Credit Spreads Expected To Widen; Defaults Flat Or Higher
New York, NY – Sentiment turned negative in the latest survey of credit portfolio managers in the second quarter IACPM Credit Outlook Survey after several quarters of improving forecasts. The Major Market Credit Spread Outlook Index was negative -20.1 for the quarter which means respondents generally believe credit spreads will widen over the next three months, while the Aggregate Credit Default Outlook Index was minus -10.0 which implies a slightly negative outlook for defaults over the next 12 months.
The results of the survey are in sharp contrast to the generally improving view of credit conditions since the spring of last year and the strongly positive outlook held by respondents in the previous survey conducted at the end of March this year. In the 2010 first quarter survey, respondents strongly believed spreads would narrow, resulting in a positive 38.8 score in the credit spread outlook index and a similarly benign outlook for defaults, registering positive 37.7 for the credit default outlook index. In this latest survey, respondents could be worried about the possibility of a double dip recession, as G-20 leaders try to cut their deficits in half by 2013 and stabilize their debt loads by 2016.
“Longer term is another matter but in the short run, many of our members are concerned about economic conditions as governments cut back on spending to fight rising deficits,” commented Som-lok Leung, Executive Director of the International Association of Credit Portfolio Managers, or IACPM. “They’re worried economic growth isn’t strong enough to survive a pullback. Additionally, many respondents are worried about the possibility of a sovereign default and the potential impact that could have on the euro and confidence generally.”
Survey respondents are members of the IACPM, which consists of credit portfolio managers at 88 leading banks and financial institutions in 14 countries in the U.S., Europe and Asia. They are surveyed at the end of every quarter. The results are calculated as diffusion indexes, which show positive and negative values ranging from 100 to -100, as well as no change which is in the middle of the scale and is recorded as “zero.” Positive numbers signify an expectation for improvement in credit conditions, specifically fewer defaults and narrower spreads, while negative numbers indicate an expectation for deterioration with higher defaults and wider spreads.
Strikingly, in the latest survey, respondents believe credit spreads will widen across the board, resulting in negative scores for both investment grade and high yield credit and in the U.S., as well as Europe. In terms of defaults, portfolio managers are especially concerned about problems in commercial real estate, resulting in a negative -25.0 index reading. At the same time, however, respondents forecast rising defaults among consumers, registering a minus -10.5. Only corporate credits escaped a negative outlook with a modestly positive 4.7%, essentially meaning respondents are evenly split between those expecting better conditions and those forecasting higher defaults.
“The outlook for commercial real estate appears to be particularly troubling,” said Mr. Leung. “Almost $600 billion of debt needs to be retired or refinanced by 2013 and survey respondents are worried that economic growth isn’t going to be strong enough for borrowers to grow their way out of debt, thus resulting in significantly higher defaults.”
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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 88 member institutions located in 14 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.