HALISTER1: High Yield Total Return Seen at -2.7% in ’17, Issuance $244b: MS

High Yield Total Return Seen at -2.7% in ’17, Issuance $244b: MS

(Bloomberg) -- Current valuations are based on low defaults, support from the Fed and ultra-low volatility, which are all unlikely to continue in 2017, Morgan Stanley strategists led by Adam Richmond write in note.
  • Base case scenario is for high yield total return of -2.7% and excess return of -2.4%, as the likely economic stimulus is expected to be offset by tighter financial conditions and less market-friendly policy changes
  • Issuance volume forecast at $244b, lower than MS’s estimate for 2016
    • Expect a modest decline in refinancing, offset by M&A activity
  • Project a 4.6% default rate in high-yield bonds for 2017
  • Fundamentals look weak across markets, late-cycle risks loom large and the Fed could push the market to the exit quicker
  • Credit could be impacted by subpar growth and the Fed withdrawing liquidity and hiking rates
  • Recommend BBs and lower levered single-Bs over CCCs next year
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

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MS US (Morgan Stanley)

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Adam Richmond (Morgan Stanley)

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