F I X E D

I N C O M E

S T R A T E G Y

July 31, 2006

Bond Market Monitor

Cortney L. Madden Fixed Income Strategy 612-303-8088 [email protected]

Market Conclusions • Last week’s GDP release indicated a 2.5% rate of growth during second quarter, a significant economic slowdown from Q1’s 5.6% pace. The market has increasingly lowered the probability of another Fed tightening in August. The market is generally split on whether the Fed will top at a target rate of 5.25 or 5.50%.

Loan Participations: Paul J. Heaney 612-303-8122 [email protected]

• Treasury yields have continued to drop as the bond market prices in a possible nearing of the completion of monetary tightening. While inflation and high energy prices continue to concern the Fed, many market participants appear to believe Bernanke’s view that a moderation in growth will cause pricing pressures to lessen.

Table of Contents Market Environment Agency Securities Mortgage-Backed Securities BQ Municipal Securities Loan Participations Supplemental Data

2-3 4 5 6 7 8-13

• Short agency paper tightened a several basis points against Treasuries over the last month, with the long end remaining unchanged. As the Fed appears to near the end of tightening, we recommend longer-duration bullet agencies and European (1x) callables with 2 years or more of lockout. • Mortgages have experienced tightening for the last two weeks under continued low volatility. We recommend that investors look for discounted bonds that will benefit from price appreciation in a market rally. • The greatest demand in bank-qualified municipals is currently in bonds that offer unique features compared to plain vanilla highly-rated GO paper. Supply/demand factors remain light but balanced.

This information is a product of the Fixed Income Trading Department and should not be construed as research or a research report. It is for informational purposes only.

1 | Piper Jaffray Bond Market Monitor

Market Environment •

The market is increasingly convinced the Fed is at or nearing the end of its 2+ year tightening cycle. Fed fund futures are pricing in a 31% chance of another 25 bp hike next week, with the probability of reaching 5.50% in the next three months at about 50% (Figure 1). Bernanke stated in his Humphrey-Hawkins testimony on July 19 that the Fed must take into account policy effects “in the pipeline,” but also that the recent rise in inflation is concerning, particularly in combination with elevated energy prices. The Chairman also stated his belief that growth moderation “should help limit inflation pressures over time.” Friday’s release of Q2 GDP, which came in lower than expected at a 2.5% annualized pace following Q1’s robust 5.6%, provided the markets evidence of this slowdown.

Figure 1. Current Fed Fund Futures and Implications

Figure 2. Current and Historical Treasury Curves 100%

5.75

75%

5.50

50% 5.25 5.00

5.35

5.10 4.85

25% Aug 8

Sep 20

Oct 24

Prob 25 bp hike

31%

14%

52%

Fed f und f utures

5.310

5.340

5.365

0%

Nov

4.60 4.35 0

5

5.380

10

Today

Source: Piper Jaffray, Bloomberg

15

20

1month ago

25

30

6 months ago

Source: Piper Jaffray, Bloomberg

•

July experienced a general downward trend in Treasury yields as economic data told of softening growth (Figure 2), pointing to the possible end of monetary contraction. The market was alarmed by the rise of core CPI to an annual rate of 2.6%, the fastest pace since early 2002; however, Bernanke’s somewhat dovish Humphrey-Hawkins testimony later that morning sufficiently calmed investors and the market rebounded. Inflation fears have subsided since peaking on May 12, the same day gold hit its highest level since 1980 (Figure 3). Crude oil has bounced around $75 a barrel, reaching a record high of almost $80 mid-month on tensions in the Middle East between Israel and Lebanon.

•

In further signs of a growth slowdown, last week’s release of the Fed’s Beige Book indicated weakening retail sales compared to early 2006, along with further declines in the residential housing market. However, business investment and the commercial building market remains strong. Companies have not laid workers off at a faster pace, as indicated by initial jobless claims once again dropping below 300,000, although hiring dropped to less than 125,000 per month during second quarter as reported by nonfarm payrolls (Figure 4).

Figure 3. Gold and 5-year TIPS Breakeven Inflation 2.75

Figure 4. Nonfarm Payrolls and Initial Jobless Claims 725

2.70

450

250

675

2.65

425

200 150

2.60 625 2.55

400

100

375

50

2.50

575

2.45 2.40 1/31

300

0 -50

2/28

3/31

4/30

5yr B/E inf lation

5/31

6/30

Gold (rt axis)

Source: Piper Jaffray, Bloomberg

2 | Piper Jaffray Bond Market Monitor

525 7/31

-100 -150

350 1/03

7/03

1/04

7/04

1/05

7/05

1/06 325

Nonfarms (rolling 3 mo avg) Initial claims (4 wk avg, rt axis)

300

Source: Piper Jaffray, Bloomberg

July 31, 2006

Figure 5. Forward Economic Calendar Release Time (CDT) Indicator Last Release Date 8/1 09:00 ISM PMI 53.8 8/1 09:00 ISM Prices Paid 76.5 8/1 09:00 Pending Home Sales 1.3 8/1 07:30 Personal Income 0.4 8/1 07:30 Personal Spending 0.4 8/1 07:30 PCE Def lator (Y oY ) 3.3 8/1 07:30 PCE Core (MoM) 0.2 8/2 06:00 MBA Mortgage A pps -1.3 8/3 07:30 Jobless Claims (000s) 298 8/3 07:30 Continuing Claims (000s) 2475 8/3 09:00 Factory Orders 0.7 8/3 09:00 ISM Non-Manuf acturing 57 8/4 07:30 Nonf arm Payroll 121 8/4 07:30 Unemployment Rate 4.6 8/8 13:15 Fed Rate Decision 5.25 8/10 07:30 Trade Balance ($B) -63.8 8/11 07:30 Import Price Index 7.2 8/11 07:30 A dvance Retail Sales -0.1 8/11 07:30 Retail Sales Less A utos 0.3 8/11 07:30 Business Inventories 0.8 8/15 07:30 Empire Manuf acturing 15.6 8/15 07:30 PPI (MoM) 0.5 8/15 07:30 PPI Less Food & Energy 0.2 8/15 08:00 Foreign Net Transactions ($B) 69.6 8/16 08:15 Industrial Production 0.8 8/16 08:15 Capacity Utilization 82.4 8/16 07:30 CPI (MoM) 0.2 8/16 07:30 CPI Less Food & Energy 0.3 8/16 07:30 Housing Starts 1850 8/16 07:30 Building Permits 1862 8/17 11:00 Philly Fed Outlook 6 8/17 09:00 Leading Indicators 0.1 8/18 08:45 U.M. Conf idence Index 84.7 8/23 09:00 Existing Home Sales (mil) 6.62 8/24 09:00 New Home Sales 1131 8/24 07:30 Durable Goods Orders 3.1 8/24 07:30 Durables Ex-Transportation 1 8/30 07:30 GDP (QoQ) 2.5 8/30 07:30 GDP Price Index 3.3 8/30 07:30 Personal Consumption 2.5 Calendar is not all-inclusive. Some economic data may not be displayed. Source: Piper Jaffray, Bloomberg

3 | Piper Jaffray Bond Market Monitor

Survey Median 53.5 75.3 -0.5 0.6 0.4 3.3 0.2 NA 310 2459 1.8 56.7 145 4.6 5.25 -64.4 NA 0.6 0.5 0.5 NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA

July 31, 2006

Agency Securities •

Bullet agency spreads were mixed on the month, with the short end a several basis points tighter and the long end relatively unchanged. There was a general widening mid-July, in line with swaps. During mid-month, 10-year bullet agencies cheapened to Libor less 15 bps, triggering buying. The same scenario occurred in mid-May, indicating this level may be an entry point favored by sizeable investors.

•

European (1x) callable structures continue to experience demand, although new structures are no longer being printed as aggressively due to the market rally making a 6% coupon unreachable. The desk has started seeing resumed interest in discounted callable paper, as spreads began tightening mid-July after two months of widening.

Figure 6. 3yrNC1yr Callable Spreads – Last 6 mo 64

3yrNC1yr Euro 3yrNC1yr Berm

62 60 58 56 54 52 50 48 46 1/27

•

2/27

3/27

4/27

5/27

6/27

7/27

As the Fed appears to be at or near the end of tightening, we encourage agency investors to consider buying longer-duration bullet agencies and callable structures with minimum lockouts of two years. We recommend investing in European call structures versus Bermudan or American, as we do not feel the small gain in yield currently priced into the market is worth the additional call risk. This is particularly true for structures with shorter final maturities (Figures 7 and 8).

Figure 7. European and Bermudan Callable Curves

Figure 8. European and Bermudan Callable Rates Final M aturity 2

1-yr lockout Euro 5.40

2-yr lockout Euro

1-yr lockout Berm 5.41

2-yr lockout Berm

5.85

3 4

5.52 5.61

5.34 5.49

5.56 5.71

5.34 5.51

5.65

5

5.69

5.60

5.82

5.64

7

5.80

5.76

6.02

5.85

6.25

6.10

6.25 6.05

5.45 Y rs to Final Maturity

5.25 0

2 4 Euro 1yr lockout Berm 1yr lockout

6

10 5.92 5.93 Note: 1- and 2-yr lockouts assume semi-annual calls

8 10 Euro 2yr lockout Berm 2yr lockout

Source: Piper Jaffray, Bloomberg

Source: Piper Jaffray, Bloomberg

•

Senate Democrats voiced their concerns regarding proposed legislation that would limit the sizes of Fannie and Freddie’s mortgage portfolios. In a letter to the Chairman of the Senate Banking Committee, eight Senators stated that portfolio restrictions would hamper the GSE’s ability to stabilize the housing market in times of distress and damage affordable housing markets. With elections coming up in three months and other issues such as the war in Iraq and crisis in the Middle East, it seems unlikely that resolution to the GSE bill will become a priority.

•

Freddie Mac trimmed its mortgage holdings by $859 million in June to a level of $722.2 billion, the fourth straight month of declines. The company stated it anticipates portfolio growth of around $30 billion for the remainder of 2006. Freddie supply will be limited over the next 5 weeks, however, as it plans to forego its reference note auction in August. For the first month since February, Fannie Mae’s holdings also declined in June by $2.9 billion to a level of $730.9 billion.

4 | Piper Jaffray Bond Market Monitor

July 31, 2006

Mortgage-Backed Securities •

Over the last two weeks, mortgage spreads have tightened almost everyday on low volatility. As shown in Figure 9, volatility has remained low over the last three months. Should this trend continue, we expect demand for mortgage product to remain strong.

Figure 9. Implied Swaption Volatility

Figure 10. Fannie Mae Fixed Rate Historical Prepays (CPR) 40

22% 20%

30

18% 20

16% 14% 7/28/05

10

10/28/0 1/28/06 2 into 5 (15 yr)

4/28/06 2 into 10 (30 yr)

7/28/06

Source: Piper Jaffray, Bloomberg

11/04

2/05

5/05 8/05 15-yr 5.5% 30-yr 6%

11/05

2/06 15-yr 6% 30-yr 6.5%

5/06

Source: Piper Jaffray, Bloomberg

•

Freddie Mac’s 30-year average national commitment rate declined to 6.72%, the lowest level in five weeks, from its 4+ year high of 6.80%. Freddie average 15-year fixed rates were 6.34% last week, continuing their drop from the 6.44% peak reached in early July. The recent steady decline in Treasury yields suggests a continuance of this downward trend in mortgage rates.

•

Conventional prepayments for June were generally flat to slightly lower as mortgage rates climbed during the month. As shown in Figure 10, prepayments of current coupon mortgages remained fairly steady through the first half of 2006. Fannie 30-year 6s and 6.5s decreased around 6.5% in June, while 15-year 5.5s and 6s fell 2 to 3%. July’s prepayments appear likely to fall again due to the peaking of 15- and 30-year mortgage rates, the historical mid-summer drop in home sales, and the impact of two fewer business days in the month.

•

If investors believe the Fed is at or near the end of its tightening cycle, we continue to recommend discounted front-end sequential CMOs off 15-year collateral. Should the Fed begin easing in 2007 as believed by some market participants, holders of this paper would be positioned to benefit from significant price appreciation. On the other hand, if rates should rise, the average life of the seasoned 15-year collateral is expected to extend relatively little (Figure 11). We recommend that buyers specifically look for sequentials that receive the first 80 to 85% of cash flows and have 10 to 12 year stated finals with adequate speed histories. A large amount of this paper was originated in 2003, but we caution it may be difficult to find in large block sizes due to its low dollar price. We compare a seasoned 4.5% 15-year front sequential to a new 10-year pass-through below.

Figure 11. 15-year Seasoned Front-End Sequential versus New 10-year Pass-Through TBA FHR 2930 KC FNCN 4.5 TBA

Coupon

Price

Spread

Yield

4.5% 4.5%

96-03 96-14

70/c 44/c

5.63 5.56

Libor OAS 3 2

Eff Dur 3.45 3.19

Eff Convexity -0.23 -0.17

WAL Base 4.1 yrs 3.8 yrs

WAL +300 bp 4.5 yrs 4.0 yrs

Pay Window Base Case 9/06 – 7/16 9/06 – 3/16

WALA 82 mo 5 mo

Note: FHR 2930 KC assumes a base prepay speed of 145 PSA (Bloomberg median). The FNCN 4.5% was ran at 5 CPR based on Bloomberg BMMI. Source: Piper Jaffray, Bloomberg , Yield Book

•

We recommend that hybrid ARM investors avoid premium pools with short months to reset in today’s market environment. Investors should instead look for longer lockout discount hybrids in order to avoid holding bonds that could reset downward if rates continue to decline.

5 | Piper Jaffray Bond Market Monitor

July 31, 2006

Bank-Qualified Municipal Securities •

New issue bank-qualified municipal paper continues to be relatively light, with 30-day visible BQ supply averaging $303 million in July, up slightly from June’s $294 million. To date for the month of August, Piper Jaffray’s negotiated calendar includes five deals totaling $27.5 million, concentrated in the states of Missouri and California.

Figure 12. BQ 30-day Visible Supply – 5 day Moving Average $450 $400 $350 $300 $250 $200 $150 1/6

1/31

2/25

3/22

4/16

5/11

6/5

6/30

7/25

Source: Piper Jaffray, Bloomberg

Figure 13. Upcoming Piper Jaffray Negotiated Bank Qualified Municipal Bond Issues Expected Rating* NR/AAA NR/AAA NR/NR TBD/TBD TBD/TBD

Date 8/1 8/1 8/7 8/16 8/16

Insurer

Issue

State

Type

Ambac Ambac TBD TBD TBD

Kingsburg Joint Elementary SD 04-B Kingsburg Joint Elementary SD Ref 2006 City of Cottleville Down USD 2006 GO Refunding Bonds Weaver USD GO Election of 2006 06-A

CA CA MO CA CA

GO GO COP GO GO

Amount ($M) 3,000 4,400 6,900 9,545 3,600

Maturities

Manager

2027/46 2007/28 2007-16 2008-31 2007-31

Sole Sole Sole Sole Sole

* Moody’s/S&P

•

Under relatively light flows, the trading desk notes that investors are now being more selective, with plain vanilla AAA-rated GO paper seeing limited demand. Greatest interest currently lies in bonds that offer unique features such as additional yield for lower credit quality or a coupon outside of a normal par-type structure. In the current environment of interest rate uncertainty farther out the curve, bank demand has tended to be in premium bonds, which hold their value better in a rising rate environment.

Figure 14. Historical BQ Yields as % of Treasuries

Figure 15. BQ as % of Treasuries

0.91

0.91

0.88

0.87

0.85

0.83

0.82 0.79

0.79 0.76

0.75

0.73

0.71

Years to M aturity

1/3

1/24 2/14 3/7 5-year

3/28 4/18 5/9 10-year

Source: Piper Jaffray, Bloomberg

•

5/30 6/20 7/11 20-year

0

5

10 To day

15

20 6/30/06

25

30 5/30/06

Source: Piper Jaffray, Bloomberg

BQ rates as a percentage of Treasuries have continued to cheapen, particularly in the long end of the curve. As shown in Figure 15, BQ yields cheapened very little inside of 10 years since the end of June, but moved 1.3 to 2% for maturities longer than 12 years. Since the end of May, BQ munis have become relatively cheaper across the entire curve, particularly beyond 7 years where Treasuries did not experience as significant of a sell-off.

6 | Piper Jaffray Bond Market Monitor

July 31, 2006

Loan Participations •

Any sign of real estate weakness continues to be narrowly contained within the housing market. In addition to the June new home sales report that showed inventories reaching a record high, an index measuring home builder confidence dropped to a 15-year low in July. Single family starts are down 9.7% from a year ago, yet commercial real estate and raw land markets continue to experienced demand. For instance, the cap rate on multi-tenant office buildings has fallen from 8.5% to 7.1% over the past five quarters, according to the National Real Estate Investor. Many experts believe that individual investors who have been involved in housing markets over the past five years are now making their presence felt as they crossover into other sectors.

•

Bank regulators are increasingly focused on the real estate lending portfolios of community banks. As concentrations of commercial real estate in loan portfolios have risen, the OCC, FDIC and others have raised concerns regarding banks’ internal lending guidelines and safety precautions. As a result, most banks are finding examiners very focused on this issue in 2006. We are hearing firsthand accounts from bankers who are being thoroughly reviewed on the composition of their real-estate backed loan portfolios, and therefore, a few banks are specifically inquiring about non-real estate opportunities in the loan participation market.

•

The Mortgage Bankers Association reported that CMBS instruments showed a 43% gain from the first quarter of 2005, but surprisingly indicated nearly a 20% drop from fourth quarter of last year. Many market experts have predicted a slowdown in CMBS as the increase in nominal interest rates curbs demand for CMBS product from Wall Street investors. Another cause of a slowdown is the increase of CDO product in which managers have the option to replace specific loans with new collateral, decreasing management fees paid by property owners to obtain funding.

•

The Bloomberg REIT index has continued to rebound from a late May sell-off (Figure 16). This reinforces the idea that while residential housing may have rolled over to some extent, the rest of the visible market has held its own.

Figure 16. Bloomberg REIT Index 240 230 220 210 200 190 180 170 1/05

4/05

7/05

10/05

1/06

4/06

7/06

Source: Piper Jaffray, Bloomberg

•

China has announced it will begin enforcing a law requiring a 20% capital gains tax on all secondhand homes that are sold, in an effort to cool the country’s overheated housing market. During 2005, the government raised mandatory down payment requirements and mortgage rates.

7 | Piper Jaffray Bond Market Monitor

July 31, 2006

Appendix Appendix A1. European (1x) Callable Agency Breakevens – Sorted by Lockout Structure

Coupon

Spread to Treas

2yNC3m 2.5yNC3m 3yNC3m 3.5yNC3m 4yNC3m 4.5yNC3m 5yNC3m 5.5yNC3m 7yNC3m 10yNC3m 2yNC6m 2.5yNC6m 3yNC6m 3.5yNC6m 4yNC6m 4.5yNC6m 5yNC6m 5.5yNC6m 7yNC6m 10yNC6m 2yNC1y 2.5yNC1y 3yNC1y 3.5yNC1y 4yNC1y 4.5yNC1y 5yNC1y 5.5yNC1y 7yNC1y 10yNC1y 3yNC2y 3.5yNC2y 4yNC2y 4.5yNC2y 5yNC2y 5.5yNC2y 7yNC2y 10yNC2y 4yNC3y 4.5yNC3y 5yNC3y 5.5yNC3y 7yNC3y 10yNC3y

5.403 5.420 5.435 5.433 5.461 5.475 5.533 5.557 5.584 5.689 5.458 5.490 5.525 5.523 5.558 5.580 5.643 5.667 5.712 5.809 5.392 5.440 5.502 5.528 5.571 5.615 5.685 5.727 5.787 5.914 5.325 5.378 5.448 5.510 5.593 5.647 5.747 5.919 5.296 5.315 5.465 5.527 5.659 5.867

42.4 46.5 50.3 52.5 56.5 57.0 61.3 63.0 64.0 69.0 47.9 53.5 59.3 61.5 66.3 67.5 72.3 74.0 76.8 81.0 41.3 48.5 57.0 62.0 67.5 71.0 76.5 80.0 84.3 91.5 39.3 47.0 55.3 60.5 67.3 72.0 80.3 92.0 40.0 41.0 54.5 60.0 71.5 86.8

Spread to Required X-year Rate in Bullet/Disco Bullet Y-years to Breakeven to Lockout Agency 18.2 5.41 Required 1.75yr rate in 0.25yr 20.9 5.41 Required 2.25yr rate in 0.25yr 21.2 5.41 Required 2.75yr rate in 0.25yr 17.6 5.41 Required 3.25yr rate in 0.25yr 18.5 5.41 Required 3.75yr rate in 0.25yr 19.4 5.41 Required 4.25yr rate in 0.25yr 24.1 5.41 Required 4.75yr rate in 0.25yr 25.4 5.41 Required 5.25yr rate in 0.25yr 24.7 5.41 Required 6.75yr rate in 0.25yr 29.8 5.41 Required 9.75yr rate in 0.25yr 23.7 5.45 Required 1.5yr rate in 0.5yr 27.9 5.45 Required 2yr rate in 0.5yr 30.2 5.45 Required 2.5yr rate in 0.5yr 26.6 5.45 Required 3yr rate in 0.5yr 28.3 5.45 Required 3.5yr rate in 0.5yr 29.9 5.45 Required 4yr rate in 0.5yr 35.1 5.45 Required 4.5yr rate in 0.5yr 36.4 5.45 Required 5yr rate in 0.5yr 37.5 5.45 Required 6.5yr rate in 0.5yr 41.8 5.45 Required 9.5yr rate in 0.5yr 17.1 5.33 Required 1yr rate in 1yr 22.9 5.33 Required 1.5yr rate in 1yr 27.9 5.33 Required 2yr rate in 1yr 27.1 5.33 Required 2.5yr rate in 1yr 29.5 5.33 Required 3yr rate in 1yr 33.4 5.33 Required 3.5yr rate in 1yr 39.3 5.33 Required 4yr rate in 1yr 42.4 5.33 Required 4.5yr rate in 1yr 45.0 5.33 Required 6yr rate in 1yr 52.3 5.33 Required 9yr rate in 1yr 10.2 5.22 Required 1yr rate in 2yrs 12.1 5.22 Required 1.5yr rate in 2yrs 17.3 5.22 Required 2yr rate in 2yrs 22.9 5.22 Required 2.5yr rate in 2yrs 30.1 5.22 Required 3yr rate in 2yrs 34.4 5.22 Required 3.5yr rate in 2yrs 41.0 5.22 Required 5yr rate in 2yrs 52.8 5.22 Required 8yr rate in 2yrs 2.0 5.22 Required 1yr rate in 3yrs 3.4 5.22 Required 1.5yr rate in 3yrs 17.3 5.22 Required 2yr rate in 3yrs 22.4 5.22 Required 2.5yr rate in 3yrs 32.2 5.22 Required 4yr rate in 3yrs 47.5 5.22 Required 7yr rate in 3yrs

Current Forwards 5.402 5.421 5.437 5.435 5.464 5.479 5.539 5.565 5.591 5.697 5.459 5.499 5.539 5.534 5.573 5.596 5.663 5.689 5.731 5.828 5.454 5.514 5.589 5.608 5.652 5.698 5.774 5.816 5.863 5.980 5.536 5.589 5.677 5.743 5.842 5.893 5.959 6.096 5.515 5.501 5.830 5.895 5.988 6.145

5.228 5.205 5.206 5.232 5.261 5.284 5.294 5.309 5.348 5.418 5.223 5.180 5.184 5.210 5.241 5.278 5.290 5.305 5.347 5.420 5.171 5.155 5.123 5.161 5.194 5.238 5.278 5.297 5.343 5.422 5.211 5.212 5.200 5.240 5.277 5.320 5.385 5.461 5.325 5.317 5.303 5.340 5.440 5.503

Cushion vs. Current X- Cushion vs. Forwards year Bullet Bullets (bp) 17.4 21.6 23.0 20.2 20.3 19.6 24.5 25.6 24.3 27.9 23.6 31.9 35.5 32.4 33.2 31.8 37.3 38.4 38.4 40.9 28.3 36.0 46.6 44.6 45.7 46.0 49.6 52.0 52.0 55.7 32.5 37.6 47.7 50.3 56.5 57.3 57.4 63.5 18.9 18.3 52.7 55.5 54.9 64.2

5.235 5.213 5.214 5.240 5.268 5.279 5.286 5.297 5.332 5.388 5.255 5.220 5.211 5.223 5.257 5.275 5.281 5.292 5.326 5.384 5.329 5.255 5.220 5.211 5.223 5.257 5.275 5.281 5.315 5.375 5.329 5.255 5.220 5.211 5.223 5.257 5.292 5.357 5.329 5.255 5.220 5.211 5.275 5.337

16.7 20.9 22.2 19.5 19.6 20.0 25.3 26.7 25.9 30.9 20.4 27.8 32.7 31.1 31.6 32.1 38.2 39.7 40.5 44.4 12.5 25.9 36.8 39.6 42.9 44.0 49.9 53.5 54.8 60.5 20.7 33.3 45.7 53.2 61.9 63.6 66.7 73.9 18.6 24.5 61.0 68.4 71.3 80.8

Source: Piper Jaffray, Bloomberg Note: The Discount Note to Lockout column is converted to bond-equivalent yield in order to accurately compare it to other bonds.

Description of breakeven analysis: By applying breakeven analysis to callable agencies, one can determine what must occur to rates in order for callable agencies to outperform or underperform bullet agency combinations. We first break down one-time (European) callables into two separate bonds at the call date. The goal is to determine at which point one of the following two trades becomes more profitable: 1) purchasing a callable, or 2) buying a shorter bullet then reinvesting the proceeds at the time of maturity in another bullet. The cushion indicates how much current/forward rates would have to increase in order for the two-bullet combination to outperform the callable agency structure. The greater the cushion, the more confident callable holders can be that they will outperform a comparable two-bullet alternative.

8 | Piper Jaffray Bond Market Monitor

July 31, 2006

Appendix A2. Rich/Cheap Analysis of Callable Agencies European Structures (callable one-time only) vs. Agencies - sorted by final maturity Structure 2yNC3m 2yNC6m 2yNC1y 3yNC3m 3yNC6m 3yNC1y 3yNC2y 5yNC3m 5yNC6m 5yNC1y 5yNC2y 5yNC3y 10yNC3m 10yNC6m 10yNC1y 10yNC2y 10yNC3y

Current Spread 18.5 24.0 17.4 21.6 30.6 28.3 10.6 24.0 35.0 39.2 30.0 17.2 27.2 41.2 51.7 52.2 47.0

1m Avg 15.5 20.1 15.6 19.5 27.0 26.5 11.0 23.7 32.9 37.9 30.1 17.8 28.6 42.0 52.5 54.0 48.9

1m ZScore 1.13 1.49 0.91 1.24 1.92 1.36 -0.37 0.24 0.41 1.24 -0.14 -0.76 -1.21 -0.78 -0.77 -1.54 -1.72

1m Rich/ Cheap Fair Fair Fair Fair Cheap Fair Fair Fair Fair Fair Fair Fair Fair Fair Fair Rich Rich

3m Avg 14.3 18.1 14.4 19.5 26.0 25.8 11.5 24.4 33.1 37.3 30.0 18.1 29.3 41.8 51.7 53.3 48.1

3m ZScore 1.71 2.25 1.48 0.93 1.96 1.31 -0.54 -0.11 0.44 0.78 0.00 -0.41 -0.83 -0.21 -0.01 -0.34 -0.35

3m Rich/ Cheap Cheap Cheap Fair Fair Cheap Fair Fair Fair Fair Fair Fair Fair Fair Fair Fair Fair Fair

6m Avg 13.6 17.7 14.6 18.0 24.8 25.3 11.0 23.7 33.4 37.9 30.7 18.5 31.6 42.8 53.6 55.5 50.2

6m ZScore 1.82 2.37 1.28 1.19 2.14 1.55 -0.25 0.07 0.45 0.49 -0.32 -0.56 -0.19 -0.48 -0.45 -0.75 -0.75

6m Rich/ Cheap Cheap Cheap Fair Fair Cheap Cheap Fair Fair Fair Fair Fair Fair Fair Fair Fair Fair Fair

12m Avg 13.4 17.2 14.9 18.1 24.6 25.7 11.3 24.4 34.0 39.2 31.6 18.9 32.8 43.5 55.0 57.4 50.4

12m Z- 12m Rich/ Score Cheap 1.63 Cheap 2.68 Cheap 1.18 Fair 0.90 Fair 2.17 Cheap 1.33 Fair -0.34 Fair -0.12 Fair 0.30 Fair 0.01 Fair -0.67 Fair -0.72 Fair -0.22 Fair -0.67 Fair -0.79 Fair -0.27 Fair -0.89 Fair

6m ZScore 2.29 2.50 1.31 1.65 2.27 0.91 0.03 -0.05 0.44 0.27 -0.21 -0.49 -0.64 -0.38 -0.40 -0.66 -0.64

6m Rich/ Cheap Cheap Cheap Fair Cheap Cheap Fair Fair Fair Fair Fair Fair Fair Fair Fair Fair Fair Fair

12m Avg 25.5 21.9 15.1 42.2 37.3 29.9 11.2 69.9 60.8 54.8 35.9 23.1 99.6 96.9 89.5 74.4 60.0

12m Z- 12m Rich/ Score Cheap 2.24 Cheap 2.72 Cheap 1.35 Fair 1.18 Fair 2.13 Cheap 0.85 Fair -0.12 Fair -0.17 Fair -0.06 Fair -0.12 Fair -0.65 Fair -0.21 Fair -1.17 Fair -0.40 Fair -0.82 Fair -0.95 Fair -0.75 Fair

Bermudan Structures (callable on specific dates) vs. Agencies - sorted by final maturity Current 1m Spread Avg 31.6 27.3 2yNC3m 28.7 24.7 2yNC6m 18.0 16.0 2yNC1y 45.8 41.8 3yNC3m 42.3 39.0 3yNC6m 32.8 30.9 3yNC1y 11.0 10.9 3yNC2y 64.1 63.1 5yNC3m 60.5 57.3 5yNC6m 52.3 51.6 5yNC1y 34.1 34.3 5yNC2y 18.0 18.5 5yNC3y 91.2 93.4 10yNC3m 89.3 91.2 10yNC6m 84.2 85.6 10yNC1y 69.4 71.8 10yNC2y 56.5 58.8 10yNC3y Source: Piper Jaffray, Bloomberg Structure

1m ZScore 1.52 1.53 1.08 0.91 1.82 1.52 0.03 1.04 0.61 0.70 -0.31 -0.66 -1.86 -1.84 -1.08 -2.01 -1.77

1m Rich/ Cheap Cheap Cheap Fair Fair Cheap Cheap Fair Fair Fair Fair Fair Fair Rich Rich Fair Rich Rich

3m Avg 25.2 22.5 14.8 41.4 37.7 28.9 11.5 61.9 56.6 50.3 33.9 18.6 91.7 89.4 83.6 70.4 57.5

3m ZScore 2.49 2.38 1.64 1.41 2.08 0.74 -0.29 0.83 0.66 0.79 0.09 -0.32 -0.13 -0.01 0.14 -0.26 -0.28

3m Rich/ Cheap Cheap Cheap Cheap Fair Cheap Fair Fair Fair Fair Fair Fair Fair Fair Fair Fair Fair Fair

6m Avg 25.5 22.3 14.9 41.1 36.9 28.9 10.9 65.4 58.2 51.3 34.6 19.0 95.6 92.2 86.8 73.2 59.8

Description of rich/cheap analysis: Z-Score = (current spread – average spread) / (standard deviation) If the Z-Score is greater than 1.5 we consider it cheap. If it is less than 1.5 we consider it rich. So why does almost everything show up as Fair or Cheap on our spreadsheet? Callable spreads have been relatively stable to slightly wider compared to historical levels. Rich/cheap analysis assumes reversion to the mean, so if spreads had been tightening, they would appear Rich on our table, and if spreads had been widening, they appear Cheap.

9 | Piper Jaffray Bond Market Monitor

July 31, 2006

Appendix A3. Callable and Bullet Yield/Spread History European Callables vs. Agency Bullets

Current 1 mo ago 3 mo ago 6 mo ago 12 mo ago

2yNC3m 18.5 12.4 22.1 11.8 13.8

2yNC6m 24.0 16.8 25.2 17.1 17.3

2yNC1y 17.4 12.9 21.5 14.9 14.8

Current 1 mo ago 3 mo ago 6 mo ago 12 mo ago

3yNC3m 21.6 18.7 23.3 17.0 18.2

3yNC6m 30.6 25.7 28.7 24.9 23.7

3yNC1y 28.3 25.4 28.2 26.6 23.2

3yNC2y 10.6 11.4 14.3 10.8 11.7

Current 1 mo ago 3 mo ago 6 mo ago 12 mo ago

5yNC3m 24.0 22.6 26.6 25.9 25.1

5yNC6m 35.0 32.6 34.5 36.9 32.6

5yNC1y 39.2 36.1 37.4 41.8 36.6

5yNC2y 30.0 29.5 29.9 33.0 30.6

Current 1 mo ago 3 mo ago 6 mo ago 12 mo ago

10yNC3m 27.2 30.6 30.0 35.3 30.6

10yNC6m 41.2 43.9 40.9 50.6 42.1

10yNC1y 51.7 53.9 49.2 61.8 52.1

Bermudan Callables vs. Agency Bullets

Current 1 mo ago 3 mo ago 6 mo ago 12 mo ago

2yNC3m 31.6 23.2 32.3 26.3 22.8

2yNC6m 28.7 21.0 28.5 23.1 20.3

2yNC1y 18.0 13.3 21.8 15.5 15.3

Current 1 mo ago 3 mo ago 6 mo ago 12 mo ago

3yNC3m 45.8 31.0 43.3 43.8 39.2

3yNC6m 42.3 37.0 39.0 38.2 34.2

3yNC1y 32.8 29.6 31.4 31.7 28.2

3yNC2y 11.0 11.3 14.5 10.8 12.2

5yNC3y 17.2 17.9 18.5 19.6 18.6

Current 1 mo ago 3 mo ago 6 mo ago 12 mo ago

5yNC3m 64.1 61.3 61.0 69.7 66.6

5yNC6m 60.5 43.0 56.2 64.7 60.6

5yNC1y 52.3 49.6 49.0 56.6 52.6

5yNC2y 34.1 33.8 33.0 37.4 35.6

5yNC3y 18.0 18.6 19.0 20.6 19.6

10yNC2y 52.2 56.4 49.8 62.4 53.6

10yNC3y 47.0 51.2 44.6 56.2 47.6

Current 1 mo ago 3 mo ago 6 mo ago 12 mo ago

10yNC3m 91.2 95.1 86.7 107.7 101.1

10yNC6m 89.3 92.6 81.8 104.1 95.1

10yNC1y 84.2 86.8 73.6 97.6 88.1

10yNC2y 69.4 73.9 60.6 81.2 72.6

10yNC3y 56.5 61.0 43.0 66.5 56.1

10yr Treas 5.01 5.14 5.05 4.51 4.28

30yr Treas 5.09 5.19 5.16 4.69 4.47

Bullet Yield History Current 1 m o ago 3 m o ago 6 m o ago 12 m o ago

2yr Treas 4.99 5.15 4.86 4.50 4.02

3yr Treas 4.95 5.13 4.87 4.46 4.07

5yr Treas 4.93 5.09 4.91 4.44 4.12

On-the-Run Treasury Yields - 1-Year History 5.30

Current 1 m o ago 3 m o ago 6 m o ago 12 m o ago

2yr Agcy 5.23 5.44 5.10 4.73 4.16

3yr Agcy 5.23 5.42 5.13 4.73 4.29

5yr Agcy 5.29 5.48 5.24 4.80 4.42

10yr Agcy 5.39 5.54 5.40 4.86 4.59

30yr Agcy 5.52 5.62 5.57 5.06 4.87

Current 3 m o ago 6 m o ago 12 m o ago

2yr Sw ap 5.43 5.31 4.90 4.39

3yr Sw ap 5.41 5.33 4.90 4.46

5yr Swap 5.45 5.40 4.94 4.56

10yr Swap 5.56 5.57 5.03 4.72

30yr Sw ap 5.66 5.72 5.16 4.95

4.90

4.50

4.10

3.70 7/28/05

2yr Treas 5yr Treas 30yr Treas 10/28/05

1/28/06

3yr Treas 10yr Treas

4/28/06

7/28/06

Source: Piper Jaffray, Bloomberg

10 | Piper Jaffray Bond Market Monitor

July 31, 2006

Appendix B1.

Agency Relative Value – OTR bullets and European/Bermudan callables 12-Month Total Returns in Various Gradual Yield Curve Shifts Parallel Curve Shifts

Tick e r FNMA FNMA FNMA FNMA FNMA FNMA FNMA FHLM FNMA FNMA FHLM FNMA FNMA FNMA FHLM FHLM FNMA FHLM FNMA FHLM FHLM

Structure Cpn YTM 2yr OTR Bullet 5.250 5.23 3yr OTR Bullet 5.375 5.22 5yr OTR Bullet 5.125 5.28 10yr OTR Bullet 5.375 5.40 6.625 5.51 30yr OTR Bullet 1.7yrNC8mo Euro 5.250 5.45 2yrNC6mo Euro 5.000 5.38 2.2yrNC3mo Euro 4.750 5.32 2.5yrNC6mo Euro 5.000 5.32 2.9yrNC10mo Euro 4.200 5.31 3.6yrNC7mo Euro 4.110 5.32 4.6yrNC1.6yr Euro 5.300 5.64 4.6yrNC7mo Euro 5.500 5.62 4.7yrNC9mo Euro 5.670 5.73 5yrNC0mo A mer 6.375 6.38 6.3yrNC1.3yr Euro 5.250 5.70 7yrNC2yr Euro 6.125 5.49 7.2yrNC2mo Berm 4.650 5.57 9.1yrNC1mo Berm 5.625 5.93 9.3yrNC1.3yr Euro 5.500 5.84 13.8yrNC3.8yr Berm5.300 6.00

Price TOAS EDur 100.03 23 1.8 100.42 28 2.8 99.34 38 4.1 99.85 36 7.6 114.81 37 12.7 99.67 30 1.1 99.30 34 1.5 98.83 34 2.0 99.26 28 1.7 97.10 36 2.6 96.15 38 3.2 98.64 50 2.9 99.53 44 1.8 99.74 43 1.7 99.98 60 0.6 97.64 64 3.9 103.64 55 5.6 94.62 51 5.1 97.91 49 4.0 97.55 68 4.8 93.48 72 7.6

ECvxy 0.04 0.09 0.20 0.71 2.37 (0.58) (0.91) (0.59) (1.25) (0.13) 0.06 (0.90) (2.31) (1.86) (2.53) (1.69) 0.38 (0.73) (2.53) (2.74) (0.56)

WAL 1.9 3.0 4.7 10.0 24.3 1.7 2.0 2.2 2.5 2.9 3.5 4.6 4.6 4.7 5.0 6.3 7.0 7.2 9.1 9.3 13.8

-150 6.34 7.95 10.11 16.15 25.36 5.09 5.18 6.86 5.21 7.13 8.71 7.24 5.25 5.40 4.52 7.91 12.93 10.32 7.00 8.33 14.46

-100 -50 5.94 5.53 7.01 6.07 8.47 6.84 12.50 8.95 18.34 11.75 5.23 5.37 5.37 5.77 6.30 5.75 5.41 6.00 6.94 6.08 7.55 6.39 6.96 6.48 5.42 5.60 5.52 5.64 4.77 5.19 7.79 7.44 10.43 7.97 9.45 7.78 7.48 7.40 8.20 7.96 12.15 9.29

0 5.13 5.15 5.24 5.49 5.55 5.46 5.31 5.19 5.32 5.22 5.25 5.63 5.77 5.76 5.43 6.15 5.55 5.69 6.04 6.64 6.02

50 4.73 4.23 3.65 2.13 (0.29) 5.15 4.86 4.64 4.64 4.37 4.12 4.46 4.84 5.30 5.91 4.15 3.18 3.40 4.06 3.93 2.48

100 4.33 3.32 2.09 (1.16) (5.78) 4.85 4.41 4.10 3.97 3.53 3.00 3.13 3.35 3.73 4.95 2.02 0.85 1.04 1.71 0.89 (1.19)

Curve Flatteners

Curve Steepeners

150 Be ar50 Be ar25 Bull25 Bull50 Be ar50 Be ar25 Bull25 Bull50 3.94 4.76 4.94 5.14 5.16 5.10 5.12 5.32 5.51 2.42 4.40 4.77 5.23 5.32 4.98 5.06 5.53 5.90 0.54 4.22 4.73 5.52 5.81 4.67 4.95 5.75 6.27 (4.36) 5.13 5.31 7.03 8.58 2.48 3.98 5.68 5.86 (10.94) 5.55 5.55 8.60 11.76 (0.30) 2.58 5.54 5.54 4.55 5.17 5.31 5.46 5.47 5.44 5.45 5.44 5.37 3.95 4.89 5.10 5.33 5.35 5.28 5.30 5.53 5.74 3.55 4.70 4.95 5.22 5.25 5.14 5.17 5.44 5.69 3.30 4.73 5.02 5.36 5.41 5.23 5.28 5.62 5.92 2.70 4.52 4.87 5.29 5.36 5.08 5.15 5.58 5.93 1.89 4.39 4.82 5.39 5.52 4.98 5.12 5.69 6.12 1.73 4.83 5.24 5.76 5.88 5.31 5.47 5.98 6.30 1.88 5.35 5.86 5.77 5.77 5.77 5.77 5.68 5.60 2.18 5.88 5.82 5.76 5.76 5.76 5.76 5.70 5.64 3.70 5.66 5.54 5.43 5.43 5.43 5.43 5.31 5.19 (0.07) 5.22 5.72 6.60 6.92 5.16 5.69 6.58 6.95 (1.44) 4.55 5.05 6.25 6.95 4.17 4.86 6.06 6.56 (1.33) 4.72 5.20 6.29 6.85 4.36 5.04 6.17 6.65 (0.82) 5.37 5.71 6.52 6.89 4.73 5.44 6.36 6.65 (2.10) 6.17 6.40 7.32 7.71 4.45 5.62 6.82 7.01 (4.90) 5.64 5.84 7.48 8.76 2.70 4.41 6.19 6.35

Source: Piper Jaffray, Yield Book. Levels as of 7/28/06 close.

Assumptions for curve flattening and steepening scenarios: Bear scenarios assume higher yields over the time horizon, while bull scenarios assume lower yields. Bear and bull scenarios are combined with either a flattening or steepening of the curve by increasing/decreasing yields by 25 or 50 bps for either the 3-month maturity (bear flattener and bull steepener) or the 10-year maturity (bear steepener and bull flattener). For example, a 25 bp bull flattener assumes the 3-month yield remains fixed at today’s level while the 10-year yield drops by 25 bps. The curve shift is then interpolated between 3-month and 10-year maturities. For all scenarios, the curve beyond 10 years was shifted parallel to the 10-year.

11 | Piper Jaffray Bond Market Monitor

July 31, 2006

Appendix B2.

Mortgage Relative Value – 15- and 30-year fixed rate collateral and Hybrid ARMs 12-Month Total Returns in Various Gradual Yield Curve Shifts

Generic Hybrid ARMs

Generic Fixed Rate Mortgage-Backed Securities

Parallel Curve Shifts Tick e r

Struc

FNCN FNCN FNCN FNCI FNCI FNCI FNCI FNCI FNCT FNCT FNCT FNCT FNCL FNCL FNCL FNCL FNCL GNMA GNMA GNMA GNMA GNMA GNMA II GNMA II GNMA II GNMA II GNMA II GNMA GNMA GNMA GNMA GNMA FNMA FNMA FNMA FNMA FNMA FNMA FNMA FNMA FNMA FNMA FNMA FNMA FNMA FNMA FNMA FNMA FNMA FNMA FNMA FNMA FNMA FNMA FNMA FNMA FNMA

10yr 10yr 10yr 15yr 15yr 15yr 15yr 15yr 20yr 20yr 20yr 20yr 30yr 30yr 30yr 30yr 30yr 15yr 15yr 15yr 15yr 15yr 30yr 30yr 30yr 30yr 30yr 1x1 1/1/5 1x1 1/1/5 1x1 1/1/5 1x1 1/1/5 1x1 1/1/5 3x1 2/2/6 3x1 2/2/6 3x1 2/2/6 3x1 2/2/6 3x1 2/2/6 3x1 2/2/6 3x1 2/2/6 5x1 5/2/5 5x1 5/2/5 5x1 5/2/5 5x1 5/2/5 5x1 5/2/5 5x1 5/2/5 5x1 2/2/6 5x1 2/2/6 5x1 2/2/6 5x1 2/2/6 5x1 2/2/6 5x1 2/2/6 7x1 5/2/5 7x1 5/2/5 7x1 5/2/5 7x1 5/2/5 7x1 5/2/5 7x1 5/2/5

Cpn YTM 4.0 4.5 5.0 4.0 4.5 5.0 5.5 6.0 4.5 5.0 5.5 6.0 4.5 5.0 5.5 6.0 6.5 4.0 4.5 5.0 5.5 6.0 4.5 5.0 5.5 6.0 6.5 3.5 4.0 4.5 5.0 5.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 3.5 4.0 4.5 5.0 5.5 6.0 3.5 4.0 4.5 5.0 5.5 6.0 4.0 4.5 5.0 5.5 6.0 6.5

5.66 5.47 5.35 5.52 5.53 5.64 5.74 5.79 5.81 5.82 5.90 5.96 5.88 5.89 6.00 6.13 6.22 5.50 5.34 5.47 5.58 5.60 5.97 5.88 5.96 6.05 6.13 5.94 5.89 5.87 5.74 5.77 5.23 5.30 5.35 5.83 5.91 6.22 6.60 5.31 5.36 5.79 5.85 6.12 6.50 5.31 5.38 5.82 5.89 5.98 6.02 5.34 5.78 5.87 5.97 6.08 6.16

Price TOAS EDur ECvxy WAL 94.48 67 96.70 46 98.71 29 93.10 42 95.39 39 97.03 43 98.85 43 100.78 36 93.20 60 95.63 50 97.88 46 100.20 41 91.75 58 94.55 48 97.04 44 99.31 39 101.11 40 94.13 45 96.34 21 97.97 29 99.73 35 101.56 31 91.34 63 95.00 41 97.51 40 99.80 43 101.59 48 96.41 64 97.75 64 98.84 64 99.95 56 100.50 61 95.82 3 96.87 13 97.91 21 97.82 69 98.82 74 99.09 108 99.15 151 95.23 13 96.68 20 96.60 66 98.03 69 98.71 92 98.97 129 94.98 13 96.42 21 96.39 66 97.82 71 99.18 74 100.37 76 95.45 15 95.46 59 97.11 65 98.77 67 100.11 71 101.10 79

3.35 3.19 2.94 4.57 4.22 3.96 3.43 2.86 5.09 4.70 4.21 3.55 5.97 5.52 4.79 3.73 2.84 4.12 4.39 4.20 3.73 3.09 6.59 5.86 5.11 4.32 3.28 3.08 2.52 2.04 1.53 1.12 2.90 2.72 2.51 2.44 2.16 1.91 1.69 3.83 3.57 3.44 3.10 2.84 2.61 3.97 3.70 3.57 3.22 2.81 2.29 4.47 4.27 3.88 3.37 2.77 2.16

(0.03) (0.19) (0.44) (0.16) (0.38) (0.69) (0.94) (1.40) (0.37) (0.70) (0.99) (1.49) (0.39) (0.89) (1.06) (2.05) (2.22) (0.07) (0.32) (0.61) (0.83) (1.10) (0.50) (1.25) (1.39) (1.59) (1.72) (1.09) (0.96) (1.04) (1.02) (0.96) (0.35) (0.41) (0.52) (0.49) (0.80) (0.87) (0.82) (0.25) (0.39) (0.45) (0.67) (0.85) (1.17) (0.24) (0.41) (0.47) (0.69) (0.95) (1.30) (0.38) (0.42) (0.71) (1.07) (1.45) (1.67)

3.8 3.8 3.8 5.6 5.5 5.7 5.5 5.3 6.9 7.1 7.1 6.7 8.6 8.9 8.7 7.5 5.7 4.8 5.5 5.5 5.1 4.7 8.7 8.4 8.1 7.4 6.0 4.2 3.7 3.4 3.1 2.8 3.6 3.5 3.4 3.2 2.9 2.6 2.4 5.0 5.0 4.9 4.7 4.2 3.6 5.2 5.1 4.9 4.7 4.2 3.6 6.3 6.2 6.1 5.5 4.5 3.8

Curve Flatteners

-150

-100

-50

0

50

100

150

9.18 8.58 7.78 10.64 9.88 9.23 7.99 6.85 11.40 10.32 8.98 7.64 12.66 11.46 9.65 7.49 6.50 10.10 9.95 9.52 8.71 7.56 13.27 11.55 10.16 8.80 7.42 7.76 6.98 6.28 5.59 5.32 7.46 7.20 6.83 7.10 6.59 6.56 6.68 9.05 8.57 8.73 7.95 7.55 7.43 9.24 8.78 8.92 8.14 7.26 6.44 9.92 9.97 9.01 7.83 6.80 6.10

8.07 7.71 7.32 9.13 8.73 8.51 7.91 7.10 9.83 9.37 8.75 7.84 10.73 10.18 9.30 7.81 6.88 8.67 8.70 8.56 8.10 7.36 11.25 10.23 9.48 8.61 7.55 7.45 6.86 6.44 5.83 5.57 6.81 6.73 6.58 6.92 6.61 6.63 6.74 7.97 7.76 8.08 7.71 7.54 7.50 8.11 7.91 8.22 7.86 7.33 6.75 8.70 8.93 8.55 7.87 7.15 6.62

6.88 6.65 6.45 7.42 7.25 7.25 7.09 6.78 7.94 7.79 7.61 7.27 8.42 8.22 7.96 7.39 6.82 7.12 7.16 7.20 7.04 6.71 8.81 8.33 8.02 7.65 7.07 6.84 6.52 6.27 5.98 5.74 6.03 6.03 6.03 6.45 6.33 6.44 6.59 6.69 6.65 7.03 6.97 7.05 7.16 6.76 6.73 7.11 7.06 6.89 6.58 7.14 7.47 7.41 7.24 6.90 6.58

5.65 5.49 5.41 5.58 5.59 5.72 5.83 5.88 5.85 5.88 5.97 6.03 5.89 5.92 6.04 6.14 6.13 5.52 5.42 5.58 5.69 5.70 6.01 5.99 6.06 6.11 6.06 5.94 5.91 5.89 5.79 5.85 5.15 5.23 5.30 5.77 5.85 6.09 6.33 5.28 5.36 5.81 5.89 6.19 6.53 5.29 5.38 5.82 5.92 6.05 6.07 5.38 5.81 5.93 6.07 6.19 6.18

4.40 4.29 4.28 3.68 3.83 4.02 4.33 4.61 3.64 3.79 4.06 4.39 3.23 3.38 3.80 4.35 4.81 3.88 3.60 3.79 4.11 4.41 3.02 3.28 3.71 4.15 4.64 4.75 5.03 5.25 5.42 5.64 4.15 4.31 4.47 4.93 5.17 5.57 5.94 3.78 3.97 4.47 4.67 5.03 5.57 3.72 3.92 4.41 4.63 4.90 5.25 3.50 4.03 4.28 4.59 5.01 5.42

3.15 3.08 3.11 1.76 2.02 2.22 2.68 3.13 1.38 1.57 1.98 2.52 0.51 0.71 1.33 2.27 3.06 2.23 1.72 1.90 2.38 2.91 0.03 0.33 1.02 1.82 2.85 3.30 3.89 4.35 4.78 5.23 3.05 3.30 3.54 4.03 4.33 4.87 5.40 2.18 2.47 3.03 3.34 3.77 4.33 2.04 2.34 2.90 3.23 3.61 4.11 1.52 2.13 2.51 2.96 3.52 4.22

1.89 1.85 1.92 (0.19) 0.17 0.37 0.95 1.52 (0.91) (0.72) (0.21) 0.51 (2.25) (2.03) (1.26) (0.02) 1.09 0.55 (0.19) (0.03) 0.58 1.28 (3.02) (2.69) (1.87) (0.78) 0.78 1.63 2.53 3.20 3.90 4.58 1.84 2.19 2.53 3.06 3.41 4.01 4.69 0.50 0.89 1.53 1.93 2.44 3.00 0.31 0.70 1.32 1.75 2.24 2.83 (0.52) 0.17 0.66 1.24 1.94 2.75

Curve Steepeners

Be ar50 Be ar25 Bull25 Bull50 Be ar50 Be ar25 Bull25 Bull50 5.03 4.87 4.80 5.02 5.03 5.14 5.26 5.34 5.32 5.32 5.39 5.47 5.41 5.39 5.48 5.61 5.67 4.97 4.86 5.02 5.15 5.21 5.55 5.51 5.56 5.63 5.66 5.26 5.33 5.43 5.45 5.61 4.47 4.57 4.67 5.17 5.36 5.71 6.05 4.49 4.58 5.04 5.15 5.49 5.98 4.50 4.59 5.05 5.17 5.37 5.56 4.64 5.07 5.18 5.34 5.60 5.77

5.34 5.18 5.10 5.30 5.31 5.43 5.54 5.61 5.59 5.60 5.68 5.75 5.65 5.65 5.76 5.88 5.90 5.24 5.14 5.30 5.42 5.46 5.78 5.75 5.81 5.87 5.87 5.60 5.63 5.67 5.63 5.74 4.81 4.90 4.99 5.48 5.61 5.91 6.19 4.89 4.97 5.42 5.52 5.85 6.26 4.89 4.99 5.44 5.55 5.72 5.83 5.01 5.44 5.56 5.71 5.90 5.98

5.95 5.77 5.64 6.22 6.15 6.22 6.22 6.15 6.64 6.57 6.54 6.45 6.92 6.83 6.77 6.61 6.37 6.05 6.02 6.14 6.14 6.01 7.21 6.97 6.84 6.70 6.44 6.10 5.99 5.92 5.76 5.80 5.27 5.32 5.38 5.86 5.90 6.12 6.35 5.60 5.63 6.05 6.10 6.35 6.66 5.64 5.68 6.10 6.16 6.22 6.15 5.90 6.28 6.32 6.37 6.36 6.26

6.25 6.03 5.86 6.83 6.67 6.67 6.55 6.35 7.38 7.20 7.03 6.78 7.89 7.66 7.40 6.95 6.50 6.56 6.59 6.64 6.53 6.27 8.32 7.83 7.51 7.18 6.72 6.23 6.06 5.92 5.73 5.74 5.37 5.40 5.44 5.94 5.94 6.15 6.37 5.88 5.86 6.27 6.27 6.49 6.75 5.95 5.94 6.35 6.36 6.34 6.20 6.38 6.71 6.68 6.63 6.49 6.30

5.02 4.91 4.89 4.21 4.37 4.57 4.89 5.16 4.12 4.30 4.60 4.93 3.64 3.83 4.30 4.87 5.29 4.42 4.13 4.33 4.64 4.91 3.39 3.71 4.16 4.60 5.04 5.43 5.62 5.76 5.80 5.92 4.83 4.97 5.10 5.55 5.70 5.99 6.25 4.54 4.73 5.22 5.41 5.75 6.19 4.47 4.68 5.16 5.37 5.62 5.83 4.20 4.73 5.00 5.30 5.67 5.91

5.34 5.21 5.15 4.91 4.99 5.17 5.38 5.55 5.00 5.12 5.32 5.52 4.79 4.92 5.22 5.56 5.76 4.98 4.79 4.98 5.19 5.33 4.73 4.90 5.17 5.42 5.60 5.72 5.79 5.85 5.81 5.89 5.00 5.11 5.21 5.67 5.78 6.04 6.29 4.93 5.07 5.53 5.66 5.99 6.38 4.90 5.05 5.51 5.66 5.85 5.97 4.82 5.30 5.49 5.71 5.96 6.07

5.96 5.80 5.71 5.86 5.87 6.00 6.11 6.14 6.11 6.15 6.25 6.30 6.12 6.18 6.31 6.40 6.34 5.80 5.70 5.86 5.95 5.94 6.23 6.23 6.31 6.35 6.26 6.26 6.18 6.10 5.95 5.89 5.48 5.55 5.61 6.06 6.08 6.26 6.45 5.68 5.76 6.19 6.26 6.51 6.78 5.68 5.77 6.20 6.29 6.37 6.31 5.75 6.18 6.30 6.42 6.45 6.36

6.28 6.11 6.01 6.13 6.15 6.29 6.39 6.40 6.36 6.43 6.54 6.57 6.35 6.43 6.58 6.64 6.55 6.08 5.98 6.14 6.21 6.18 6.45 6.46 6.55 6.59 6.45 6.57 6.43 6.29 6.09 5.89 5.82 5.87 5.91 6.33 6.29 6.42 6.57 6.07 6.15 6.56 6.62 6.81 7.01 6.07 6.16 6.58 6.66 6.67 6.52 6.12 6.55 6.66 6.75 6.69 6.53

Note: Margins for 1x1 ARMs are (1yr CMT + 150 bp), while for all other hybrids is (1yr LIBOR + 160 bp) Source: Piper Jaffray, Yield Book. Levels as of 7/28/06 close.

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July 31, 2006

Commonly Used Terms OAS European Call Bermudan Call American Call MMD FOMC Fed CPI PPI Core CPI/PPI PCE GDP TIPS GSEs BMA CMO PAC CMBS CDO REIT

Option-adjusted spread Bond with call option on single specified date Bond with call option on periodic specified dates Bond with call option on or any time after specified date Municipal Market Data (data provider) Federal Open Market Committee Federal Reserve Board Consumer Price Index Producer Price Index Excluding food/energy Personal Consumption Expenditures Gross Domestic Product Treasury Inflation Protected Securities Government Sponsored Enterprises (Fannie Mae and Freddie Mac) Bond Market Association Collateralized Mortgage Obligation Planned Amortization Class Commercial Mortgage Backed Security Collateralized Debt Obligation Real Estate Investment Trust

ALL TABLE AND GRAPHICAL DATA AS OF PRIOR DAY’S CLOSE UNLESS OTHERWISE NOTED

Disclaimer This material is based on data obtained from sources we deem to be reliable; it is not guaranteed as to accuracy and does not purport to be complete. This information is not intended to be used as the primary basis of investment decisions. Because of individual client requirements, it should not be construed as advice designed to meet the particular investment needs of any investor. It is not a representation by us or an offer or the solicitation of an offer to sell or buy any security. Further, a security described in this release may not be eligible for solicitation in the states in which the client resides. Past performance is not indicative of future results. The above investments are subject to availability and price change. Bond prices fluctuate as general interest rates change, so you may receive more or less than you paid if you sell prior to maturity. Generally, the longer a bond’s period to maturity, the greater its price sensitivity. Generally, with bonds of similar maturities, the higher the return, the higher the risk. Any increase in principal value may be taxable. For zero coupon bonds, interest is paid at maturity, but is subject to annual taxation. Fixed income securities offer varying degrees of credit, interest rate, reinvestment and liquidity risk. Other call features may apply. Prepayment rates are based on assumptions that can and do change and will affect yield. Interest earned on U.S. Treasury securities is subject to federal taxation. U.S. Treasury securities are guaranteed as to the payment of principal and interest by the U.S. Government. Government agency securities are not direct obligations of the U.S. Government. Brokered CDs are FDIC insured up to $100,000 per depositor per institution and are quoted yield to maturity. Certain issues may be callable by the issuer. The yield and average life for Collateralized Mortgage Obligations (CMOs) consider prepayment assumptions that may or may not be met, and will fluctuate depending on the actual prepayment experience and changes in interest rates. Changes in payments may significantly affect yield and average life. Piper Jaffray makes no representation of warranty as to the actual rate or timing of payments on any of the underlying assets or the payments or yield on the securities. Securities products and services offered through Piper Jaffray & Co., member SIPC and NYSE, Inc., a subsidiary of Piper Jaffray Companies. Additional information is available upon request. No part of this report may be reproduced, copied, redistributed or posted without the prior consent of Piper Jaffray & Co. © 2005 Piper Jaffray & Co., 800 Nicollet Mall, Suite 800, Minneapolis, Minnesota 55402-7020

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July 31, 2006