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    Topics@CreditEdge: Navigating Choppy Markets

    Our subject matter experts discuss the use of credit risk measures in evaluating firms to determine tendencies in performance in comparison to their peers in the S&P 500 universe.

    In early October, equity markets suffered their second major correction this year and their worst fall in more than eight months. Rising yields in particular increase the potential for equity volatility.

    Our subject matter experts demonstrate that firms with high credit quality risk and high default risk tend to underperform their peers in the S&P 500 universe on average, especially seen in the tech sector over the last two years. Our experts also show how CreditEdge factor-based strategies have tended to succeed in particular during flattening yield curve environments, with the performance of the low credit quality risk strategy tending to be more insulated to interest rate risk on average.

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    Weekly Market Outlook: VIX, EDF and National Activity Index Go Far at Explaining the High-Yield Spread

    There is no one way of statistically explaining the bond yield spreads of high-yield corporate bonds. However, one of the better approaches employs a multi-variable regression model and generates a highly significant adjusted r-square statistic of 0.89.

    October 2019 Pdf John Lonski, Yukyung ChoiKatrina Ell, Michael Ferlez, Ryan Sweet
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    Weekly Market Outlook: Abundant Liquidity Suppresses Defaults

    Nothing quite increases the risk of debt repayment like a drop in the income that funds the servicing of outstanding debt.

    September 2019 Pdf John Lonski, Yukyung ChoiKatrina Ell, Barbara Teixeira Araujo, Ryan Sweet, Steven Shields
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    Weekly Market Outlook: Cheap Money in Action

    The corporate bond market has proven to be resilient amid recent equity market volatility. Moreover, despite a slew of bearish headlines, the market value of U.S. common stock's latest low of August 14 was still a huge 20.8% above its low of December 24, 2018, while August 2019's month-long average of 19.0 points for the VIX was well under the 25.0 points of December 2018.

    September 2019 Pdf John Lonski, Yukyung ChoiKatrina Ell, Barbara Teixeira Araujo, Ryan Sweet, Steven Shields
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    Weekly Market Outlook: Bond Implied Ratings Hint of More Fallen-Angel Downgrades

    On September 9, the senior unsecured bond rating of Ford Motor was lowered from Baa3 to Ba1, where the downgrade constituted a ratings reduction from investment- to speculative-grade (or high-yield). Because investor mandates often prohibit the inclusion of high-yield bonds in investment-grade portfolios, such a downgrade can quickly lower the prices of adversely affected bonds.

    September 2019 Pdf John Lonski, Yukyung ChoiKatrina Ell, Barbara Teixeira Araujo, Ryan Sweet, Steven Shields
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    Weekly Market Outlook: Leading Credit-Risk Indicator Signals A Rising Default Rate

    The month-long average for the expected default frequency metric of U.S./Canadian high-yield issuers climbed from August 2018's 2.38% and July 2019's 4.16% to 4.59% in August.

    September 2019 Pdf John Lonski, Yukyung ChoiKatrina Ell, Barbara Teixeira Araujo, Ryan Sweet, Michael Ferlez
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    Weekly Market Outlook: Upon Further Review, Aggregate Financial Metrics Worsen

    The Bureau of Economic Analysis recently lowered its estimates of corporate profits for 2017 and 2018. The downward revision of nonfinancial-corporate profits mostly stemmed from a major upward revision of employee compensation costs and a slight downward revision of nonfinancial-corporate gross value added, where GVA is a proxy for revenues net of non-labor costs.

    August 2019 Pdf John Lonski, Yukyung ChoiKatrina Ell, Barbara Teixeira Araujo, Ryan Sweet, Steven Shields
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    Weekly Market Outlook: Lowest Investment-Grade Industrial Company Bond Yields since 1956

    The latest rally by Treasury bonds drove Moody's long-term industrial company bond yields down to new 63-year lows. On August 14, the single-A industrial company bond yield closed at 3.30% and the Baa industrial yield ended at 4.08%.

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    Weekly Market Outlook: Sluggish Business Revenues Pressure Corporate Credit Quality

    It was a tumultuous week. Volatility will lurk until trade issues are resolved. Perhaps the best markets can hope for on the trade front is a long-lived truce.

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    Weekly Market Outlook: Successful Rate Cuts Are Short and Shallow; Failures Are Deep and Extended

    Since 1984, there have been seven distinct series of Fed rate cuts. Four of the seven rate cut episodes occurred amid a mature business cycle upturn and managed to stave off a recession. They happened in 1985, 1987, 1995, and 1998.

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    Weekly Market Outlook: Faster Loan Growth Would Bode Poorly for Corporate Credit Quality

    Forecasts of a prolonged depreciation of the dollar exchange rate may be overlooking to the increased importance of U.S. spending as a driver of global economic growth.

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