Short-Term Credit Spread Outlook Remains Tight
New York, NY – The latest IACPM Credit Outlook Survey continues to forecast rising credit defaults over the next twelve months. Survey respondents see rising corporate defaults in every region globally, including North America, however, they have becoming increasingly concerned about defaults in Europe. Overall, the IACPM Credit Default Outlook Index is negative -22.4, while the Outlook Index for European corporate defaults declined from negative -22.0 at the end of September to minus -31.4 in the latest reading.
At the same time, however, the outlook for credit spreads is relatively benign. The IACPM Credit Spread Outlook Index is a modestly negative -4.3, which means there isn’t strong sentiment among survey respondents, either for wider or for tighter spreads over the next three months.
“In many ways, these results are indicative of the wider financial markets,” commented Som-lok Leung, Executive Director of the IACPM. “We are well along in the current economic cycle so people are naturally inclined to believe defaults will rise, however, central banks continue to flood the markets with liquidity so short term credit spreads remain exceptionally tight.”
The key question facing risk managers in 2015, as well as the financial markets in general, is how long central banks will continue to provide enormous amounts of liquidity and how long the current cycle will last. Both portfolio managers and market participants as a whole will have to decide how to prepare for this uncertain future.
“One survey respondent pointed to the difference between the outlook for spreads and defaults and wondered whether the outlook for spreads is overly optimistic given the strong sentiment for rising defaults,” said Mr. Leung. “Perhaps it’s the difference in the forecast period. Respondents are asked to forecast defaults over the next 12 months, while the outlook for spreads is just over the next three months. On the other hand, perhaps market participants have simply gotten overly complacent and the real question then is how long can central banks continue to drive this level of market complacency.”
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 102 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 102 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.