WEEKLY MARKET OUTLOOK APRIL 19, 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. Outstandings Now Show Leveraged Loans Topping High-Yield Bonds Credit Markets Review and Outlook by John Lonski Outstandings Now Show Leveraged Loans Topping High-Yield Bonds » 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: Bond issuance will suffer to the degree a climb by Treasury bond yields mostly stems from budget deficit and inflation worries. » FULL STORY PAGE 11 Ratings Round-Up by Njundu Sanneh Spain’s Sovereign Upgrade Drives Positive Rating Surge » FULL STORY PAGE 16 Market Data Credit spreads, CDS movers, issuance. » FULL STORY PAGE 19 Moody’s Capital Markets Research recent publications Links to commentaries on: Profit growth, foreign investors, internal funds, tariffs, borrowing restraint, default decline; corporate bonds, tax law changes, stocks and spreads, Greek drama, South Korea, Brazil sovereign credit, Greece and Spain, dangers in the outlook. » FULL STORY PAGE 24 Credit Spreads Investment Grade: We see year-end 2018’s average investment grade bond spreads exceeding its recent 11 2 bp. High Yield: Compared to a recent 339 bp, the high-yield spread may approximate 425 bp by year-end 2018. Defaults US HY default rate: Compared to March 2018’s 3.9%, Moody's Default and Ratings Analytics team forecasts that the U.S.' trailing 12-month high-yield default rate will sink to 1.7% by March 2019. Issuance In 2017, US$-denominated IG bond issuance grew by 6.8% to a record $1.508 trillion, while US$-priced high-yield bond issuance advanced by 33.0% to a new record calendar-year high of $453 billion. For 2018’s US$-denominated corporate bonds, IG bond issuance may drop by 5.1% to $1.431 trillion, while high-yield bond issuance is likely to fall by 4.6% to $433 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 Franklin Kim 1.212.553.4419 franklin.kim@moodys.com Yuki Choi 1.212.553.0906 yukyung.choi@moodys.com Njundu Sanneh 1.212.553.4036 njundu.sanneh@moodys.com Moody’s Analytics/U.S.: Ryan Sweet 1.610.235.5213 ryan.sweet@moodys.com Moody's Analytics/Europe: Barbara Teixeira Arajuo +420.224.222.926 barbara.teixeiraarajuo@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 Reid Kanaley 1. 610.235.5273 reid.kanaley@moodys.com CAPITAL MARKETS RESEARCH 2 APRIL 19, 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. Outstandings Now Show Leveraged Loans Topping High-Yield Bonds The corporate bond credit ratings ladder consists of 19 rungs ranging from a high of Aaa to a bottom of Caa3. As of 2018’s first quarter, the A3 rating’s record $1,351 billion constituted the largest dollar amount of outstanding US corporate bonds. Second place belonged to the $1,016 billion of Baa1-rated bonds, while the $888 billion of Baa2-grade bonds came in third. Except for the A3 rating, each of the remaining 18 rating notches was below its record high. Shortfalls of 50% or deeper from record highs were found at the extremes. For 2018’s final quarter, the $147 billion of outstanding Aaa-rated corporate bonds was 64% under its zenith of Q4-2008, the $112 billion of Aa1-grade bonds was 74% below its Q3-2007 high, the $166 billion of Aa2-rated bonds trailed its Q3-2008 apex by 63%, and the $203 billion of Aa3-grade bonds was a deep 80% beneath its Q2-2007 zenith. First-quarter 2018’s outstandings of only one high-yield category shows a deeper than 50% drop from its record high that being the $44 billion of outstanding Caa3-grade bonds, which trailed its top of Q1-2016 by 60%. The high-yield bond spread’s moving five-day average has narrowed from April 2’s already below-average 375 basis points to April 18’s 339 bp. The latter is less than what might be inferred from other aggregate estimates of credit risk. Moreover, because of an ongoing reduction by high-yield bonds outstanding and a simultaneous expansion by the outstandings of highly leveraged loans, the high-yield bond spread