Credit managers forecast improvements in defaults, spreads — survey

Credit portfolio managers see an improving forecast for both credit defaults and credit spreads for North American investment-grade and high-yield debt, according to a survey from the International Association of Credit Portfolio Managers.

The aggregate Credit Default index was 4.5 as of Dec. 31, which the IACPM characterized as mildly positive.

A negative number indicates credit conditions are expected to worsen, while positive numbers mean that credit conditions are expected to improve.

The index was -6.9 as of Sept. 30, and -35.6 as of June 30.

“It's definitely improving,” said Som-lok Leung, IACPM executive director, in a telephone interview. “That's the main message from this. (It's) not smooth sailing, but definitely if you look at the trend over the last several quarters, definitely things are improving and getting better.”

“We've seen a lot of information over the last week or so that corroborates this fairly well,” Mr. Leung said, citing bank earnings and the reduction of credit reserves.

As of Dec. 31, the IACPM Credit Spread Outlook index for North American investment-grade debt, which measures the expected direction credit spreads will move over the next three months, tightened to zero in the new reading, from -23.4 in the old reading, at the end of the third quarter.

“I think, well, if you look at the responses, we calculate this index as a measure of consensus. We ask a very simple question: We ask if people think things are getting better or worse or will stay the same,” Mr. Leung said.

He said about 55% of managers said spreads would remain unchanged, with an equal number of managers responding “better” and “worse.”

The more positive forecast for default rates, which Mr. Leung called “the underlying economics of credit quality,” bodes well.

The index for North American high-yield debt also improved, to 9.5 as of Dec. 31, from -30.