Outlook for Credit Defaults Continues to Improve in Latest IACPM Credit Outlook Survey As Global Economy Picks Up; Forecast for Credit Spreads is Neutral
New York, NY – For the second quarter in a row, respondents to the latest IACPM Credit Outlook Survey improved their forecast for credit defaults over the next 12 months. The aggregate Credit Default Index was mildly positive at 4.5 which is a considerable improvement from last June when the reading was negative -35.6 or even the last quarterly result in September when the outlook was negative -6.9.
At the same time, the outlook for credit spreads over the next three months is essentially neutral with almost half of survey respondents believing spreads will neither tighten nor widen. The IACPM aggregate Credit Spread Index is 1.8 in the new survey.
Our members clearly believe the economy is improving, not just in the US but elsewhere as well, as shown in the continued improvement in their outlook for de-faults,” commented Som-lok Leung. “Interestingly, at the same time, the outlook for credit spreads is demonstrating a state of equilibrium that we haven’t seen in some time. At least in the short term, our members don’t see markets demanding either a greater or lesser risk premium, despite the uptick in the global economy.”
The improved outlook for credit defaults is evenly spread with almost universal improvement in all measured debt classes and in all regions of the world. The outlook for corporate defaults changed from negative -13.2 in September to positive 4.3 in the new survey, while the forecast for retail or consumer mortgage debt moved from minus -2.4 in September to 0.8 and commercial real estate picked up from negative -3.9 to positive 8.3. Globally, respondents forecast better conditions in Europe, Asia, North America and Australia.“In some ways, the improved sentiment is feeding on itself,” said Mr. Leung. “For example, increased demand in the United States will likely help China’s economy through increased exports.”
The outlook for credit spreads in North America improved from negative territory in the September survey. The index for North American investment grade debt changed from negative -23.4 in September to 0.0 in the latest survey. The forecast for North American high yield debt moved from minus -30.4 in the last reading to 9.5 now.
The forecast for European credit spreads, on the other hand, moved a bit side-ways. European investment grade debt dropped from 11.1 in September to negative -5.1 in the newest survey. The outlook for European high yield debt went the other way, changing from 0.0 in September to positive 2.6.
“The results for Europe investment grade debt probably reflect differences between northern and southern Europe with the north generally doing better and the south still working through its structural issues,” noted Mr. Leung. “In North America, the markets seem to have achieved a bit of a balance in the face of better economic results and the Fed’s recent action on its quantitative easing program.”
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 89 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 89 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.