WEEKLY MARKET OUTLOOK APRIL 30, 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. Length of Zero Interest Rate Policy Reflects Diminished Fundamentals Credit Markets Review and Outlook by John Lonski Length of Zero Interest Rate Policy Reflects Diminished Fundamentals. » FULL STORY PAGE 2 Topic of the Week by Ben Garber Production Slowdown Could Affect Corporate Credit Quality. » FULL STORY PAGE 4 The Week Ahead We preview economic reports and forecasts from the US, UK/Europe, and Asia/Pacific regions. » FULL STORY PAGE 7 The Long View Check our chart here for forecast summaries of key credit market metrics. Full updated stories, “First-quarter 2015’s 12% annual increase by the worldwide issuance of high-yield corporate bonds consisted of a 39% surge by offerings from US-based companies and a -11% drop by supply from the rest of the world,” begin on page 15. » FULL STORY PAGE 15 Ratings Round-Up by Njundu Sanneh Slow, but No Energy Downgrades, Two Financial Upgrades. » 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: Avon, BBT, MS, Greece, Citi, yield, Nokia, GCC, GS, EMEA, Venezuela, credit, JPM, WFC, Sysco, sov risk, GIS. » FULL STORY PAGE 24 Credit Spreads Investment Grade: Year-end 2015 spread to be under its recent 132 bp. High Yield: Recent spread of 455 bp could dip to 445 bp by year-end 2015. Defaults US HY default rate: Mar 2015, 1.9%; 2.5% average in 4Q/2015 Issuance For 2015, US$ IG bond offerings may grow by 5% to $1.187 trillion, while US$ HY bond issuance edges up by 1% to $424 billion. In 2014, US$ 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 Emily Dabbs 1.612.9270.8159 Emily.dabbs @moodys.com Editor Dana Gordon 1.212.553.0398 dana.gordon@moodys.com CAPITAL MARKETS RESEARCH 2 APRIL 30, 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. Length of Zero Interest Rate Policy Reflects Diminished Fundamentals Recently markets discovered that there was only a limited speculative demand for 10-year European government bonds yielding less than 1%. Unless forced to do so by an investment mandate, it’s highly unlikely that many long-term investors had been loading up on European government debt yielding less than 1%. Despite their latest climb, European government bond yields remained low compared to what otherwise might be inferred from fundamental drivers excluding European Central Bank (ECB) demand. ECB purchases have been substantial and are scheduled to be so. For example, the ECB still intends to purchase another one trillion euro of European bonds by the autumn of 2016. Over the past week, the 10-year German government bond yield rose by 22 bp to 0.38%. In near lock step fashion, the 10-year US Treasury yield increased by 19 bp to 2.10%. The unexpected rise by Treasury bond yields helped to trigger an accompanying 0.9% drop by the market value of US common stock. We still hold that the forthcoming upswing by US bond yields will more closely resemble a mild rise, as opposed to a jarring lift-off. Though financial markets are likely to overreact to the first convincing hint of a higher fed funds rate, the record shows that the market value of US common stock does not peak until several years after the initial rate hike. Yes, payrolls are growing, but the quality of new jobs may be lacking, according to the subpar growth of employee compensation and below-trend income expectations. Thus, the reaction of household expenditures, including home sales,