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Weekly Market Outlook: Benign Credit Outlook Comes With Blemishes

No forecast is free of downside risks. In a manner that is consistent with (1) the recent increase in the incidence of high-yield credit rating downgrades relative to upgrades and (2) a roughly unchanged reading for the average high-yield EDF (expected default frequency) metric since the EDF's month-long average last bottomed in February 2017, Moody's Default Research Group upwardly revised its projected U.S. high-yield default rates for each of the 11 months ended October 2018 by 24 basis points (bp), on average. For example, the projected average default rate for 2018's third quarter was raised from the 2.14% of the November 2017 forecast to 2.40% as of December's projection.

December 2017 Pdf John Lonski, Njundu Sanneh, Franklin Kim, Yukyung Choi, Kristopher Cramer, Barbara Teixeira Araujo, Katrina Ell, Faraz Syed

Wholesale Used-Car Price Report December 2017

Wholesale used-vehicle auction sales waned in November, while the average transaction price fell by 0.53% from a year ago to $10,556. The surge in replacement demand after Hurricanes Harvey and Irma appears to be fading, resulting in prices and sales normalizing from the strong performance in October and September.

December 2017 Pdf Michael Vogan, Roland Lindmayer

Weekly Market Outlook: Dangers Lurk Amid 2018's Positive Outlook

Earnings-sensitive markets thrived in 2017. Though late 2016's outlook for 2017's pretax operating profits proved to be fairly accurate, the market value of U.S. common stock still soared higher by 18% to a new record high. Several developments explained why the market value of common equity outran the growth of core profits in 2017. First, the market strongly believes in the efficacy of forthcoming tax law changes and has effectively shrugged off whatever harmful effects may arise from a wider federal budget deficit. Moreover, a recent study from Moody's Investors Service concludes that while most US companies will be better off following the enactment of corporate tax reform, at least a quarter of highly-leveraged companies will be worse off.

December 2017 Pdf John Lonski, Njundu Sanneh, Franklin Kim, Yukyung Choi, Tomas Holinka , Barbara Teixeira Araujo, Katrina Ell, Faraz Syed

Weekly Market Outlook: High-Yield Borrowing May Slow Following 2017's Boom

A fundamentally excessive climb by interest rates is one of the bigger threats to 2018's positive outlook. Lately, financial asset prices have been advancing in response to the expectation that 2018's widely anticipated rise by benchmark borrowing costs will be manageable. In all likelihood, a Powell Fed will avoid taking preemptive action against a hypothetical jump in inflation risks unless the Treasury bond and foreign exchange markets demand otherwise. For now, the latest flattening of the Treasury yield curve reflects increased confidence in the long-term containment of inflation expectations.

December 2017 Pdf John Lonski, Njundu Sanneh, Franklin Kim, Yukyung Choi, Tomas Holinka , Barbara Teixeira Araujo, Katrina Ell, Faraz Syed

The Data Revolution: Gaining Insight from Big and Small Data

In this article, we explore the importance of small data in risk modeling and other applications and explain how the analysis of small data can help make big data analytics more useful.

December 2017 WebPage Dr. Tony Hughes

Weekly Market Outlook: 2018 Outlooks for Defaults and Profits Imply Ample Liquidity

Sometimes analysts cry wolf and nothing worse than a barking Chihuahua appears. And so it was with the Great Junk Bond Scare of November 9 through 17. Liquidity effectively shrugged off the high-yield bond market's sell-off of mid-November. When credit is in real trouble, high-yield funding quickly dries up. which simply didn't happen during the high-yield market's latest correction.

November 2017 Pdf John Lonski, Njundu Sanneh, Franklin Kim, Yukyung Choi, Tomas Holinka , Barbara Teixeira Araujo, Katrina Ell, Faraz Syed

Weekly Market Outlook: Fewer Defaults Will Stave Off Much Wider Spreads

The high-yield bond market recently incurred a jarring sell-off. On October 24, the composite speculative-grade bond yield and its spread over Treasuries bottomed at 5.46% and 340 bp, respectively. By November 15, the spec-grade yield had jumped up to 6.13%, while the spread swelled to 407 bp. Nevertheless, the latest widening of high-yield bond spreads more likely stems from a correction of under-compensation for default risk rather than from a deterioration of corporate credit quality.

November 2017 Pdf John Lonski, Njundu Sanneh, Franklin Kim, Yukyung Choi, Tomas Holinka , Barbara Teixeira Araujo, Katrina Ell

Weekly Market Outlook: Fewer Defaults Favor Even Pricier Equities

The benign outlook for high-yield defaults now supports the US equity market. Moody's Default Research Group recently projected a decline by the US high-yield default rate from October 2017's 3.2% to 2.1% by October 2018.

November 2017 Pdf John Lonski, Njundu Sanneh, Franklin Kim, Yukyung Choi, Tomas Holinka , Barbara Teixeira Araujo, Katrina Ell, Veasna Kong

Weekly Market Outlook: Slower Labor Costs and Pricier Metals Help Stocks Soar

To the benefit of credit quality, the world economy is humming. However, the pace of global expansion has yet to significantly boost inflation expectations or the real return demanded from credit market instruments. Thus, benchmark government bond yields remain low. For 10-year sovereign government bond yields, the US Treasury's recent 2.35% was well above Japan's 0.04%, Germany's 0.37%, the UK's 1.26%, and Canada's 1.95%.

November 2017 Pdf Franklin Kim, Njundu Sanneh, Yukyung Choi, Tomas Holinka , John Lonski, Barbara Teixeira Araujo, Katrina Ell, Veasna Kong

Project Finance: The Potential Returns

Effective risk assessment approaches to project finance must reflect a true understanding of complex issues. These assessments include the macroeconomic context, which provides an early indication of the potential risks and returns of infrastructure investments.

October 2017 Pdf Dr. Jing Zhang, Kevin Kelhoffer, Jorge A. Chan-Lau

Auto Finance Insights - October 2017

Auto lending growth continues to slow. Despite higher pay and solid returns from equity markets, consumers are finding that new cars are losing luster as objects worth their hard-earned cash. The tightening of lending standards has obvious ramifications for the auto industry as a whole, where expansionary credit cycles typically support new vehicle sales.

October 2017 Pdf Michael Vogan

Weekly Market Outlook: Higher Bond Yields Could Depress Share Prices

Any analysis regarding the appropriate valuation of a long-lived asset must account for the influence of interest rates. All else the same, a rise by the interest rates of lower-risk debt obligations, namely US Treasury debt, will reduce the prices of other financial and real assets. Whenever asset prices defy higher interest rates and rise, a worrisome overvaluation of asset prices may be unfolding. Today's high priceto- earnings multiples of equities and narrow yield spreads of corporate bonds have increased the vulnerability of financial asset prices to a widely anticipated climb by short- and long-term Treasury yields.

October 2017 Pdf Franklin Kim, Njundu Sanneh, Yukyung Choi, Tomas Holinka , John Lonski, Barbara Teixeira Araujo, Katrina Ell

Weekly Market Outlook: So Much Debt, So Little Growth

Today marks the 30th anniversary of the stock market crash of 1987. October 19, 1987's -17.9% daily plunge by the market value of US common stock included a -20.5% plummet by the S&P 500. To better grasp what transpired, consider that a -20% dive by today's Dow Jones Industrial Average would sink the blue-chip average by roughly 4,600 points to something under 20,000 points. Moreover, a -17.9% collapse would slash the market value of common equity by -$4.75 trillion, which approximates 25% of Q2-2017's nominal GDP.

October 2017 Pdf Franklin Kim, Njundu Sanneh, Yukyung Choi, Tomas Holinka , John Lonski, Barbara Teixeira Araujo, Katrina Ell, Faraz Syed

Modeling and Forecasting Interest Rate Swap Spreads

In this article, we model and forecast the term structure of swap spreads across a range of currencies using a principle component decomposition.

Stressed Realized LGDs: Forecasting Recovery Rates under Alternative Macroeconomic Scenarios

This article proposes a method of modeling realized losses given default (LGDs) as a function of macroeconomic drivers for stress testing purposes.

Weekly Market Outlook: Special Events Supply an Upside Surprise

Corporate credit is seeing one of the more unusual business cycle upturns since the Second World War. Not only have corporate bond yield spreads narrowed and default probabilities declined despite steeper leverage, but special events have gone from dragging ratings lower, on balance, to, once again, being of a net benefit to US corporate credit ratings.

October 2017 Pdf Franklin Kim, Njundu Sanneh, Yukyung Choi, Tomas Holinka , John Lonski, Barbara Teixeira Araujo, Katrina Ell, Faraz Syed

Weekly Market Outlook: Rate Spike Would Tame the Bulls

The US equity market may continue to set new record highs as the VIX index lengthens its stay under an extraordinarily low 10 points. Ample liquidity implies that a recent high-yield bond spread of 359 bp might soon dip under 350 bp.

October 2017 Pdf Franklin Kim, Njundu Sanneh, Yukyung Choi, Tomas Holinka , John Lonski, Barbara Teixeira Araujo, Katrina Ell, Faraz Syed

Five Focus Points for Commercial Lease Due Diligence

Proper assessment of your prospective borrower's future cash flow from rental income involves both a qualitative and quantitative analysis of the underlying leases. A sample “Lease Abstract Form” is provided to facilitate the compilation of relevant information. This article discusses five key aspects of a commercial lease which drive this analysis.

September 2017 Pdf Robin Russell

Weekly Market Outlook: Less Fear, More Debt

Times have changed. In a world where core inflation ebbs amid a sharply lower jobless rate and corporate bond yield spreads narrow despite steeper leverage, pigs just might fly.

September 2017 Pdf Franklin Kim, Njundu Sanneh, Yukyung Choi, Tomas Holinka , John Lonski, Barbara Teixeira Araujo, Katrina Ell

Weekly Market Outlook: Low Inflation May Suppress Bond Returns

A less accommodative US monetary policy may heighten market volatility near term. However, over time, the fundamentals that give direction to business activity and financial markets will prevail. For now, current trends involving demography, technology, regulation, and globalization favor the containment of core price inflation and still relatively low US Treasury bond yields.

September 2017 Pdf Franklin Kim, Njundu Sanneh, Yukyung Choi, Tomas Holinka , John Lonski, Barbara Teixeira Araujo, Katrina Ell, Faraz Syed

Weekly Market Outlook: What Might Trigger the Next Market Plunge?

An overvalued equity market and an extraordinarily low VIX index offer no assurance of impending doom for US equities. Provided that interest rates do not rocket higher, expectations of corporate earnings growth should be sufficient for the purpose of avoiding a severe equity market correction that would doubtless include the return of corporate bond yield spreads in excess of 700 bp for high-yield and above 200 bp for Baa-rated issues.

September 2017 Pdf Franklin Kim, Njundu Sanneh, Yukyung Choi, Tomas Holinka , John Lonski, Barbara Teixeira Araujo, Katrina Ell, Faraz Syed

Canada Housing Market Outlook: Stepping on the Brake

Canada's housing market is starting to feel the effects of federal and provincial government restrictions, and now the Bank of Canada has also started its long-awaited tightening of interest rates

September 2017 Pdf Andres Carbacho-Burgos

Weekly Market Outlook: Jobs, VIX and Defaults Move Together

Consensus forecasts of corporate bond yields are hard to come by. However, the Blue Chip Financial Forecasts publication supplies a consensus outlook for the long-term Aaa and Baa corporate bond yields.

September 2017 Pdf Franklin Kim, Njundu Sanneh, Yukyung Choi, Tomas Holinka , John Lonski, Barbara Teixeira Araujo, Katrina Ell

Toys R Us Exposure in CLOs

This report shows the CLO exposure to Toys R Us as of the latest available monthly surveillance report on September 8, 2017.

September 2017 Pdf Tess Likens

Weekly Market Outlook: Low Inflation Trims Interest-Rate Risk

The recent slowdown by the underlying rate of consumer price inflation significantly lowered the risk of a disruptive climb by interest rates. In response, the VIX index sank from the 16.0 points of August 10, 2017 to a recent 10.7 points, while a composite high-yield bond spread narrowed from August 11's 410 bp to August 30's 399 bp.

August 2017 Pdf Franklin Kim, Njundu Sanneh, Yukyung Choi, Tomas Holinka , John Lonski, Barbara Teixeira Araujo, Katrina Ell

Weekly Market Outlook: Medium-Grade Bond Yields May Lag Consensus Views

Though the number of new jobs has been plentiful, the quality of new jobs has not been great enough to improve the outlook for employment income. In order to compensate for lackluster employment income prospects, interest rates must not increase significantly. The 10-year Treasury yield is unlikely to spend much time close to or above 2.5% anytime soon.

August 2017 Pdf Franklin Kim, Njundu Sanneh, Yukyung Choi, Tomas Holinka , John Lonski, Barbara Teixeira Araujo, Katrina Ell, Jack Chambers

Weekly Market Outlook: Jobless Rate's Waning Influence on Inflation and the Fed

The minutes of the July 25-26 meeting of the FOMC indicated that Fed policymakers have become increasingly concerned about persistently soft consumer prices despite higher rates of resource utilization, including the lowest unemployment rate in 16 years. In response, fed funds futures recently assigned only a 44.4% likelihood to a year-end 2017 midpoint for the fed funds rate that is higher than its current 1.125%. Policymakers and some market participants worry that if underlying inflation slows when rates of resource utilization climb, then a destructive bout of price deflation might arrive once resource utilization rates inevitably ease.

August 2017 Pdf Franklin Kim, Njundu Sanneh, Yukyung Choi, Tomas Holinka , John Lonski, Barbara Teixeira Araujo, Alaistair Chan, Katrina Ell

Weekly Market Outlook: Swelling of Low-Grade Spreads Looms

Markets became slightly unhinged at the prospect of a US military confrontation with North Korea over the latter's nuclear weapons program. As of August 10's early afternoon trading, the market value of US common stock had declined by -1.2% from its August 8 close, or just prior to the intensification over the North Korean conflict. In a more immediate response to jitters surrounding the possibility of a very destructive conflict, a composite high-yield bond spread widened from August 8's 371 bp to August 9's 387 bp as the accompanying speculative-grade bond yield jumped up from 5.57% to 5.72%.

August 2017 Pdf Franklin Kim, Njundu Sanneh, Yukyung Choi, Tomas Holinka , John Lonski, Barbara Teixeira Araujo

Global Outlook: Stable Growth as Uncertainty Wanes

A series of favorable electoral outcomes in Europe has reduced political uncertainty, elevating business and consumer confidence. Key support for global growth will come from China and the U.S. Proposed fiscal policy measures by the Trump administration, albeit less expansive than earlier anticipated, are expected to provide a near-term boost in real GDP growth from 1.6% annualized in 2016 to 2.4% in 2017.

August 2017 Pdf Stephen Ciccarella

Weekly Market Outlook: Liquidity Buoys Corporate Credit

Long-term fundamentals suggest that interest rates will remain well under their averages of 2002-2007's recovery. If only because of an unprecedented and irreversible aging of the US population and workforce, fears of a disruptive lift-off and extended high-altitude orbit by Treasury bond yields are probably exaggerated.

July 2017 Pdf Franklin Kim, Njundu Sanneh, Yukyung Choi, Tomas Holinka , John Lonski, Katrina Ell, Barbara Teixeira Araujo, Alaistair Chan
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