Credit Markets Review and Outlook。    By John Lonski, Chief Economist, Moody’s Capital Markets Research, Inc.。    Low Inflation Trims Interest-Rate Risk。    The recent slowdown by the underlying rate of consumer price inflation significantly lowered the risk of adisruptive climb by interest rates. In response, the VIX index sank from the 16.0points of August 10,2017to a recent 10.7points, while a composite high-yield bond spread narrowed from August 11’s 410bpto August 30’s 399bp.。    However, the narrowing by the high-yield bond spread has been limited by a climb by the average highyieldEDF (expected default frequency) metric from the July 2017average of 3.9% to the 4.4% average ofthe five-days-ended August 30. Moreover, the US high-yield credit rating revisions of the third-quarterto-date show downgrades topping upgrades even after excluding rating changes that were not primarilydriven by fundamentals.。    As recently as early July 2017, the Blue Chip consensus had anticipated a 2.5% average for Q3-2017’s 10-year Treasury yield. Much to the contrary, the 10-year Treasury yield has averaged 2.26% thus far in thethird quarter, including a recent 2.13%. Not even a widely anticipated September 2017start to the Fed’sreduced reinvestment of maturing bonds has been capable of lifting Treasury bond yields demonstrably.In addition to July’s 1.4% annual rate of core PCE price index inflation, benchmark bond yields have beenreined in by the market’s much reduced expectation of another Fed rate hike for 2017. As of mid-day onAugust 31, the futures market implicitly assigned only a 36.4% likelihood to fed funds’ midpoint finishing2017at something greater than its current 1.125% according to the CME Group’s FedWatch tool.By itself, core PCE price index inflation’s performance of the last 20years suggests that the FOMC mayhave considerable difficulty as far as sustaining PCE price index inflation at 2% or higher. For the 20-years-ended June 2017, core PCE price index inflation averaged only 1.7% annually. The annual rate ofcore PCE price index inflation was at least 2% in only 58, or 24.2%, of the last 240months (20years).For those months showing an annual rate of core PCE price index inflation of at least 2%, the averageannual rate of core inflation was only 2.2%, wherein the fastest annual rate of core inflation was the 2.5%of August 2006.。

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