WEEKLY MARKET OUTLOOK MAY 24, 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. Higher Interest Rates Will Be the Source of Their Own Demise Credit Markets Review and Outlook by John Lonski Higher Interest Rates Will Be the Source of Their Own Demise » 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: A slower pace for corporate bond issuance helps to curb balance-sheet leverage. » FULL STORY PAGE 11 Ratings Round-Up U.S. Rating Changes Dominated by Industrial and Utility Sectors » FULL STORY PAGE 15 Market Data Credit spreads, CDS movers, issuance. » FULL STORY PAGE 18 Moody’s Capital Markets Research recent publications Links to commentaries on: Profit growth, credit quality, default rates, foreign investors, internal funds, tariffs, borrowing restraint, corporate bonds, tax law changes, stocks and spreads, Greek drama, South Korea, Brazil sovereign credit. » FULL STORY PAGE 23 Credit Spreads Investment Grade: We see year-end 2018’s average investment grade bond spreads exceeding its recent 124 bp. High Yield: Compared to a recent 358 bp, the high-yield spread may approximate 425 bp by year-end 2018. Defaults US HY default rate: Moody's Default and Ratings Analytics team forecasts that the U.S.' trailing 12-month high-yield default rate will sink from April 2018’s 3.7% to 1.5% by April 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 6.7% to $1.407 trillion, while high-yield bond issuance is likely to fall by 8.9% to $413 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 Moody’s Analytics/U.S.: Ryan Sweet 1.610.235.5213 ryan.sweet@moodys.com Kathryn Asher 1.610.235.5176 kathryn.asher@moodys.com Michael Ferlez 1.610.235.5162 michale.ferlez@moodys.com Moody's Analytics/Europe: Barbara Teixeira Arajuo +420.224.106.438 barbara.teixeiraarajuo@moodys.com Moody's Analytics/Asia-Pacific: 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 MAY 24, 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. Higher Interest Rates Will Be the Source of Their Own Demise The remedy of higher interest rates is taking effect. The risk of an overheating of financial markets and business activity appears to be waning. The market value of U.S. common stock has been unable to return to its record high of January 26 ever since the 10-year Treasury yield has risen from its 2.56% average of 2018’s first 36 days to 2.88% since then. In turn, the S&P 500’s forward-looking price-to-earnings ratio has eased from January 26’s 18.7:1 to a recent 17.1:1. Not only will a less exuberant equity market rein-in wealth-driven spending by consumers, it will also curb business expenditures by containing the market valuation of business assets and increasing the cost of equity capital. Moreover, a less vibrant equity market may prompt creditors to demand additional compensation for default risk when lending to businesses. More than recent problems arising in several emerging market countries challenge forecasts of an extended stay by a greater-than-3% 10-year Treasury yield. In addition, there are signs of a loss of momentum by interest-sensitive activity in the U.S. Higher Interest Rates Outweigh Favorable Default Outlook Notwithstanding the lift ordinarily supplied by expectations of a significantly lower high-yield default rate, May-to-date’s plummet by US$-denominated corporate bond issuance hints of possibly lower U.S. Treasury yields six to 12 months hence. The 6.37% average composite speculative-grade bond yield of the first 22 days of May was up by 63 basis points from its comparably measured 5.74% average of May 2017. In response to this jump by the speculative-grade bond yi