1. Investment Implementation: Questioning the De-risking Concept Joe Ramos
William Berkmeier
This presentation and all research and materials enclosed are property of Lazard Asset Management LLC. © 2011 Lazard Asset Management LLC
Information and opinions presented have been obtained or derived from sources believed by Lazard to be reliable. Lazard makes no representation as to their accuracy or completeness. All opinions expressed herein are as of the date of this presentation and are subject to change.
An investment in bonds carries risk. If interest rates rise, bond prices usually decline. The longer a bond’s maturity, the greater the impact a change in interest rates can have on its price. If you do not hold a bond until maturity, you may experience a gain or loss when you sell. Bonds also carry the risk of default, which is the risk that the issuer is unable to make further income and principal payments. Other risks, including inflation risk, call risk, and pre-payment risk, also apply. High yield securities (also referred to as “junk bonds”) inherently have a higher degree of market risk, default risk, and credit risk.

2. The U.S. Fixed Income Market Remains Precarious
We are in the middle of an unprecedented deleveraging transition of key historical pillars of prior stability; Financials, Housing, Consumer.
Central bank policy is in uncharted waters in a new era of aggressive intervention and balance sheet leverage.
Interest rates are abnormally low and unlikely to go lower without the advent of a prolonged disinflationary environment.
Ratings, the standard barometers of impairment outcomes, are unreliable.
The information and opinions expressed are as of October 31, 2011 and are subject to change.

3. Deleveraging Will Take Years – Expect Disruptions
During The Great Moderation, the private sector increased debt to unprecedented levels as leverage and wealth became interlinked
The current deleveraging era is likely to continue to be defined by cash flow disruptions, defaults, restructurings, and government interventions
299% of GDP
92%
72% of GDP
29% of GDP
(%)
Peaked at 367%
of GDP in 1Q2009
88%
73%
81%*
Need to merge data source for pages 4 and 5 and set cell references for page 5 to year-end lines for page 4. - ok
As of 30 June 2011
Source: U.S. Federal Reserve, U.S. Bureau of Economic Analysis, Morgan Stanley, U.S. Treasury Department
* Government debt includes federal debt owned by the public ($9.8 trillion) (including federal debt owned by other government entities would increase this figure by $4.6 trillion) and debt issued by state and local governments ($2.4 trillion)

4. Uncharted Waters: Aggressive Intervention and Balance Sheet Leverage
U.S. Federal Reserve Balance Sheet
(USD 000s)
U.S. Treasury OAS of 5-10 Year Bank Debt versus the TED Spread
(bps)
Need to merge data source for pages 4 and 5 and set cell references for page 5 to year-end lines for page 4. - ok
As of October 26, 2011
Source: Bloomberg, BofA Merrill Lynch

5. U.S. Treasury Rates are Abnormally Low
As of 15 September 2011
Source: U.S. Federal Reserve, Bureau of Labor Statistics

6. Ratings Have Been Unreliable
Industry
Description
Jan '07 Eff Dur
Jan '07 Yield
January Composite Rating
June 2009 Composite Rating
Brokerage
Goldman Sachs
7.2
5.69
AA- A
Lehman Bros.
7.9 A+
Default
Banking
Wells Fargo
13.5
5.82 AA
Wash Mutual
5.75 A-
Banking/Brokerage
Barclays PLC
7.4
Kaupthing Bank
7.1
6.07
Insurance
Mass Mutual
13.3
5.80
Ambac
13.4
6.05 C+
Apparel/Textiles
VF Corporation
12.6
6.43
Jones Apparel
12.1
7.13
BBB- B+
Printing & Publishing
Donnelley & Sons
6.16
BBB
Knight Ridder
7.5
6.67
CC+
Building & Construction
MDC Holdings
6.6
6.41
Lennar Corp
6.5
6.20
The securities identified are not necessarily held by Lazard Asset Management for all client portfolios, and should not be considered a recommendation or solicitation to purchase or sell these securities.
Shown for illustrative purposes only.
Source: Bank of America Merrill Lynch, Bloomberg