NEW YORK--(EON: Enhanced Online News)--Kroll Bond Rating Agency (KBRA) has issued a new report entitled “Welcome the Old Normal.” The report makes the following key points:
- Since the last week in October 2016, even as U.S. Treasury yields started to move upward dramatically, yield spreads on corporate bonds have remained stable for investment grade debt and have fallen for high-yield debt. At the same time, equity market valuations for non-banks have tracked the overall rise in market valuations for banks, leaving many names at or above book value for the first time in years.
- The fact that high yield risk premiums have continued to decline since the short-term spike in yield spreads during Q3 2016 makes us believe that the U.S. economy may be heading into a relatively virtuous if dull period of modest GDP growth, flat but stable earnings and relatively low inflation expectations. Further, interest rates are likely to fall eventually as the market’s perception of future U.S. fiscal policy comes into alignment with the likely reality in Washington.
- Given that banks and nonbanks likely will see declining credit volumes across many different asset classes in 2017, from 1-4 family mortgages to multi-family to auto and commercial and industrial loans, KBRA wonders whether recent gains in equity market prices and fixed income spreads are truly sustainable.
- Based upon the behavior of corporate bond spreads and the still brisk demand for duration coming from institutional investors, we think it is appropriate to ask whether current yields for Treasury debt do not represent a near-term high. The execution realized by KBRA-rated issuers in Q4 2016 suggests that fixed income investors are not particularly concerned about inflation and, instead, seem very focused on acquiring attractive credit exposures.
To view the report click here.
About Kroll Bond Rating Agency
KBRA is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (NRSRO). In addition, KBRA is recognized by the National Association of Insurance Commissioners (NAIC) as a Credit Rating Provider (CRP).