WEEKLY MARKET OUTLOOK MAY 14, 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. Risks Mount If Yields Rise as Activity Falls Credit Markets Review and Outlook by John Lonski Risks Mount If Yields Rise as Activity Falls. » FULL STORY PAGE 2 Topic of the Week by Ben Garber The Wrong Way One-Way Euro Bond Bet. » 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, “Since the 10-year Treasury yield bottomed on April 3, the composite speculative grade bond yield fell by -8 bp (to 6.16%), while the long-term Baa industrial company bond yield increased by 54 bp (to 4.95%),” begin on page 16. » FULL STORY PAGE 16 Ratings Round-Up by Njundu Sanneh Upgrades Outnumber Downgrades. » 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: Monsanto, Toyota, Genworth, Ally, bank risk, Jamaica, AXA, corp credit, Kroger, Ocwen, Pfizer, production, Greece, TXN, HNT. » FULL STORY PAGE 25 Credit Spreads Investment Grade: Year-end 2015 spread to be under its recent 131 bp. High Yield: Recent spread of 452 bp could dip to 445 bp by year-end 2015. Defaults US HY default rate: April 2015, 1.7%; 2.9% average in 1Q/2016 Issuance For 2015, US$ IG bond offerings may grow by 6% to $1.19 trillion, while US$ 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: Alaistair Chan 1.612.9270.8148 Alaistair.Chan@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 MAY 14, 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. Risks Mount If Yields Rise as Activity Falls The latest upturn by Treasury bond yields diminishes prospects for the real economy and reinforces a benign outlook for price inflation, mostly because the Treasury bond market has downplayed the importance of slower-than-expected economic activity. The response of actual and expected activity to the taper tantrum of 2013-2014 offers guidance as to how to interpret the current climb by yields. As implied by the name “taper tantrum”, irrationality help to drive the 10-year Treasury yield’s yearlong average up from April 2013’s unsustainably low 1.74% to June 2014’s untenably high 2.70%. Just prior to the late May 2013 start to the taper tantrum, the Blue Chip consensus had predicted annual increases for US real GDP of 2.1% for 2013 and 2.7% for 2014. Moreover, the consensus forecast of early May 2013 also projected yearlong averages for the 10-year Treasury yield of 2.0% for 2013 and 2.5% for 2014. However, as of early October 2013, the consensus reacted to the climb by the 10-year Treasury yield’s moving three-month average from April 2013’s 1.88% to September 2013’s 2.70% by lowering its economic growth forecast to 1.6% for 2013 and 2.6% for 2014. An upward revision of the consensus’s forecast for yearlong 2014’s 10-year Treasury yield to 3.1% complemented views of more limited upsides for economic growth and price inflation in 2014. As it turned out, the consensus failed to fully appreciate the emotional underpinnings of the taper tantrum and, in order to counter 2014’s slower-than-expected rate of growth for the economy, the 10-year Treasury yield averaged a much lower-than-anticipated 2.53% in 2014. High-yield EDF of taper tantrum was lower and