Fixed Income and CPI

1. Fixed Income Investing
The Yield Curve and Trading Strategies
Yield Curve Determinants
Default risk
Supply/demand
Term structure
Central bank intervention
Interpreting slope
Positive, flat and inverted
Interest Rate Cycle

2. Greece

3. Yield Curve Shapes

4. Yield Curve Determinants
• Market expectations of future rate changes
• Bond risk premiums
• Convexity bias

5. US Treasury Yield Curve
2/30 Year

6. Components of CPI
• FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals,
snacks)
• HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture)
• APPAREL (men's shirts and sweaters, women's dresses, jewelry)
• TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance)
• MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and
eye care, hospital services)
• RECREATION (televisions, toys, pets and pet products, sports equipment, admissions);
• EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer
software and accessories);
• OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal
services, funeral expenses).

7. Corporate Leverage Increasing
• Leverage has risen to near its crisis peak, even after adjusting
for the increase in balance sheet cash
• Debt continued to grow in 2Q13, increasing 2.1% (+$59bn)
q/q and 9.1% (+$239bn) y/y reaching a new decade high of
$2.9tn for the companies in our analysis. Despite strong
balance sheets and high cash balances, companies continued
to issue debt at the highest pace since the crisis, due in part,
to low yields until recently.
• Gross debt increased by 9% over the past 4 quarters, 7% for
the prior 4 quarters, and 5% for the 4 quarters two years ago,
so there has been no moderation in pace of debt growth as of
yet, despite limited EBITDA growth.

8. CPI
THE COST OF GOVERNMENT
• Also included within these major groups are various government-charged
user fees, such as water and sewerage charges, auto registration fees, and
vehicle tolls. In addition, the CPI includes taxes (such as sales and excise
taxes) that are directly associated with the prices of specific goods and
services.
• However, the CPI excludes taxes (such as income and Social Security taxes)
not directly associated with the purchase of consumer goods and services.
• The CPI does not include investment items, such as stocks, bonds, real
estate, and life insurance. (These items relate to savings and not to day-to-
day consumption expenses.)
• For each of the more than 200 item categories, using scientific statistical
procedures, the Bureau has chosen samples of several hundred specific
items within selected business establishments frequented by consumers
to represent the thousands of varieties available in the marketplace. For
example, in a given supermarket, the Bureau may choose a plastic bag of
golden delicious apples, U.S. extra fancy grade, weighing 4.4 pounds to
represent the Apples category.

9. CPI Flaws
1) PRODUCTIVITY
2) COST OF GOVERNMENT
3) SHELTER

10. THE POWER OF THE CPI
• Government Financing
Interest Expense
Indexed Benefits
• GDP Deflator
• Term Structure and Liquidity

11. What goods and services does the CPI cover?
The CPI represents all goods and services purchased
for consumption by the reference population (U or W)
BLS has classified all expenditure items into more than
200 categories, arranged into eight major groups.

12. Owners’ equivalent rent of primary residence (OER)
Rent of primary residence (Rent)
How the CPI measures price change of Shelter, the service that
housing units provide their occupants, is a major part of the CPI
market basket—the goods and services that people need for day-to-
day living. Two CPI indexes, Owners’ equivalent rent of primary
residence (OER) and Rent of primary residence (Rent), measure the
change in the shelter cost consumers receive from their primary
residences.
Housing units are not in the CPI market basket. Like most other
economic series, the CPI views housing units as capital (or
investment) goods and not as consumption items. Spending to
purchase and improve houses and other housing units is investment
and not consumption. Shelter, the service the housing units
provide, is the relevant consumption item for the CPI. The cost of
shelter for renter- occupied housing is rent. For an owner-occupied
unit, the cost of shelter is the implicit rent that owner occupants
would have to pay if they were renting their homes.

13. Home Prices and Consumption
• Extreme changes in the price of homes may have a
significant impact on consumers’ cost of living and
consumption patterns