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CIO Insights Resilience versus recession 03 Bonds: approaching equilibrium 2022 was a turbulent year for the bond market. Sharply rising inflation and the increasingly tight monetary policy of many central banks resulted in substantial yield increases. 10-year U.S. bond yields, for example, went from 1.5% at the end of 2021 to around 4%. The yield on investment- grade European corporate bonds currently averages 4.3%, compared with just 0.5% at the end of 2021. 2022 may however prove to have been a year of transition to increased bond market stability. Following the great sell-off, 2023 could offer more interesting investment opportunities. The basis for any new equilibrium must be an expectation that inflation will not reach the persistent very high levels seen in the 1970s. It is more likely that inflation rates will be moderately high, like they were between 1998 and 2014. Average inflation forecasts currently stand at around 2.5% for the next five years in the U.S., for example. Overall, current bond yields are fairly close to levels that have historically been associated with a moderately high inflation environment. Figure 5: Yields: current vs. end-2021 and recent averages* Source: Deutsche Bank AG, Refinitiv Datastream. Data as of November 21, 2022. % 12 24 10 20 8 16 6 12 4 6 2 4 0 0 -2 -4 10 year U.S. breakeven 10 year ECB Deposit Eurozone U.S. HY EUR HY MSCI U.S Treasuries 10 year Bunds Facility Rate HICP YoY Europe 5Y Michigan 10 year Federal Funds U.S. CPI YoY U.S. IG EUR IG S&P 500 Infl. Exp U.S. TIPS Rate (Upper) Note: *Figures from 1998 to 2014 (except for EUR HY from 1999 to 2014) 31.12.2021 (Yields,Ihs) Current Yield (Ihs) Average Yield (98-14) (Ihs) 31.12.2021 (P/E, rhs) Current (P/E, rhs) Average P/E (98-14) (rhs) Bond market investors will however have little cause to relax. The value of bonds will continue to fluctuate widely, taking time to calm the ongoing hit from inflation and interest rate rises. Further, if less substantial interest rate increases are expected in the U.S. and, above all, in the Eurozone because central banks are likely to pursue their tight anti-inflationary policies, this will create headwinds in the bond market. Due to the ongoing risks, investors will probably initially prefer liquid and investment-grade bonds from the U.S. and Europe in the months ahead, despite the return to attractive yields in most bond categories. In Europe, Middle East and Africa as well as in Asia Pacific this material is considered marketing material, but this is not the case in the U.S. No assurance can be given that any forecast or target can be achieved. Forecasts are based on assumptions, estimates, opinions and hypothetical models which may prove to be incorrect. Past performance is not indicative of future returns. Performance refers to a nominal value based on price gains/losses and does not take into account inflation. Inflation will have a negative impact on the purchasing power of this nominal monetary value. Depending on the current level of inflation, this may lead to a real loss in value, even if the nominal performance of the investment is positive. Investments come with risk. The value of an investment can fall as well as rise and you might not get back the amount originally invested at any point in time. Your capital may be at risk. This document was produced in December 2022. 9

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