Credit portfolio managers forecast wider credit spreads and rising credit defaults this year due to a litany of concerns, including rising interest rates in North America, said a second-quarter survey from the International Association of Credit Portfolio Managers.
The Credit Spread Outlook index for the next three months dropped to -66 from -56.2 in the most recent survey, which was conducted in the beginning of July. The Aggregate Credit Default Outlook index for the next 12 months is -51.1, down from -47.2 in the previous quarter's 12-month survey. A negative number indicates credit conditions are expected to worsen, while positive numbers mean conditions are expected to improve.
Specifically, more pessimistic outlooks for North America and Europe differ because the former is further along in the economic cycle. Respondents pointed to the U.S. Federal Reserve continuing to hike interest rates, raising concerns about wider spreads, higher defaults and higher inflation. The North America Investment Grade Credit Spread Outlook index for the next three months dropped to -57.7 from -50 the prior quarter. Among survey respondents, 58% expect spreads to widen compared to 42% who expect them to remain unchanged. None of the respondents believes spreads will narrow.
By region, pessimism was highest for North American corporate credit, whose Credit Default Outlook index fell to -65.5 from -57.9, with 66% of respondents saying credit defaults will go up in the next 12 months and 34% saying they will be unchanged.
"It really is because we are ahead of Europe in many ways," said Som-lok Leung, IACPM's executive director, in a telephone interview. "We started raising interest rates sooner. The economy has looked pretty good, but the concern around trade almost certainly has its impact. Not exactly clear the size of it. There's so much unpredictability with the current administration I think it's hard to call. I think the broad consensus is that recent moves in trade will increase credit risk. The impact will be different in different sectors, but very broadly (there will be) increased credit risk. I think we have more uncertainty now than perhaps a year or two ago. It certainly weighs on people, the very unpredictable environment."
The Credit Default Outlook index for European corporate credit dropped to -55.6 from -45.7, with 56% of respondents saying defaults will increase while 44% said they will remain unchanged. The slightly less pessimistic outlook is cited by the survey as the result of the European Central Bank's key lending rate remaining at zero through next summer despite the impending end of quantitative easing in December.
The survey is conducted among IACPM members, which consist of credit portfolio managers at more than 90 financial institutions in 20 countries.