All Eyes on Fed as Credit Conditions are Softening

IACPM Survey Respondents Say Credit Conditions are Softening In Latest Poll, Forecasting Wider Spreads and Rising Defaults; But All Eyes Remain on Fed Which Is Driving Financial Markets

New York, NY – Respondents to the latest IACPM Credit Outlook Survey are seeing signs of softening in credit markets with a pickup in defaults and weakness in Europe and US manufacturing but—and it is a big but—the US Federal Reserve is asserting its ability to change outlooks and drive financial markets. Respondents expect credit spreads to widen over the next three months and defaults to rise over the next 12 months but concur the Fed can change everything.

“The outlook is certainly biased towards wider spreads and rising defaults given the length of the current economic expansion and recent signs of weakness but, in reality, credit markets are tightening,” noted Som-lok Leung, Executive Director of the International Association of Credit Portfolio Managers, or IACPM. “Only one factor matters—central bank activity, especially the Fed. We’ve had weakness in the equity and credit markets but, as soon as the Fed moves, the markets have responded.”

Survey participants forecast spreads to widen in the latest quarterly reading with an aggregate score of minus -19.1. They expect defaults to rise with an aggregate forecast of negative -45.4. The scores do not predict the severity of either widening spreads or rising defaults but, rather, they reflect an aggregate view of the direction of credit conditions.

Respondents report seeing weaknesses in credit markets but caution it is modest so far. They report a pickup in defaults but note the increase is from an extremely low base. They are also keeping close tabs on Europe, which is showing signs of distress, as well as US manufacturing activity which appears to be slowing. The latest Purchasing Managers Index, or PMI, reading is 51.7% for June, a decline of 0.4% from May and the lowest score since October 2016 but is still generally expansionary. A reading below 50% would indicate a contraction.

“There’s a big difference between bad and really bad,” said Mr. Leung. “In terms of defaults, for example, rising and really rising are totally different. Defaults can’t climb significantly higher at the moment because interest rates are so low.”

That said, respondents who are members of the IACPM and who are responsible for managing corporate loan portfolios at global banks, insurance companies and asset managers are carefully monitoring loan structures which are increasingly covenant-lite. The structures could lead to significantly higher default levels, although in the near term they ease the burden on borrowers.

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 aggregate 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 over 100 member institutions located in more than 20 countries, is a profession-al 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.