Wide Spreads Likely until the Next Upturn

WEEKLY MARKET OUTLOOK APRIL 7, 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. Wide Spreads Likely until the Next Upturn Credit Markets Review and Outlook by John Lonski Wide Spreads Likely until the Next Upturn. » FULL STORY PAGE 2 Topic of the Week by Ben Garber Divergent Outlooks to Global Credit. » FULL STORY PAGE 4 The Week Ahead We preview economic reports and forecasts from the US, UK/Europe, and Asia/Pacific regions. » FULL STORY PAGE 7 The Long View Check our chart here for forecast summaries of key credit market metrics. Full updated stories, “Despite March’s upswing by high yield offerings from 2016’s first two months, the moving yearlong sum of high yield bond issuance should trail its current cycle high until the next upturn,” begin on page 17. » FULL STORY PAGE 17 Ratings Round-Up by Njundu Sanneh Fewer Downgrades and a Few Upgrades Tease. » FULL STORY PAGE 20 Market Data Credit spreads, CDS movers, issuance. » FULL STORY PAGE 22 Moody’s Capital Markets Research recent publications Links to commentaries on: banks, Amazon, PEMEX, Brexit, Fed, Hungary, rally, builders, Brazil, BNPP, profits, OXY, Valeant, USB, DB, STANLN. » FULL STORY PAGE 26 Credit Spreads Investment Grade: Year-end 2016 spread to resemble its recent 153 bp. High Yield: After recent spread of 710 bp, it may approximate 680 bp by year-end 2016. Defaults US HY default rate: after February 2016’s 3.6%, Moody’s Credit Policy Group forecasts 5.5% by January 2017. 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 increase by 8.1% to $1.434 trillion, while US$-priced high yield bond issuance may sink by -13.6% to $310 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: Jack Chambers +61 (2) 9270-8111 Jack.chambers@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 APRIL 7, 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. Wide Spreads Likely until the Next Upturn The recent less-than-1.75% 10-year Treasury yield and softer dollar exchange rate stem from a deceleration by US business activity. Though business sales may continue to grow, the rate of expansion will lag the 5% or faster pace that held earlier in the ongoing upturn. In all likelihood, credit spreads will not return to their current cycle lows until the next economic recovery. After narrowing from extraordinary widths, corporate bond yield spreads have widened somewhat to still historically wide bands. After plunging from February 11, 2016’s 887 bp to March 21’s 665 bp, the Bank of America/Merrill Lynch measure of the market-wide high yield bond spread has since broadened to the 704 bp of April 6. The latter was well above the current recovery’s bottom for the spread’s moving 12-month average, or the 395 bp of the span-ended November 2014. The much lower bottoms of the high yield spread’s yearlong averages in the two previous upturns highlight the current recovery’s significantly lower level of confidence in the profits outlook. For the last two business cycle upturns, the high yield bond spread’s moving 12-month average troughed at the 297 bp of July 2007 and the 276 bp of February 1998. In terms of moving 12-month averages, major bond yield spreads are unlikely to return to their respective lows of the current recovery until the next business cycle upturn. Getting to the next upturn requires a recession that would help to form a definitive cycle peak for the default rate, while also forcing businesses to manage