US Interest Rate Outlook: The Storm Before the Calm

WEEKLY MARKET OUTLOOK FEBRUARY 16, 2017 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. US Interest Rate Outlook: The Storm Before the Calm Credit Markets Review and Outlook by Ben Garber US Interest Rate Outlook: The Storm Before the Calm. » FULL STORY PAGE 2 The Week Ahead We preview economic reports and forecasts from the US, UK/Europe, and Asia/Pacific regions. » FULL STORY PAGE 6 The Long View Check our chart here for forecast summaries of key credit market metrics. Full updated stories, “If yearlong 2017’s issuance of US$ high-yield bonds grows by 6.9% to $364 billion, the latter is still under 2013’s record $444 billion,” begin on page 11. » FULL STORY PAGE 11 Ratings Round-Up by Njundu Sanneh Upgrades Predominate. » FULL STORY PAGE 16 Market Data Credit spreads, CDS movers, issuance. » FULL STORY PAGE 18 Moody’s Capital Markets Research recent publications Links to commentaries on: France, demography, boom, Japan, reform, India, Turkey, risk, UK, deregulation, potential, BAC, optimism, Portugal, DB, revisions, outlook, US, great, China, Italy » FULL STORY PAGE 22 Credit Spreads Investment Grade: Year-end 2017 spread to exceed its recent 121 bp. High Yield: After recent spread of 381 bp, it may approximate 440 bp by year-end 2017. Defaults US HY default rate: after January 2017’s 5.8%, Moody’s Credit Policy Group forecasts it near 3.7% by 4Q 2017. Issuance In 2016, US$-denominated IG bond issuance grew by 5.5% to a record $1.411 trillion, while US$-priced high-yield bond issuance fell by -3.5% to $341 billion. For 2017, US$-denominated IG bond issuance may rise by 0.6%, while US$-priced high-yield bond issuance may increase by 6.9%. 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: Emily Dabbs +61 (2) 9270-8159 Emily.dabbs@moodys.com Katrina Ell +61 (2) 9270-8144 Katrina.ell@moodys.com Editor Dana Gordon 1.212.553.0398 dana.gordon@moodys.com CAPITAL MARKETS RESEARCH 2 FEBRUARY 16, 2017 CAPITAL MARKETS RESEARCH, INC. / MARKET OUTLOOK / MOODYS.COM Credit Markets Review and Outlook Credit Markets Review and Outlook By Ben Garber, Economist, Moody’s Capital Markets Research, Inc. US Interest Rate Outlook: The Storm Before the Calm The outlook for interest rate movements in the US is highly uncertain in the near term. Policy actions will drive the price of credit, as markets await news on trade, fiscal, and monetary matters. The extreme optimism seen in financial markets and confidence surveys following the election has raised expectations for both growth and inflation. Recent economic data supports to this euphoria, driving a sell-off in Treasuries. But beyond the immediate risk of further increases in bond yields, the long-term prospects for more muted US economic activity argue against an extended bear market in bonds. Economic optimism is overdone With momentum in growth and inflation building, interest rates are budging higher. The 10-year Treasury yield rose to the three-week high of 2.51% on February 15, keying off rising inflation readings and a more aggressive tone from Federal Reserve policymakers. Robust results for core retail sales and manufacturing output point to a firming economy, supporting the rise in interest rates. Such conditions promote a positive environment for corporate credit quality, as the latest US high yield bond spread reported by Bloomberg Barclays fell to the multi-year low of 367 bp after averaging 569 bp last year. To a far greater degree than bond price movements, equities and business confidence measures are pointing to heightened optimism. Stock market gains have been the obvious signal that growth and corporate profits are expected by many to accelerate significantly. But readings of business sector confidence have been truly extraordinary. The National Federation of Independent Business found that small business owners have radically shifted their views on