• As Wall Street banks begin rolling out their annual market and economic outlooks for 2018, analysts look to a new year that carries with it perhaps more uncertainty, and a wider potential range of outcomes for credit markets, than recent years.15
  • As we approach the ninth year of the current economic expansion, the Fed will likely continue tightening at a time when inflation has remained relatively muted.16 For its part, the European Central Bank appears set to begin unwinding its own bond-buying program.17
  • At the same time, equity valuations are at or near historic highs by some measures, while yields across the corporate credit market remain very low.18,19 As the chart highlights, high yield bonds currently yield approximately just 5.8%, and have been below their 5-year average of approximately 6.3% since December 2016.20
  • Given these conditions, corporate credit outlooks range widely. Some analysts show continued optimism, citing a still relatively supportive macro environment while others, who regard asset values across the corporate credit markets as high, call for a new round of spread widening.15
  • Much about 2018 remains uncertain. What does seem reasonably likely, however, is that it should be another year in which income could remain at a premium. Though the Fed most recently projected that it will raise rates three times next year, the current tightening cycle remains notably more cautious and slow than earlier tightening periods.20

1 Federal Reserve Bank of St. Louis, Average Hourly Earnings, http://bit.ly/2vGwgMM.
2 ICE Bank of America Merrill Lynch U.S. High Yield Master II Index.
3 ICE Bank of America Merrill Lynch U.S. High Yield CCC & Lower Rated Index.
4 ICE Bank of America Merrill Lynch U.S. High Yield B Rated Index.
5 ICE Bank of America Merrill Lynch U.S. High Yield BB Rated Index.
6 Thomson Reuters Lipper.
7 Credit Suisse Leveraged Loan Index.
8 Federal Reserve Bank of St. Louis, 10-year Treasury yields, http://bit.ly/29ecBfp.
9 U.S. Bureau of Labor Statistics, http://bit.ly/2vpSbKZ.
10 U.S. Bureau of Labor Statistics, http://bit.ly/2iYbHWM.
11 Bloomberg, based on CME data.
12 Econoday, http://bit.ly/1iJOdAP.
13 U.S. Federal Reserve, http://bit.ly/2jcHEiW.
14 U.S. Federal Reserve, http://bit.ly/29y0IjN.
15 Bloomberg, https://bloom.bg/2ABD2Jr.
16 Bureau of Economic Analysis, http://bit.ly/2mOhSP0.
17 European Central Bank, http://bit.ly/2gLTDD7.
18 Robert Shiller, Yale University, http://bit.ly/1qlZ47U.
19 Bloomberg, based on the yield-to-worst of the Bank of America Merrill Lynch U.S. High Yield Bond Index, as of December 7, 2017.
20 U.S. Federal Reserve, http://bit.ly/2fjuEX3.

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