Outlook for Credit Spreads Strongly Positive; Default Outlook Negative but Better
New York, NY – Survey respondents in the IACPM Credit Outlook survey turned sharply positive in the latest reading, forecasting tighter credit spreads and becoming considerably less pessimistic about the prospects for credit defaults. Measured at the beginning of the year, the IACPM Credit Spread Outlook Index is 33.7, while the IACPM Credit Default Outlook Index is negative -11.9 compared to negative -34.6 in the previous quarterly outlook survey taken at the beginning of October.
Further, results are improved almost across the board. The outlook is better for both investment grade and high yield credit spreads over the next three months with spreads forecast to tighten in Europe, as well as North America. For example, the Credit Outlook Spread Index reading for high yield European debt is 30.0 versus negative -4.9 in the last survey. The outlook for credit defaults over the next twelve months, has improved for corporate and consumer debt, as well as commercial real estate. The Credit Default Outlook Index reading for commercial real estate is negative -11.5, vastly improved over the previous score of negative 38.7.
“To some extent, there’s a time lag,” noted Som-lok Leung, Executive Director of the IACPM. “Things haven’t turned out as badly as some people might have feared last year in terms of Europe or the fiscal cliff in the US, so now sentiment seems to be considerably improved.”
To be sure, survey respondents still have some fundamental concerns even if their near term forecast has brightened. One respondent notes that while the European sovereign debt crisis is not currently creating negative headlines, the underlying issues are still largely unresolved. Tellingly, the Credit Default Outlook Index for European corporate debt is still a sharply negative -44.2.
The outlook for the US is considerably more positive than it is for Europe but few are predicting a robust economic recovery. The outlook for corporate credit defaults is virtually flat at 6.4 and survey respondents remain concerned about political fights over the US debt ceiling, taxes and government spending, as well as the new healthcare law and tepid employment numbers.
Even Asia presents a mixed picture. Survey respondents generally believe the Chinese economy is stabilizing but are worried about other parts of Asia, such as Japan and Australia.
“One certainly doesn’t have to look far to find reasons to be worried, in the US, Europe or even Asia,” said Mr. Leung. “That said, market sentiment is clearly positive, perhaps surprisingly so.”
The credit outlook survey is conducted among members of the IACPM, which is an association of credit portfolio managers at 88 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 88 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.