New York, NY – Credit spreads are expected to widen over the next three months, according to the IACPM Credit Outlook Index published today by the International Association of Credit Portfolio Managers, or IACPM, but the outlook is not as strongly held as it was three months ago. The Index is -33.9, a clear forecast for widening spreads, but not nearly as pronounced as the -69.1 registered at the end of the second quarter. The Indexes are calculated from a quarterly survey of members of the IACPM.
“Credit portfolio managers clearly believe spreads will continue to widen but, even in the midst of the current financial upheaval, managers are much more divided than they were three months ago,” commented Som-lok, Leung, Executive Director of the IACPM. “A minority, but a significant one, believes spreads will either stay the same or even decline.”
Fewer managers are convinced spreads will widen even as they continue to expect a higher level of loans to default. The IACPM Credit Outlook Index for credit defaults over the next 12 months is -80.0 in the latest survey, virtually unchanged from last quarter’s -79.9.
The survey results are calculated as diffusion indexes, which show positive and negative values from 100 to -100, as well as no change which is recorded as “zero.” Positive values signify an expectation of improving conditions, such as tighter spreads and fewer defaults, while negative values indicate an expectation of deteriorating conditions. The IACPM represents credit portfolio managers from 88 major banks and other financial institutions worldwide. The members were most recently surveyed at the end of September.
“The results are interesting as they indicate people believe real risk in the form of credit defaults is as strong as ever while fewer people are convinced investors will demand an increased risk premium in the form of wider spreads,” commented Mr. Leung. “Some managers may believe current spreads are already wide enough to account for the threat of increased defaults.”
In a reversal from the outlook for the third quarter, managers are now somewhat more pessimistic about credit spreads in Europe than they are about the United States. The Credit Outlook Index for spreads on European investment grade debt is -40.0 compared to just -11.9 for the U.S.. Similarly, the outlook for Europe high-yield spreads is -47.5 versus -37.2. Last quarter, managers were more pessimistic about credit spreads in the U.S..
Almost the same number of managers also believe credit defaults will hit consumers, business and real estate across the board over the next 12 months. The Credit Outlook Index for defaults in corporate loans is -81.5. It is -75.8 for consumer defaults and -82.5 for real estate loans.
The IACPM conducts these quarterly surveys because its members value knowing how their colleagues around the world are assessing risk as they make their own risk management decisions. The IACPM decided to begin publicly releasing the results last quarter because the Association believes other market participants will benefit from the collective views of professional credit portfolio managers.
Please click here to access a selection of aggregated survey data.
The IACPM, with 88 member institutions located in 16 countries, is a professional 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.