WEEKLY MARKET OUTLOOK MAY 28, 2015 CAPITAL MARKETS RESEARCH Corporate Yields May Set New Lows in the Next Upturn Credit Markets Review and Outlook by John Lonski Corporate Yields May Set New Lows in the Next Upturn. » 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, “Corporate borrowing activity has been relatively quiet given the 69% year-over-year surge by the dollar value of US-company related M&A for the year-ended April 2015,” begin on page 18. » FULL STORY PAGE 18 Ratings Round-Up by Njundu Sanneh Bank Rating Methodology Change Fuels European Rating Revisions. » FULL STORY PAGE 21 Market Data Credit spreads, CDS movers, issuance. » FULL STORY PAGE 23 Moody’s Capital Markets Research recent publications Links to commentaries on: Colgate-Palmolive, ECB, ConAgra Foods, Best Buy, Lat Am, Exxon, HY covenants, euro bonds, Comcast, JetBlue, Greece, risk, Monsanto, Toyota, Genworth, Ally, bank risk. » FULL STORY PAGE 27 Credit Spreads Investment Grade: Year-end 2015 spread to be under its recent 144 bp. High Yield: Recent spread of 450 bp could dip to 445 bp by September 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 12% to $1.260 trillion, while US$ HY bond issuance dips by -3% to $407 billion. In 2014, US$ 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 Farad.syed@moodys.com Editor Dana Gordon 1.212.553.0398 dana.gordon@moodys.com 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. CAPITAL MARKETS RESEARCH Credit Markets Review and Outlook Credit Markets Review and Outlook By John Lonski, Chief Economist, Moody’s Capital Markets Research, Inc. Corporate Yields May Set New Lows in the Next Upturn Reference often is made to how the high-grade bond market was crushed in 1994. All too often, however, the bond market’s solid recovery of 1995 goes unmentioned. Basically, 1995’s drop by bond yields was in response to a slowdown by business activity stemming from 1994’s fundamentally excessive climb by borrowing costs. In terms of month-long averages, the 10-year Treasury yield soared up from an October 1993 low of 5.33% to November 1994’s now 24-year high of 7.96%. Immediately thereafter the 10-year Treasury yield began a descent that ended with a January 1996 bottom of 5.65%. More importantly for corporate credit is how both the long-term Baa industrial company bond yield and the composite speculative-grade bond yield did not bottom until September 1998 at 7.04% for the former and March 1998 at 8.88% for the latter. In other words, 1994’s sell-off was merely a transitory head-fake as far as corporate credit’s performance during 1991-2000’s business cycle upturn. Sales, Profits and Default Risk Imply T-Bond Yields May Have Peaked for the Cycle Given the persistently subpar tone of the current recovery, the 10-year Treasury yield’s month-long average may have already peaked for the cycle at December 2013’s 2.89%. Imagine just how disruptive the sudden return of a nearly 3% 10-year Treasury yield would be to the financial markets and business activity. For starters, an equity market sell-off of at least -10% seems likely. In addition, the recent 451 bp high-yield bond spread could swell by at least 100 bp. Corporate America’s operating performance has softened since Q4-2013. In 2013’s final quarter, the sales and operating income of the S&P 500’s non-financial companies grew annually by 3.5% and 6.0%, respectively. By contrast, those same metrics incurred year-to-