Expectations for Wider Credit Spreads and Rising Defaults Jump in Latest IACPM Credit Outlook Survey
New York, NY – Facing a litany of real and potential concerns, respondents to the latest IACPM Credit Outlook Survey forecast wider credit spreads and rising credit defaults. The IACPM Credit Spread Index jumped from negative -22.0 at the end of last year to minus -56.2 in the most recent reading taken at the beginning of this month. The IACPM Credit Default Index rose from negative -30.3 to minus -47.2. The outlook for North American high yield spreads was especially one sided with 79% of respondents expecting spreads to widen over the next three months.
“There is no question rising interest rates, trade concerns and the US political environment, among other factors, are impacting confidence,” noted Som-lok Leung, Executive Director of the International Association of Credit Portfolio Managers. “There’s a material change in tone. The outlook is now clearly negative.”
In the US, survey respondents are concerned about a number of factors, some of which are clearer than others. Rising interest rates are one factor, especially because corporate debt has risen significantly over the last several years. Highly leveraged companies are especially vulnerable. Recently proposed trade tariffs are another concern. However, in this regard, the landscape is fluid. IACPM member institutions review each proposal as it arises, only to discover in many cases, the tariff may not be imposed after all. Last year’s tax cuts are a concern as well, as people consider the impact of those cuts on the federal budget deficit.
“At least in the US, we may have reached a turning point,” commented Mr. Leung. “We’re seeing a slowdown in corporate profits and increasing debt. We started seeing this towards the end of last year and many survey respondents now say the real question is when will we feel the broader impact.”
The outlook for Europe is also negative but somewhat less pronounced than it is for the US. On balance, survey respondents expect credit spreads to widen over the next three months but 50% of respondents believe investment grade spreads will remain unchanged. Similarly, 49% of respondents expect defaults to rise over the next 12 months, while 49% think they will stay at current levels.
In Asia, the outlook is negative as well but, once again, more than half of survey respondents believe defaults will remain unchanged, while 44% think they will rise, producing a negative index reading of -40.7.
The survey is conducted among members of the IACPM, an association of more than 90 financial institutions in over 20 countries around the world. 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 over 90 member institutions located in 20 countries, is a professional association dedicated to the advancement of credit portfolio management. The organization’s programs of meetings, studies, research and collaboration are designed to increase awareness of the value and the function of credit portfolio management among financial markets worldwide, and to discuss and resolve issues of common interest to its members.