

1

Dec-0

2

Jan

-04

Fe

b-0

5

Ma

r-06

Ap

r-07

Ma

y-0

8

Jun

-09

Jul-1

0

Au

g-1

1

Se

p-1

2

Oct-

13

Nov-1

4

Dec-1

5Avera

ge

Mo

nth

ly C

ha

ng

e

Recession Fed Labor Market Conditions Index

0

50

100

150

200

250

300

350

Dec-1

2

Ma

r-13

Jun

-13

Se

p-1

3

Dec-1

3

Ma

r-14

Jun

-14

Se

p-1

4

Dec-1

4

Ma

r-15

Jun

-15

Se

p-1

5

Dec-1

5

Ma

r-16

Jun

-16

Se

p-1

6

Net

Ch

an

ge (

Mo

M, 1000s)

Nonfarm Payrolls (MoM, net change, thousands) 6M Moving Average

56

58

60

62

64

66

68

70

72

74

0

2

4

6

8

10

12

14

16

18

Jan

-94

Jan

-95

Jan

-96

Jan

-97

Jan

-98

Jan

-99

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

Jan

-09

Jan

-10

Jan

-11

Jan

-12

Jan

-13

Jan

-14

Jan

-15

Jan

-16

La

bo

r Fo

rce P

artic

ipa

tion

Rate

(%)

Un

em

plo

ym

en

t (%

)

Employment Rate: Part-Time for Economic Reasons, Nonagricultural Industries

U3 Unemployment Rate

U6 Unemployment Rate

Civilian Labor Force Participation Rate (Right)

Page 9

Source: Bloomberg

Financial Stress Indicators and GDP

St. Louis Fed & Bloomberg Financial Stress Index, Jan ’09 – Jul ’16 Goldman Sachs Financial Conditions Index, Jan ’09 – Jul ’16

Response of GDP to Goldman Sachs Financial Stress Index, Mar 2005 – Sep 2017

-10

-8

-6

-4

-2

0

2

4

6

8

-10

-8

-6

-4

-2

0

2

4

6

8

Ma

r-05

Jun

-05

Se

p-0

5

Dec-0

5

Ma

r-06

Jun

-06

Se

p-0

6

Dec-0

6

Ma

r-07

Jun

-07

Se

p-0

7

Dec-0

7

Ma

r-08

Jun

-08

Se

p-0

8

Dec-0

8

Ma

r-09

Jun

-09

Se

p-0

9

Dec-0

9

Ma

r-10

Jun

-10

Se

p-1

0

Dec-1

0

Ma

r-11

Jun

-11

Se

p-1

1

Dec-1

1

Ma

r-12

Jun

-12

Se

p-1

2

Dec-1

2

Ma

r-13

Jun

-13

Se

p-1

3

Dec-1

3

Ma

r-14

Jun

-14

Se

p-1

4

Dec-1

4

Ma

r-15

Jun

-15

Se

p-1

5

Dec-1

5

Ma

r-16

Jun

-16

Se

p-1

6

Dec-1

6

Ma

r-17

Jun

-17

Se

p-1

7

% Δ

, Qo

Q %

Δ, Q

oQ

GDP

GDP w/o Financial Shocks

98.0

99.0

100.0

101.0

102.0

103.0

104.0

105.0

Jan

-09

Au

g-0

9

Jan

-10

Au

g-1

0

Jan

-11

Au

g-1

1

Jan

-12

Jul-1

2

Jan

-13

Jul-1

3

Jan

-14

Jul-1

4

Jan

-15

Jul-1

5

Jan

-16

Jul-1

6

Le

vel

GS Financial Conditions Index

-7.0-6.0-5.0-4.0-3.0-2.0-1.00.01.02.03.04.05.0

Jan

-09

Au

g-0

9

Jan

-10

Au

g-1

0

Jan

-11

Au

g-1

1

Jan

-12

Jul-1

2

Jan

-13

Jul-1

3

Jan

-14

Jul-1

4

Jan

-15

Jul-1

5

Jan

-16

Jul-1

6

Le

vel

Bloomberg Financial Conditions Index

St Louis Fed Financial Stress Index

Page 10

Source: Bloomberg.

Overseas Economies

World GDP Map World Unemployment Map

Selected

Countries

-13.9 13.9 0.5 26.7

Name Real GDP YoY Unemployment Name Real GDP YoY Unemployment

% Date % Date % Date % Date

France 1.3 3/16 9.9 5/16 Spain 3.4 3/16 19.8 5/16

Germany 1.6 3/16 4.2 5/16 United Kingdom 2.0 3/16 5.0 5/16

Greece -1.4 3/16 24.1 3/16 China 6.7 6/16 4.0 3/16

Italy 1.0 3/16 11.5 5/16 Japan 0.1 3/16 3.2 5/16

Portugal 0.9 3/16 11.6 5/16 Brazil -5.4 3/16 11.2 5/16

Russia -1.2 3/16 5.6 5/16 US 2.1 3/16 4.9 6/16

Page 11

Source: Bloomberg.

Treasury Term Premium

Treasury yields can be decomposed into expectations of the future path of short-term Treasury yields and the

Treasury term premium

The term premium is not readily observable in the market and is the compensation that investors require for

bearing the risk that short-term Treasury yields do not evolve as expected

Based on a methodology that they have developed, Adrian, Crump and Moench (“ACM”) of the Federal Reserve

Bank of New York publish term premiums for the 10-year Treasury

The term premium is visibly cyclical and is correlated with the slope of the yield curve (63% for monthly changes

since 1962) and the short-term rate (negative 27% for the same data)

Recent term premia have been low and often negative, compared to an average of 1.65% since 1961. Observers

suggest that this is due to the effects of QE and high demand for Treasury notes and bonds

ACM 10Y UST Term Premium vs. Slope of Treasury Curve ACM 10Y UST Term Premium vs. Unemployment

0

2

4

6

8

10

12

-1

0

1

2

3

4

5

6

Jun-6

1

Nov-

63

Apr-

66

Sep-6

8

Feb

-71

Jul-73

Dec-

75

May-

78

Oct-80

Mar-

83

Aug-8

5

Jan-8

8

Jun-9

0

Nov-

92

Apr-

95

Sep-9

7

Feb

-00

Jul-02

Dec-

04

May-

07

Oct-09

Mar-

12

Aug-1

4

(%)

(%)

Recession ACM 10Y Treasury Term Premium

Unemployment Rate (RA)

-3

-2

-1

0

1

2

3

4

5

6

Jun-6

1

Aug-6

3

Oct-65

Dec-

67

Feb

-70

Apr-

72

Jun-7

4

Aug-7

6

Oct-78

Dec-

80

Feb

-83

Apr-

85

Jun-8

7

Aug-8

9

Oct-91

Dec-

93

Feb

-96

Apr-

98

Jun-0

0

Aug-0

2

Oct-04

Dec-

06

Feb

-09

Apr-

11

Jun-1

3

Aug-1

5

(%)

Recession ACM 10Y Treasury Term Premium Slope 3M to 10Y

Page 12

-5.6%

-4.5%

-4.3%

-4.1%

-3.7%

-3.6%

-2.9%

-1.9%

-0.9%

0.1%

-6% -5% -4% -3% -2% -1% 0% 1%

Financials

Materials

Information Technology

Industrials

Consumer Discretionary

Energy

Health Care

Consumer Staples

Telecommunication Services

Utilities

-14.4%

-13.3%

-13.2%

-9.0%

-8.8%

-8.4%

-8.3%

-7.1%

-5.9%

-4.0%

-3.7%

-3.5%

-3.4%

-3.3%

-3.2%

-3.2%

-3.1%

-3.0%

-2.9%

-2.8%

-2.3%

-2.2%

-2.1%

-1.8%

-1.7%

-1.6%

-1.3%

-0.8%

-0.4%

-14.8%

-13.9%

-13.8%

-10.1%

-12.3%

-9.6%

-4.8%

-8.4%

-7.3%

-7.7%

-3.6%

-4.6%

-5.6%

-3.3%

-4.8%

-10.0%

-5.3%

-2.9%

-3.8%

-5.6%

-3.6%

-3.0%

-2.7%

-3.1%

-3.0%

-2.1%

-2.1%

-3.3%

-3.3%

-16% -14% -12% -10% -8% -6% -4% -2% 0%

Athens Ex (GR)

Ftse Mib (IT)

Ibex 35 (SP)

Euro Stoxx 50 Pr (EC)

Omx Stockholm 30 (SW)

Cac 40 (FR)

Nikkei 225 (JN)

Dax (GE)

Aex (NE)

Ftse/Jse Africa Top40 Ix (SA)

S&P 500 (US)

Swiss Market (SZ)

Bist 100 (TU)

Dfm General (UA)

S&P/Asx 200 (AU)

Ftse 100 (GB)

Kospi (SK)

Hang Seng (HK)

Brazil Ibovespa (BZ)

Mexico Ipc (MX)

Taiwan Taiex (TA)

Nifty 50 (IN)

Straits Times (SI)

Micex (RU)

S&P/Tsx Composite (CA)

Stock Exch Of Thai (TH)

Csi 300 (CH)

Jakarta Composite (ID)

Ftse Bursa Malaysia Klci (MA)

USD Local Currency

Returns of S&P 500 Sub-Sectors Returns of World Indexes

The stock markets in Southern Europe

were hardest hit by the Brexit results,

judging by respective one day losses

The UK market lost approximately 10%

in dollar terms although in GBP the

loss was far less dramatic

Across US sectors, utilities and

telecoms appeared to be the most

resilient to the news, while the

financials lost most

Notes: Returns are calculated from the close prior to the Brexit vote results to the close on the following trading day. Source: Bloomberg.

Impact of Brexit Announcement: Equities

Page 13

BofA ML Index Industries: Change in Credit Spreads Returns of World Indexes

US markets recovered while Treasury rates remain low

Notes: Returns are calculated from the close prior to the Brexit vote results to the close on 7/20/2016.

Source: Bloomberg.

Brexit: Longer-term Impact

-7.2%

-6.7%

-3.8%

-2.6%

-2.6%

-2.2%

-1.9%

-1.1%

0.6%

1.5%

1.9%

1.9%

2.3%

2.6%

2.8%

3.0%

3.1%

3.1%

3.8%

4.2%

5.0%

5.2%

5.3%

5.3%

5.4%

6.0%

6.2%

7.7%

9.7%

-10.1%

-9.5%

-11.1%

-5.6%

-2.2%

-5.2%

-4.9%

-4.1%

-2.4%

0.0%

-3.0%

-0.6%

-5.4%

1.4%

2.8%

1.9%

3.0%

1.0%

1.6%

4.0%

2.7%

3.3%

5.4%

5.3%

5.3%

4.0%

5.5%

7.6%

13.1%

-15% -10% -5% 0% 5% 10% 15%

Athens Ex (GR)

Ftse Mib (IT)

Bist 100 (TU)

Ibex 35 (SP)

Ftse/Jse Africa Top40 Ix (SA)

Euro Stoxx 50 Pr (EC)

Cac 40 (FR)

Dax (GE)

Aex (NE)

Kospi (SK)

Ftse Bursa Malaysia Klci (MA)

Omx Stockholm 30 (SW)

Swiss Market (SZ)

Micex (RU)

Nikkei 225 (JN)

S&P 500 (US)

S&P/Tsx Composite (CA)

Mexico Ipc (MX)

Nifty 50 (IN)

S&P/Asx 200 (AU)

Csi 300 (CH)

Stock Exch Of Thai (TH)

Hang Seng (HK)

Dfm General (UA)

Straits Times (SI)

Taiwan Taiex (TA)

Ftse 100 (GB)

Jakarta Composite (ID)

Brazil Ibovespa (BZ)

USD Pos USD Neg Local Currency Pos Local Currency Neg

US Yield Curve

-40 -30 -20 -10 0 10

PipelineMetals & MiningEnergyFood & DrugPharmaChemicalsPaper & PackagingHealthcareMediaIndustrialBeverageNon Food & DrugRestaurantTelecomTransportationFinancial Svc.TobaccoHG MasterConsumer ProductsAutomotiveReitsUtilityMulti-LineP&C InsuranceAerospace & DefenseInsuranceLife InsuranceBankingBuilding Materials

Basis Points

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0 5 10 15 20 25 30

Tre

asu

ry Y

ield

(%

)

Maturity (Years)

07/20/16 06/23/16

Page 14

0 5 10 15

PharmaHealthcare

Consumer ProductsMediaReits

RestaurantTobacco

P&C InsuranceAerospace & Defense

AutomotiveNon Food & Drug Retail

IndustrialEnergy

Food & Drug RetailPaper & Packaging

PipelineChemicals

Financial Svc.Building Materials

TransportationHG MasterInsurance

Life InsuranceBeverage

UtilityMulti-Line InsuranceTelecommunications

BankingMetals & Mining

Basis Points

European banks are among most affected individual

names in terms of spreads widening from June 23 to

June 24, 2016

Among sectors, the most affected were Metals and

Mining and Banking

The 10-year US Treasury yield declined by

approximately 19 bps, while the 30-year declined by 15

bps

BofA ML Index Industries: Increase in Credit Spreads Selected Banking Bonds

US Yield Curve

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0 5 10 15 20 25 30

Tre

asu

ry Y

ield

(%

)

Maturity (Years)

06/24/16 06/23/16

1.30

1.40

1.50

1.60

1.70

1.80

1.90

2.00

120140160180200220240260280300320340360380400

Yie

ld (%

, US

T)

Sp

read

(b

ps)

C 3.4 05/01/26 JPM 3.2 06/15/26 HSBC 4.3 03/08/26

BACR 4 3/8 01/12/26 BNP 4 3/8 05/12/26 SANTAN 5.179 11/19/25

T 1 5/8 05/15/26

Notes: The changes are calculated from the close prior to the Brexit vote results to the close on the following trading day. Merrill Lynch bond indexes include USD bonds issued by foreign issuers. Source: Bloomberg.

Impact of Brexit Announcement: Fixed Income Markets

Page 15

* Real rate of Interest is measured as yield on respective inflation protected securities. Expected inflation is measured as the difference between nominal and real government rates. Source: Bloomberg.

Brexit and Government Rates

Selected Government Rates

Changes in the government rate can be decomposed into changes in the real rate of interest and

changes in inflation expectations, disregarding the short-term effects of “flight to quality”

The uniform decline in the real rate of interest in the US, Germany, and the UK since the Brexit

announcement may suggest slowing growth for the three countries

Inflation expectations declined in the US and Germany in sync with the real rates. Inflation expectations

in the UK, however, increased, possibly pointing to higher inflation

Country Date, Date Range Real Rate of Interest

(%) *

Change In Real Rate

of Interest Since June

23, 2016 (bps)

Expected Inflation

(%) *

Change In Expected

Inflation Since June

23, 2016 (bps)

5Y 10Y 5Y 10Y 5Y 10Y 5Y 10Y

US June 23, 2016 -0.256 0.195 - - 1.495 1.549 - -

June 24, 2016 -0.322 0.103 -7 -9 1.384 1.459 -11 -9

June 30, 2016 -0.415 0.034 -16 -16 1.400 1.438 -9 -11

Germany June 23, 2016 - -0.787 - - - 0.890 - -

June 24, 2016 - -0.816 - -3 - 0.790 - -10

June 30, 2016 - -0.954 - -17 - 0.830 - -6

UK June 23, 2016 -1.273 -0.936 - - 2.301 2.310 - -

June 24, 2016 -1.600 -1.221 -32 -29 2.321 2.307 2 0

June 30, 2016 -1.908 -1.507 -64 -57 2.416 2.374 12 6

Page 16

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