But Growing Concern For Rising Credit Defaults, Especially Outside US
New York, NY – The latest IACPM Credit Outlook Survey forecasts unchanged credit spreads over the next three months but, at the same time, also reveals concern about potentially rising credit defaults over the next twelve months, especially outside of the United States. The IACPM Credit Spread Outlook Index is 4.4, or nearly neutral in the newest reading, compared to an index value of 8.5 in the previous quarter. The IACPM Credit Default Index, however, is minus -28.0 versus negative -18.6 previously.
Survey respondents say concern is rising over potential defaults because the current economic expansion has lasted for an unusually long period, almost six years in the US. At some point, the expansion has to come to an end. For the short term, how-ever, central banks are underpinning economies globally by keeping interest rates at nearly historic lows, thus keeping credit spreads at current tight levels.
Longer term, there are certainly tensions, the Middle East, Ukraine, economic malaise in Europe, commented Som-lok Leung, Executive Director of the IACPM, but none of these are strong enough or deep enough to mark the current period as inflection point upon which portfolio managers would need to substantially change their positions.
To be sure, there are significant differences globally. The outlook for rising defaults in Europe changed from 0.0, or neutral, at the end of June to minus -22.0 in the new survey. The index for Asia moved from minus -25.0 in June to negative -40.0 this time. Australia declined from minus -17.4 in the previous survey to minus -43.5. The outlook for the US, however, remains roughly the same. The Credit Default Index for the US was negative -20.0 in the latest survey compared to minus -23.9 in the previous one.
The big question facing portfolio managers and investors in general is when will the US Federal Reserve raise interest rates, noted Mr. Leung. Economic expansion is long in the tooth. At some point, the Fed will raise rates, creating a new paradigm. Until then, however, credit conditions remain at extremely benign levels and the outlook for defaults is generally unchanged.
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.
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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 102 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.