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Where to Now? A discussion of Fixed Income markets after the November Election

Where to Now? A discussion of Fixed Income markets after the November Election. Presented by: Matt Toms Head of U.S. Public Fixed Income Investments ING U.S. Investment Management November 27 th , 2012. The Debt Super Cycle Unwind.

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Where to Now? A discussion of Fixed Income markets after the November Election

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  1. Where to Now? A discussion of Fixed Income markets after the November Election Presented by: Matt Toms Head of U.S. Public Fixed Income Investments ING U.S. Investment Management November 27th, 2012

  2. The Debt Super Cycle Unwind • The current economic environment is a continuation of the unwinding of the debt super cycle that peaked in 2008. Source: IMF; Reuters EcoWin IMF Projections as of 11/15/11 1

  3. U.S. Economic Headwinds • The U.S. economy will continue to face the effects of consumer deleveraging, but growth will prove resilient, albeit subdued. Source: Bloomberg and ING U.S. Investment Management Data as of September 2012. 2

  4. U.S. Government Debt and Deficit Perspective • Total federal public debt outstanding exceeds 95% of GDP, and the current U.S. deficit is more than 9% of GDP (excluding Social Security and Medicare). % of GDP U.S. Government Debt Deficit Levels $ > 95% of GDP Debt > 9.4% of GDP Debt Deficit Deficit Source: Factset 3

  5. Fed Funds Target Rates and U.S. Treasury Yields • Both the Fed funds rate and U.S. Treasury yields are at their lowest levels ever, and the Fed has indicated it intends to keep rates low well into 2015. 3 Month T-Bill Yield Treasury Yields % Fed Funds Target Rates % 2-Year T-Note Yield 3-Month T-Bill Yield 1 basis point Average 1 basis point Note: 3-Month T-Bill Yield is annualized based on purchase at a discount and holding to maturity. The 2-Year Treasury Note Rate is annualized. Source: Reuters, Bloomberg, FactSet 4

  6. Mutual Fund Flows • Notwithstanding low interest rates, year-to-date 2012 bond flows have been very strong, while net outflows from domestic equity funds show that investors remain spooked by market volatility. Source: Investment Company Institute (ICI)

  7. Stock vs. Bond Valuation • Stocks look historically attractive based on their earnings yield (E/P) vs. the yield-to-maturity of 10-year Treasuries. % Earnings Yield (solid = forward, dotted = trailing) U.S. Treasury Yield (10 year) Equivalent to P/E of 13 7.91 Equivalent to P/E of 59 1.70 Note: Earnings Yield is the inverse of the P/E ratio and is calculated as the sum of the reported next twelve months’ earnings estimates divided by market capitalization. The 10-year U.S. Treasury yield is used for bonds. Source: Standard & Poor’s, First Call, Reuters, Bloomberg, FactSet 6

  8. Dividend Yields • Disregarding the 2008 spike, stock dividend yields remain generally above levels seen since 1996 — and historically attractive relative to bond yields. Dividend Yields Dividend Yield Minus Bond Yield % % Stocks Attractive Falling Stock Prices Rising Stock Prices average Bonds Attractive Note: Bond yield is represented by the 10-year U.S. Treasury note. Source: Standard & Poor’s, Reuters, FactSet 7

  9. Monetary Policy Outlook • Both developed and emerging market central banks continue to pursue accommodative monetary policies. Source: Bloomberg, ING U.S. Investment Management Data as of September 2012. 8

  10. Euro Zone • Even with total debt at 152% of GDP, Greece accounts for less then 3% of the euro zone, but Italy is a major economy with much higher total debt at 120% of GDP, and Spain has serious bank solvency concerns. Source: International Monetary Fund (IMF) as of 2011 9

  11. Euro Zone Real GDP • Euro zone growth has faltered, and the 17-country region is now in recession. Yearly Change Quarterly Change Source: FactSet 10

  12. European Economic Issues • The ongoing political and fiscal turmoil in Europe has led to outright recession. European policymakers must now take more decisive and immediate action to avoid more serious consequences. Source: Bloomberg Data as of September 2012. 11

  13. Developed and Emerging Market Contrasts • Aging populations in mature economies strain public resources and produce heavier government debt burdens that hinder economic growth. *G7= France, Italy, Germany, Japan, U.K., U.S and Canada Source: IMF, CIA World Factbook

  14. International Economics • China, India and Brazil are growing rapidly, and China is now second only to the U.S. in total output, while Germany’s export-driven economy is the runaway euro zone leader. Source: FactSet. Data is most recent available. 13

  15. Consumer Trends • At about 70% of GDP, the U.S. consumer is the game changer in the economic recovery. Consumption, income and retail sales are at all-time highs, and retail sales, although stalled earlier this year, have risen consistently. $ billions Highest level ever Personal Income Retail Sales Personal Consumption Expenditures Source: FactSet 14

  16. Employment Payrolls • Total payrolls, including all non-farm employment, have inched upward from low second quarter figures, but not enough to meaningfully reduce unemployment rates. 000’s +184 most recent private Total Payrolls +171 most recent total Total Private Payrolls Source: FactSet 15

  17. Unemployment Rate • High unemployment may reluctantly recover as growth resumes; recent reports and news of job growth and payrolls have shown a modestly favorable trend. 000’s Recessions Unemployment Rate Initial Unemployment Claims Source: Bureau of Labor Statistics, FactSet

  18. S&P Case-Shiller Home Price Index • Home values are still 31% below 2006 levels but the 20 City Composite Index has shown recent upticks and signs of a sustainable recovery with the first year-over-year price increase in two years. Index Level % 1 YR change 207 146 Source: Factset, S&P Case-Shiller, Bloomberg 17

  19. Consumer Confidence • U.S. consumer confidence seems low, but consumer confidence is backward-looking and has often been a contrary indicator for subsequent stock market returns. Index Level Market returned 16.3% in subsequent 12 months Total Index Market returned 13.9% in subsequent 12 months Present Market returned 49.8% in subsequent 12 months Source: The Conference Board, Factset 18

  20. Home Sales and Housing Starts • Despite positive recent evidence that housing has turned the corner, the sector still lags other U.S. industries; existing homes and new household formation suggest that outstanding supply will remain a hurdle for some time. 000’s 000’s Peak: 2.27 million housing starts/month Housing Starts including multi family (right axis) Existing Homes (left axis) New Homes (right axis) Source: U.S. Census Bureau, FactSet 19

  21. Savings Rates and Household Net Worth • Lower personal savings rates and household net worth increase the burden that future savings must bear to achieve retirement security. 3 month average, % of disposable income $ trillions Most recent data:9/30/12 Most recent data: 6/30/12 62.8 Household wealth has likely stabilized 3.7 Since reaching a bottom at 1% in 2008, the savings rate has moved unevenly higher. Source: Bureau of Economic Analysis, Federal Reserve, FactSet.

  22. Commercial Real Estate • Commercial real estate prices, which are highly correlated to the business cycle, have recovered nearly half of the decline from the 2007 peak, led by rising demand for prime office and apartment space in major urban centers. Source: Moody’s/RCA, Bloomberg Commercial data as of July 2012, Unemployment data as of August 2012. 21

  23. Operating Profits and Operating Margins • Corporate profits (excluding financials) have improved steadily along with operating margins, which collapse in recessions and surge in recoveries. Recovery` Recovery` Recovery` Recession Recession Recession Note: Values are calculated based on a market value-weighted sum of the quarterly historical results of the S&P 500 constituents excluding Financials. Values reflect results for trailing four quarters at each quarter end. Data as of 6/30/12. Source: Standard & Poor’s, Compustat, FactSet

  24. U.S. Leading Indicators • U.S. Leading Indicators have been consistently positive — in fact, for 19 of the last 24 months. % Recessions Source: Bloomberg, Factset The Conference Board U.S. Leading Index consists of the weighted average of the following indices: 1. Average weekly hours, manufacturing 2. Average weekly initial jobless claims 3. Manufacturers’ new orders, consumer 4. Vendor performance, slower deliveries 5. Manufacturers’ new orders, capital 6. Building permits, new private housing units 7. Stock prices, 500 common stocks 8. Money Supply, M2 9. Interest Rate Spreads 10. Index of consumer expectations 23

  25. Broadening Manufacturing • U.S. manufacturing capacity utilization is expanding from record lows and is nearing historically normal levels. Manufacturing is a significant part of the U.S. economy and accounts for 61% of U.S. exports. U.S. Manufacturing Capacity Utilization U.S. Export Composition % 78% Source: FactSet , U.S. Census Bureau

  26. Broadening Manufacturing • U.S. factory activity bounced back into expansion territory in September, after depressed summer readings driven by uncertainties about the euro zone, China and the “fiscal cliff” at home. Global Manufacturing U.S. Institute for Supply Management Expansionary (>50) Non Manufacturing 54.2 49.2 51.7 45.4 Manufacturing Contractionary (<50) Source: Institute of Supply Management, Federal Reserve, FactSet

  27. A Capital-Spending-Led Recovery • Corporations have ample capacity to retool with cash — not debt — while contributions to growth from fiscal policy, housing, and consumption may be muted. Source: Bloomberg, ING U.S. Investment Management Data as of June 2012. 26

  28. U.S. New Durable and Non-Durable Goods Orders • New durable goods orders recovered last month after plummeting to the lowest levels since February 2011 in September. $ billions Non-Durable Goods Durable goods Source: Factset 27

  29. Inflation — CPI • Core and headline inflation remain under control; recent figures show that commodities prices have rebounded after having retreated dramatically for almost two years. % Index Level CRB Index (left) Core Inflation (right axis) Headline Inflation (right axis) Note: Core CPI reflects consumer price inflation excluding food and energy. Source: Factset. 28

  30. Bond and Loan Returns • Although long-term U.S. Treasuries were winners in crisis periods, over time, risk relates to return in a rational way, and riskier bonds have been the leaders. Note: All spreads are option-adjusted spreads except for Emerging Markets and Senior Loans. Emerging Markets spread is the spread over the U.S. Treasury curve. Senior Loans spread is the average three-year call secondary spread. All returns are total returns including dividends expressed as percentages. Returns for 3- and 5-year periods are annualized. All other returns are cumulative. Source: Barclays Capital, JPMorgan, Standard & Poor’s 29

  31. Federal Budget Deficit • Troubling projected budget deficits are driven by large mandatory programs, defense and interest payments, making it difficult to reduce government spending. Federal Budget Deficit Federal Budget Breakdown Source: Congressional Budget Office, Office of Management and Budget, Data as of 2012

  32. The steep U.S. yield curve is indicative of economic growth. Higher yield opportunities can be found outside the U.S. Yield Curves U.S. Yield Curve Global Yield Curves 3 mo 2 yrs 5 yrs 10 yrs 30 yrs 3 mo 2 yrs 5 yrs 10 yrs 30 yrs Source: Reuters, Bloomberg, FactSet

  33. Global Yields • Investors seeking income may benefit from the rich opportunities for higher yield available from global bonds. 10-Year Sovereign Bond Yields Source: Bloomberg, FactSet

  34. U.S. Treasury Yield • Nominal and real yields on 10-year U.S. Treasuries are far below long-term averages, and the Fed’s open market operations are designed to keep them low. 10-Year Treasury Yield Real 10-Year Treasury Yield % % 0 1.73 Note: Real 10-Year Treasury Yield is equal to the 10-Year Treasury yield minus core CPI (ex food and energy) Source: Federal Reserve, Bloomberg, FactSet

  35. Spread Sectors Outlook • In an increasingly scarce yield environment, higher quality spread sectors will be very well supported and yield spreads will be contained within the ranges of the past 12 months. Source: Barclays Capital Aggregate Benchmark Index data, Moody’s. Data as of September 2012. 34

  36. Foreign Ownership of U.S. Treasuries • Foreign ownership of U.S. debt has more than tripled since 2000, in effect, financing U.S. consumption and facilitating unsustainable deficit spending. Foreign Ownership of Treasuries Breakdown of Foreign Ownership $ billions Europe 11% $5.1 trillion Other 17% Commodity Exporters 8% Offshore 16% Japan 21% China 27% Source: U.S. Treasury. Data as of 6/15/2012, Factset

  37. Major Currencies • The U.S. dollar declined marginally in 2012, bringing it to 36% below its 1985 peak compared to a trade-weighted basket of world currencies. € falling vs.$ ¥ falling vs. $ ¥ / $ $ / € 12/31/11: 76.94 10/31/12: 79.56 Change: -3% 12/31/11: 1.30 10/31/12: 1.29 Change: -.7% £ rising vs.$ $ falling vs. major currencies $ / £ 12/31/11: 1.55 10/31/12:1.61 Change: 3.8% 12/31/11: 82.18 10/31/12: 82.42 Change: .3% Source: FactSet

  38. Disclosure An investor should consider the investment objectives, risks, charges and expenses of the Fund(s) carefully before investing. For a free copy of the Funds’ prospectus, which contains this and other information, visit us at www.inginvestment.com or call ING Funds at (800) 992-0180. Please read the prospectus carefully before investing. CID-4956

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