GS Fixed Income Monthly May 2011

8/6/2019 GS Fixed Income Monthly May 2011

1/20Important disclosures appear at the back of this document

Fixed Income MonthlyMay, 2011

Goldman Sachs Global Economics,

Commodities and Strategy Research

at https://360.gs.com

The Greek Conundrum

Government bond yields have ralliedfurther over the past month, mirroring the

ongoing downgrade to consensus (and our

own) growth forecasts across the major

economic regions.

Our models suggest that higher inflation

expectations represent a significant offsetto the lower outlook for real activity in

determining the current fair value of

bond yields. On valuation grounds, wethink 2.8% should represent an important

resistance level for the UST 10-yr.

We expect a decision on the disbursement

of further financial aid to Greece to bemade in the coming weeks. This month,

we discuss the different options

policymakers could be exploring. Ourcentral case is that agreement will be

reached on the extension of the program,

involving a top-up of public funds and, in

2012, a re-profiling of the maturitystructure of official bonds and those held

by the private sector.

More broadly, we continue to believe thatthe larger high-yielding sovereigns (Italy,

Spain, Belgium) offer value relative to

their AAA-rated EMU peers. In the yearto date, these countries have significantly

outperformed the core; notably, Italy has

outperformed on a volatility-adjusted

basis.

Francesco U. [email protected]

+44 (0)20 7774 5078

Constantin Burgi

[email protected]

+44 (0)20 7051 4009

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

Fed FundsTarget

2-yr 5-yr 10-yr 30-yr

% Bonds Priced Consistently withNegative Fed Funds

Taylor-type Rule Yield Curve

-/+ 1 std.dev.

Current Yield Curve

Source: Bloomber , GS Global ECS Research

0

10

20

30

40

50

60

70

80

90

100

End 2011 2-yr 5-yr 10-yr

% Cumulative Unconditional Probability ofGreek Default Implied by CDS*

*Assuming 45c recoverySource: GS Gl obal ECS Research


2/20May 20112

Fixed Income MonthlyGoldman Sachs Global Economics, Commodities and Strategy Research

Bond Rally Capped

Slower Growth Priced InSince the April issue of ourFixed Income Monthly, fixed-income markets have rallied further, with US Treasuryyields now setting fresh lows for the year. Year-to-datetotal returns in local currency on 7-10-yr US T-notes arenow around 3.9%, comfortably outperforming theEuropean markets and Japan. Australian bondsour toppick in previous issues of this publicationhave posted

the highest period returns among the majors (4.0% ytd).

Over the past weeks, bond yields have mirrored theongoing downgrade to consensus growth expectations andthe relative decline in cyclical stocks in evidence sinceMarch. Over this period, the relationship between ourWavefrontUS Growth equity basket (which pits cyclicalsvs. defensives in the S&P500) and the 2-10-yr slope ofthe US curve has been relatively tight.

Our aggregate GDP growth forecast for 2011 in theadvanced economies has come down by 30bp since lastDecember. The biggest downward revisions have been in

the UK and Asia. Consensus forecasts have increased by10bp for the advanced economies over the same period,mainly due to an upgrade to the Euro-zone numbers.Importantly, our forecasts for inflation this year haverisen by 110bp since the start of the year, and those ofconsensus have risen by 90bp. Controlling for the lowermean, the volatility of headline inflation is now as high asit was in the 1970.

These shifts in the macro outlook beg the question ofwhether changes to our bond forecasts are also warranted.To remind readers, using 10-yr Treasuries as a gauge, atthe start of the year our forecasts for the end of 2011 were25bp below the forwards; they are currently 45bp abovethe forwards. While the uncertainty around our near-termprojections is admittedly high, our strategic view remainsthat global bond yields will rise in the second half of thisyear, for the following reasons:

Treasury yields are not too high in relation tocontemporaneous measures of the output gap andconsumer inflation, according to our Taylor rule-typeestimates across US benchmark maturities, firstintroduced in the November issue of this publication.Even with the Fed Funds rate at negative 3.5%, ourestimates suggest that 10-yr T-notes should currentlytrade at 2.9%. Taking our 1-year-ahead projections forgrowth and inflation, we calculate that the termstructure should flatten from the 2-yr sector, with 10-yrrates trading at 3.6% at that horizon. Given theongoing deterioration in the growth-inflation trade-

off, we consider these estimates conservative.

The current fair value for US Treasuries is 3.4%, andthe corresponding figures for Bunds and JGBs are3.2% and 1.3%all are above the current marketyields. According to ourSudokubond valuation model,which feeds off our 1-year-ahead domestic and

Government bond yields have rallied further, mirroring the ongoing downgrade to consensus (and our own)

growth forecasts across the main economic regions. Our models suggest that higher inflation expectations

represent a significant offset to the lower outlook for real activity in determining the current fair value of bond

yields. On valuation grounds, we think 2.8% should represent an important resistance level for the UST 10-yr

(currently 3.05%). In Europe, we expect a decision on the disbursement of further financial aid to Greece to bemade in the coming weeks. We continue to believe that the larger high-yielding sovereigns (Italy, Spain,

Belgium) offer value relative to their AAA-rated EMU peers. In the year-to-date, these countries have

significantly outperformed the core ones; notably, Italy has outperformed on a volatility-adjusted basis.

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11

%yoy Rolling 1- year-ahead InflationExpectations Continue to Rise...

US

Euroland

UK

Japan

Source: Co nsensus Economics, GS Global ECS Research

1.0

1.5

2.0

2.5

3.0

3.5

Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11

%yoy ...While GDP Growth ForecastsAre Being Pushed Down

US

Euroland

UK

Japan

Source: Consenus Economics, GS Global ECS Research


3/20May 20113


international expectations for short rates, GDP growthand inflation, the shifts in the two macro factorsdescribed earlierlower growth and higher inflationbroadly cancel each other out in the determination ofequilibrium bond yields.

Our measure of the bond risk premium remainsdepressed. This could be related to the sovereignuncertainties in Euroland, as well as to the actions bythe Federal Reserve, which we calculate could haveshaved as much as 40bp off 10-yr bonds (see our Aprilissue of the Monthly). Admittedly, the premium maytake some time to reverse, but it is unlikely to declinefurther from here. Over longer horizons, we havefound that our measure of the premium is tied to 5-10-yr-ahead inflation expectations. These have been more

volatile lately, reflecting the rise in commodity prices.

In conclusion, the slowdown in activity growth appears tous already largely priced into the bond market, and risingcore inflation should prevent a decline in nominal rates.That said, the risk to our forecasts stems from a moremeaningful downward revision in growth prospects in2012-13, stemming, for example, from a fiscal

contraction in the US and Europe. This appliesparticularly to our projections for the end of 2012, but theavailable information does not allow us to reach strongconclusions either way. Using 5-yr and 10-yr USTs as agauge, on current macro information, the valuationargument starts become compelling at yield levels of

around 1.5% and 2.8%, respectively.

End Game for Greece ApproachingOn the first anniversary of the Greek financial rescue andthe eve of a fourth disbursement of quarterly funding,intense pressures on the sovereign have resurfaced. Basedon CDS and bond pricing, and assuming a recovery rateof around 45c, the market is assigning a 20-30% probability of a default occurring in the coming six

months, and a much higher cumulative probability of acredit event over the next five years.

As we discuss in the next section, a number of policyoptions are still being discussed, and more clarity shouldbe reached. Our baseline view is that Greece will be givenadditional time, and funding, to smooth out its adjustmenttowards a sustainable primary surplus. Additional

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2-yr 5-yr 10-yr 30-yr

% Smaller Output Gap by End-2012 Means HigherRates Than Forwards Discount

Taylor Type Model Projec tions

Forward Rates

Source: Bloomberg, GS Global ECS Research

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

Fed FundsTarget

2-yr 5-yr 10-yr 30-yr

% Bonds Priced Consistent withNegative Fed Funds

Taylor-type Rule Yield Curve

-/+ 1 std.dev.

Current Yield Curve

Source: Blo omberg, GS Global ECS Research

1.8

2.0

2.2

2.4

2.6

2.8

3.0

85

90

95

100

105

110

Aug-09 Feb-10 Aug-10 Feb-11

%Index US Bonds Track Underperformanceof Cyclical Stocks

GS Wavefront US Growth Basket (LHS)

2s-10s UST slope (RHS)

Source: GS Gl obal ECS Research

-8

-6

-4

-2

0

2

4

00 02 04 06 08 10

% Global Bond Premium Remains Below Average

Global Bond Premium

Period average



4/20May 20114


austerity measures and an accelerated privatisation planare currently being discussed, although the negotiationswill probably remain tense for some more weeks. We alsohold the view that the existing debt stock is in alllikelihood too high for Greece to shoulder and that someform of restructuring can be expected.

Developments in Greece understandably continue tocommand a lot of attention, as decisions taken there willset an important precedent for the Euro-zonespolicymaking (conditionality, seniority of claims, etc). Ona broader basis, a number of important developmentshave occurred over the past year.

All three program countries (Greece, Portugal andIreland) have been largely quarantined from a flow of

funds standpoint. The public sector is almost entirelyfunded by official channels (which will represent up to50% of the total debt stock by 2013), while banks relyextensively on the ECB.

The distribution of losses on existing liabilities remains politically charged, but manageable (the governmentdebt stock represents around 7% of the Euro-zones)particularly if piloted by the official sector. Secondarymarket purchases of outstanding Greek bonds by theEFSF, currently not allowed, would be a cost-efficientway of moving forwards, in our view.

At the end of March, EMU member states agreed to a

deeper integration of the areas economic governance.Moreover, common joint rescue mechanisms havebeen established.

In light of these developments, our strategy templatecontinues to highlight the divergence between the threeprogram countries and the larger high-yieldingeconomies. Yield spreads relative to Germany in Italy,Spain and Belgium incorporate, in our view, a high risk premium. Italy and Spain have been among the bestperformers since the start of the year, even controlling forvolatility.

InflationUpward Pressures ContinueOur Commodity Strategy team has recently revisedupwards their forecasts for Brent crude (fromUS$106.5/bbl to US$126.5/bbl in 12 months), Gasoline(from US$2.78/gal to US$3.36/gal), and Wheat to8.35$/bu. On the back of these new projections, we nowestimate that the contribution of food and energy prices tooverall inflation in the US and Euroland will peak later(probably between August and September) and at a higherlevel (150bp in the Euro area and around 250bp in theUS). Meanwhile, core inflation appears to have turnedupwards since the end of last year. Our focus is on themore persistent components, particularly servicesexcluding energy and rents. According to our i-Swapmetrics, 5-year inflation swaps are now more than 1standard deviation below fair value in the Euro-zone,

US and the UK. We continue to recommend long 5-yearJPY inflation swaps.

Francesco U. Garzarelli and Constantin BurgiLondon, May 27, 2011

-3

-2

-1

0

1

2

3

4

05 06 07 08 09 10 11 12

%, yoy Non-Core Contribution to CPI InflationExpected to Remain High

EurolandJapanUKUS

Source: GS Global ECS Research

GSF'cast

Contribution of food andenergy to headline inflation

0

100

200

300

400

500

600

700

800

900

1000

Mar-09 Sep-09 Mar-10 Sep-10 Mar-11

bp Greater Segmentation AcrossNon-Core EMU Bonds

Program Countries (Avg. ofGreece, Ireland, Portugal)

Italy, Spain and Belgium (avg.)



5/20May 20115


The Greek Conundrum

By Way of Background

Policymakers now acknowledge that Greeces adjustmentprogram, laid out in May of last year, contains a numberof design shortfalls. The timeline set for turning around

the structural fiscal dynamics is very front-loaded (calling

for a swing of 7% of GDP in the primary budget balance

between 2010 and 2013) and, until recently, officialfunding carried punitive rates. The program also assumes

that Greece would be able to refinance itself in markets

as early as 2012one and a half years after losing

market access, only just after achieving a primary surplus

and well before the mid-2013 expected overhaul of EMU

government bond clauses.

The Greek government lowered the deficit by around 5%of GDP last year to 10.5%, and agreed to reduce it by

another three percentage points this year. However,

further fiscal effortswhich have now entered the politically-charged phase of structural reforms and

privatizationswill have to be implemented in the

context of a weaker economy. The combination of

budgetary restraint, a stronger exchange rate and higher

energy prices has led to a contraction in nominal GDP ofa further 4.1% between Q2:10 and Q1:11, bringing the

cumulative decline since end-2008 to 6.5%.

Choose From One of the Following OptionsThere are several routes policymakers can take from here,

but they can be grouped into three broad options:

1. Modify the adjustment plan and provide Greece with a

top-up of public fundsThis remains the option advocated by the ECB, provided

the Greek government shows strong commitment to adhere

to fiscal adjustment and speeds up privatizations. It wouldinvolve acknowledging that, partly due to factors outside

of Greeces control (e.g., a stronger EUR and higher oil

prices), the country will need more time to achieve a

primary fiscal surplus, and hence that commercial funding

is unlikely to be in place until mid-2013. Under suchcircumstances, Greece would need an additional EUR60bn

to make up for bond redemptions, and at least another

EUR10-15bn to fill the funding gap, assuming

privatization proceeds yield around EUR20bn over thenext two years, or two and a half times the amount

currently budgeted by the IMF. Additional funds would presumably come mostly from EMU peers (who have

already committed EUR80bn, of which EUR37.9bn have

been disbursed to date) and probably be raised through the

EFSFa more cost-effective option than bilateral loans,

but requiring a broader political consensus. Under thisscenario, official-sector lending could represent more than

half of Greeces sovereign debt by end-2013. In order to

appease public opinion across Europe on the merits of

granting Greece more aid, the resources could be subject to

more binding clauses and be collateralized by privatizationreceipts (an option that should not trigger CDS, according

to the prevailing legal interpretation). Outside the IMF(which enjoys preferred creditor status), aid from

Eurozone countries ranks pari passu with existing

bondholders. Of note, after 2013, if the ESM (thepermanent successor to the EFSF) provides new funding,

this would be senior to private creditors (although this

could be modified) and junior to the IMF. Whether at thattime new private creditors would also demand seniority is

open to debate.

2. Buy time through a voluntary re-profiling of public

debt maturitiesLast March, Euro-zone officials decided to extend themaximum maturity of the loans provided to Greece from

3 years to 7.5 years. The IMF is considering taking

similar action, switching the assistance status for Greece

from a Stand-by Agreement to an Extended FundFacility, with the repayment profile stretching up to ten

years. Official-sector creditors could be subject to

comparability of treatment from at least a subset of

private creditors (e.g., commercial banks), probablywithout a discount of principal. Extending the maturity of

a good portion of the bonds coming due in, say, 2012-15

would release resources from the existing program, and

these could then be allocated to other usesfor example,boosting the capital base of Greek banks in the event of a

credit event down the line (see below, for more on the

recapitalization needs). Considering that around 40% of

Greek public bonds are held by financial institutions inGreece and other Euro-zone countries, an extension of

maturities for the period 2012-13 alone could release

something in the region of EUR30bn. The challenge is

making such a re-profiling take place voluntarily, i.e.,without triggering a default (although rating agencies

would nonetheless label such move as SD, selectivedefault) . This involves an appropriate mix of incentives

Greece and its official-sector creditors face important decisions in the coming weeks. The background to their

discussions will be the quarterly adjustment program review by the IMF, planned ahead of a fourth

disbursement of financial aid.

Breakdown of Greek Public Debt by Holder

as of Q1:2011 % of total

Greek Banks 17.9

Other Greek Residents 6.9

Total Greek Private Sector 24.8

Bank of Greece 5.9

ECB 17.6

Bilateral Loans + IMF 18.5

Total Official Sector 42.0

Eurozone Banks 17.1

Other Holders Outside Greece 16.2

Total Non Greek Private Sector 33.3

Source: Bank of Greece, IMF, GS estimates


6/20May 20116


(the type of securities used to replace maturing ones) and

penalties for not participating in the exchange (usually,

the threat of default does the trick, but in Europe that

threat is less credible than in emerging economies).Potential violations of inter-creditor equity and the need

for coordination among different jurisdictions are amongthe issues that need to be taken into account, if this option

is pursued, as is the possibility of contagion. The

response of Ireland and Portugal, for example, would also

need to be considered.

3. Declare that debt dynamics are unsustainable and

manage a restructuringAccording to Eurostat, Greek public debt stood at

142.8% of GDP last year, and is currently officiallyprojected to peak at about 160% in 2013. The argument is

frequently put forward that such a high level of debt istoo onerous for Greece, particularly given that three-

quarters of its creditors are residents of other EMU

countries. Some commentators go as far as to argue thatrestructuring the debt now could clear the air, allowing

the country to return to markets sooner. As early as in

May 2010, the IMF admitted that medium-termsustainability was subject to significant uncertainties.

But, at the time, the Fund argued that aid was nonetheless

justified given a high risk of international systemicspillover effects. In its third review, published at the end

of February, an update to the debt sustainability analysis

(DSA) continued to emphasize the risks surrounding the

baseline case, and contained conservative assumptions onprivatization receipts (a total of EUR6bn in 2012-13). Anew DSA will be made public in the coming weeks with

the fourth review. In the (unlikely, in our view) event

that debt dynamics are considered to be unsustainable,

the Fund would not be able to disburse any further funds.This helps explain the recent emphasis on speeding up

privatizations, as they would compensate for the

deterioration in the underlying fiscal dynamics (and helpunlock a funding top up by other EMU members). As to

the potential impact of a haircut on sovereign debt,

opinions vary significantly. In a narrow sense, at least, a

Greek default would appear manageable according toestimates run by our European bank research team.

Assuming a 60% haircut (which is roughly what the

market is currently discounting), the impact on European

commercial banks would amount to around EUR41bn(broken down as around EUR25bn in Greece, EUR3.8bn

in France, EUR7.5bn in Germany and the remainder in

other countries). This would correspond at most to a 36bp

hit to aggregate European Tier 1 capital ratios (52bp inGermany and 23bp in France) and thus would notrepresent a threat to the stability of the financial system.1

Based on such a large haircut assumption, the hit onGreek banks would instead be commensurately big,

wiping out 80% of Tier 1 capital, equivalent to around

170% of current market cap. Thus, recapitalizing the

Greek institutions with some EUR30-40bn of funding

would seem a necessary precondition ahead of arestructuring. As to the possibility of contagion, the hit to

European banks should Portugal and Ireland also both

decide to apply a 60% haircut appears small (an

additional 30bp hit to aggregate European Tier 1 ratios).

Importantly, the market is currently treating the fortunesof Greece and the other two program countries (Ireland

and Portugal) as broadly separate from those of othernon-core markets, such as Italy, Spain and Belgium. But

whether this pattern will hold also in the event of a Greek

default is hard to say. Other known unknowns include

where short Greek sovereign CDS risk is ultimatelywarehoused, and what could be the net impact of a

sovereign default on pension funds and insurance

companies, where data on holdings is less accessible.

The Greek ConundrumWhere policymakers will place themselves along this

spectrum of options (and combinations thereof) is thesubject of intense debate among investors.

There are a few points that we think should be taken into

account in the discussions.

Both Greece and its EMU peers share an interest in thecountry reaching a primary budget surplus (i.e., put

1. Includes only banks that participated in the European stress test. SeeEuropean bank exposure to Greece revisited, April 20, 2011.

0

10

20

30

40

50

60

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029

2031

2033

2035

2037

2039

EUR bn Maturity Profile of Greek Public Debt

Official loans

Interest Payments

Bond Principal

Source: Bank of G reece, IMF, GS G lobal ECS Research estimates

40

50

60

70

80

90

100

110

2-year 5-year 10-year 30-year

% of par Greece: Benchmark Bond Yields

19-Oct-09

07-May-10

26-May-11



7/20May 20117


Greece Inc. on a sustainable cash flow positive

trajectory) in an orderly fashion. This is a necessary

condition for the sovereign to eventually return to

market, and for its public-sector sponsors to bereassured they are not feeding unsustainable dynamics.

In the absence of an offset to fiscal tightening from

easier financial conditions (the ECB is not easing ratesin response to the weakness in Greek domestic

demand; oil prices and the EUR continue to work in

the wrong direction), a more lenient fiscal approach is

probably opportune.

Buying Greece more time to reach a primary surplus

requires more money. Topping up the size of the

program or keeping the existing bondholders tied to thecredit for longer, so that existing resources can be

diverted to bridge the cash flow shortfall rather than

paying redemptions, is ultimately a question of politicalchoice. As European Parliaments may be hostile to

committing more funds, keeping existing creditors

involved has its advantages (an option that has several

historical precedents, as we have highlighted for severalmonths in our research, and which we think has merits).

Not all investors can be brought into a debt exchange,

other than through retroactive legislation forcing them to

agree, and this may create transfers of wealth across

investors (which may have already whetted some

appetites, judging from the buying in 2-5-yr maturities).

The question of the sustainability of the existing debtstock is a different one, involving the distribution of

potential losses among creditors, the current

generation of taxpayers and future ones. We continue

to believe that going for a haircut now, with Greece

still running a cash flow deficit, carries more costs

than benefits. Even in this event, funding in 2012-13

will most likely still need to be provided by the officialsector, and the backlash on growth and on the

commitment to deliver deep-seated adjustments may

be negative.

The issue of contagion cannot be easily dismissed, in

our view, although the cross-section of prices would

currently suggest differently. The CDS market prices a20% chance of a credit event by the end of this year

(assuming a 45cent recovery, roughly the cash price of

the Greek 30-yr bond), and a much higher probability of

a default over the next 5-years (the cumulative

Year of Default Defaulting CountryAverage Trading Price**

(% of par)

PV*** Ratio of Cash Flows

(ratio in %)

1998 Russia 18 50

1999 Pakistan 52 65

1999 Ecuador 44 60

2000 Ukraine 69 602000 Ivory Coast* 18 NA

2001 Argentina 27 30

2002 Moldova 60 95

2003 Uruguay 66 85

2004 Grenada* 65 NA

2005 Dominican Republic 95 95

2006 Belize 76 NA

2008 Seychelles* 29 NA

2008 Ecuador 26 NA

50 68

31 38* Not rated by Moodys at the time of default.

** 30-day post-default price or pre-distressed exchange trading price.

Source: Moody's, Sovereign Default and Recovery Rates, 1983-2008 (March 2009)

Recovery Rates on Defaulted Sovereign Bond Issuers

Issuer-Weighted Recovery Rates

Value-Weighted Recovery Rates

*** Ratio of the present value of cash f lows received as a result of the distressed exchange versus those initially promised, discounted using

yield to maturity immediately prior to default (Source: Bank of England (2005)).

0

10

20

30

40

50

60

70

80

90

100

End 2011 2-yr 5-yr 10-yr

% Cumulative Unconditional Probability ofGreek Default Implied by CDS*

*Assuming 45c recoverySource: GS Global ECS Research


8/20May 20118


probability is close to 90% over the next 5-years). Andyet indicators of systemic risk in the Euro-zone are much

healthier today than a year ago. In our view, there is only

a small probability that the shockwaves from a Greek

restructuring will materially affect bigger countries,such as Spain, which are busy fixing problems in their

own banking sector. But if Spain were indeed to face

pressures, the current endowment of rescue funds would

most likely be insufficient to take on market forces, anda round of asset purchases by the ECB would probably

be the only credible fire-breaker. Policy risk

management should account for this timing issue.

On most plausible macro scenarios, the Greek stock of

public debt will have to be restructured eventually, as it is

difficult to see Greece being able (or wanting) to sustain thebond rollover schedule it used to have before the crisis. The

level at which Greek GDP growth and the fiscal position

stabilize in the next few years will allow policymakers and

investors to form a better judgment on the countrys debt

capacity.

A managed deleveraging could be facilitated by the

transfer of bonds into the official sector, which hasalready started. The process could receive a boost from

secondary market bulk purchases of Greek bondsat a

discount, but at the risk of pushing market priceshigherby the other Euro-zone governments, either in

exchange for cash or other securities. The EFSF is

currently authorized only to conduct primary market

interventions, but this could change. In the process, the

ECB could be relieved of its intervention portfolio ataverage cost. The official entity that has purchased the

securities would then have a range of options at its

disposal, including extending maturities and sitting on the

bonds while benefiting from a positive carry, arranginga reduction of principal orour preferred solution

accepting subordination to new funding.

Francesco U. GarzarelliLondon, May 27, 2011


9/20May 20119

Fixed Income MonthlyGoldman Sachs Global ECS Research

Interest Rate Forecasts

Forecasts Forward Gov't Rate Swap RateSwap rate

(Forward)

27-May-11 0.3 0.3 - 3.1 3.2 -

Jun-11 0.2 0.4 0.3 3.5 3.8 3.2

Sep-11 0.2 0.4 0.3 3.8 4.1 3.3

Dec-11 0.2 0.5 0.4 3.8 4.1 3.4

Mar-12 0.2 0.5 0.5 4.0 4.4 3.6

Jun-12 0.2 0.5 0.7 4.0 4.4 3.8

Dec-12 0.2 0.8 1.1 4.3 4.6 4.0

27-May-11 1.3 1.4 - 3.0 3.3 -

Jun-11 1.3 1.3 1.5 3.3 3.6 3.3

Sep-11 1.5 1.6 1.7 3.3 3.6 3.4

Dec-11 1.8 1.9 1.8 3.5 3.7 3.5

Mar-12 1.8 2.0 1.9 3.5 3.8 3.5

Jun-12 2.0 2.3 2.0 3.5 3.8 3.7

Dec-12 2.5 2.8 2.3 4.0 4.3 3.8

27-May-11 0.1 0.2 - 1.1 1.2 -

Jun-11 0.1 0.4 0.3 1.3 1.4 1.2

Sep-11 0.1 0.4 0.3 1.4 1.5 1.2

Dec-11 0.1 0.4 0.3 1.6 1.8 1.3

Mar-12 0.1 0.4 0.3 1.7 1.9 1.3

Jun-12 0.1 0.4 0.3 1.8 2.0 1.4

Dec-12 0.1 0.4 0.4 1.9 2.1 1.6

27-May-11 0.5 0.8 - 3.3 3.5 -

Jun-11 0.5 0.8 0.8 3.5 3.7 3.5

Sep-11 0.5 0.9 0.9 3.8 4.0 3.6

Dec-11 0.8 1.1 1.0 4.0 4.2 3.7

Mar-12 1.0 1.3 1.2 4.3 4.5 3.8

Jun-12 1.3 1.6 1.4 4.5 4.8 3.9

Dec-12 2.0 2.3 1.8 4.8 5.0 4.1

27-May-11 1.0 1.2 - 3.0 3.3 -

Jun-11 1.0 1.3 1.3 3.8 4.0 3.4

Sep-11 1.0 1.4 1.3 3.8 4.0 3.4

Dec-11 1.3 1.8 1.5 4.0 4.2 3.5

Mar-12 1.8 2.3 1.7 4.0 4.3 3.6

Jun-12 2.3 2.6 1.8 4.3 4.6 3.8

Dec-12 2.5 2.6 2.2 4.5 4.8 4.0


Interest Rate Forecasts: Policy, Interbank, 10-yr Gov't and 10-yr Swap Rates

Date Policyrate

3-mth rates 10-yr rates

Canada

UK

Japan

Germany

USA


10/20May 201110


Forecasts Forward Gov't Rate Swap RateSwap rate

(Forward)

27-May-11 4.8 5.0 - 5.2 5.8 -

Jun-11 4.8 5.0 5.0 5.6 6.1 5.7

Sep-11 4.8 5.1 5.1 5.8 6.3 5.8

Dec-11 5.0 5.3 5.1 5.8 6.3 5.8

Mar-12 5.3 5.5 5.1 6.0 6.5 5.8

Jun-12 5.3 5.5 5.2 6.0 6.5 5.9

Dec-12 5.3 5.5 5.3 6.3 6.8 6.0

27-May-11 0.3 0.2 - 1.8 2.2 -

Jun-11 0.3 0.3 0.2 2.0 2.4 2.2

Sep-11 0.5 0.3 0.2 2.3 2.7 2.3

Dec-11 0.8 0.5 0.3 2.5 2.9 2.3

Mar-12 1.3 0.8 0.5 2.5 2.9 2.4

Jun-12 1.8 1.3 0.6 2.8 3.2 2.5

Dec-12 2.8 2.3 1.0 3.3 3.7 2.7

27-May-11 1.8 2.5 - 2.9 3.5 -

Jun-11 1.8 2.5 2.4 3.5 3.9 3.6

Sep-11 2.3 2.9 2.7 3.8 4.2 3.6

Dec-11 2.8 3.3 2.9 3.8 4.2 3.6

Mar-12 3.0 3.5 3.0 4.0 4.5 3.6

Jun-12 3.3 3.8 3.1 4.0 4.5 3.7

Dec-12 3.8 4.2 3.2 4.3 4.8 3.7

27-May-11 2.5 2.8 - 5.1 5.2 -

Jun-11 2.5 2.7 2.6 5.8 5.9 5.2

Sep-11 2.5 2.7 2.7 5.8 5.9 5.3

Dec-11 2.5 2.7 2.9 6.0 6.2 5.4

Mar-12 3.0 3.4 3.2 6.2 6.4 5.5

Jun-12 3.5 3.9 3.5 6.3 6.5 5.6

Dec-12 3.8 4.1 4.1 6.5 6.7 5.8

27-May-11 2.3 2.8 - 3.4 4.4 -

Jun-11 2.3 2.8 2.8 4.0 4.7 4.4

Sep-11 2.5 3.0 3.0 4.0 4.7 4.4

Dec-11 2.8 3.2 3.1 4.3 5.1 4.5

Mar-12 3.0 3.5 3.3 4.3 5.1 4.5

Jun-12 3.3 3.7 3.4 4.5 5.3 4.6

Dec-12 3.8 4.2 3.8 4.8 5.6 4.7


Interest Rate Forecasts: Policy, Interbank, 10-yr Gov't and 10-yr Swap Rates

3-mth rates 10-yr ratesPolicyrate

Date

Australia

Switzerland

Sweden

New

Zealand

Norway


11/20May 201111


GS SudokuValuation Model Output

CE GS CE GS GS

USA 3.07 -0.6 -0.4 3.40 3.31 0.05

Germany 3.00 -0.3 -0.2 3.18 3.14 0.08

Japan 1.13 -0.4 -0.2 1.29 1.22 0.00

UK 3.33 -0.4 -0.2 3.63 3.53 0.09

Canada 3.04 -0.7 -0.6 3.70 3.60 0.09

Australia 5.23 0.0 0.1 5.26 5.15 -0.05

Switzerland 1.83 -0.2 0.0 1.91 1.82 0.13

Sweden 2.87 0.2 0.2 2.64 2.52 0.12


10-yr Bond Yields: Market vs GS Sudoku Model*, Spot and 3 Months into the Future

Misvaluation against fair

value***, standard

deviations

Fair value***, %

Fair value change

(due to change in

fundamentals),

t + 3mth

* Details in Chapter 12 of The Foreign Exchange Market (2006), Global Viewpoint 07/24 and Global Viewpoint 08/04. **Last close.

***CE stands for Consensus Economics inputs of macroeconomic fundamentals (latest available month), GS stands for GS Economic

Research inputs (current month).

Actual** (%)

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

St.Dev. Degree of 10-yr Bond Misvaluation

According to Sudoku (I)*

USA Germany

Japan UK

Source: GS Global ECS Research * Latest data point used is last close.

-1 St.Dev.

-2 St.Dev.-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

St.Dev. Degree of 10-yr Bond MisvaluationAccording to Sudoku (II)*

Canada Australia

Switzerland Sweden

Source: GS Global ECS Research * Latest data po int used is last close.

-1 St.Dev.

-2 St.Dev.


12/20May 201112


Source: Datastream, Goldman Sachs.

1.0

2.0

3.0

4.0

5.0

6.0

7.0

00 01 02 03 04 05 06 07 08 09 10 11

%USA, 10-yr Bond Yield

Actual

Fundamental

+/- 2 St.Dev.

1.0

2.0

3.0

4.0

5.0

6.0

7.0

00 01 02 03 04 05 06 07 08 10 11

%Germany, 10-yr Bond Yield

Actual

Fundamental

+/- 2 St.Dev.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

00 01 02 03 04 05 06 07 08 09 10 11

%Japan, 10-yr Bond Yield

Actual

Fundamental

+/- 2 St.Dev.

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

00 01 02 03 04 05 06 07 08 09 10 11

%UK, 10-yr Bond Yield

Actual

Fundamental

+/- 2 St.Dev.

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

00 01 02 03 04 05 06 07 08 09 10 11

%Canada, 10-yr Bond Yield

Actual

Fundamental

+/- 2 St.Dev.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

00 01 02 03 04 05 06 07 08 09 10 11

%Sweden, 10-yr Bond Yield

Actual

Fundamental

+/- 2 St.Dev.

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

00 01 02 03 04 05 06 07 08 09 10 11

%Switzerland, 10-yr Bond Yield

Actual

Fundamental

+/- 2 St.Dev.

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

00 01 02 03 04 05 06 07 08 09 10 11

%Australia, 10-yr Bond Yield

Actual

Fundamental

+/- 2 St.Dev.


13/20May 201113


Policy Rates Outlook: GS Forecast vs. Market

0.0

0.1

0.2

0.3

Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12

% Japan: Overnight Call Rate

GS Forecast

Implied by OIS


0.0

0.5

1.0

1.5

2.0

2.5


% UK: Bank of England Repo Rate

GS Forecast

Implied by OIS


0.5

1.0

1.5

2.0

2.5

3.0


% Euro-area: ECB Main Refinancing Rate

GS Forecast

Implied by OIS


0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0


%US: Federal Funds Rate

GS Forecast

Implied by OIS


0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6


%Canada: Overnight Interest Rate Target

GS Forecast

Implied by OIS

Source: Blo omberg, S Global ECS Research

4.50

4.75

5.00

5.25

5.50


%Australia: RBA Cash Rate

GS Forecast

Implied by OIS


0.0

0.5

1.0

1.5

2.0

2.5

3.0


%Switzerland: 3-mth LIBOR Middle Target

GS Forecast

Implied by OIS


1.0

1.5

2.0

2.5

3.0

3.5


%Sweden: Riksbank Repo Rate

GS Forecast

Implied by OIS



14/20May 201114


GS CurveValuation Model Output: US and Germany

-0.80

-0.30

0.20

0.70

1.20

1.70

2.20

2.70

3.20

3.70

4.20

4.70

5.20

3m 6m 1y 2y 3y 5y 7y 10y 20y 30y

%USD Yield Curve: Actual vs GS Curve*

Actual (27/5/2011)

Fitted

Fair (Fundamental)Fair (Dynamic)

Source: Goldman Sachs.

* GS Curve output using

May 2011 data.

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

5.50

3m 6m 1y 2y 3y 5y 7y 10y 20y 30y

% USD Yield Curve Dynamics

Actual (27/5/2011)

Actual, month before (27/4/2011)

Actual, quarter before (26/2/2011)


USD Yield Spreads: Market vs GS Curve*bp 2-5y 2-10y 5-10y 10-30y 2-5-10y** 2-10-30y**

Actual (27/5/2011) 125 258 133 116 -4 71

Fitted 132 263 131 116 0 74

Fair (Fundamental) 158 273 115 93 22 90

Fair (Dynamic) 147 272 125 107 11 83


* Details in Chapter 11 ofThe FX Market (2007) and Global Viewpoint 08/16. Fundamental fair

value is based on economic variables only. Dynamic fair value also accounts for the past

dynamics of yields. ** A-B-Cy 'butterflies' are calculated as B-(0.5A+0.5C).

0.00

1.00

2.00

3.00

4.00

5.00

3m 1y 3y 5y 7y 9y 20y

%DEM Yield Curve: Actual vs GS Curve*

Actual (27/5/2011)

Fitted

Fair (Fundamental)

Fair (Dynamic)


* GS Curve output usingMay 2011 data.

0.00

1.00

2.00

3.00

4.00

5.00

6.00

3m 1y 3y 5y 7y 9y 20y

% DEM Yield Curve Dynamics

Actual (27/5/2011)




DEM Yield Spreads: Market vs GS Curve*

bp 2-5y 2-10y 5-10y 10-30y 2-5-10y** 2-10-30y**

Actual (27/5/2011) 67 139 72 53 -3 43

Fitted 81 148 67 56 7 46

Fair (Fundamental) 76 155 78 70 -1 42

Fair (Dynamic) 88 150 62 50 13 50






15/20May 201115


GS CurveValuation Model Output: Japan and UK

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

3m 1y 2y 3y 4y 5y 7y 10y 15y 20y 30y

% GBP Yield Curve: Actual vs GS Curve*

Actual (27/5/2011)

Fitted

Fair (Fundamental)

Fair (Dynamic)



0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

3m 1y 2y 3y 4y 5y 7y 10y 15y 20y 30y

% GBP Yield Curve Dynamics

Actual (27/5/2011)




GBP Yield Spreads: Market vs GS Curve*

bp 2-5y 2-10y 5-10y 10-30y 2-5-10y** 2-10-30y**

Actual (27/5/2011) 120 212 92 142 14 35

Fitted 109 233 124 112 -7 60

Fair (Fundamental) 131 214 83 64 24 75

Fair (Dynamic) 124 226 101 85 12 70





0.00

0.50

1.00

1.50

2.00

2.50

3m 1y 3y 5y 7y 9y 15y 30y

% JPY Yield Curve Dynamics

Actual (27/5/2011)




-0.30

0.20

0.70

1.20

1.70

2.20

3m 1y 3y 5y 7y 9y 15y 30y

%JPY Yield Curve: Actual vs GS Curve*

Actual (27/5/2011)

Fitted

Fair (Fundamental)Fair (Dynamic)



JPY Yield Spreads: Market vs GS Curve*

bp 2-5y 2-10y 5-10y 10-30y 2-5-10y** 2-10-30y**

Actual (27/5/2011) 24 95 72 89 -24 3

Fitted 53 124 72 67 -9 29

Fair (Fundamental) 63 132 69 62 -3 35

Fair (Dynamic) 62 138 76 69 -7 34






16/20May 201116


GS iSwapValuation Model Output

1.5

1.7

1.9

2.1

2.3

2.5

2.7

1yr 2yr 5yr 10yr 15yr 20yr

% EUR Inflation Swap Curve, Fair & Actual

Fair

Current

Source: GSGlo balECSResearch

0.8

1.3

1.8

2.3

2.8

3.3


% USD Inflation Swap Curve, Fair & Actual

Fair

Current


-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0


% JPY Inflation Swap Curve, Fair & Actual

Fair

Current


2.5

3

3.5

4

4.5

5


% GBP Inflation Swap Curve, Fair & Actual

Fair

Current


0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.32.5

2.7

2.9

04 05 06 07 08 09 10 11

% Euroland 5-yr Fair and Actual*

Actual

Fair (based on our iSwap model)

Source: GS Global ECS Research *Last Close

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

04 05 06 07 08 09 10 11

% US 5-yr Fair and Actual*

ActualFair (based on our iSwap model)


-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

04 05 06 07 08 09 10 11

% Japan 5-yr Fair and Actual*

Actual



0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

04 05 06 07 08 09 10 11

% UK 5-yr Fair and Actual*

Actual




17/20May 201117


-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

05 06 07 08 09 10 11

Contribution of Food to Headline

Japan

US

Euroland

UK

Source: GS calculations.

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

05 06 07 08 09 10 11

Contribution of Core Goods to Headline

Japan

US

Euroland

UK


-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

-0.10%

-0.05%

0.00%

0.05%

0.10%

0.15%

0.20%

05 06 07 08 09 10 11

Contribution of Rents and OER to Headline

Japan

Euroland

UK

US (RHS)


-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

05 06 07 08 09 10 11

Contribution of ex-housing Services toHeadline

Japan US

Euroland UK


-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

05 06 07 08 09 10 11

Contribution of Energy to Headline

Japan

US

Euroland

UK


Food EnergyCore

goods

Services

ex-

housing

Housing

yoy

Japan -0.8% 6.8% -0.2% 0.5% -0.4%

US 3.9% 18.2% 0.7% 2.1% 1.0%

Euroland 2.1% 12.6% 1.0% 2.0% 1.4%

UK 7.4% 9.7% 1.9% 4.6% 2.3%

weightsJapan 0.20 0.07 0.20 0.34 0.18

US 0.08 0.09 0.21 0.34 0.30

Euroland 0.15 0.10 0.29 0.36 0.06

UK 0.11 0.09 0.31 0.40 0.05

= contribution

Japan -0.16% 0.51% -0.04% 0.17% -0.07%

US 0.31% 1.56% 0.16% 0.73% 0.28%

Euroland 0.32% 1.21% 0.30% 0.70% 0.08%

UK 0.80% 0.85% 0.61% 1.83% 0.12%

G4 Inflation Breakdown*

* Reclassified by GS so as to make the sub-components fully

comparable across ec onomies (see Global View point No: 07/14)

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

05 06 07 08 09 10 11

Contribution of Food to Headline

Japan

US

Euroland

UK


-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

05 06 07 08 09 10 11

Contribution of Core Goods to Headline

Japan

US

Euroland

UK



18/20May 201118


Main Economic Forecasts

For our latest Currency and GSDEER forecasts please refer to the Goldman Sachs institutional portal(https://portal.gs.com/gs/portal/research/econ/econmarkets/).

For India we use WPI not CPI. Asia consists of China, Hong Kong, India, Indonesia, Japan, Malaysia, Philippines, Singapore, South Korea,Taiwan, Thailand.

Central Bank Policies

Current Situation Next Meetings Expectation

Jun-22

Aug-09

Jun-14

Jul-12

Jun-09

Jul-07

UK: BoE Monetary Jun-09

Policy Committee Jul-07

EUROLAND: ECB

Governing Council

The ECB hiked rates by 25bp to

1.25% on April 7, 2011.

We expect the ECB to continue hiking to

1.75% by end-2011.

The BoE cut rates by 50bp to 0.5%

on March 5, 2009.

We expect the BoE to keep the policy rate

on hold until a 25bp hike in Q4 2011.

UNITED STATES:

FOMC

The Fed cut the funds rate to a range

of 0%-0.25% on December 16, 2008.

We expect the Fed to keep the funds rate

near 0% through the end of 2012.

JAPAN: BoJ Monetary

Policy Board

The BoJ cut the overnight call rate to

a range of 0%-0.1 on October 5,

We expect the BoJ to keep the policy rate

near 0% through the end of 2012.

GDP Forecast: %change yoy CPI Forecast: %change yoy

2009 2010 2011 2012 2009 2010 2011 2012

USA -2.6 2.9 2.6 3.2 USA -0.3 1.7 3.1 2.1Euroland -4.1 1.7 2.0 1.7 Euroland 0.3 1.6 2.8 2.1

Japan -6.3 4.0 -0.8 3.0 Japan -1.3 -0.7 0.7 0.3

UK -4.9 1.3 1.9 2.6 UK 2.2 3.3 4.2 2.2

Canada -2.5 3.1 3.0 3.3 Canada 0.3 1.8 2.5 2.0

Australia 1.3 2.7 2.5 3.7 Australia 1.8 2.8 3.4 2.8

Switzerland -1.9 2.6 2.2 2.3 Switzerland -0.5 0.7 0.8 1.6

Sweden -5.3 5.3 4.6 3.1 Sweden -0.3 1.3 3.2 3.1

New Zealand -1.7 1.5 1.5 3.9 New Zealand 2.1 2.3 4.4 2.7

Norway -1.6 0.3 1.6 2.7 Norway 2.2 2.4 1.5 2.1

Brazil -0.6 7.5 4.5 4.0 Brazil 4.9 5.2 6.6 6.5

Russia -7.9 4.0 5.3 5.6 Russia 11.7 6.8 8.4 6.2

India 7.7 8.5 7.5 7.8 India 3.8 9.6 8.1 5.1China 9.2 10.3 9.4 9.2 China -0.7 3.3 4.7 3.0

G7 -3.7 2.8 2.0 2.8 G7 -0.1 1.4 2.7 1.8

G10 -3.5 3.0 2.1 3.0 G10 -0.1 1.4 2.7 1.9

G20 -0.5 5.0 4.3 4.7 G20 1.3 3.1 4.1 3.1

Advanced Economies -3.3 3.0 2.2 2.9 Advanced Economies 0.2 1.6 2.9 2.0

BRICs 5.6 8.8 7.9 7.9 BRICs 2.5 5.4 6.1 4.2

Asia 4.1 8.3 6.4 7.1 Asia 0.6 3.7 4.6 3.2

Asia ex Japan 6.4 9.2 7.8 7.9 Asia ex Japan 1.1 4.7 5.4 3.8

Central and Eastern Europe -1.0 3.0 3.6 3.9 Central and Eastern Europe 3.0 2.7 3.7 3.0

Latin America -1.9 6.2 4.9 4.3 Latin America 6.2 6.2 6.7 6.5

Emerging Markets 3.3 7.9 7.1 7.0 Emerging Markets 3.9 5.8 6.4 5.0

World -0.6 5.1 4.3 4.7 World 1.7 3.4 4.4 3.4


19/20May 201119


Trading recommendations

Date Date

TOP TEN

1. Stay long 5-yr JPY Inflation Swaps 16-Feb-11 -13 bp 40 bp 8 bp n/a n/a 21.0 bp

TACTICAL

1. Stay long 30-yr Greece (4.6% Sep 2040) 03-Sep-10 54 c n/a 28-Apr-11 49.1 c -4.9 c

2. Close short 5-yr EONIA 13-Jan-11 2.08 % n/a 03-Feb-11 2.44 % 38 bp

3. Close Paying 3m2yr ILS rates vs USD 18-Feb-11 288 bp n/a 14-Mar-11 327 bp 39* bp

4. Stay long 10-yr Spain vs Italy 25-Feb-11 54 bp n/a 20-May-11 82 bp -28 bp

5. Pay 5-yr Swiss swap rates vs Euroland 04-Mar-11 -137 bp -100 bp -130.9 bp below -152 bp n/a n/a 6.1 bp

6. Stay Short 5-yr UST 18-Mar-11 1.94 % n/a 03-May-11 1.98 % 0* %

7. Pay 5-yr Korean swaps 18-Mar-11 4.04 % 4.40 % 3.96 % below 3.80 % n/a n/a -0.08 %

8. Pay 2-yr GBP rates vs EUR 29-Mar-11 -48 bp n/a 12-Apr-11 -66 bp -18* bp

*including carry. Source: GS Global ECS Research

n/a

n/a

n/a n/a

n/a

n/a

n/a

STOP

n/a

n/a

n/a

n/a

n/a

n/a

RATE TRADES IN 2011OPENED LAST CLOSE CLOSED

POTENTIAL

PROFIT

At At At

TARGET


20/20


We, Francesco U. Garzarelli and Constantin Burgi, hereby certify that all of the views expressed in this report accurately reflect

personal views, which have not been influenced by considerations of the firms business or client relationships.

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GS Fixed Income Monthly May 2011