Director of Real-Time Economics
Ryan Sweet is director of real-time economics at Moody's Analytics. He is also editor-in-chief of Economy.com, to which he regularly contributes, and a member of the US macroeconomics team in West Chester, PA. He is among the most accurate high-frequency forecasters of the US economy, according to MarketWatch. He is also an adjunct professor in the Economics and Finance Department at West Chester University of Pennsylvania. He has a master's degree in economics from the University of Delaware and a bachelor's degree in economics from Washington College.
The latest version of the Federal Reserve's “Financial Accounts of the United States” was released on March 7. As of 2018's final quarter, the total outstandings of private and public nonfinancial-sector debt grew by 5.1% year-to-year to a record high $51.796 trillion.
Weakness abroad and a faltering demand for U.S. output now put downward pressure on both earnings-sensitive securities' prices and benchmark Treasury yields. The equity and high-yield credit rallies will be put on hold until the earnings outlook stabilizes.
Two milestones will be arrived at in 2019. First, but not necessarily the foremost, Moody's corporate bond yield averages will record their 100th anniversary in 2019.
High-yield bonds have led the credit market in total return thus far in 2019. After soaring from 6.32% at the end of September to 8.06% by year-end 2018, a composite speculative-grade bond yield has dropped to February 20's 6.79%.
In terms of a moving yearlong average, U.S. nonfinancial corporate debt rose to a record high 46.0% of GDP as of the span-ended September 2018. Nonfinancial corporate debt's 6.4% year-over-year increase for the 12-months-ended September 2018 outran nominal GDP's comparably measured rise of 5.0%.
As high ranking Federal Reserve officials reiterated many times earlier, monetary policy is not on a preset course.
Because of its acute sensitivity to the business-cycle and corporate earnings, the high-yield credit market will have more to worry about this year.
In 2018's final quarter, the 22 downgrades of U.S. investment-grade companies included nine that were at least partly ascribed to mergers, acquisitions and divestitures and three that were linked to equity buybacks. Only half, or 11, of fourth-quarter 2018's U.S. investment-grade downgrades were primarily driven by worsened operating or market fundamentals.
The outstanding high-yield corporate bonds of U.S.-domiciled issuers fell from a year earlier for an eighth consecutive quarter in 2018's final three months. Fourth-quarter 2018's 4.6% year-over-year drop lowered the outstandings of U.S. corporate high-yield bonds to $1.221 trillion, which was 9.1% under fourth-quarter 2016's current zenith of $1.344 trillion.
The world is now incapable of shouldering a 10-year Treasury yield above 3%. A remedial decline by the U.S.' benchmark interest rates will be critical to rejuvenating global business activity and stabilizing financial markets. Otherwise, the corporate earnings outlook might deteriorate by enough to sink the market value of U.S. common stock by another 20% and swell the now 552 basis point high yield bond spread to 800 bp.