May *EU Periphery Sovereigns include bonds from countries such as Greece, Ireland, Italy, Portugal and Spain.

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1 May 2013 Government rates - are trading near the lowest levels of the year in the major markets as unprecedented central bank easing persists. Receding inflation pressures are providing central bankers with the latitude to ease monetary policy in an effort to stimulate demand. The European Central Bank - cut the refinancing rate by 25bp to a historically low 0.5% on May 2. Citi analysts expect recession to persist for two or three more years, and for further accommodation to occur before year end. The Reserve Bank of Australia also eased policy this month as it cut its policy rate to a record low of 2.75%. While rangebound US rates are likely to prevail near term - due to weak data and fiscal drag, Citi analysts continue to believe that the macro underpinnings of a sustainable recovery are falling into place, and that the US will lead the cyclical rebound in the developed markets. Sectors 12 Months View Investment Rationale Dev. Market (Core) Sovereigns EU Periphery Sovereigns* Emerging Market Sovereigns High Grade Corporates High Yield Corporates Underperform Market Perform Outperform Outperform Outperform G4 rates likely to remain subdued near term; German bunds poised to outperform US and UK; Japanese Government Bond yields to remain low ECB backstop dilutes risks but challenges remain; Ireland fundamentals improving, remain cautious on Italy and Spain Remain overweight hard currency, though prefer local EM markets; Valuations and yields attractive vs. developed; Favour short-dated Venezuela external bonds and Mexico local debt Low absolute yields and expectations for higher rates limit return upside; Focus on US financials and subordinated debt Despite historically low yields and less attractive valuations, risk-on momentum should continue to fuel positive returns *EU Periphery Sovereigns include bonds from countries such as Greece, Ireland, Italy, Portugal and Spain.

2 Important Information Citi analysts refers to investment professionals within Citi Research ( CR ), Citi Global Markets Inc. ( CGMI ) and voting members of the Citi Global Investment Committee. This document is based on information provided by Citigroup Investment Research, Citigroup Global Markets, Citigroup Global Wealth Management and Citigroup Alternative Investments. It is provided for your information only. It is not intended as an offer or solicitation for the purchase or sale of any security. Information in this document has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on the information, consider its appropriateness, having regard to their objectives, financial situation and needs. Any decision to purchase securities mentioned herein should be made based on a review of your particular circumstances with your financial adviser. Investments referred to in this document are not recommendations of Citibank or its affiliates. Although information has been obtained from and is based upon sources that Citibank believes to be reliable, we do not guarantee its accuracy and it may be incomplete and condensed. All opinions, projections and estimates constitute the judgment of the author as of the date of publication and are subject to change without notice. Prices and availability of financial instruments also are subject to change without notice. Past performance is no guarantee of future results. Investment products are (i) not insured by any government agency; (ii) not a deposit or other obligation of, or guaranteed by, the depository institution; and (iii) subject to investment risks, including possible loss of the principal amount invested. The document is not to be construed as a solicitation or recommendation of investment advice. Subject to the nature and contents of the document, the investments described herein are subject to fluctuations in price and/or value and investors may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal the amount invested. Certain investments contained in the document may have tax implications for private customers whereby levels and basis of taxation may be subject to change. Citibank does not provide tax advice and investors should seek advice from a tax adviser. Citibank N.A., London Branch is authorised and regulated by the Financial Services Authority with reference number Citibank International Plc. is authorised and regulated by the Financial Services Authority with reference number Citibank N.A., London Branch and Citibank International Plc. are licensed by the Office of Fair Trading with licence numbers and respectively to extend credit under the Consumer Credit Act Citibank N.A., London Branch is registered as a branch in the UK at Citigroup Centre, Canada Square, Canary Wharf, London E14 5LB. Registered number BR Citibank International Plc. has its registered office at Citigroup Centre, Canada Square, Canary Wharf, London E14 5LB. Citibank N.A., Jersey Branch is regulated by the Jersey Financial Services Commission under the Financial Services (Jersey) Law 1998 for the conduct of investment business. Citi International Personal Bank is registered in Jersey as a business name of Citibank N.A. The address of Citibank N.A., Jersey Branch is P.O. Box 104, 38 Esplanade, St Helier, Jersey JE4 8QB. Citibank N.A. is incorporated with limited liability in the USA. Head office: 399 Park Avenue, New York, NY 10043, USA. 2013, Citibank N.A. CITI, CITI and Arc Design are registered service marks of Citigroup Inc. Calls may be monitored or recorded for training and service quality purposes.

3 Developed Markets Government Bonds Low benchmark yields continue to echo softening economic activity and benign inflation. In the major markets, rates are trading near their lowest levels of the year as unprecedented central bank accommodation persists. Receding global inflation pressures are providing central bankers with the latitude to ease policy in an effort to stimulate demand. On May 7, the Reserve Bank of Australia became the latest to expand accommodation as it cut its short-term policy rate to a record low of 2.75%. This move arrives on the heels of the ECB, which cut its refinancing rate by 25bp to a historically low 0.5% on May 2. The ECB not only implied that it was open to further rate cuts, but that it would also consider negative deposit rates. While not comparable to the shock and awe from the Bank of Japan s newly expanded easing announced on April 4, the ECB has shifted to a more dovish tone as economic woes deepen. Citi analysts expect recession to persist in the euro-area for two or three more years, and for the ECB to consider further accommodation before year end. As such, government yields are likely to remain near current lows, and German Bunds are expected to outperform other major markets. In the United States, a better-than-expected monthly job report helped reverse some of the recent gains from the rally that began in mid-march. That said, prevailing yields still reflect a more cautious outlook about growth prospects than markets anticipated during the first quarter (Fig 1). This is consistent with declining inflation pressures and the slowdown in activity expected this quarter. Citi projects that tax hikes and government spending restraints will limit 2Q 13 US GDP to around 1.5%. Citi analysts continue to believe that the macro underpinnings of a sustainable recovery are falling into place, and that the US will lead the cyclical rebound in the developed markets. In their view, the current slowdown is poised to be shallow as stronger fundamentals (i.e., housing-related activity, credit demand and employment gains) gain more traction during the second half of the year. This should provide enough fodder for the Federal Reserve to begin tapering off asset purchases before year-end. Rangebound US rates are likely to prevail near term due to weak data and fiscal drag. However, Citi analysts continue to believe that rates will rise further than forward markets currently expect. While forward markets discount around a 2.0% 10-year Treasury yield at year end, Citi rate strategists forecast 2.5% in December 2013 (Please keep in mind that forecasts may not be attained and are subject to change with market conditions). Overall, Citi analysts continue to prefer credit risk over rate risk in the developed world. Long term JGB yields have mostly been rangebound after the sharp backup that occurred when the Bank of Japan announced a new quantitative/qualitative easing program last month (Fig. 2). Citi analysts expect yields to trend lower. Volatility should remain elevated, particularly at the long end. The Bank of Japan s 2.0% inflation target (within the next two years) seems unrealistic, in their view, particularly if the consumption tax hike is implemented next year. If fiscal discipline is diluted with the elimination of the tax, JGB debt may risk another ratings downgrade. Figure 1: Benchmark rates reflect a cautious outlook on growth Figure 2: JGB yields rangebound since Bank of Japan announcement

4 Emerging Markets Government Bonds External (US dollar denominated) emerging market (EM) sovereign debt has only partially benefited from the most recent risk rally. Indeed, the Citi Emerging Market Sovereign Index (ESBI) has trailed both the high grade and high yield developed corporate markets this year (Fig. 3). This is partly due to profit-taking and some isolated events that have occurred in countries like Venezuela, Indonesia and Hungary. Citi analysts also note that commodity prices have substantially weakened, which has played a role in softer demand for bonds issued by EM exporting countries (e.g., Mongolia). Despite a weak first quarter, Citi analysts continue to believe that hard currency debt will outperform the broader fixed income market this year. EM valuations have become more compelling as yields in most other asset classes reach new lows and the risk of substantially higher US rates has waned. Citi analysts continue to favour Russian hard currency issues and short-dated Venezuela bonds (2- to 3- year paper yields 6% to 7%). Russia posted a gain of 1.6% last month, while short Venezuela debt gained 1.1%. Citi analysts believe there is also value in Turkey sovereign debt, where the potential for an investment grade rating at Moody s has become more likely. In the event of an upgrade, our analyst would expect spreads to tighten further. Rated Ba1 at Moody s (BBB- at Fitch), 10-year Turkish government bonds yield 3.3%, or 150 basis points greater than comparable US Treasury debt. Local currency markets have enjoyed more upside than external debt, and year-to-date returns are approximately 3.3%. Bond yields in most local markets declined last month due to disappointing economic data, lower inflation pressures, and falling commodity prices. This has solidified a more dovish tone among the EM central banks. Yields in these markets still remain relatively attractive compared to developed government bond markets. Increased quantitative easing measures should help maintain strong foreign demand. Moreover, potential inflows from Japanese investors (prompted by the Bank of Japan s newly expanded asset purchase program) are likely to support further spread tightening. While credit risks have risen in EMEA due to the euro-area recession and geopolitical conflicts, EMEA bonds have been the best performing local debt sector (Fig. 4). Central banks in the region have generally maintained a dovish tone. Indeed, the rate cut from the National Bank of Poland on May 8 was accompanied by a very dovish statement that highlighted significantly below target CPI inflation, and concerns that it would persist. Slowing growth, low inflation, and broad central bank easing continues to support Citi conviction on short-dated Russia OFZ bonds (which yield near 6.0%). Figure 3: EM hard currency has lagged High Grade and High Yield returns Source: Barclays Capital. Figure 4: EMEA local debt has outperformed Source: JP Morgan Mexico continues to produce attractive returns. It generated a 3.8% gain in April, boosting year-to-date gains to more than 8.0%. Citi analysts remain overweight Mexican Bonos (which was upgraded on May 8 by Fitch to BBB+), and expect the local market to be an attractive destination for Japanese investors given the market s size and liquidity. Ten-year Mexican local debt currently yields around 4.5%.

5 Investment Grade Corporate Bonds Global high grade corporate debt reversed course during the last six weeks after posting negative returns during the first quarter of the year (Fig. 5). Indeed, since the middle of March, the Citi Global Corporate Index has gained 2.3%, boosting year-to-date performance to 1.6%. USD corporate index spreads are 8bp tighter since the beginning of April (currently 133bp), and average bond prices rose by 1.25 points to $ The turnaround was primarily fuelled by the sharp rally in US interest rates. A similar pattern emerged in euro and sterling-denominated corporate bonds due to the rally in German Bunds (10-year yields reached a historic low of 1.16% on May 2) and UK Gilts. Year to date, returns in these markets are approximately 2.0% and 4.9%, respectively. The UK market especially benefitted from long-dated Gilt outperformance. Indeed, long-dated sterling denominated corporate bonds have rallied by about 8.5% during the last 3 months. Valuations appear stretched in the global credit markets as index yields reach new lows and spreads flatline around current levels. As we ve discussed before, there has historically been a strong negative correlation between the direction of interest rates and credit spreads. That is, as interest rates fall, credit spreads typically widen. During the last month, this trend reversed as credit spreads compressed when rates declined. This was principally due to an increase in investor demand for credit exposure, prompted by massive central bank liquidity and the quest to capture higher yields. Given that Citi analysts expect US rates to rise during the second half of the year, they have become less constructive about the sector. At current levels, they believe US corporate bond spreads will be hardpressed to move meaningfully tighter. Based upon Citi year-end forecasts for US rates and prevailing record-low corporate yields, the projected rise in Treasury yields could potentially eliminate sector gains accumulated year-to-date (assuming spreads remain constant). That said, until the progression of higher rates begins, intermediate-term maturities are expected to continue to outperform. A steep curve and relatively attractive carry versus other sectors are likely to provide high grade with enough investor interest to build on positive momentum in the near term. While Citi analysts continue to believe that corporate debt should be considered a core holding in most fixed income portfolios, they do not recommend establishing overweight positions in the current environment. Citi analysts continue to recommend US financial issuers (they favour subordinated structures). Fundamentals are still positive as economic activity improves and new regulatory rules strengthen balance sheets. Valuations are attractive even though the spread advantage over non-financials has dissipated. Indeed, financial issuer index spreads have just begun to trade through industrials for the first time post-crisis (Fig. 6). Citi analysts also favour the energy sector where spread valuations are attractive and fundamentals are supported by elevated oil and natural gas prices. Figure 5: High grade corporates have gained in last six weeks Figure 6: Financial spreads are trading through industrials

6 -yield issuers) are expected t High Yield Corporate Bonds The high yield corporate debt sector is one of the best performing fixed income asset classes this year. With a year-to-date total return of nearly 5.5%, high yield is on pace to exceed Cit analysts 7.0% to 8.0% projected return for This is consistent with the performance of other risk assets, which have flourished in the current low yielding, easy monetary climate (for instance, equities have thrived: the MSCI World index has risen by nearly 12% year-to-date). Spreads and yields in lower-rated corporate debt have fallen sharply. Spread (to worst) on Citi s Hig Yield Market Index is currently 425 basis points, or 65bp tighter for the year, its lowest level since July Moreover, index yields continue to reach new lows. High yield has just dipped below 5.0% for the first time, which amounts to nearly a 70bp decline since the beginning of April (Fig. 7). Figure 7: High yield index yields have dipped to a new low Despite historically low yields and the tightest post-crisis spreads, high yield is poised to outperform for the remainder of the year, in Citi analysts view. Against a backdrop of modestly higher rates, central bank accommodation and low default rates, fixed income investors are poised to be rewarded with outsized returns. With the spread between Triple-B and Double-B issuers now at its tightest level since June 2008, it s clear that investors have become more comfortable moving down the risk spectrum. Citi analysts expect this down-inquality trend (including Triple-C issuers) to persist as risk-on momentum prevails.