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We have updated our Fixed Income Model Portfolios to reflect our current opinion of the market place and our specific security recommendations. Please see page 4 for links to the Model Portfolios or contact your Financial Advisor for further information. On February 21, 2013, we made a change to our Asset Class High Yield Portfolio. Please click on the link on page 4 for more details on the change or contact your Financial Advisor. TIPS have taken the top spot as the worst-performing asset class to start the year, posting a return of -1.54%, followed by emerging markets with a -1.05% return; High Yield generated the best return over the same time period of 1.41%. While the Treasury Index is only down -0.70% the devil still lies in the details, in our opinion. Looking deeper at the returns, the long end of the Treasury curve, more specifically the 10 & 30 year, are down -1.98% & -5.13%, respectively. In our opinion, investors in long duration, risk-free securities may want to revisit their holdings. While spreads on the HY Index are still historically above the tights of 240bps in 2007, the yield-to-worst continues to sit below 6.00% at 5.82%. Currently, 72% of the Citigroup High Yield Market Index is callable/puttable, which makes price appreciation very challenging due to the negative convexity of the asset class. With a callable bond, as interest rates fall, the incentive for the issuer to call the bond at par increases; therefore, its price will not rise as quickly as the price of a non-callable bond. Due to this call constraint, prices could re-route high yield buyers into other asset classes such as equities, in our view. High Grade spreads continue to be range-bound to start 2013. Currently, the spread on the IG Index is 135 with the index trading between 131 and 135. The two worst-performing IG sectors year to date are Publishing -2.66% and Telecommunications, -2.37%, while the two best-performing sectors are Securities, 1.18%, and Building products, 0.60%.
KEITH E KNOOP
MSSB North America - Morgan Stanley Smith Barney LLC Keith.E.Knoop@mssb.com +1 212 783-3315
DAVID HAIRE
MSSB North America - Morgan Stanley Smith Barney LLC David.Haire@mssb.com +1 212 783-3308
This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This is not a research report and was not prepared by the Research departments of Morgan Stanley Smith Barney LLC, Morgan Stanley & Co. LLC, or Citigroup Global Markets Inc. It was prepared by Morgan Stanley Smith Barney sales, trading or other non-research personnel. Past performance is not necessarily a guide to future performance. Please refer to important information, disclosures, and qualifications at the end of this material.
Table of Contents
Fixed Income Model Portfolio Mission Statement Multi-Asset Class Portfolios Single-Asset Class Portfolios Model Portfolio Statistical Overview
Product Breakdown Historical Yield to Worst
Page 3 Page 3 Page 4 Page 5 Page 5 Page 5 Page 6 Page 6 Page 7 Page 7 Page 8 Page 8 Page 8 Page 9 Page 9 Page 9 Page 10 Page 10 Page 10 Page 11 Page 12 Page 13 Page 14 Page 15 Page 16 Page 17 Page 18 Page 18 Page 19 Page 20 Page 20 Page 21 Page 22 Page 24 Page 26 Page 27
US Treasury Yields
Yield Curve U.S. 10-year TIPS Breakeven
Representative Fixed Income Indices (Graphs) Index Definitions Glossary Fixed Income Risk Considerations Disclosures
Please refer to important information, disclosures and qualifications at the end of this material.
Please refer to important information, disclosures and qualifications at the end of this material.
Please click on the links below to access our most recently published Fixed Income Model Portfolio updates.
Fixed Income Model Portfolio: Conservative Multi-Asset Class Portfolio Fixed Income Model Portfolio: Moderate Multi-Asset Class Portfolio Fixed Income Model Portfolio: Aggressive Multi-Asset Class Portfolio Fixed Income Model Portfolio: Asset Class - Government Fixed Income Model Portfolio: Asset Class Corporate Fixed Income Model Portfolio: Asset Class Preferred
In lieu of our latest Asset Class High Yield full report, please click on the link below to access our most recently published Asset Class High Yield Change note published on February 21, 2013.
Fixed Income Model Portfolio: Change - Asset Class High Yield
Please refer to important information, disclosures and qualifications at the end of this material.
Source: Morgan Stanley Smith Barney Fixed Income Strategy, as of January 31, 2013
U.S.U.S. Treasury Conservative Moderate Aggressive Government Corporate Preferred High Yield 22.76% 4.45% 4.50% 31.48%
6.42%
Source: Morgan Stanley Smith Barney Fixed Income Strategy, as of January 31, 2013
Source: Morgan Stanley Smith Barney Fixed Income Strategy, as of January 31, 2013 International investing entails greater risk, as well as greater potential rewards compared to U.S. investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economies The majority of preferred securities are "callable" meaning that the issuer may retire the securities at specific prices and dates prior to maturity. Interest/dividend payments on certain preferred issues may be deferred by the issuer for periods of up to 10 years. The investor would still have income tax liability even though payments would not have been received. The initial rate on a floating rate or index-linked preferred security may be lower than that of a fixed-rate security of the same maturity.
Please refer to important information, disclosures and qualifications at the end of this material.
Source: MSSB Fixed Income Strategy; & Bloomberg. 2013 Citigroup Index LLC. All rights reserved. Data as of 2/21/13 and is subject to change at anytime.
Yield To Worst
550 500 450 400 350 300 250 200 150 100 50 0 Broad Investment Grade (BIG) Treasury Agency Mortgage Corporate 51 15 50 135
509
252
High Yield
Emerging Markets
Source: MSSB Fixed Income Strategy; & Bloomberg. 2013 Citigroup Index LLC. All rights reserved. Data as of 2/21/13 and is subject to change at anytime. Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets. Principal is returned on a monthly basis over the life of a mortgage-backed security. Principal prepayment can significantly affect the monthly income stream and the maturity of any type of MBS, including standard MBS, CMOs and Lottery Bonds. Yields and average lives are estimated based on prepayment assumptions and are subject to change based on actual prepayment of the mortgages in the underlying pools. Please refer to important information, disclosures and qualifications at the end of this material. 6
Source: MSSB Fixed Income Strategy; & Bloomberg. 2013 Citigroup Index LLC. All rights reserved. Data as of 2/21/13 and is subject to change at anytime.
High
Low
Current
Average
Source: MSSB Fixed Income Strategy; & Bloomberg. 2013 Citigroup Index LLC. All rights reserved. Data as of 2/21/13 and is subject to change at anytime.
Please refer to important information, disclosures and qualifications at the end of this material.
Source: MSSB Fixed Income Strategy; & Bloomberg. 2013 Citigroup Index LLC. All rights reserved. Data as of 2/21/13 and is subject to change at anytime.
Emerging Markets High Yield Corporate Mortgage Agency TIPS (1.54) Treasury Broad Investment Grade (BIG)
Emerging Markets High Yield Corporate Mortgage Agency TIPS (0.71) (0.04)
(0.82) (0.71)
-1.75 -1.50 -1.25 -1.00 -0.75 -0.50 -0.25 0.00 0.25 0.50 0.75 1.00 1.25 1.50 Total Return (%)
Source: MSSB Fixed Income Strategy; & Bloomberg. 2013 Citigroup Index LLC. All rights reserved. Data as of 2/21/13 and is subject to change at anytime. Treasury Inflation Protection Securities (TIPS) coupon payments and underlying principal are automatically increased to compensate for inflation by tracking the consumer price index (CPI). While the real rate of return is guaranteed, TIPS tend to offer a low return. Because the return of TIPS is linked to inflation, TIPS may significantly underperform versus conventional U.S. Treasuries in times of low inflation. Please refer to important information, disclosures and qualifications at the end of this material. 8
Source: MSSB Fixed Income Strategy; & Bloomberg. 2013 Citigroup Index LLC. All rights reserved. Data as of 2/21/13 and is subject to change at anytime.
M a y -0 9
A u g -0 9
N o v -0 9
F e b -1 0
M a y -1 0
A u g -1 0
N o v -1 0
F e b -1 1
M a y -1 1
A u g -1 1
N o v -1 1
F e b -1 2
M a y -1 2
A u g -1 2
N o v -1 2
F e b -1 3
6 mo 2 yr
5 yr
10 yr
30 yr
Source: MSSB Fixed Income Strategy; & Bloomberg. 2013 Citigroup Index LLC. All rights reserved. Data as of 2/21/13 and is subject to change at anytime. The table above represents an indication of the current US Treasury Yield Curve. The yield curve depicts the relationship between bond yields and maturities. Investors should use the yield curve as a point of reference. The treasury yield curve is widely used as a benchmark for pricing many other fixed income securities. Interest income from zero coupon bonds is subject to annual taxation as ordinary income even though no interest payments will be received by the investor if held in a taxable account.
Please refer to important information, disclosures and qualifications at the end of this material.
Source: MSSB Fixed Income Strategy; & Bloomberg. 2013 Citigroup Index LLC. All rights reserved. Data as of 2/21/13 and is subject to change at anytime.
30 Year (5.13)
(0.35)
10 Year
5 Year
(4.18)
(1.51)
3 Month T-Bill
0.01
(0.43)
1 Month T-Bill
0.00
0.03
-5.50 -5.00 -4.50 -4.00 -3.50 -3.00 -2.50 -2.00 -1.50 -1.00 -0.50 0.00 0.50 Total Return (%)
-5.00 -4.50 -4.00 -3.50 -3.00 -2.50 -2.00 -1.50 -1.00 -0.50 0.00 0.50 Total Return (%)
Source: MSSB Fixed Income Strategy; & Bloomberg. 2013 Citigroup Index LLC. All rights reserved. Data as of 2/21/13 and is subject to change at anytime.
Please refer to important information, disclosures and qualifications at the end of this material.
10
Source: MSSB Fixed Income Strategy; & Bloomberg. 2013 Citigroup Index LLC. All rights reserved. Data as of 2/21/13 and is subject to change at anytime. The yields represented herein are fair market yield curves and may not represent levels currently available. Credit ratings are subject to change. Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies. CD rates may vary due to a clients state of residence. CDs sold prior to maturity are subject to market risk and therefore investors may receive more or less than the amount invested or the face value. Callable CDs are callable at the sole discretion of the issuer.
Please refer to important information, disclosures and qualifications at the end of this material.
11
Source: MSSB Fixed Income Strategy; & Bloomberg. 2013 Citigroup Index LLC. All rights reserved. Data as of 2/21/13 and is subject to change at anytime. The value of fixed income securities will fluctuate and, upon a sale, may be worth more or less than their original cost or maturity value. Bonds are subject to interest rate risk, call risk, reinvestment risk, liquidity risk, and credit risk of the issuer.
Please refer to important information, disclosures and qualifications at the end of this material.
12
Source: MSSB Fixed Income Strategy; & Bloomberg. 2013 Citigroup Index LLC. All rights reserved. Data as of 2/21/13 and is subject to change at anytime. Please refer to important information, disclosures and qualifications at the end of this material. 13
Source: MSSB Fixed Income Strategy; & Bloomberg. 2013 Citigroup Index LLC. All rights reserved. Data as of 2/21/13 and is subject to change at anytime.
Please refer to important information, disclosures and qualifications at the end of this material.
14
Source: MSSB Fixed Income Strategy; & Bloomberg. 2013 Citigroup Index LLC. All rights reserved. Data as of 2/21/13 and is subject to change at anytime. Bonds rated below investment grade may have speculative characteristics and present significant risks beyond those of other securities, including greater credit risk, price volatility, and limited liquidity in the secondary market. High yield bonds should comprise only a limited portion of a balanced portfolio.
Please refer to important information, disclosures and qualifications at the end of this material.
15
Source: MSSB Fixed Income Strategy; & Bloomberg. 2013 Citigroup Index LLC. All rights reserved. Data as of 2/21/13 and is subject to change at anytime.
Please refer to important information, disclosures and qualifications at the end of this material.
16
Source: MSSB Fixed Income Strategy; & Bloomberg. 2013 Citigroup Index LLC. All rights reserved. Data as of 2/21/13 and is subject to change at anytime.
Please refer to important information, disclosures and qualifications at the end of this material.
17
Source: MSSB Fixed Income Strategy; & Bloomberg. 2013 Citigroup Index LLC. All rights reserved. Data as of 2/21/13 and is subject to change at anytime.
Source: MSSB Fixed Income Strategy; & Bloomberg. 2013 Citigroup Index LLC. All rights reserved. Data as of 2/21/13 and is subject to change at anytime. Investing in foreign emerging markets entails greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks. Please refer to important information, disclosures and qualifications at the end of this material.
18
Source: MSSB Fixed Income Strategy; & Bloomberg. 2013 Citigroup Index LLC. All rights reserved. Data as of 2/21/13 and is subject to change at anytime.
Please refer to important information, disclosures and qualifications at the end of this material.
19
Source: MSSB Fixed Income Strategy; & Bloomberg. 2013 Citigroup Index LLC. All rights reserved. Data as of 2/21/13 and is subject to change at anytime.
Source: MSSB Fixed Income Strategy; & Bloomberg. 2013 Citigroup Index LLC. All rights reserved. Data as of 2/21/13 and is subject to change at anytime. Investing in commodities entails significant risks. Commodity prices may be affected by a variety of factors at any time. In addition, the commodities markets are subject to temporary distortions or other disruptions due to various factors, including lack of liquidity, participation of speculators and government intervention. Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.
Please refer to important information, disclosures and qualifications at the end of this material.
20
Exhibit 31. Citigroup US Broad Investment-Grade (USBIG) Agency Index Option Adjusted Spread
200 180 160 140 120 OAS 100 80 60 40 20 0 M a y -11 F e b -11 N o v -11 M a y -12 F e b -12 N o v -12 F e b -13 F e b -0 8 N o v -0 8 M a y -0 8 F e b -0 9 N o v -0 9 M a y -0 9 M a y -10 F e b -10 N o v -10 A ug -11 A ug -12 A ug -0 8 A ug -0 9 A ug -10
Exhibit 32. Citigroup US Broad Investment-Grade (USBIG) Corporate Index Option Adjusted Spread
600
500
Average - 46
Current - 15
OAS
400
Average - 239
300
Current - 135
200
F e b -0 8
M a y -0 8
N o v -0 8
F e b -0 9
M a y -0 9
N o v -0 9
M a y -10
F e b -10
N o v -10
A ug -11
A ug -0 8
A ug -0 9
Exhibit 33. Citigroup US Broad Investment-Grade (USBIG) High Yield Index Option Adjusted Spread
2150 2000 1850 1700 1550 OAS
Exhibit 34. Citigroup Global Emerging Market Sovereign Bond Index (ESBI) Option Adjusted Spread
800 700 600 OAS
A ug -10
Average - 343
Current - 254
M a y -11
M a y -11
N o v -11
M a y -12
N o v -11
F e b -11
F e b -11
M a y -12
F e b -12
N o v -12
F e b -12
F e b -13
A ug -12
N o v -0 8
M a y -0 8
M a y -0 8
N o v -0 8
F e b -0 8
N o v -0 9
F e b -0 8
M a y -0 9
M a y -0 9
N o v -0 9
F e b -0 9
F e b -0 9
M a y -10
M a y -10
F e b -10
N o v -10
F e b -10
N o v -10
A ug -11
A ug -12
A ug -11
A ug -0 8
A ug -0 8
A ug -0 9
A ug -0 9
A ug -10
Source: MSSB Fixed Income Strategy; & Bloomberg. 2013 Citigroup Index LLC. All rights reserved. Data as of 2/21/13 and is subject to change at anytime. The indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. The indices selected by Morgan Stanley Smith Barney to measure performance are representative of broad asset classes. Morgan Stanley Smith Barney retains the right to change representative indices at any time.
Please refer to important information, disclosures and qualifications at the end of this material.
A ug -10
A ug -12
F e b -13
F e b -13
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Index Definitions
Citigroup Mortgage Index - This index measures the mortgage component of the USBIG Index, comprising 30-and 15-year GNMA, FNMA, and FHLMC pass-throughs and FNMA and FHLMC balloon mortgages. Citigroup US Treasury Benchmark (On-the-Run) Indexes These indexes measure total returns for the current two-, three-, five-, seven-, ten-, and 30-year on-the-run Treasuries that have been in existence for the entire month. Citigroup US Inflation-Linked Securities Index (US-ILSI) The US-ILSI measures debentures with fixed-rate coupon payments that adjust for inflation as measured by the Consumer Price Index (CPI). This index has a minimum maturity of one year and a minimum amount outstanding of $1 billion for both entry and exit. It is separate and distinct from our Broad Investment-Grade (BIG) Bond Index and currently comprises Treasury securities. Citigroup High-Yield Market Index The index includes cash-pay, deferred-interest, and Rule 144A bonds. The bonds must have a remaining maturity of at least one year, a minimum amount outstanding of $100 million (subject to an entry criteria of $200 million per issue or $400 million per issuer), and a speculative-grade rating by both Moodys Investor Service and Standard & Poors. When an issuer misses or expects to miss an interest payment or enters Chapter 11, the bonds exit the index at month-end. The returns are adjusted for the loss of a coupon payment or accrued interest. Citigroup Global Emerging Market Sovereign Bond Index (ESBI) The index includes Brady bonds and US dollar-denominated emerging market sovereign debt issued in the global, Yankee, and Eurodollar market, excluding loans. The bonds must have a remaining maturity of at least one year, a minimum amount outstanding of $500 million, and a maximum rating of BBB+/Baa1 by S&P or Moodys. Brady bonds, restructured in accordance to the Brady Plan, of countries with no foreign debt or whose foreign debt is not rated by S&P and Moodys are included in the ESBI. We exclude defaulted issues from the ESBI. Investment Grade Corporate Index - is an aggregate index of all outstanding investment grade (BBB and higher) corporate bonds with maturities of 1 through 100 years. AA Corporate Rated Index - option adjusted spread to aggregate Treasuries (1 30 yr maturities). The AA Corporate Rated Index is an aggregate index of all outstanding AA investment grade corporate bonds with maturities of 1 through 100 years. The obligators capacity to meet its financial obligation is verystrong; with very low expectation of credit risk and very strong capacity for timely payment of financial commitments. A Corporate Rated Index - option adjusted spread to aggregate Treasuries (1 30 yr maturities). The A Corporate Rated Index is an aggregate index of all outstanding A investment grade corporate bonds with maturities of 1 through 100 years. The obligors capacity to meet its financial obligation is strong. However, the obligor is more susceptible to economic swings than higher rated issuers. BBB Corporate Rated Index - option adjusted spread to aggregate Treasuries (1 30 yr maturities). The BBB Corporate Rated Index is an aggregate index of all outstanding BBB investment grade corporate bonds with maturities of 1 through 100 years. The obligors capacity to meet its financial obligations are of medium grade. The safety parameters currently appear to be sufficient, but may deteriorate over the long term. BB Corporate Rated Index - option adjusted spread to aggregate Treasuries (1 30 yr maturities). The BB Corporate Rated Index is an aggregate index of all outstanding BB non-investment grade corporate bonds with maturities of 1 through 100 years. Issuers with speculative fundamentals. The obligors capacity to meet its future payments is only moderate.
Please refer to important information, disclosures and qualifications at the end of this material.
22
B Corporate Rated Index - option adjusted spread to aggregate Treasuries (1 30 yr maturities). The B Corporate Rated Index is an aggregate index of all outstanding B non-investment grade corporate bonds with maturities of 1 through 100 years. There is little assurance that the obligor has the capacity to meet its financial obligation. Investors looking for higher returns often explore this category, but are exposed to high risk. CCC Corporate Rated Index option adjusted spread to aggregate Treasuries (1 30 yr maturities). The CCC Corporate Rated Index is an aggregate index of all outstanding CCC non-investment grade corporate bonds with maturities of 1 through 100 years. The obligor may be in default, or at risk of default. The capacity of meeting its future obligations depends upon favorable business conditions. Issues rated in this category are vulnerable and of poor quality. Emerging Market US$ Index option adjusted spread to aggregate Treasuries (1 100 yr maturities). The Emerging Market US$ Index is an aggregate index of outstanding US$ denominated Emerging Market bonds with maturities of 1 through 100 years. S&P 500 - The Standard & Poors 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The index was developed with a base level of 10 for the 1941-43 base period.
Please refer to important information, disclosures and qualifications at the end of this material.
23
Glossary
Basis Points (BPS) - A short hand reference to 1/100 of 1 percent (.01%). For example, a bond with a yield of 5.50% is 50 basis points higher than a bond yielding 5.00%. Consumer price index (CPI) - measures changes in the price level of consumer goods and services purchased by households. The CPI is defined by the United States Bureau of Labor Statistics as "a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services." Corporate Bond - A debt security issued by a corporation and sold to investors. The backing for the bond is usually the payment ability of the company, which is typically money to be earned from future operations. In some cases, the company's physical assets may be used as collateral for bonds. Corporate bonds are considered higher risk than government bonds. Cost - Includes principal and accrued interest but does not include management or transaction fees. Crude Oil WTI (West Texas Intermediate) Cushing - A crude stream produced in Texas and southern Oklahoma which serves as a reference or "marker" for pricing Coupon - The annual rate of interest payable on an interest bearing security expressed as a percentage of the principal amount. Credit Risk - The risk that the issuer might be unable to pay interest and/or principal on a timely basis. Widely recognized rating agencies, such at Moody's Investors Service and Standard & Poor's offer their assessment of an issuer's creditworthiness. U.S. Treasury securities are considered the 'safest' investment as they are backed by the 'full faith and credit' of the U.S. Government. On the other side of the scale, high yield corporate bonds are considered to have the greatest credit risk. Current Yield - Annual interest rate paid by a bond, expressed as a percentage of it's current market price. It does not reflect the total return over the life of the bond. Dow Jones Industrial Average (DJIA) - The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928. Effective Duration - An option-adjusted measure of a bond's (or portfolio's) sensitivity to changes in interest rates. The figure is calculated as the average percentage change in a bond's value (price + accrued interest) under Treasury curve shifts of +/- 100 basis points. It incorporates the effect of embedded options for corporate bonds and changes in prepayments for mortgaged-backed securities. Estimated Income Per Year - Income is derived from multiplying the coupon of each individual security within the portfolio by its par amount. This figure does not take into consideration future principal pay down or income lost from matured assets. Federal Funds Rate - The federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight. Interest Rate Risk - The risk that the market value of securities might rise or fall, primarily due to changes in prevailing interest rates. All fixed income securities are susceptible to fluctuations in interest rates; if interest rates rise, bond prices will fall and vice versa. LIBOR (London Interbank Offered Rate) - LIBOR is the primary benchmark used by banks, securities houses and investors to fix the cost of borrowing in the money, derivatives and capital markets around the world. The rate is based on rates quoted by British Bankers Association contributor banks. Maturity Date - The date on which the principal of a fixed income security becomes due and payable to the security holder. NASDAQ Composite Index - The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market, and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.
Please refer to important information, disclosures and qualifications at the end of this material.
24
Overnight indexed swap (OIS) - is an interest rate swap where the periodic floating rate of the swap is equal to the geometric average of an overnight index rate over every day of the payment period. The index rate is typically a central bank rate or equivalent, for example the Federal funds rate in the US. Overnight Index Swaps are instruments that allow financial institutions to swap the interest rates they are paying without having to change the terms of contracts in place with other financial institutions. The fixed rate of OIS is typically an interest rate considered less risky than the corresponding interbank rate (LIBOR), because it is based on a central bank rate and only the net difference in interest rates is paid at maturity of the swap so there is limited counterparty risk. Par Amount - Is the amount of money an investor may receive once a bond matures or is called. Perpetual Preferred Securities - A type of preferred stock that has no maturity date. Issuers of perpetual preferred stock typically will have redemption privileges on such shares. The portfolio analytics tool we use to calculate effective duration and yield to maturity defaults to a 50-year maturity for securities that are perpetual in nature. Prime Rate - The prime rate is the rate that banks use to set rates on many consumer loan products. The prime rate will move up or down in lock-step with the federal funds rate. It is the most widely quoted bank measure at which banks will also lend money to their most favored customers Secondary Market Risk - While a secondary market exists for most fixed income securities, there is no guarantee that a secondary market will exist for a particular fixed income security. Furthermore, if a security is sold prior to maturity, the price received may be more or less than face value, or the amount of the original investment. Spot Gold - Spot gold is the price in U.S. dollars for one ounce of gold bullion. Risk Tolerance - Classes include conservative, moderate and aggressive. Conservative investors are those who emphasize principal preservation over return on investment. Moderate investors are those willing to subject a portion of their principal to increased risk in order to generate a greater rate of return. Aggressive investors are those who emphasize return on investment over principal preservation. They are willing to subject a greater portion of their portfolio to risk in anticipation of a greater return on investment. US TIPS Breakeven - The difference in yield between inflation-linked bonds and conventional bonds, also known as the breakeven inflation rate (BEI), is a rough measure of inflation expectations. Breakeven inflation encompasses both the expected inflation rate and the inflation risk premium, two components of nominal yields that on their own are not always easily quantifiable. US Treasury Bill - A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills commonly have maturities of one month, three months, or six months. T-bills are issued through a competitive bidding process at a discount from par, which means that rather than paying fixed interest payments like conventional bonds, the appreciation of the bond provides the return to the holder. US Treasury Bond - A fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest payments semi-annually and interest is only taxed at the federal level. US Treasury Inflation Protected Security (TIPS) - A treasury security that is indexed to inflation. TIPS are backed by the U.S. government and their par value rises with inflation, as measured by the Consumer Price Index, while their interest rate remains fixed. Interest on TIPS is paid semiannually. US Treasury Notes - A U.S. government debt security with a fixed interest rate and a maturity between one and 10 years. Treasury notes make interest payments semi-annually and interest is only taxed at the federal level. Weighted Average Coupon - The average coupon weighed in proportion to the market value of the individual securities within the portfolio. Yield To Maturity - The yield of a bond if an investor were to buy and hold it until its maturity date. This yield factors in the purchase price, the interest one is set to receive, and the length of time to maturity. Yield To Worst - The lower of yield to maturity and yield to the date of the worst call. The lowest potential yield that can be received on a bond without the issuer actually defaulting.
Please refer to important information, disclosures and qualifications at the end of this material.
25
Please refer to important information, disclosures and qualifications at the end of this material.
26
Disclosures
This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This is not a research report and was not prepared by the Research Departments of Morgan Stanley & Co. LLC or Citigroup Global Markets Inc. The views and opinions contained in this material are those of the author(s) and may differ materially from the views and opinions of others at Morgan Stanley Smith Barney LLC or any of its affiliate companies. Past performance is not necessarily a guide to future performance. The author(s) (if any authors are noted) principally responsible for the preparation of this material receive compensation based upon various factors, including quality and accuracy of their work, firm revenues (including trading and capital markets revenues), client feedback and competitive factors. Morgan Stanley Smith Barney is involved in many businesses that may relate to companies, securities or instruments mentioned in this material. This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security/instrument, or to participate in any trading strategy. Any such offer would be made only after a prospective investor had completed its own independent investigation of the securities, instruments or transactions, and received all information it required to make its own investment decision, including, where applicable, a review of any offering circular or memorandum describing such security or instrument. That information would contain material information not contained herein and to which prospective participants are referred. This material is based on public information as of the specified date, and may be stale thereafter. We have no obligation to tell you when information herein may change. We make no representation or warranty with respect to the accuracy or completeness of this material. Morgan Stanley Smith Barney has no obligation to provide updated information on the securities/instruments mentioned herein. The securities/instruments discussed in this material may not be suitable for all investors. The appropriateness of a particular investment or strategy will depend on an investors individual circumstances and objectives. Morgan Stanley Smith Barney recommends that investors independently evaluate specific investments and strategies, and encourages investors to seek the advice of a financial advisor. The value of and income from investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, market indexes, operational or financial conditions of companies and other issuers or other factors. Estimates of future performance are based on assumptions that may not be realized. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Morgan Stanley Smith Barney does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. This material should not be viewed as advice or recommendations with respect to asset allocation or any particular investment. This information is not intended to, and should not, form a primary basis for any investment decisions that you may make. Morgan Stanley Smith Barney is not acting as a fiduciary under either the Employee Retirement Income Security Act of 1974, as amended or under section 4975 of the Internal Revenue Code of 1986 as amended in providing this material. Morgan Stanley Smith Barney and its affiliates do not render advice on tax and tax accounting matters to clients. This material was not intended or written to be used, and it cannot be used or relied upon by any recipient, for any purpose, including the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. federal tax laws. Each client should consult his/her personal tax and/or legal advisor to learn about any potential tax or other implications that may result from acting on a particular recommendation. International investing entails greater risk, as well as greater potential rewards compared to U.S. investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economies. Investing in commodities entails significant risks. Commodity prices may be affected by a variety of factors at any time, including but not limited to, (i) changes in supply and demand relationships, (ii) governmental programs and policies, (iii) national and international political and economic events, war and terrorist events, (iv) changes in interest and exchange rates, (v) trading activities in commodities and related contracts, (vi) pestilence, technological change and weather, and (vii) the price volatility of a commodity. In addition, the commodities markets are subject to temporary distortions or other disruptions due to various factors, including lack of liquidity, participation of speculators and government intervention. Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond's maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk that principal and/or interest payments from a given investment may be reinvested at a lower interest rate. Bonds rated below investment grade may have speculative characteristics and present significant risks beyond those of other securities, including greater credit risk and price volatility in the secondary market. Investors should be careful to consider these risks alongside their individual circumstances, objectives and risk tolerance before investing in high-yield bonds. High yield bonds should comprise only a limited portion of a balanced portfolio. Treasury Inflation Protection Securities (TIPS) coupon payments and underlying principal are automatically increased to compensate for inflation by tracking the consumer price index (CPI). While the real rate of return is guaranteed, TIPS tend to offer a low return. Because the return of TIPS is linked to inflation, TIPS may significantly underperform versus conventional U.S. Treasuries in times of low inflation. Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment. Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets. The indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. The indices selected by Morgan Stanley Smith Barney to measure performance are representative of broad asset classes. Morgan Stanley Smith Barney retains the right to change representative indices at any time. Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.
Please refer to important information, disclosures and qualifications at the end of this material.
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CDs are insured by the FDIC, an independent agency of the U.S. Government, up to a maximum amount of $250,000 (including principal and interest) for all deposits held in the same insurable capacity (e.g. individual account, joint account) per CD depository, through December 31, 2013. On January 1, 2014, the maximum insurable amount will return to $100,000 (including principal and interest) for all insurable capacities except IRAs and certain self-directed retirement accounts, which will remain at $250,000 per depository. Investors are responsible for monitoring the total amount held with each CD depository. All deposits at a single depository held in the same insurable capacity will be aggregated for purposes of the applicable FDIC insurance limit, including deposits (such as bank accounts) maintained directly with the depository and CDs of the depository held through Morgan Stanley Smith Barney. A secondary market in CDs may be limited. CDs sold prior to maturity are subject to market risk and therefore investors may receive more or less than the amount invested or the face value. Callable CDs are callable at the sole discretion of the issuer. For more information about FDIC insurance, please visit the FDIC website at www.fdic.gov. Contingent return (e.g. index-linked) CDs are treated as having original issue discount (OID) for tax purposes. Although interest is not received until maturity, the CD is assumed to pay a pre-determined interest rate that will be treated as current income for tax purposes if held in a taxable account. Investors should be made aware that contingent return CDs generally feature an averaging method of return calculation, which averages the changes in value of the relevant index as measured on predetermined dates over the life of the CD. Therefore, the CDs return will not mirror the actual index value or return. If the measured index return using the averaging method is zero or negative, the investor receives no interest. Some contingent return CDs also have a participation rate (the degree to which an investor participates in the measured return of the index) that is less than 100%. Interest on contingent return CDs is not eligible for FDIC insurance before the final valuation date. Principal is returned on a monthly basis over the life of a mortgage-backed security. Principal prepayment can significantly affect the monthly income stream and the maturity of any type of MBS, including standard MBS, CMOs and Lottery Bonds. Yields and average lives are estimated based on prepayment assumptions and are subject to change based on actual prepayment of the mortgages in the underlying pools. The level of predictability of an MBS/CMOs average life, and its market price, depends on the type of MBS/CMO class purchased and interest rate movements. In general, as interest rates fall, prepayment speeds are likely to increase, thus shortening the MBS/CMOs average life and likely causing its market price to rise. Conversely, as interest rates rise, prepayment speeds are likely to decrease, thus lengthening average life and likely causing the MBS/CMOs market price to fall. Some MBS/CMOs may have original issue discount (OID). OID occurs if the MBS/CMOs original issue price is below its stated redemption price at maturity, and results in imputed interest that must be reported annually for tax purposes, resulting in a tax liability even though interest was not received. Investors are urged to consult their tax advisors for more information. Interest income from taxable zero coupon bonds is subject to annual taxation as ordinary income even though no interest payments will be received by the investor if held in a taxable account. Zero coupon bonds may also experience greater price volatility than interest bearing fixed income securities because of their comparatively longer duration. Investing in foreign emerging markets entails greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks. The majority of $25 and $1000 par preferred securities are callable meaning that the issuer may retire the securities at specific prices and dates prior to maturity. Interest/dividend payments on certain preferred issues may be deferred by the issuer for periods of up to 5 to 10 years, depending on the particular issue. The investor would still have income tax liability even though payments would not have been received. Price quoted is per $25 or $1,000 share, unless otherwise specified. Current yield is calculated by multiplying the coupon by par value divided by the market price. The initial rate on a floating rate or index-linked preferred security may be lower than that of a fixed-rate security of the same maturity because investors expect to receive additional income due to future increases in the floating/linked index. However, there can be no assurance that these increases will occur. Some $25 or $1000 par preferred securities are QDI (Qualified Dividend Income) eligible. Information on QDI eligibility is obtained from third party sources. The dividend income on QDI eligible preferreds qualifies for a reduced tax rate. Many traditional dividend paying perpetual preferred securities (traditional preferreds with no maturity date) are QDI eligible. In order to qualify for the preferential tax treatment all qualifying preferred securities must be held by investors for a minimum period 91 days during a 180 day window period, beginning 90 days before the ex-dividend date. Credit ratings are subject to change. This material is disseminated in Australia to retail clients within the meaning of the Australian Corporations Act by Morgan Stanley Smith Barney Australia Pty Ltd (A.B.N. 19 009 145 555, holder of Australian financial services license No. 240813). Morgan Stanley Smith Barney is not incorporated under the People's Republic of China ("PRC") law and the research in relation to this report is conducted outside the PRC. This report will be distributed only upon request of a specific recipient. This report does not constitute an offer to sell or the solicitation of an offer to buy any securities in the PRC. PRC investors must have the relevant qualifications to invest in such securities and must be responsible for obtaining all relevant approvals, licenses, verifications and or registrations from PRC's relevant governmental authorities. Morgan Stanley Private Wealth Management Ltd, which is authorized and regulated by the Financial Services Authority, approves for the purpose of section 21 of the Financial Services and Markets Act 2000, content for distribution in the United Kingdom. Morgan Stanley Smith Barney is not acting as a municipal advisor and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This material is disseminated in the United States of America by Morgan Stanley Smith Barney LLC. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. Morgan Stanley Smith Barney material, or any portion thereof, may not be reprinted, sold or redistributed without the written consent of Morgan Stanley Smith Barney. 2013 Morgan Stanley Smith Barney LLC. Member SIPC.
Please refer to important information, disclosures and qualifications at the end of this material.
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