Timing Remains Elusive As Market Volatility Picks Up

Respondents to Latest IACPM Credit Outlook Survey Continue to Forecast Rising Defaults and Wider Spreads But Timing Remains Elusive As Market Volatility Picks Up

      New York, NY – Respondents to the latest IACPM Credit Outlook Survey forecast wider credit spreads with a negative reading of -38.2 and rising defaults with a score of minus -47.2. The survey was taken at the beginning of October as 10-year treasury bond yields reached their highest levels since 2011 and equity markets fluctuated with some of the greatest volatility of the year.

“Our survey respondents manage corporate loan portfolios and as global market participants they have long kept a wary eye on central bank liquidity and the potential end to one of the longest running economic expansions on record,” commented Som-lok Leung, Executive Director of the International Association of Portfolio Managers. “The US Federal Reserve has started raising interest rates, treasury yields are higher and equity markets are volatile. The real question has never been whether economic expansion would end but rather when conditions would change.”

Indeed, survey respondents are almost equally divided in their forecast over the short term. A large number, 44%, expect North American credit spreads to widen over the next three months, while 47% think they will remain unchanged. Very few, 8%, believe spreads will tighten. In Europe, 44% of respondents are also forecasting wider spreads in the short run with 53% expecting them to remain unchanged. Just 3% think spreads will tighten.

There is more consensus regarding credit defaults, which are forecast over a longer time horizon. Fifty eight percent of respondents think corporate defaults will increase globally over the next 12 months, while 34% expect them to remain unchanged. Again, just 8% believe defaults will decline.

Survey respondents point out in the United States, the Federal Reserve is raising interest rates from historically low levels and, so far, the increases have not sparked a significant downturn. Respondents report they are not seeing a widespread pickup in the number of credit impairments or workouts in their portfolios which they would normally encounter if conditions were broadly deteriorating. To be sure, there is little room for improvement but there is clear disagreement as to when economic growth will ease.

“People are not as negative as you might expect them to be this late in the cycle,” said Mr. Leung. “It’s unusual but, as long as indicators, especially forward-looking ones, are benign, a number of market participants are unwilling to put on the brakes.”

Survey respondents are keeping an eye on other potential problems as well but, to this point, their ultimate impact is unclear. Trade tariffs, for example, could be inflationary but thus far it is hard to separate winners from losers. Europe is still contending with Brexit and, more recently, with Italian challenges to European Union budget constraints but, for now, respondents are not seeing these issues creating major problems for the overall European economic system.

The Credit Outlook Survey is conducted among members of the IACPM, an association of more than 100 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 over 100 member institutions located in 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.