Lower Bond Yields Ward Off Wider Spreads

WEEKLY MARKET OUTLOOK MAY 18, 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. Lower Bond Yields Ward Off Wider Spreads Credit Markets Review and Outlook by John Lonski Lower Bond Yields Ward Off Wider Spreads. »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, “ The funding of acquisitions now lends material support to a still brisk pace of new bank loan programs from high-yield issuers” begin on page 11. »FULL STORY PAGE 11 Ratings Round-Up by Njundu Sanneh Upgrades and Rating Activity Lively. »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: Less, doubt, Venezuela, inflation, CCAR, global, Treasury yield, France, improve, cycle, South Africa, yields, Venezuela, equity, eurozone, hike, global, profits, Korea. »FULL STORY PAGE 22 Credit Spreads Investment Grade: Year-end 2017 spread to exceed its recent 118 bp. High Yield: After recent spread of 383 bp, it may approximate 470 bp by year-end 2017. Defaults US HY default rate: Compared to April 2017’s 4.5%, Moody's Credit Policy Group forecasts the US trailing 12-month high-yield default rate to average 3.0% during the three-months-ended April 2018. 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 $341 billion. For 2017, US$-denominated IG bond issuance may rise by 0.4% to a new zenith of $1.417 trillion, while US$-priced high-yield bond issuance may increase by 16.3% to $397 billion, which lags 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) 666-384Tomas.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 MAY 18, 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. Lower Bond Yields Ward Off Wider Spreads Elevated political risk has slashed the likelihood of either tax reform or increased infrastructure spending taking effect in 2017. The much reduced probability of a stimulatory fiscal impulse implies interest rates will be significantly lower than otherwise. When Hillary Clinton was widely expected to win the Presidency during the week prior to the November 8’s Election Day, the 10-year Treasury yield averaged 1.82%. Thereafter, the 10-year Treasury yield climbed as high as 2.62% in anticipation of faster economic growth, heightened inflation risks, Fed rate hikes, and greater returns from equity capital. However, a slowdown by consumer spending and the fading prospects for fiscal stimulus lowered the 10-year Treasury yield to 2.3% even before the latest bout of political turmoil. Interest rates may approach pre-election expectations Political turmoil will not lower share prices and widen corporate bond yield spreads if markets expect profits to grow despite the absence of fiscal stimulus, including corporate tax reform. In part, such expectations demand that interest rates reflect the much diminished likelihood of fiscal action. Prior to November 8’s Election Day, the Blue Chip consensus projected yearlong 2017 averages of 0.8% for the three-month Treasury bill rate and 2.1% for the 10-year Treasury yield. After Trump’s surprise victory, yearlong 2017’s projections averaged 0.9% for the Treasury bill rate and 2.7% for the benchmark Treasury yield, according to surveys taken in the first four months of 2017. As of early May, the consensus expected a slightly higher 1.0% average for 2017’s three-month Treas