CROSS-SECTORSECTOR COMMENT 10 January 2017ContactsBenjamin 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 TwitterMarket CommentCredit Markets Torched by Rising Optimism The final quarter of 2016 was difficult for credit markets. Surging bond yields sparked losses on high grade credit, keying off of tighter monetary policy and rising expectations for growth and inflation. Risk-taking has paid off of late, with high yield spreads narrowing to multi-year lows and equities spiking higher. Yet if heightened projections for the economy fall short, credit markets could outperform diminished expectations.Rate jump hurts long-duration debt High-grade, long-duration debt took it on the chin last quarter (Figure 1). Treasuries with maturities greater than 10 years lost 11.7% in value in Q4, narrowing the annual return to a modest 1.3%. The ten-year Treasury yield advanced 85 bp during the quarter to end the year at 2.45%, which produced dire results for bond values, given the hefty negative price effectsMoodys 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.MOODY'S ANALYTICS CROSS-SECTORwhen rates rise from historically low levels. Shorter maturity Treasury debt managed a far milder 2.3% loss last quarter, narrowing the annual return to 1.1%. Were the Federal Reserve to stick to a more aggressive posture, Treasuries of both long and short durations will have a very rough 2017.High yield credit caps a notably strong year US high yield corporate debt went on a wild ride last year, as deep losses in the early weeks gave way to an impressive rally. Led by the recovery of the energy sector, high yield rose 1.8% in Q4 and 17.1% for the year. That annual gain is the sharpest since the 58% post-recession surge of 2009. Yet questions about the durability of the energy sector turnaround raise doubts about the outlook for high yield debt. With the average s...
