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Canadian Bond Market Presentation January 18, 2011 John Braive, Vice-Chairman CIBC Global Asset Management Inc. CONFIDENTIAL Market Review Key Developments (Q4’10) • BoC on hold at 1.00%, but the market’s priced for hikes to resume in May 2011. We expect no further action until H2’11. No Fed Funds hike expected until 2012. • Longer-term yields rose in response to evidence that the economy had avoided a double-dip recession and due to rising concerns that the Fed’s second round of quantitative easing would lead to higher inflation. • Yield curve has flattened modestly since end of Q3, as 2-year yields rose 30 bps, while 30-year yields rose 18 bps, reflecting rising inflation fears and a resumption of the “risk on” trade. • Corporate bonds outperformed GoC and Provincial bonds, given their shorter duration and stable spreads. However, all had negative returns for the quarter. • DEX Corporate Spread narrowed 2 bps, to 138 bps; up 3 bps YoY. DEX Provincial spread narrowed 2 bps, to 118 bps; down 10 bps YoY. Investors remain hungry for yield. • New issue activity remained strong with total issuance during the quarter at $20.9 BN, with YTD at $82.9 BN vs $60.7 BN for same period in ’09. Issuance was higher that seen in 2009 and 2008. Source: CIBC Global Asset Management Inc. CIBC Global Asset Management Inc. CONFIDENTIAL | Page 1 Market Review Yields – short-term rates up, long-term yields stable 5.0 March 2010 4.0 June 2010 December 2010 3.0 September 2010 2.0 1.0 0.0 0 yr 5 yrs 10 yrs 15 yrs 20 yrs 25 yrs 30 yrs • Yields rose in Q4 as QE2 started, increasing inflation fears and encouraging the “risk on” (sell bonds / buy stocks) trade. Source: CIBC Global Asset Management Inc. CIBC Global Asset Management Inc. CONFIDENTIAL | Page 2 Market Review Yield Curve – Still steep, but flattening trend started • The yield curve flattened further in the quarter as longer-term yields rose less than shorterterm yields rose as QE2 began. • The steep curve anticipates tightening by the Bank of Canada in 2011. • Current steepness of the yield curve provides resistance to long rates rising significantly. CIBC Global Asset Management Inc. Source: PC Bond, a business unit of TSX Inc. CONFIDENTIAL | Page 3 Market Review Credit - Corporate Yield Spread Dec 31 ’10 +138 bps Low: Jan 31, ’86 +28 bps High: Dec 29 ’08 +366 bps Avg: +95 bps • Spreads are still near prior credit crisis levels, and were largely unchanged for the year. • We expect continued volatility, but remain overweight given expectations that corporate bonds will outperform government bonds over the next year. Source: PC Bond, a business unit of TSX Inc. CIBC Global Asset Management Inc. CONFIDENTIAL | Page 4 Market Review Credit – Corporate Bond Issuance Canadian Corporate New Issuance ($millions) $100,000 $94,700 $89,094 $82,882 $80,000 $61,359 $60,669 2008 2009 $60,000 $40,000 $20,000 $2006 2007 2010 Source: CIBC Global Asset Management • Q4 supply was robust at $20.9, and was $82.9 BN in ‘10 vs $60.7 in ’09. • Maple bond issuance returned, with $4.4 BN in ‘10 issuance surpassing 2009 levels, but well below the ~$25BN level seen in each of ’06 and ‘07. • Canadian banks were busy issuing in Canada and the U.S.; $26.8 BN issued domestically in ‘10. • The calendar was well managed, helping to keep spreads stable. CIBC Global Asset Management Inc. Source: PC Bond, a business unit of TSX Inc. CONFIDENTIAL | Page 5 Market Review Credit – Tier 1 • Basel III will likely result in the early call of only those Tier 1 bonds with maturity dates after 2023. We don’t hold them in the Model Accounts. • Outstanding Tier 1 and older subordinated debt will likely lose capital treatment on a straight-line basis from 2013 – 2023. But they are not expected to be called. • Basel III subordinated debt issuance will likely resume. CIBC Global Asset Management Inc. Source: PC Bond, a business unit of TSX Inc. CONFIDENTIAL | Page 6 Market Review Credit - Long Provincial Yield Spread Dec 31 ’10 +81 bps Low: May 22 ’07 +38 bps High: Mar 6 ’09 +153 bps Avg: +67 bps • Long-term provincial spreads tightened (-6 bps to 81 bps in Q4) in the search for yield and longer-duration assets. • Overall, provincial spreads tightened 2 bps in the quarter to 118 bps; down 10 year/year. • Long-term provincial spreads look expensive as compared to corporates. Source: PC Bond, a business unit of TSX Inc. CIBC Global Asset Management Inc. CONFIDENTIAL | Page 7 Canadian Fixed Income Sector Returns – DEX Universe Bond Index 1 year – As at December 31, 2010 Quarter – As at December 31, 2010 Corporate Provincial 8.2% Corporate -0.7% Overall 8.6% Municipal -0.6% Municipal Federal Provincial -0.5% 7.3% Overall -0.7% Federal -0.9% 6.7% 5.4% Source: PC Bond DEX Universe Bond Index is a trademark of TSX Inc. CIBC Global Asset Management Inc. CONFIDENTIAL | Page 8 Portfolio Returns Periods ending December 31, 2010 CIBC Bond Fund - 29901* QTD (%) 1 YEAR (%) 4 YEARS (%) Portfolio -0.54 8.42 6.12 Benchmark -0.71 6.74 5.56 0.17 1.68 0.56 Added Value * Returns are before fees In Canadian dollars Source: CIBC Global Asset Management Inc. Performance is shown before management and custodial fees CIBC Global Asset Management Inc. CONFIDENTIAL | Page 9 Canadian Fixed Income – Active Management Attribution – 12 months ending December 31, 2010 Value Added Activity Strategy in Period Duration Long Sector Allocation Underweight Gov’t of Canada Term Structure Curve to stay steep (bullet) 6 Carry Overweight Corproates 78 Security Selection Higher beta names CIBC Global Asset Management Inc. Impact Basis Points 29 Represent characteristics of CIBC Pooled Fixed Income Fund – 80020 Source: PC Bond and CIBC Global Asset Management Inc. CONFIDENTIAL 13 42 | Page 10 Economy – National Bureau of Economic Indicators U.S. Personal Income Less Transfers U.S. Nonfarm Payroll U.S. Personal Income less Transfers Expansion vs. Average Expansions Current vs. Average Expansions U.S. Nonfarm Payroll Average Expansions Current vs. Expansion Average vs. Expansions 105 105 104 104 Assuming recession ended in June 2009 (=100) 103 102 Assuming recession ended in June 2009 (=100) 103 102 101 101 100 100 99 JUN 07 DEC 07 JUN 08 DEC 08 JUN 09 DEC 09 JUN 10 DEC 10 JUN 07 DEC 07 JUN 08 Current Expansion of Personal Income less Transfers Average Expansions DEC 08 JUN 09 DEC 09 JUN 10 DEC 10 Current Expansion of Nonfarm Payrolls Average Expansions Source: Datastream & CIBC Global Asset Manag ement Inc. Calculations Source: Datastream & CIBC Global Asset Manag ement Inc. Calculations • Both income growth and employment are tracking well below prior recoveries. • Lack of income growth is a serious headwind. • In spite of massive fiscal and monetary stimulus, the economy is expanding well below historic trends. Source: Datastream and CIBC Global Asset Management Inc. CIBC Global Asset Management Inc. CONFIDENTIAL | Page 11 Economy – Housing U.S. Months' SupplyofofExisting Existing Homes U.S. Months’ Supply Homes 12 Canadian Housing Valuation: home prices vs. fair value & deviations from fair value (%) Months 11 350000 130 120 10 110 100 9 250000 90 80 8 CDN $ 70 7 6 60 150000 50 40 30 50000 5 20 10 4 0 -10 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 -50000 1980 U.S. Total Existing Homes -20 1985 1990 deviations from fair value 1995 home prices 2000 2005 fair value • An unprecedented run-up in prices has led to an unprecedented supply of homes. Source: Datastream • The GoC just introduced measures to restrict the supply of credit to the housing sector. • Our valuation model for Canada suggests an extended period of flat prices, like the early 1990’s. • Weak housing impacts consumers’ spending attitudes. CIBC Global Asset Management Inc. Source: Datastream and CIBC Global Asset Management Inc. CONFIDENTIAL | Page 12 2010 Economy - Debt Canadian Household Credit as % of GDP U.S. Household Credit as % of GDP US Household Credit as % of GDP C anadian Hous ehold Credit as % of GD P 90 90 80 80 70 70 60 60 50 50 40 40 30 30 1970 1975 1980 1985 1990 1995 2000 2005 2010 55 60 65 70 75 Canadi an Househol d Credi t as % of GDP T rend 80 85 90 95 00 10 05 15 USHousehold Credit as % of GDP Trend Sour ce: D atastr eam & CIBC Gl obal Asse • Households have become over extended with record amounts of debt Source: Datastream & CIBC Global Asset Management Inc. Calculations • Debt has to be paid back … or written-off. • Loan demand will remain soft as attitudes toward debt become more conservative. CIBC Global Asset Management Inc. Source: Datastream and CIBC Global Asset Management Inc. CONFIDENTIAL | Page 13 20 Economy - Savings • The consumer can’t do the heavy lifting in this recovery. & Canada Savings Rate U.S. U.S. & Canada Savings Rate 20% • Lowered return expectations should lead to higher savings. 16% • An aging population is increasing savings to meet their retirement needs. 12% • Demand for safe income is rising. • Bonds should benefit. 8% 4% 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 U.S. Savings Rate Canada Savings Rate Source: Datastream CIBC Global Asset Management Inc. Source: Datastream and CIBC Global Asset Management Inc. CONFIDENTIAL | Page 14 Inflation – Wages • Wage costs are the best predictor of future inflation. Cost LaborCost UnitLabor U.S. Hourly Earnings AverageHourly Canada Canada Average Earningsvsvs. Unit • U.S. Unit labour costs – the combination of productivity, output and wages – will remain low. 5% 4% 3% • The excess slack in labour markets and in industrial capacity should persist. 2% 1% 0% -1% -2% -3% 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Canada Average Hourly Earnings - Industrial Aggregate YoY US Unit Labor Cost YoY Source: Datastream & CIBC Global Asset M anag ement Inc. Calculations Source: Datastream and CIBC Global Asset Management Inc. CIBC Global Asset Management Inc. CONFIDENTIAL | Page 15 Interest Rates – Trend The Secular Rally is Intact Government of Canada – 30-year Yield • Interest rates remain in their downward channel. • There is a strong correlation between short-term and long-term interest rates. • The Federal Reserve and the Bank of Canada will keep administered rates low for an extended period. • CIBC GAM forecasts a range of 3.25% to 4.25% for long-term yields. Source: PC Bond, a business unit of TSX Inc. and CIBC Global Asset Management Inc. CIBC Global Asset Management Inc. CONFIDENTIAL | Page 16 Outlook Forecast Yield Range • The Bank of Canada will resume raising short-term rates later this year. CGAM expects another 0.50% increase under the base case scenario (Sluggish Recovery). • We expect no action from the U.S. Federal Reserve this year. • Longer-term bonds should remain in a trading range given the headwinds of fiscal policy, continued deleveraging, and Basel III’s impact. 1 YEAR FORECAST Dec 31 2010 Probability-> Economic Expansion 25% Sluggish Recovery 50% Deflation 25% Bank Rate 1.00 2.25 1.50 0.50 2 Year 1.67 3.65 2.40 1.00 10 Year 3.20 4.40 3.50 2.00 Corporate Yield Corporate Spread 3.81 1.41 4.50 0.66 3.75 0.95 3.25 2.00 RRB Yield 1.10 2.20 1.85 2.60 Source: CIBC Global Asset Management Inc. CIBC Global Asset Management Inc. CONFIDENTIAL | Page 17 Strategy Current • Duration neutral vs. index. • Overweight mid-term bonds, given expectations that the curve will remain steep. • Portfolio yield still higher than benchmark (+75 bps at year-end 2010). • Selectively adding corporate positions – both investment grade and high yield. Source: CIBC Global Asset Management Inc. CIBC Global Asset Management Inc. CONFIDENTIAL | Page 18 Strategy Risks to Outlook • Credit spreads widen – risk of European sovereign issues • Yields rise markedly – due to higher than forecasted inflation • Yield curve flattens – greater tightening than anticipated Source: CIBC Global Asset Management Inc. CIBC Global Asset Management Inc. CONFIDENTIAL | Page 19