Low Bond Yields Extend an Aging Upturn

WEEKLY MARKET OUTLOOK JUNE 22, 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. Low Bond Yields Extend an Aging Upturn Credit Markets Review and Outlook by John Lonski Low Bond Yields Extend an Aging Upturn. » 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, “During January-May 2017, medium-grade issues supplied 56% of investment-grade bond offerings — close to its 55% share of the last five years,” begin on page 13. » FULL STORY PAGE 13 Ratings Round-Up by Njundu Sanneh A Much Better Week in the US. » FULL STORY PAGE 18 Market Data Credit spreads, CDS movers, issuance. » FULL STORY PAGE 20 Moody’s Capital Markets Research recent publications Links to commentaries on: Philippines, thin, Qatar, toxic, Paris, mediocre, capital, retail, Korea, yields, less, doubt, Venezuela, inflation, CCAR, global, Treasury yield, France. » FULL STORY PAGE 24 Credit Spreads Investment Grade: Year-end 2017 spread to exceed its recent 119 bp. High Yield: After recent spread of 385 bp, it may approximate 425 bp by year-end 2017. Defaults US HY default rate: Compared to May 2017’s 3.9%, Moody's Credit Policy Group forecasts the US trailing 12-month high-yield default rate to average 2.7% during the three-months-ended May 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 2.8% to a new zenith of $1.451 trillion, while US$-priced high-yield bond issuance may increase by 17.3% to $400 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 Weekly Market Outlook Contributors: John Lonski 1.212.553.7144 john.lonski@moodys.com Njundu Sanneh 1.212.553.4036 njundu.sanneh@moodys.com Franklin Kim 1.212.553.4419 franklin.kim@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 Faraz Syed +61 (2) 9270-8146 Faraz.Syed@moodys.com Editor Dana Gordon 1.212.553.0398 dana.gordon@moodys.com CAPITAL MARKETS RESEARCH 2 JUNE 22, 2017 CAPITAL MARKETS RESEARCH / 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. Low Bond Yields Extend an Aging Upturn A renewed drop by the price of crude oil has grabbed the market’s attention. June 2017’s average price of WTI crude oil is on track to fall by nearly -6.5% annually. In turn, the annual rate of PCE price index inflation may eventually slow from April’s 1.7%, or when the price of crude oil was up by 24.3% from a year earlier. Though PCE price index inflation is likely to remain under the Fed’s 2% target, it would be premature to dismiss the possibility of a 1.375% midpoint for fed funds by the end of 2017. Recently, the futures market implicitly assigned odds of less than 50% to fed funds finishing 2017 at something greater than its current 1.125% midpoint. Lately, industrial commodity prices have been hinting of a mild and non-inflationary rate of global economic growth, which explains why the 10-year Treasury yield has eased from a March 2017 average of 2.48% to the 2.18% of June-to-date. Compared to their respective averages of yearlong 2011 (or when the 10-year Treasury yield averaged 2.79%), the June-to -date averages were down by -52% for the price of crude oil and off by -21% for Moody’s industrial metals price index. Though June-to -date’s average for the industrial metals price index topped its June 2016 average by 18.3%, the same June-to -date average trailed its 31-month high of February 2017 by -6.7%. Flat to lower industrial commodity prices would practically rule out a lasting stay by the 10-year Treasury yield at 2.5% or higher. (Figure 1.) 3005508001,0501,3001,5501,8002,0502,3002,550$8$18$28$38$48$58$68$78$88$98$108$118$128$138Jun-00Dec-01Jun-03Dec-04Jun-06Dec-07Jun-09Dec-10Jun-12Dec-13Jun-15Dec-16Crude Oil Price: WTI, $/bbl ( L )Industrial Metals Price Index: ( R )Figure 1: Compared to 2011's Yearlong Averages, June-to-Date's Industrial Metals Price Index Index Was Off by -21%, while P