Halister News

(Bloomberg) -- Capital market conditions are expected to stay robust heading into 2017, with high yield remaining constructive, even as global central banks are poised to pivot away from their current dovish policies, JPM strategists led by Peter Acciavatti write in note

• New issuance forecast at $300b next year, or a $25b increase y/y, driven by an uptick in M&A activity, which should offset a modest decline in refinancing
  • JPM estimated $275b in issuance this year
• Estimate above-coupon full-year return of 8.3%, which would outperform the majority of fixed-income alternatives, driven by accelerating top-line performance of corporates amid better-than-expected economic conditions
• Expect total return of 10%-12% led by more accommodative than expected global central bank policies even as they gradually pivot away from their dovish stance
• Decreased regulation, positive tax reform, increased fiscal spending and less congressional gridlock could produce favorable backdrop for corporate earnings and conditions for high yield next year
• Republican sweep of U.S. elections is seen as pro-growth for U.S. corporate earnings and U.S. economy
• High-yield bond spreads offer strong relative value in the context of an anticipated intra-cycle decline in defaults
• HY default rate forecast to decline to 2.5% in 2017 given an improved fundamental backdrop for commodity credits coupled with a gradual pace of Fed tightening alongside better global economic conditions
  • JPM revised 2016 default forecasts twice this year, from 3% to 4.5% and then to 6%, dominated by energy and commodities sectors
• Expect spreads to tighten to +475bps by end-2017, absorbing the expected 40bps rise in 5Y Treasury yields
• Downside risks include a more aggressive Fed than expected, a more substantial rise in Treasury yields, political missteps with economic ramifications and/or a 10-20% slide in commodity prices led by oil