NonUS Supranational Panel Margaret Kerins CFA Head of

Non-US Supranational Panel Margaret Kerins, CFA Head of Fixed Income Strategy Margaret. Kerins@bmo. com 312 -845 -2687 Dan Krieter, CFA Dan. Krieter@bmo. com 312 -845 -4015 October 27, 2020 0

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SSA Strategy USD SSA Market Grows While GSEs Shrink USD Non-DN Debt Outstanding ($ bn) • US agency non-DN outstandings have shrunk by over $800 bn since 2008, or by 40%. • The USD SSA market has grown to 77% of the non-DN US agency market, compared to 23% in 2008. • Net Issuance since the financial crisis • US Agency: -$841 bn • USD SSA: $569 bn USD Net Non-DN Debt Issuance ($ bn) 2 Source: FNMA, FHLMC, FHLB, FFCB, Bloomberg

SSA Strategy Agency Issuance Declining • FHLB and FFCB now the dominant issuers in the agency market • DN and floater issuance has increased while the bullet and callable markets shrink at all four GSEs • Bullet issuance difficult to find in the agency market. Likely diversification needs as FHLB and FFCB represent the best way to add term debt. 2015 Net Agy Issuance ($ bn) 3 Source: FNMA, FHLMC, FHLB, FFCB 2015 Net Agy Issuance ($ bn)

SSA Strategy Reform: Decline the Only Certainty • FNMA and FHLMC expected to continue shrinking until $250 bn floor is reached in 2018. • Debt used to fund retained mortgage portfolios will not be a feature of whatever shape housing finance reform takes. • Bottom Line: Under every regulation bill yet introduced to Congress, FNMA and FHLMC are wound down over a five year period, after which all remaining debt is explicitly guaranteed. 2015 Net Non-DN Agy Issuance ($ bn) 4 Source: FNMA, FHLMC

SSA Strategy What Is the Most Logical Replacement for Agency Debt? • MBS? Prepayment/Extension risk; Uncertainty over mortgage market reform. • Corporates? Credit and liquidity risk High Quality Market • Supranational – International organization whose mandate extends across national boundaries e. g. IBRD (World Bank), EIB (European Investment Bank), Af. DB (African Development Bank). Typically backed by paid-in and callable capital of member countries. • Sub-Sovereign – Public debt at a sub-national level e. g. Canadian Provinces. • Non-US Agency – Public and private entity that typically functions for a social or public need e. g. Kf. W (Kreditanstalt für Wiederaufbau), EDC (Export Development Bank of Canada). 5

SSA Strategy Key Factors of SSA Debt • SSA Analysis Checklist • Purpose • Parent Country/Countries • Guarantee Structure from Parent (Explicit, Maintenance, Implicit) • Rating (and Dependency of Rating on Parent) • Regulatory Risk Weighting • Size of USD Borrowing Program • Trading Spread 6

SSA Strategy BMO SSA Cheat Sheet a Good Resource 7

SSA Strategy Overview of USD SSA Market USD SSA Issuance ($ bn) • In 2015, USD SSA issuance totaled $217 bn, down slightly from 2014. • 2016 supply likely similar to 2015 • On average ~75% of SSA deals are benchmark-sized (>=$1 bn). • $37 bn in MTN supply in 2015. • Global vs. 144 a/Reg. S format. • Kf. W/EIB/IBRD represent ~30% of total USD SSA supply USD SSA Issuance ($ bn) 8

SSA Strategy Who Buys USD SSA Debt? • On average, banks and central banks purchase almost 80% of new USD SSA issues. • Central banks: ~50% of SSA debt purchased. Focus on the safety of FX reserves • Banks: Increased from 10% to 35% of SSA purchases due to favorable regulatory capital treatment Distribution of Post-Crisis New Issue SSA Deals (%) 9 Source: Informa, BMO Capital Markets % of New Issues Bought by Banks (%)

SSA Strategy SAFETY: Supranationals the Safest Option in the SSA Market • Within the SSA market, supranationals have the strongest credit quality • Preferred Creditor Status • Backed by Paid-in and Callable Capital from member countries World Bank Loans and Available Capital 10 Source: IBRD Investor Presentation

SSA Strategy LIQUIDITY: Supranational the Most Liquid Option in the SSA Market • Most SSA debt is not TRACE eligible, making liquidity measurements difficult. • Market Efficiency Coefficient (MEC) is a measure of liquidity, and SSA debt is closing the gap on agencies. • Supranationals trade similar to TSY/Agy. Agencies trade more like corporates. MEC Over the Past 5 Years 11 Source: Trade. Web, , Bloomberg, BMO Capital Markets

SSA Strategy LIQUIDITY: SSA Liquidity Improving in Normal Market Conditions • Average Bid/Ask spread equal to US agency debt (~3. 5 bp). • SSA bid/ask spreads roughly equivalent to agencies in normal times, but still vulnerable to drops in stressed market environments. • Included in major US fixed income indices (Barc, Citi, BAML). SSA Bid/Ask Spread Relative to US Agencies(bp) 12 Source: Trade. Web, , Bloomberg, BMO Capital Markets

SSA Strategy RETURN: How Do SSAs Trade Compared to Agencies? 3 yr Spread to Treasuries 13 Source: Trade. Web, BMO Capital Markets 3 yr SSA Spreads to Agencies

SSA Strategy SSA Borrowers at the Forefront of Socially Responsible Investing • • SSA borrowers were the very first issuers in the green bond market. In 2015, 40% of green bond issuance came from SSA borrowers. 2016 issuance may approach $75 bn following Paris climate accord. SSA institutions are experts in the green bond space, with green frameworks and reporting standards greatly exceeding the standards of other borrowers. Green Bond Issuance ($ bn) 14 Source: Trade. Web, , Bloomberg, BMO Capital Markets Number of Socially Responsible Mutual Funds

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