Rising Inflation, Higher Interest Rates Prompt Forecasts of Wider Credit Spreads and Higher Defaults

But Strongest Impact to Come in Second Half of Year according to Latest IACPM Credit Outlook Survey

New York, NY – A confluence of higher inflation, rising interest rates, supply chain issues and labor shortages have prompted respondents to the latest IACPM Credit Outlook Survey to forecast wider credit spreads over the next three months and rising defaults over the next year. At the same time, however, respondents do not expect to see the full impact of these problems until later in the year.

“Our members are starting to see signs of the effects of rising rates, supply chain and labor issues in their portfolios but they don’t expect to see an uptick in defaults until the second half of the year,” commented Som-lok Leung, Executive Director of the IACPM. “They’re keeping an especially close eye on highly leveraged companies, though, because they are most vulnerable to rising rates and a slowing economy.”

Reflecting this outlook, survey respondents, who manage corporate loan portfolios globally at banks, insurance companies and asset managers, are modestly positive about retaining risk in their portfolios. The IACPM’s Diffusion Index for Retained Risk rose in the latest survey from a positive 7.3 at the end of last quarter to positive 12.8 in the current reading.

“Bear in mind, banks are in the best capital position they’ve been in since before the Great Recession,” noted Mr. Leung. “They have a huge amount of capital which they can’t just sit on. They’re under enormous pressure to deploy it.”

Respondents say they are not particularly focused on the emergence of the latest Covid variant, Omicron. The virus could delay some actions, such as central bank rate increases, but the real factors driving the economy and the credit markets are supply chain and labor issues, along with rising inflation and higher interest rates.

“A swift Omicron departure will leave us looking at all the other underlying risks,” said Mr. Leung. “Under current circumstances, Covid is sort of a blanket covering up all the other problems we face.”

The expectation for wider credit spreads rose in the latest survey to minus -42.2 versus negative -31.0 three months ago. Not unexpectedly, high yield spreads appear to be more vulnerable than investment grade spreads with index readings of minus -42.9 in North America and negative -54.5 in Europe.

“The forecast for wider spreads is a direct result of central banks tightening credit,” said Mr. Leung. “The Bank of England just recently raised a key rate and the Federal Reserve is strongly signaling it plans to raise rates in the near future.”

The outlook for rising defaults increased globally at the end of the fourth quarter, increasing from negative -16.2 at the end of the third quarter to minus -31.2 in the latest survey. Respondents expect corporate defaults to increase over the next 12 months in every region of the globe, with the North America reading at minus -21.2, Europe negative -18.5 and Asia minus -33.3.

In Asia, China’s default outlook has become increasingly public. Evergrande, referred to as the world’s most indebted developer, has reportedly tried to pay overdue bills with unfinished properties and has asked employees to lend it money. Survey respondents note beyond Evergrande, other supposedly healthier developers, such as Shimao, have also taken steps to reduce heavy debt loads.

The Credit Outlook Survey is conducted among members of the IACPM, an association of 129 financial institutions in 26 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 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 129 member institutions located in 26 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.