WEEKLY MARKET OUTLOOK:Ample Spreads Reflect a Leaner Outlook

WEEKLY MARKET OUTLOOK MARCH 26, 2015 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. Ample Spreads Reflect a Leaner Outlook Credit Markets Review and Outlook by John Lonski Ample Spreads Reflect a Leaner Outlook. » 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 6 The Long View Check our chart here for forecast summaries of key credit market metrics. Full updated stories: “Though up from a year earlier, Q1-2015’s worldwide offerings of high-yield bonds may still fall short of 2013’s record high for a first quarter by roughly-10%,” begin on page 16. » FULL STORY PAGE 16 Ratings Round-Up by Njundu Sanneh Activity Good, but More Downs than Ups. » FULL STORY PAGE 19 Market Data Credit spreads, CDS movers, issuance. » FULL STORY PAGE 21 Moody’s Capital Markets Research recent publications Links to commentaries on: Greece, commodities, HSBC, Unum, Brazil, CNA, dollar, AIR, Fed, Petrobras, CIT, AT&T, Turkey, HAs, YUM, corp issu, bank risk, STT, US risk, HCA, Greece. » FULL STORY PAGE 25 Credit Spreads Investment Grade: Year-end 2015 spread to be under its recent 1137 bp. High Yield: Recent spread of 483 bp could dip to 450 bp by year-end 2015. Defaults US HY default rate: Feb 2015, 2.0%; 2.2% average in 2H/2015 Issuance For 2015, US$ IG bond offerings may grow by 9% to $1.230 trillion, while US$ HY bond issuance sinks by -3 % to $408 billion. In 2014, US$ IG bond issuance rose by 0.9% to $1.129 trillion, while US$ HY bond issuance dropped by -2.3% to $421 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 Capital Markets Research, Inc. Weekly Market Outlook Contributors: David W. Munves, CFA 1.212.553.2844 david.munves@moodys.com John Lonski 1.212.553.7144 john.lonski@moodys.com Ben Garber 1.212.553.4732 benjamin.garber@moodys.com Njundu Sanneh 1.212.553.4036 njundu.sanneh@moodys.com Yukyung Choi 1.212.553.0906 yukyung.choi@moodys.com Irina Baron 1.212.553.4307 irina.baron@moodys.com Franklin Kim 1.212.553.4419 franklin.kim@moodys.com Xian (Peter) Li 1.212.553.1404 Xian.li@moodys.com Moody's Analytics/Europe: Zach Witton 44 (20) 7772-1678 Zach.witton@moodys.com Moody's Analytics/Asia-Pacific: Katrina Ell 1.612.9270.8144 Katrina.ell @moodys.com Faraz Syed 1.612.9270.8146 Faraz.Syed @moodys.com Editor Dana Gordon 1.212.553.0398 dana.gordon@moodys.com CAPITAL MARKETS RESEARCH 2 MARCH 26, 2015 CAPITAL MARKETS RESEARCH, INC. / 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. Ample Spreads Reflect a Leaner Outlook Lackluster revenue growth now raises eyebrows. First-quarter 2015’s deceleration by business sales extends well beyond energy products. February’s shipments of durable goods fell by -0.2% monthly. Combining the latter with earlier news of February’s -0.8% monthly plunge by retail sales excluding gas station sales suggests that core business sales might be lucky to decline by -0.2% monthly in February. (Core business sales equal the sales of manufacturers, retailers, and wholesalers less sales of identifiable energy products.) Even an outsized and unlikely 1.0% monthly rebound for March would not be great enough to prevent Q1-2015’s core business sales from shrinking by -0.8% annualized from Q4-2014. Thus, far for the current recovery the worst comparably measured showing by core business sales is the 0.8% annualized quarterly rise of Q1-2014. By contrast, during 2003-2007, the worst annualized quarterly percent change by core business sales was the 1.6% increase of 2006’s second quarter. Core business sales now grow more slowly than nonfinancial-corporate debt, which, when combined with an expected increase in the incidence of defaults and the limited upside for US household expenditures should lend resistance to any narrowing by corporate bond yield spreads. Given the backdrop of a mature economic recovery and a less-than-20% risk of a recession over the next 12 months, corporate bond yield spreads are now atypically wide across all rating categories. For example, the recent long-term industrial company bond yield spreads for the single-A and Baa rating categories of 134 bp and 196 bp, respectively, are significantly above their averages of 104 bp and 158 bp from the four-years-ended June 2007. In addition, the recent high yield bond spread of 483 bp is much wi