30 year OATi

Developing a real rate yield curve in Euro

September 1999
Summary

I Structure of OATis
II Market development
III The rationale for a 30 year-OATi
IV France Trésor issuing policy
V Comparisons, correlations and analysis
VI How to access France Trésor information?

2
Summary

I Structure of OATis
II Market development
III The rationale for a 30 year-OATi
IV France Trésor issuing policy
V Comparisons, correlations and analysis
VI How to access France Trésor information?

3
France Trésor - OATi
ë The 30 year OATi is the inaugural issue under the
name “France Trésor”, the new label for French
Government Securities
ë France offers the widest possible range of liquid
investment tools in euro:
l Fixed-rate products (BTFs, BTANs, OATs)
l Strips
l TEC 10 OATs (10 year Constant Maturity Rate)
l Inflation-indexed OATs
ë These products are recognised as benchmarks in
the Euro zone.
ë OATis attest France Trésor as an innovative
borrower setting-up the standard for Indexed-linked
securities in euro. 4
OATi : Structure 1
ë OATi is a fixed-rate bond...
ë ...whose coupon and redemption amounts are
indexed to the evolution of the French CPI between
theinitial accrual date and the cashflow payment date.
125% 25.00%

120% 20.00%

115% 15.00%

110% 10.00%

105% 3.06% 3.31% 3.45% 3.59% 3.73% 5.00%

3.18%

100% 0.00%
07/99

07/00

07/01

07/02

07/03

07/04

07/05

07/06

07/07

07/08

07/09
Coupon Principal Accrued Inflation Index (left hand scale) 5
OATi: Structure 2
ë Principal and coupons are therefore protected
against inflation.
ë Investor gets a guarantee against deflation on the
principal: Reimbursement is guaranteed at par.
ë All cash flows (coupons, accrued interest,
redemption amount) are indexed to the same ratio:
Daily inflation reference payment date
Index ratio payment date =
Daily inflation reference initial accrual date
ë Daily inflation references are calculated thanks to a
simple interpolation between 2 monthly French CPI.

6
Summary

I Structure of OATis
II Market development
III The rationale for a 30 year-OATi
IV France Trésor issuing policy
V Comparisons, correlations and analysis
VI How to access France Trésor information?

7
OATi 10 year: Original distribution
ë A diversified client base (September 1998):

UNITED
UNITED STATES
KINGDOM 3%
6% Insurance
Companies
REST EUROPE 35%
12%

FRF 24 bn ~ EUR 3,6 bn

Others
9% Retail Retirement
2% Mutual Funds Funds
27% 6%

8
OATi : Market development

ë Total issuance of OATi for 1999 was announced in

December 1998: EUR 6 bn
ë Regular Issuance through auctions :
l Specific auctions
l Auction frequency matched market development
l Auction announced one week in advance

ë Track record : 5 auctions in 10 months

l average amount of EUR 600 m
l outstanding size of 10 year OATi brought to EUR 7 bn

ë Launch of the 30 year-OATi widens the range of

inflation-linked products
9
OATi 10 year: a strong demand at every issue
Size Average Break- Cover Tail
(EUR m) Real even * Ratio (cents)
Yield Inflation
issued by
14 September 3600 2.98 1.20% 3.00 syndication
1998
5 November 681 3.12% 1.20% 2.80 15

4 February 626 3.01% 0.90% 2.85 5

1 April 677 3.01% 1.10% 3.03 7

6 May 546 2.75% 1.39% 2.88 9

1 July 576 2.90% 1.78% 2.15 30

* against OAT curve
10
 OATi 10 year: Auction example (1st April)
EUR m 0 50 100 150 200 250 300 350

3.002% ~ 99,97%
99,96%
Amount : EUR 677 m
99,95%
99,94% Limit Price : 99,90%
99,93% Cover ratio : 3,0
99,92% Tail : 7 ct
99,91%
3.008% ~ 99,90%
99,89%
99,88%
99,87%
99,86%
99,85%
99,84%
99,83% Bids accepted
99,82%
99,81% Other bids
3.012% ~ 99,80%
99,75%
99,70%

11
OATi 10 year: Secondary market liquidity

Launch Size of Daily Liquidity

Date Market Turnover Ratio
(EUR m) (EUR m)
U.K. 1981 92 000 226 0,24%
ILG
U.S.A. Jan 97 71 000 93 0,13%
TIPS
FRANCE Sept 98 7 000 80 1,15%
OATi

12
OATi 10 year: Turnover

EUR m EUR m
3,000 160
140
2,500
120
2,000 100
1,500 80
60
1,000
40
500
20
0 0

May-99
Mar-99

Apr-99
Nov-98

Feb-99

Jun-99
dec-98

Jan-99

Monthly Traded Volume Daily Average (right hand scale)

13
 0,70
0,90
1,10
1,30
1,50
1,70
1,90
24/09
02/10
12/10
20/10
29/10
06/11
17/11
25/11
03/12
11/12
24/12
08/01
18/01
26/01
03/02

Break-Even Inflation
15/02
23/02
03/03
11/03
19/03
29/03

OATi
07/04
OATi 10 year: Yield history

15/04
23/04
03/05
11/05
20/05
31/05
08/06
OAT 2009

16/06
24/06
05/07
13/07
22/07
02/08
10/08
18/08
26/08
14
2,60%
3,10%
3,60%
4,10%
4,60%
5,10%
 97
98
99
100
101
102
103
104
105
106
107

15Sep98
28Sep98
09Oct98
26Oct98
09Nov98
26Nov98
10Dec98
04Jan99
18Jan99
01Feb99
15Feb99
03Mar99
18Mar99
02Apr99
19Apr99
30Apr99
14May99
28May99
11Jun99
OATi
OATi 10 year: Relative performance

25Jun99
EONIA

09Jul99
OAT 2008

23Jul99
06Aug99
20Aug99
03Sep99
15
I Structure of OATis
II Market development
III The rationale for a 30 year-OATi
IV France Trésor issuing policy
V Comparisons, correlations and analysis
VI How to access France Trésor information?

16
OATi 30 year: Term sheet

ë Maturity : 25 July 2029

ë Initial accrual date: 25 July 1999
ë Launch by syndication:
l lead managers BNP, Crédit Agricole Indosuez, Deutsche
Bank
l SVT-only syndicate

ë Size: minimum EUR 2.5 bn

ë Coupon: to be set at launch

17
OATi 10 and 30 year: Investment motivations

ë A very wide range of investors use 10 year OATi as

an efficient tool for:
l protection vs. inflation, asset and liability management
l portfolio diversification or optimisation
l real rate play
l carry

ë Same investment patterns will be replicated on the

OATi 30 year.
ë Moreover, a 30 year OATi will attract additional
investors who will find in a long-dated inflation-
indexed bond a perfectly-matching asset.

18
OATi : investor typology and motivation
Protection vs. inflation
Active Asset and Liability management
Investors What for? Active on 10 What
year OATi? about 30
year
OATi?
Non life Future repayments
Insurers Inflation cycle management +++ è

Life Insurers Pensions

Inflation cycle management ++++ ì

Corporates Savings schemes

Payroll management +++ ì

Banks ALM departments

+++ î

Retirement Prudential guarantee funds

and Pension Capitalised funds ++++ ì
Funds
Retail Safe investment
+ ì
19
OATi : investor typology and motivation
Portfolio diversification
Portfolio optimisation
Investors What for? Active on 10 What
year OATi? about 30
year
OATi?
Bond fund Optimisation
managers Lower volatility +++ ì
Low correlation with bonds
Equity fund Optimisation
managers Lower volatility + ì
Low correlation with equity
Multiple Asset allocation modelling
asset fund Optimisation ++ ì
managers
Specific Natural investment tool
Funds + ì

20
OATi : investor typology and motivation
Real rate and real rate yield curve play
Investors What for? Active on 10 What
year OATi? about 30
year
OATi?
Fund Real rate anticipations
managers Inflation cycle management ++ ì
High sensitivity to real rates
Hedge funds Real rate anticipations
Arb accounts Cross-market arbitrage + ì
Yield curve arbitrage
Positive carry
Money Low volatility alternative
market ++ è
Funds
Banks Low volatility alternative to
traditional fixed-rate carry + î

21
A structural interest for this type of product
ë A need for protection against inflation
ë Before the emergence of the OATi, few assets
could offer efficient protection against inflation
(real estate, equity, ... ) and a capital guarantee
ë The unfavorable demographic trends triggering
significant saving shifts in continental Europe
towards longer instruments
ë The introduction of the euro allows diversification
into inflation-indexed products in the absence of
any foreign exchange rate risk
ë An unrestricted access to inflation-indexed
investments is now granted amongst a very wide
range of investors in the euro zone.
22
French CPI: a good proxy for long term inflation in
Euroland

7
French CPI
6 German CPI
EMU HIPC
5

0
92 93 94 95 96 97 98 99

23
Diversification and an active ALM instrument

9.0% 0.30%

Efficient Frontier
8.0%
0.25%

7.0%

Additional return
0.20%
Real return

6.0%
0.15%
5.0%

0.10%
4.0%

Return with OATi 0.05%

3.0%
Return without OATi
Additional return
2.0% 0.00%

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%
2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

RisK
24
The 30 year-OATi

ë Inflation uncertainty over a very long period implies

greater need for protection
ë Investors look for long-dated inflation-protected
instruments to match long-duration liabilities
ë Positive carry
ë Developing a longer real rate yield curve will offer :
l better portfolio adjustment
l real rate curve arbitrage
l better overall market liquidity

25
A wide range of investors
ë Insurers
l Non-Life insurance companies
l Life insurance companies

ë Retirement and pension funds, mutual funds

managing corporate savings schemes
ë Asset management companies
l Equity asset management
l Fixed income asset management
l Specialised funds

ë Retail investors

26
Insurers and Pension Funds

ë Life insurance companies

l hold long-duration liabilities
l exposed to long-term inflation ( especially pension)
l need for a liquid alternative to real estate and equity
offering a capital guarantee

ë Retirement and pension funds

l capitalisation vehicles look for long-dated inflation-
protected instruments for asset and liability matching
l distribution vehicles also look for similar protection to
hedge their “prudential guarantee fund”

27
Insurers and Pension Funds

ë Non-Life insurance companies

l property : standard long contractual policy involving
needs for real-rate long-dated assets
l casualty : OATi well suited for new contracts which
guarantee “replacement to identical”

ë Insurers with a globalised casualty and life

insurance management
l Protection against a brisk increase of long-term yields
as a significant bulk of their outstanding policies still
pay very high minimum returns.

28
Asset Management

ë Equity/Bonds mixed funds

l A way to better diversify portfolios with a low volatility
asset far less exposed to a strong depreciation of fixed
rate bond market
l Active Asset Management:
• Offensive strategy: OATi allows fund managers to
overweigh risky assets in their portfolio mix
• Defensive strategy: In case of a bear market, OATi
protects portfolio performance
l The issuance of a long-dated OATi will create
opportunities for break-even inflation maturity trades
ë Specialized funds
l A new asset with different maturities and credits (French
republic, Cades, Oresund Konsortiet…)

29
Retail

ë OATi have been offered to retail in France through the OAT

private investor program since Jan 1999. OATi accounts for
20% (around EUR 300 million for 1999) of the total OAT
amount sold to individuals

ë The 30 yr OATi is a good complementary asset for

retirement savings ( low risk and higher return than money
market funds ). Private individuals are increasingly shifting
their short-term financial assets into savings support with
longer investment horizon

ë Indirect purchase of OATi through Mutual Funds is high

ë Capital guarantee and purchasing power protection will

undoubtedly generate natural demand all over the euro
zone.
30
Summary

I Structure of OATis
II Market development
III The rationale for a 30 year-OATi
IV France Trésor issuing policy
V Comparisons, correlations and analysis
VI How to access France Trésor information?

31
France Trésor OATis Issuing policy

ë OATis match the standard of fixed-rate OATs

l liquidity (outstanding amount, price quotation,...)
l transparent issuing policy
l constant and proactive cooperation issuer/primary dealers
l the most liquid and efficient Repo market in the Euro zone
l build a yield curve

ë France Trésor will auction 10 & 30 yr OATi in the

future:
l within the indicative amount of OATi issuance as detailed
in the yearly financing program
l frequency, maturity and auction size will closely match
final customer demand

32
Summary

I Structure of OATis
II Market development
III The rationale for a 30 year-OATi
IV France Trésor issuing policy
V Comparisons, correlations and analysis
VI How to access France Trésor information?

33
Principal Index-linked market features
Australia Canada Sweden * United Kingdom United States France

First issue 1985 1991 1994 1981 1997 1998

date
Maturities 2005 to 2020 2021 to 2031 2001 to 2028 2001 to 2030 2002 to 2029 2009 to 2029

Reference CPI CPI CPI RPI CPI-Urban INSEE CPI

CPI (quarterly) (monthly) (monthly) (monthly) (monthly) (monthly)
Coupon Quarterly Semi -annual Annual Semi-annual Semi-annual Post- Annual
frequency Pre-determined Post- determined
and type determined Post-determined Pre-determined Post-determined

Indexation Quart. with Daily with Daily with On RPI with Daily with Daily with
mechanism 3-month lag
3-month lag 3-month lag * 8-month lag 3-month lag. 3-month lag.

Redemption at a Redemption at a
minimum of par. minimum of par.

Amount 2020: A$ 250 m 2031: C$ 1bn - 2011: £375 m 2029: US$ 7bn 2009: EUR 2.4bn
issued from
January 2015: A$ 100 m 2030: £375 m 2008: US$ 7bn
1999 2024: £375 m 2009: US$ 8bn

* Since 1999 Sweden has adopted the same structure as the French and
US ones with a principal repayment at par

34
Break-even Inflation: International comparison

US UK France
Short term 5.25 4.68 2.5
Nominal Rate 10 year 6 5.3 5.05
30 year 6.12 4.55 5.75
Real 10 year 4.04 2.27 3.2
Rate 30 year 4 2.04
Current inflation 2.1 2.2 0.3
Break-even 10 year 1.96 3.03 1.85
inflation 30 year 2.12 2.50
Slope Spread 10-30 0.12 -0.65 0.70
Spread 10-30 real -0.04 -0.23
3rd September 99

35
Break-even Inflation: Historical comparison
3.5

2.5

1.5
France 10 yr
1 US 10 yr
UK 10 yr
0.5 US 30 yr
UK 30 yr
0

Aug-99
Apr-99

May-99
Jan-99

Jun-99

Jul-99
Oct-98

Feb-99

Mar-99
Sep-98

Dec-98
Nov-98

36
Real rate in France
ë Calculation of the short term real rate is straight-forward:
Short Real Rate = Short Rate - Current inflation
2.20 = 2.50 - 0.30
ë The 10 year real rate depends on the unpredictability of nominal rates
10 yr Real Rate = 10 yr Rate - Break-even inflation
3.20 = 5.05 - 1.85
ë The break-even inflation includes anticipated inflation and the inflation risk
premium which is higher on a 30 year bond than on a 10 year bond
5.0 3 month Euribor
OATi 3% 07/2009
OAT 8.5% 10/2008
4.5

4.0

3.5

3.0

2.5
Jan-99 Feb-99 Mar-99 Mar-99 Apr-99 May-99 Jun-99 Jul-99 Aug-99 37
Real rate in France

ë 30 yr Real Rate = Nominal Rate - Break-even

inflation
3.9
3.7
Real Rate

3.5
3.3
3.1
2.9
2.7
2.5
2 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 3
Break-even Inflation

38
Assessing the real rate curve: Term structure

ë US real and nominal curves (3rd sept 99)

6.5

Nominal rates
5.5
Real rates
5

4.5

3.5

3
1999 2002 2005 2007 2010 2013 2016 2018 2021 2024 2027 2029

39
Assessing the real rate curve: Term structure

ë UK real and nominal curves (3rd sept 99)

6

5.5

4.5
Nominal rates
4 Real rates

3.5

2.5

2
1999 2002 2005 2007 2010 2013 2016 2018 2021 2024 2027 2029

40
Assessing the real rate curve: Curve slope
ë US real and nominal curve differentials

Aug-98

May-99

Aug-99
Nov-98

Dec-98
Sep-98

Feb-99

Mar-99

Jun-99
Jan-99

Apr-99
Oct-98

Jul-99
0.9
10 to 30 real rate slope
10 to 30 nominal rate slope
0.7

0.5

0.3

0.1

-0.1

-0.3

41
Assessing the real rate curve: Curve slope

ë UK real and nominal curve differentials

May-99

Aug-99
Nov-98

Dec-98
Sep-98

Mar-99
Feb-99

Jun-99
Jan-99

Apr-99
Oct-98

Jul-99
0.2

0.0

-0.2

-0.4 10 to 30 real rate slope

10 to 30 nominal rate slope
-0.6

-0.8

-1.0

42
Duration and risk 1

ë High duration + Low real rate volatility = low price exposure

ë OATi 2009 price exposure is less than half the price exposure
of OAT 2008

Duration Basis Point Rate Price

Value volatility volatility

OATi 07/2009 8.65 8.21 7.5% 2%

OAT 04/2009 7.98 7.11 18.4% 5.5%

From September 98 to September 99

43
Duration and risk 2

ë OATi 2009 price exposure is equivalent to the

OAT 2002 price exposure
16%
OAT's price volatility
14%
OATi 2009 and CADESi 2013 price volatility
12%

10%

8%
OAT
6%

4% CADESi
OATi
2%

0%
1999 2001 2003 2004 2006 2008 2009 2011 2013 2014 2016 2017 2019 2021 2022 2024 2026 2027 2029

Volatilities are calulated from September 98 to September 99

44
Duration and risk 3
80% 3.5
Ratio OATi 2009 Volatility / OAT
10/2008 Volatility 3.4
70%
OATi 2009 real rate 3.3
60%
3.2
50%
3.1

40% 3.0

2.9
30%
2.8
20%
2.7
10%
2.6

0% 2.5
11/98 11/98 12/98 01/99 02/99 03/99 04/99 05/99 06/99 07/99 08/99

OATi Volatility increases when OATi performs

Volatilitiy is calculated on 30 days

45
10 year real rate: Correlations

3-month OAT 10
Euribor year
OATi 2009 0.51 0.31

5.0 3 month Euribor

OATi 3% 07/2009
OAT 8.5% 10/2008
4.5

4.0

3.5

3.0

2.5
Jan-99 Feb-99 Mar-99 Mar-99 Apr-99 May-99 Jun-99 Jul-99 Aug-99

46
Summary

I Structure of OATis
II Market development
III The rationale for a 30 year-OATi
IV France Trésor issuing policy
V Comparisons, correlations and analysis
VI How to access France Trésor information?

47
France Trésor information sites

ë Web : www.oat.finances.gouv.fr

ë Bloomberg : TRESOR <GO>

ë Reuters : <TRESOR>

ë Reuters web : http://tresor.session.rservices.com

48