WEEKLY MARKET OUTLOOK JANUARY 11, 2018 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. Stocks and Spreads May Transcend Higher Treasury Yields Credit Markets Review and Outlook by John Lonski Stocks and Spreads May Transcend Higher Treasury Yields » 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 Full updated stories and key credit market metrics: Early indications for January are positive for investment-grade corporate bond offerings and negative for high-yield issuance. Begins on page 14. » FULL STORY PAGE 14 Ratings Round-Up by Njundu Sanneh Retail Drags Down Rating Revisions » 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: Brazil sovereign credit, Greece and Spain, dangers in the outlook, high-yield borrowing, Saudi Arabia, defaults, credit/stocks, China, yields/prices, debt/growth, Spain, upside surprise, bulls, less fear, Fed & BoJ, inflation, market triggers. » FULL STORY PAGE 25 Credit Spreads Investment Grade: We see year-end 2018’s average investment spread exceeding its recent 100 bp. High Yield: Compared to a recent spread of 325 bp, it may approximate 400 bp by year-end 2018. Defaults US HY default rate: Compared to November 2017’s 3.4%, Moody's Default and Ratings Analytics team forecasts that the US' trailing 12-month high-yield default rate will average 2.4% 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 probably rose by 6.7% to a new zenith of $1.507 trillion, while US$-priced high-yield bond issuance may increase by 31.1% to $450 billion, thereby surpassing 2014’s previous high of $435 billion. 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/U.S.: Kathryn Asher 1.610.235.5000 Kathryn.Asher@moodys.com Moody's Analytics/Europe: Reka Sulyok +420 (224) 106-435 Reka.Sulyok@moodys.com Moody's Analytics/Asia-Pacific: Alaistair Chan +61 (2) 9270-8148 Alaistair.Chan@moodys.com Katrina Ell +61 (2) 9270-8144 Katrina.Ell@moodys.com Editor Reid Kanaley 1. 610.235.5273 reid.kanaley@moodys.com CAPITAL MARKETS RESEARCH 2 JANUARY 11 2018 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. Stocks and Spreads May Transcend Higher Treasury Yields Markets now focus on early 2018’s climb by Treasury bond yields to heights last observed in March 2017. Though the 10-year U.S. Treasury yield climbed from year-end 2017’s 2.41% to a recent 2.55%, the latter resembles the 2.6% average predicted for 2018’s first quarter by the Blue Chip Financial consensus of late December 2017. Moreover, the 10-year Treasury yield still lags its 2.74% average of the six-months-ended March 2014 that coincided with the taper tantrum. During the height of the taper tantrum of late 2013 and early 2014, the 10-year Treasury yield rose to nearly 3%. Notwithstanding a jump by the average 10-year Treasury yield from the 1.81% of the six-months-ended March 2013 to the 2.74% of the six-months-ended March 2014, the market value of U.S. common equity still advanced by 24.7% year over year. Moreover, the high-yield bond spread’s moving six-month average narrowed from the 515 basis points of the six-months-ended March 2013 to the 398 bp of the six-months-ended March 2014. Thus, the prices of earnings-sensitive securities need not collapse if the 10-year Treasury yield again remains above 2.7%. Richly Priced Shares Heighten Equities’ Vulnerability to Higher Yields However, there are some important differences between the six-months-ended March 2014 and today. First, today’s equity market is more richly priced than that of the taper tantrum. During the six-months-ended March 2014, the market value of U.S. common stock approximated 12.3 times after-tax profits. By contrast, the market value of equi