More Stable Outlook in Europe according to Latest IACPM Credit Outlook Survey
New York, NY – Despite last week’s deal to raise the US debt ceiling and re-open the federal government, respondents to the latest IACPM Credit Outlook Survey see credit conditions tightening in North America with credit spreads widening and corporate defaults rising. The Credit Spread Outlook Index for North American investment grade debt widened from minus -2.2 at the end of the second quarter to negative -23.4 in the new reading. The Credit Spread Outlook Index for high yield North American debt moved from minus -20.9 to negative -30.4.
At the same time, the credit outlook for Europe has stabilized. The Credit Spread Outlook Index for European investment grade debt changed from negative -7.7 at the end of June to positive 11.1 now. The Credit Spread Outlook Index for high yield European debt improved from negative -24.3 to an even 0.0.
“The differentiation between the US and Europe is meaningful,” commented Som-lok Leung, Executive Director of the International Association of Credit Portfolio Managers. “The emerging view is that the US is deeper into the credit cycle than Europe. In contrast to Europe, credit portfolio managers have switched from an optimistic view on interest rates in the US at the beginning of the year to a more pessimistic view now.”
Survey respondents say the Federal Reserve’s decision last month to continue its bond buying program at a high level led to a relief rally in the credit markets, tightening credit spreads. Respondents believe spreads have come in too far, especially in light of underlying weakness in the US economy. Neither interest rates nor credit defaults can go any lower, so the next move would have to be higher rates and, in turn, a larger number of defaults.
In Europe, on the other hand, the level of concern has declined considerably. The Credit Default Outlook Index for European corporate debt has changed from negative -48.8 at the end of last June to 0.0 in the latest reading. Survey respondents may not be convinced Europe’s problems have been resolved but they appear to be at least contained.
“Our members are clearly concerned about the US, pointing out that many companies have avoided defaults with very low interest rates but they will no longer be able to do that when rates go up,” said Mr. Leung. “At the same time, Europe is showing signs of stabilizing with civil unrest ebbing and balance sheets in better shape.”
The credit outlook survey is conducted among members of the International Association of Credit Portfolio Managers, which is an association of credit portfolio managers at 89 financial institutions located in 17 countries in the U.S., Europe, Asia, Africa and Australia. Members include portfolio managers at many of the world’s largest commercial banks, investment banks and insurance companies, as well as a number of asset managers. Members are surveyed at the beginning of each quarter.
Survey results are calculated as diffusion indexes, which show positive and negative values ranging from 100 to minus -100, as well as no change which is in the middle of the scale and is recorded as “0.0.” Positive numbers signify an expectation for improved credit conditions, specifically fewer defaults and narrower spreads, while negative numbers indicate an expectation of deterioration with higher defaults and wider spreads.
Please click here to access a selection of aggregated survey data.
The full aggregated survey results will be published with a 6 months time lag in the members only section of our website. Please click here to access prior quarters’ survey results.
The IACPM, with 89 member institutions located in 17 countries, is an industry association dedicated to the advancement of credit portfolio management. Founded in 2001, the organization’s programs of meetings, studies, research and collaboration are designed to increase awareness of the value and function of credit portfolio management among financial markets worldwide, and to discuss and resolve issues of common interest to its members.