WEEKLY MARKET OUTLOOK:Treasury Yields May Fall Short of Consensus Views

WEEKLY MARKET OUTLOOK APRIL 27, 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. Treasury Yields May Fall Short of Consensus Views Credit Markets Review and Outlook by John Lonski Treasury Yields May Fall Short of Consensus Views. » 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 5 The Long View Check our chart here for forecast summaries of key credit market metrics. Full updated stories, “Likely yearly percent changes for April’s high-yield borrowing activity include a -22% drop for bond offerings and a +72% advance for new bank loan programs,” begin on page 19. » FULL STORY PAGE 15 Ratings Round-Up by Njundu Sanneh Energy Companies Among the Upgrades. » FULL STORY PAGE 19 Market Data Credit spreads, CDS movers, issuance. » FULL STORY PAGE 21 Moody’s Capital Markets Research recent publications Links to commentaries on: France, improve, cycle, South Africa, yields, Venezuela, equity, eurozone, hike, global, profits, Korea, Caa, yes, hike, VIX, rates, France, demography. » FULL STORY PAGE 25 Credit Spreads Investment Grade: Year-end 2017 spread to exceed its recent 122 bp. High Yield: After recent spread of 385 bp, it may approximate 475 bp by year-end 2017. Defaults US HY default rate: after March 2017’s 4.7%, Moody’s Credit Policy Group forecasts it near 2.9% during 2018’s first quarter. Issuance In 2016, US$-IG bond issuance grew by 5.6% to a record $1.412 trillion, while US$-priced high-yield bond issuance fell by -3.5% to $341 billion. For 2017, US$-IG bond issuance may rise by 2.6% to a new zenith of $1.449 trillion, while US$-priced high-yield bond issuance may increase by 16.6% to $397 billion but would still lag 2014’s $435 billion record high. 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 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: Katrina Ell +61 (2) 9270-8144 katrina.ell@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 27, 2017 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 Yields May Fall Short of Consensus Views Once again, the 10-year Treasury yield confounds the consensus. As of early April, the consensus had predicted that the benchmark 10-year Treasury would average 2.6% during 2017’s second quarter. To the contrary, the 10-year Treasury yield has averaged a much lower 2.29% thus far in the second quarter, including a recent 2.30%. Moreover, the 10-year Treasury yield has moved in a direction opposite to what otherwise might be inferred from March 14’s hiking of fed funds’ midpoint from 0.625% to 0.875%. For example, April 27’s 10-year Treasury of 2.30% was less than its 2.62% close of March 13, just prior to the latest Fed rate hike. The latest decline by Treasury bond yields since March 14’s Fed rate hike stems from a slower than anticipated pace for business activity that has helped to rein in inflation expectations. March’s unexpectedly small addition of 98,000 workers to payrolls increases the risk of lower than expected household expenditures that could bring a quick end to the ongoing series of Fed rate hikes. As inferred from the CME Group’s FedWatch tool, the fed funds futures contract assigns a negligible 4.3% probability to a Fed rate hike at the May 3 meeting of the FOMC. However, the likelihood of a rate hike soars to 70.6% at June 14’s FOMC meeting. Thus, do not be surprised if the policy statement of May 3’s FOMC meeting strongly hints of a June rate hike. Nevertheless, a June rate hike probably requires the return of at least 140,000 new jobs per month, on average, for April and May. Unlike the Treasury bond market’s more sober view of business prospects since the March 14 rate hike, equities ha