Chart 7: Cumulative Japanese purchases of foreign bonds since 2010

Chart 7: Cumulative Japanese purchases of foreign bonds since 2010 900 800 700 600 500 400 300 . 200 100 0 -100 1/1/2010 7/1/2011 1/1/2013 71112014 1/1/2016 Source: BofA Merrill Lynch Global Research Chart 8: USD/JPY 10y forward outright 100 95 90 85 80 75 70 65 60 55 50 1/1/2010 5/1/2011 8/4/2012 = 1/1/2014) 5/1/2015 = 9/1/2016 Source: BofA Merrill Lynch Global Research true against the JPY given the Bank of Japan is pegging 10y JGB yields at zero. We are cognizant of the possibility that the willingness of Japanese investors — who have already bought record amount of US bonds this year — to buy more is likely to be constrained by their recent losses (Chart 7). However, with long-dated USD/JPY forward outrights near their lowest levels in more than a year, further purchases are more likely to be currency unhedged (Chart 8). This is why we would recommend buying USD/JPY even after the big rally of the past week. More generally, the USD is likely to benefit from repatriation of overseas US corporate earnings, which is highly likely, in our view, given that it is the lowest hanging fruit in Washington for the new administration. 4. MXN is oversold but BRL faces more headwinds Until the US election, EM fixed income was the best performing asset class in 2016, benefiting from the decline in rates in core markets as well as the rebound in global growth. The combination of higher US rates and higher USD over the past week has nearly wiped out its YTD gains. However, long positions remain crowded (Chart 9) and liquidity conditions are poor. For these reasons, we think downside risk remains and would recommend selling a basket of Brazilian, Mexican, and Colombian long bonds. Some EM markets have already seen brutal capitulation. In particular, MXN has priced in alot of bad news, even though it is not clear that the net impact of Trump policy is negative for Mexico. In contrast, the BRL remains one of the most crowded EM Chart 9: EM fixed income performance vs. positioning a 320) 575 280 _ 160 475 ao Jan-11. Jan-?? Jan dd Jan14 Jan-15) Jan-16 oo —EXD cumulative of flows, ETFs, % ——EMBl bondindex, nghi Source: BofA Merrill Lynch Global Research, EPFR Global Chart 10: BRL/MXN 8.5 8 79 7 6.5 6 5.5 5 45 4 4/3/2011 1/8/2012 = 1/3/2013 1/38/2014 = 1/3/2015 = 1/3/2016 Source: BofA Merrill Lynch Global Research 4 Global Rates, FX & EM 2017 Year Ahead | 16 November 2016 BankofAmerica <2” Merrill Lynch HOUSE_OVERSIGHT_014734