Respondents Point to Plateau;
Outlook for Corporate Credit Defaults Rises Modestly
New York, NY – Respondents to the latest IACPM Credit Outlook Survey took a decidedly neutral approach to the outlook for credit spreads over the next three months, with a large number forecasting spreads would remain unchanged from current levels. The outlook is sharply different from the previous survey taken in January when respondents strongly believed spreads would tighten. The latest IACPM Credit Spread Outlook Index is a slightly negative -3.6, compared to a sharply positive reading in the last survey of 33.7.
“There’s a sense spreads have reached a plateau,” commented Som-lok Leung, Executive Director of the IACPM. “Our members aren’t seeing a reversal but there’s also a view spreads aren’t going to tighten any further.”
The outlook for spreads fell almost uniformly across both investment grade and high yield debt. Not surprisingly, sentiment was more negative in Europe but, nevertheless, the outlook fell in North America and Asia, as well as Europe. The three month credit spread index for North American investment grade debt dropped from 38.8 in January to 4.3 in the latest reading. The three month outlook for investment grade debt in Europe declined from 30.2 at the beginning of the year to minus -12.8.
“In some ways, it’s as if we’re in the fourth quarter of the bull market,” commented Mr. Leung. “The game isn’t over but we’re looking for a shift and we could be just an event or two away from a reversal.”
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 86 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.
The outlook for credit defaults over the next 12 months is mixed in the latest survey, although the forecast for corporate defaults is decidedly negative. The forecast for corporate defaults declined from negative -10.6 in January to minus -18.1 in the new survey. Not surprisingly, the results continue to be more negative in Europe than either North America or Asia with the index in Europe remaining at minus -43.9.
“The deterioration in the outlook for corporate defaults is at least partially a reflection of where we are in the credit cycle,” said Mr. Leung. “The period is sustainable for awhile but not forever. Who knows when, but we’re getting closer to the point where corporate defaults will pick up.”
The outlook for retail, residential mortgage and commercial real estate defaults, however, actually improved in the latest survey. The outlook for retail and residential mortgage defaults eased to minus -0.9 from negative -13.6, while commercial retail estate improved from negative -11.5 to minus -0.9. Special factors appear to be at work. Demand for residential housing in the US has picked up substantially, creating better conditions in that market and commercial real estate appears to be benefitting from accommodative policy from the US Federal Reserve.
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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 86 member institutions located in 17 countries, is a professional as-sociation 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 manage-ment among financial markets worldwide, and to discuss and resolve issues of common interest to its members.