WEEKLY MARKET OUTLOOK NOVEMBER 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. Fewer Defaults Will Stave Off Much Wider Spreads Credit Markets Review and Outlook by John Lonski Fewer Defaults Will Stave Off Much 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, “Refinancings continue to dominate the stated uses of proceeds from newly issued US$ corporate bonds,” begin on page 16 . » FULL STORY PAGE 16 Ratings Round-Up by Njundu Sanneh US Upgrades Fly, Fueled by Energy Sector. » FULL STORY PAGE 22 Market Data Credit spreads, CDS movers, issuance. » FULL STORY PAGE 24 Moody’s Capital Markets Research recent publications Links to commentaries on: Saudi Arabia, defaults, credit/stocks, China, yields/prices, debt/growth, Spain, upside surprise, bulls, less fear, Fed & BoJ, inflation, market triggers, hurricanes, data in sync, Harvey, inflation, yields, Korea, jobless rate, spreads, Saudi Arabia, lending, El Salvador. » FULL STORY PAGE 28 Credit Spreads Investment Grade: Year-end 2017 spread to exceed its recent 106 bp. High Yield: After recent spread of 370 bp, it may approximate 410 bp by year-end 2017. Defaults US HY default rate: Compared to October 2017’s 3.2%, Moody's Default and Ratings Analytics team forecasts that the US' trailing 12-month high-yield default rate will average 2.2% during 2018’s third 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 7.3% to a new zenith of $1.515 trillion, while US$-priced high-yield bond issuance may increase by 23.5% to $421 billion, or less than 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 Analytics 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 Barbara Teixeira Araujo +420 (224) 106-438 Barbara.TeixeiraAraujo@moodys.com Moody's Analytics/Asia-Pacific: Katrina Ell +61 (2) 9270-8144 Katrina.ell@moodys.com Editor Dana Gordon 1.212.553.0398 dana.gordon@moodys.com Editor’s note: The Weekly Market Outlook will not be published Thursday, November 23. It is the US Thanksgiving national holiday. Next issue: November 30. CAPITAL MARKETS RESEARCH 2 NOVEMBER 16, 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. Fewer Defaults Will Stave Off Much Wider Spreads The high-yield bond market recently incurred a jarring sell-off. On October 24, the composite speculative-grade bond yield and its spread over Treasuries bottomed at 5.46% and 340 bp, respectively. By November 15, the spec-grade yield had jumped up to 6.13%, while the spread swelled to 407 bp. Nevertheless, the latest widening of high-yield bond spreads more likely stems from a correction of under-compensation for default risk rather than from a deterioration of corporate credit quality. Neither current nor prospective credit rating revisions are signaling a noteworthy climb by default risk. Thus far in 2017’s final quarter, both high-yield and investment-grade credit rating revisions show more upgrades than downgrades. In addition, since the end of June 2017, the number of improved outlooks for US corporate credit quality has surpassed the number of worsened outlooks. The current outlook for US business activity weighs against an impending deterioration of corporate credit quality that otherwise might drive the high-yield bond spread well above its 454 bp median for the months overlapping economic recoveries since 1984. According to an early November survey of more than 50 forecasters that was conducted by Blue Chip Economic Indicators, the consensus looks for faster rates of growth for US real GDP and pretax operating profits in 2018. Moreover, early November’s consensus assigned only a 19% probability to the likelih