CROSS-SECTORSECTOR COMMENT 12 July 2016ContactsBenjamin S. Garber 1.212.553.4732 Asst Dir-Economist benjamin.garber@moodys.comABOUT CAPITAL MARKETS RESEARCHAnalyses from Moodys Capital Markets Research, Inc. (CMR) focus on explaining signals from the credit and equity markets. The publications address whether market signals, in the opinion of the groups analysts, accurately reflect the risks and investment opportunities associated with issuers and sectors. CMR research thus complements the fundamentally-oriented research offered by Moodys Investors Service (MIS), the rating agency.CMR is part of Moodys Analytics, which is one of the two operating businesses of Moodys Corporation. Moodys Analytics (including CMR) is legally and organizationally separated from Moodys Investors Service and operates on an arms length basis from the ratings business. CMR does not provide investment advisory services or products.View the CMR FAQ Contact the CMR team Follow us on TwitterMoodys Analytics markets and distributes all Moodys Capital Markets Research, Inc. materials. Moodys Capital Markets Research,Inc. is a subsidiary of Moodys Corporation. Moodys Analytics does not provide investment advisory services or products.For further detail, please see the last page.Market CommentBondholders Profit from Less Than Rosy Outlook The first half of this year produced some of the strongest credit market returns of the current expansion, with shrinking economic risks and accommodative monetary policy reining in bond yields. Yet in the aftermath of the rally, we still find elevated credit spreads and severely depressed government bond yields. These signals support expectations for limited economic growth and modest inflation far into the future. Solid gains can continue for investors if the US economy maintains its lukewarm pace, yet bonds remain distinctly exposed to both rate risk on the upside and credit risk in the event of a slump.MOODY'S ANALYTICS CROSS-SECTOR2 12 July 2016 Market Comment: Bondholders Profit from Less Than Rosy OutlookMid-year bond gains defied outlook Government and corporate debt markets sharply advanced in recent months, shirking off a historically putrid start to the year (Figure 1). Concerns about the Chinese economy, European banks, and tighter monetary policy from the Federal Reserve sent credit spreads skyward and walloped equity markets through early February. Subsequently, reassuring economic data and aggressive policy action more than reversed that downturn. On an annualized basis, US Treasuries gained 11.0% in the first two quarters of the year while US high yield corporate bonds advanced 18.9%. Both of those values exceed every full year return of the previous six years. Such upward momentum also played out in Europe, with euro sovereign bonds rising 11.7% annualized as high yield euro corporate bonds increasing 7.4%.Yet, these windfall credit market gains are not a ringing endorsement of global eco...
