Low Interest Rates Offset Fiscal Gridlock

WEEKLY MARKET OUTLOOK JULY 20, 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 Interest Rates Offset Fiscal Gridlock Credit Markets Review and Outlook by John Lonski Low Interest Rates Offset Fiscal Gridlock. » 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 4 The Long View Check our chart here for forecast summaries of key credit market metrics. Full updated stories, “The outstandings of high-yield bonds from US companies contracted year-over-year by -3.9% in Q1-2017 and -5.0% in Q2-2017,” begin on page 11. » FULL STORY PAGE 11 Ratings Round-Up by Njundu Sanneh US Downgrades Mount Up. » FULL STORY PAGE 15 Market Data Credit spreads, CDS movers, issuance. » FULL STORY PAGE 17 Moody’s Capital Markets Research recent publications Links to commentaries on: Sov risk, Qatar, equities, debt-to -GDP, e nergy, bond yields, Philippines, thin spreads, Qatar, toxic tightening, Paris, sales and profits, aging upturn, r etail, Korea, lower yields, less risk, doubt VIX, Venezuela. » FULL STORY PAGE 21 Credit Spreads Investment Grade: Year-end 2017 spread to exceed its recent 111 bp. High Yield: After recent spread of 372 bp, it may approximate 420 bp by year-end 2017. Defaults US HY default rate: Compared to June 2017’s 3.8%, Moody's Credit Policy Group forecasts the US trailing 12-month high-yield default rate will average 2.9% during 2018’s second 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 $341 billion. For 2017, US$-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 20.0% to $409 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 Yuki Choi 1.212.553.0906 yukyung.choi@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 JULY 20, 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 Interest Rates Offset Fiscal Gridlock A fundamentally excessive climb by Treasury bond yields is one of the bigger risk factors facing corporate credit. Now that gridlock may persist indefinitely in Washington, the absence of fiscal stimulus requires a continuation of low interest rates. The demise of healthcare legislation reduces the likelihood of tax reform or increased infrastructure spending becoming law well into 2018, if ever. Nevertheless, the market value of US common stock recently set a new record high, having advanced by more than 10% since year-end 2016. Low interest rates compensate for lack of fiscal stimulus Monetary accommodation can substitute for the lack of fiscal stimulus. Markets will not sell-off in response to unfulfilled expectations of fiscal stimulus if interest rates are low enough to assure a pace of expenditures that is capable of growing profits. Remember, during the week prior to Election Day — when Hilary Clinton was heavily favored to capture the Presidency and by doing so preserve gridlock in Washington — the 10-year Treasury yield averaged 1.82%. The 10-year Treasury yield’s month-long average subsequently peaked at December 2016’s 2.49% in anticipation of a dose of fiscal stimulus that was supposed to stoke both business activity and price inflation. In response to fading prospects for any fiscal stimulus into the foreseeable future, the 10-year Treasury yield has since receded to 2.24%. In the event, business activity slows and inflation expectations do not rise, the benchmark Treasury yield will move lower. Diminished worry over a possibly disruptive climb by fed funds and Treasury bond yields has helped to narrow corporate bond yield spreads. For example, the long-term Baa industrial company bond yield spre