Short-term Outlook Sharply Lower; Longer term Outlook Also Down But Flatter
New York, NY – Respondents to the IACPM Credit Outlook Survey turned sharply negative in the latest quarterly reading with the outlook for both credit spreads and credit defaults uniformly lower around the globe. In the US, the three month outlook for credit spreads on investment grade bonds changed from a positive reading of 15.2 at the beginning of April this year to a negative -19.1 at the beginning of this month. In Europe, the outlook worsened from negative -9.8 to negative -30.0.
“It’s hardly surprising,” said Som-lok Leung, Executive Director of the IACPM. “We’re seeing a wider slowdown with a wider impact. Survey respondents are seeing considerably more downside risk than upside potential.”
Underscoring the global nature of the worsening outlook, the outlook for corporate credit defaults is even negative in Asia and Australia. Sentiment dropped from essentially flat at the beginning of April in Australia to negative –26.9 at the beginning of July. The outlook for defaults in Asia declined slightly from negative –17.9 in April to negative –20.7 this month.
“Australia may be a special case,” said Mr. Leung. “Some survey respondents are concerned the country is experiencing a bubble but beyond that, around the world, our members see China softening, the European crisis still unresolved and economic recovery slowing down in the U.S.”
The credit outlook survey is conducted among members of the IACPM, which is an association of credit portfolio managers at 84 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.
While the outlook for both credit spreads and credit defaults is clearly negative, there is a difference between the two indices. On the one hand, the outlook for relatively short-term credit spreads, which are forecast over a three month period, is sharply negative compared to the previous quarter. The outlook for credit defaults, on the other hand, which are forecast over a longer twelve month period, is relatively flat versus the last quarter. The outlook for credit spreads changed from positive 2.9 at the beginning of April to a sharply negative reading of -29.0 at the beginning of July. The outlook for credit defaults, however, dropped only modestly from negative -23.3 to negative -26.0.
“It may be a bit of a leap of faith to think things are bottoming out,” commented Mr. Leung, “but it is interesting to note that the longer term outlook is at least flattening somewhat.”
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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 84 member institutions located in 17 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.