WEEKLY MARKET OUTLOOK JUNE 4, 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. Fundamentals, not Bunds, Ultimately to Guide T-Bonds Credit Markets Review and Outlook by John Lonski Fundamentals, not Bunds, Ultimately to Guide T-Bonds. » 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, “January-May 2015’s year-over-year percent changes for the world’s issuance of corporate bonds showed a 12% advance for investment-grade and a -8 decline for high-yield,” begin on page 15. » FULL STORY PAGE 15 Ratings Round-Up by Njundu Sanneh Global Banks and Energy Companies. » 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: JNJ, bank risk, GECC, VZ, Greece, Brazil, yields, Colgate-Palmolive, ECB, ConAgra Foods, Best Buy, Lat Am, Exxon, HY covenants, euro bonds. » FULL STORY PAGE 24 Credit Spreads Investment Grade: Year-end 2015 spread to resemble its recent 145 bp. High Yield: Recent spread of 441 bp could approximate 460 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 16% to $1.305 trillion, while US$ HY bond issuance dips by -1% to $415 billion. In 2014, US$ 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: Matthew Circosta 1.612.9270.8118 Matthew.circosta@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 JUNE 4, 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. Fundamentals, not Bunds, Ultimately to Guide T-Bonds The latest climb by bond yields reinforces the widespread downgrading of economic growth forecasts. As inferred from late May’s consensus forecast of quarterly growth rates, real GDP’s annual growth rate is likely to slow from 2014’s 2.4% to 2.2% in 2015. As recently as March 2015, the consensus projected a 3.1% annual gain for 2015’s US real GDP. As opposed to taking their cue from slower-than-expected business activity, US Treasury yields now seem to be following the path taken by German government bond yields. During the first three months of 2015, a drop by the 10-year German bond yield from year-end 2014’s 0.53% to March 31’s 0.15% facilitated a decline by the 10-year Treasury yield from 2.17% to 1.93%. Thereafter, a jump by the German bond yield to a recent 0.82% helped to drive the 10-year Treasury yield up to 2.32%. Perhaps it’s worth recalling how during the 12-months-ended June 2014, which contained the “taper tantrum”, the 10-year Treasury yield’s 2.70% average was joined by a 1.67% average for the 10-year German government bond yield. Thus, the ECB’s reaffirmation to continue its bond buying program may limit the upside for the 10-year German bond yield, which, in turn, would add to the difficulty of realizing another 2.7% 12-month average for the 10-year Treasury yield. The global sell-off of equities in response to the latest jump by benchmark bond yields should help to prevent the 10-year Treasury yield from remaining at or above 2.7% until global economic growth quickens from its recent 3.1% pace to at least 3.7%. However, the global economy will be incapable of gaining such a speed unless US growth breaks well above 3%. 1.002.003.004.005.006.007.008.009.0010.001.002.003.004.005.006.007.008.009.0010.00Jan-86Apr