Credit Portfolio Managers Slightly Bearish for 2018

IACPM Survey Forecasts Wider Credit Spreads And Rising Defaults As Respondents Keep Eye On Global Central Banks; U.S. Tax Reform Could Hurt High Yield Credits

     New York, NY – Respondents to the latest IACPM Credit Outlook Survey forecast wider credit spreads and higher default rates, as they continue to closely monitor global central banks. With a reading of minus -22.0, respondents are forecasting wider spreads and, with a negative score of -30.3, they expect rising defaults. Central banks have kept interest rates and defaults at record lows for almost a decade but, as credit markets may have started realizing, the banks’ unprecedented actions will cease at some point.

“Interest rates and credit defaults can only go in one direction from here,” noted Som-lok Leung, Executive Director of the IACPM. “When central banks stop injecting liquidity into the financial markets, rates and defaults will go up. They have nowhere else to go.”

The yield on 10-Year Treasury Bonds rose from 2.40% at the end of December to 2.55% at the end of last week, as investors began to consider the possible effects of tightening actions from the Federal Reserve, as well as new concern over inflation. European bond yields have also seesawed over the past month and a half, as investors in these markets have turned a wary eye towards inflation and an end to quantitative easing. Five year German Bunds yielded minus -0.120 at the end of last week compared to negative -.346 December 1st, meaning investors have to pay less to purchase the securi-ties.

“The potential for tighter credit conditions has been with us for some time but the real question has always been when will they change,” said Mr. Leung. “Forty two percent of our respondents think North American investment grade credit spreads will widen over the next three months, while 33% expect them to stay the same. In Europe, respondents are even more equally divided. Thirty eight percent think investment grade spreads will widen, while 38% expect them to stay the same.”

North American high yield spreads are a different story. Fifty eight percent of respondents believe these spreads will widen, while only 24% think they will stay the same. Concern over Fed tightening is certainly part of the reason but U.S. tax reform may also be a factor. Accountants are still working through the implications of the new tax code but limitations for deducting interest payments would certainly be a problem for highly leveraged companies, especially if interest rates rise. They make sizeable interest payments as it stands and losing some of the deductibility of these payments would be a blow.

“Tax reform will clearly benefit much of the corporate sector but we could see wider spreads in U.S. high yield markets, if the deductibility of interest payments is significantly limited,” commented Mr. Leung.

Survey respondents expect defaults to increase globally over the next 12 months, with the possible exception of Europe. The Credit Default Index score for North America is negative -26.5, Asia minus -42.1 and Australia negative -29.4. Europe is almost neutral at minus -8.8 which reflects the ongoing Quantitative Easing program as it continues to pump liquidity into Europe’s financial system.

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.

 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 more than 90 member institutions located in over 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.