Treasury Bonds Thrive as Markets Dive

WEEKLY MARKET OUTLOOK FEBRUARY 11, 2016 CAPITAL MARKETS RESEARCH Moody’s Analytics markets and distributes all Moody’s Capital Markets Research, Inc. materials. Moody’s Capital Markets Research, Inc is a subsidiary of Moody’s Corporation. Moody’s Analytics does not provide investment advisory services or products. For further detail, please see the last page. Treasury Bonds Thrive as Markets Dive Credit Markets Review and Outlook by John Lonski Treasury Bonds Thrive as Markets Dive. » FULL STORY PAGE 2 Topic of the Week by Ben Garber No Longer Cuckoo for CoCos. » FULL STORY PAGE 5 The Week Ahead We preview economic reports and forecasts from the US, UK/Europe, and Asia/Pacific regions. » FULL STORY PAGE 8 The Long View Check our chart here for forecast summaries of key credit market metrics. Full updated stories, “First quarter 2016’s worldwide issuance of corporate bonds may incur year-over-year setbacks of -22% for investment-grade and -60% for high-yield,” begin on page 20. » FULL STORY PAGE 20 Ratings Round-Up by Njundu Sanneh Commodity Downgrade Story Continues. » FULL STORY PAGE 23 Market Data Credit spreads, CDS movers, issuance. » FULL STORY PAGE 25 Moody’s Capital Markets Research recent publications Links to commentaries on: MRO, EDF, Encana, Devon, UK, spreads, bank risk, WFC, AIG, BAC, sov risk, JPM, credit, MS, GS, DB, Satellite. » FULL STORY PAGE 29 Credit Spreads Investment Grade: Year-end 2016 spread to be less than its recent 183 bp. High Yield: After recent spread of 873 bp, it may approximate 750 bp by year-end 2016. Defaults US HY default rate: December 2015, 3.2%; Moody’s Credit Policy Group forecasts 4.2% by November 2016. Issuance In 2015, US$-denominated investment-grade (IG) bond offerings advanced by 17.5% to $1.297 trillion, while US$-priced high-yield bond issuance sank by -19.5% to $289 billion. For 2016, US$-denominated IG bond issuance may sink by -2.2% to $1.358 trillion, while US$-priced high-yield bond issuance may drop by -18.3% to $293 billion. Click here for Moody’s Credit Outlook, our sister publication containing Moody’s rating agency analysis of recent news events, summaries of recent rating changes, and summaries of recent research. Moody’s Capital Markets Research, Inc. Weekly Market Outlook Contributors: David W. Munves, CFA 1.212.553.2844 david.munves@moodys.com John Lonski 1.212.553.7144 john.lonski@moodys.com Ben Garber 1.212.553.4732 benjamin.garber@moodys.com Njundu Sanneh 1.212.553.4036 njundu.sanneh@moodys.com Yukyung Choi 1.212.553.0906 yukyung.choi@moodys.com Irina Baron 1.212.553.4307 irina.baron@moodys.com Franklin Kim 1.212.553.4419 franklin.kim@moodys.com Xian (Peter) Li 1.212.553.1404 Xian.li@moodys.com Moody's Analytics/Europe: Tomas Holinka +420 ( 221) 666-384 Tomas.holinka@moodys.com Moody's Analytics/Asia-Pacific: Alaistair Chan +61 (2) 9270-8148 Alaistair.chan@moodys.com Emily Dabbs +61 (2) 9270-8159 Emily.dabbs@moodys.com Editor Dana Gordon 1.212.553.0398 dana.gordon@moodys.com CAPITAL MARKETS RESEARCH 2 FEBRUARY 11, 2016 CAPITAL MARKETS RESEARCH, INC. / MARKET OUTLOOK / MOODYS.COM Credit Markets Review and Outlook Credit Markets Review and Outlook By John Lonski, Chief Economist, Moody’s Capital Markets Research, Inc. Treasury Bonds Thrive as Markets Dive Elevated market volatility reflects and amplifies risk aversion. Holders of US Treasury bonds have been among the few beneficiaries of the recent extreme volatility. The 10-year US Treasury yield recently sank to 1.65% for its lowest reading since January 2015. The conventional wisdom was that the long awaited Fed rate hike of December 16, 2015 would trigger a “lift off” by the 10-year Treasury yield. However, much to the contrary, a 25 bp hiking of the federal funds rate has instead been accompanied by a -65 bp plunge by the 10-year Treasury yield from the 2.30% of December 16. The latest nosedive by Treasury bond yields mocks expert opinion. A consensus forecast compiled in early February projected a Q1-2016 average of 2.20% for the 10-year Treasury yield. Moreover, the same survey expected a yearlong 2016 average of 2.40% for the 10-year Treasury yield, which was up from yearlong 2015’s average of 2.20%. Inexplicably, the projected average yield ran counter to the Blue Chip consensus’s downgrading of the outlook for US business activity. The consensus now expects US real GDP growth to slow from 2015’s 2.4% to 2.1% in 2016. The expected slowing of activity in the world’s biggest economy increases the likelihood of a deceleration by global expenditures that may prevent 2016’s annual average for the 10-year Treasury yield from topping 2015’s 2.2%. If anything, yearlong 2016’s average for the 10-year Treasury yield may be less than 2.2%. The 10-year Treasury yield should continue to trail its year earlier readings until global expenditures accelerate sufficiently. After