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October 24, 2013 01:00 AM

Credit managers continue to predict rising defaults and wider spreads

James Comtois
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    IACPM
    Som-lok Leung

    Credit portfolio managers see credit conditions tightening in North America, with credit spreads widening and corporate defaults rising, according to a survey from the International Association of Credit Portfolio Managers.

    As of Sept. 30, 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, widened to -23.4 in the new reading, from -2.2 at the end of the second quarter. A negative number indicates credit conditions are expected to worsen or widen, while positive numbers mean that credit conditions are expected to improve or narrow.

    Meanwhile, the credit outlook for Europe has stabilized. The Credit Spread Outlook index for European investment-grade debt changed to 11.1 from -7.7 at the end of June. The Credit Spread Outlook index for high-yield European debt improved to zero from -24.3.

    “There is a view that in North American and in the U.S., defaults will likely increase,” said Som-lok Leung, IACPM executive director, in a telephone interview. “For Europe, while things haven't gotten better, nothing has gotten worse. In fact, since conducting the survey, things have actually started to improve in various parts of Europe.”

    According to portfolio managers surveyed from the 89 member institutions of the IACPM, the Federal Reserve's decision last month to continue its bond-buying program at a high level led to a relief rally in the credit markets, causing credit spreads to tighten tightening credit spreads.

    Respondents believe spreads have come in too far. Since neither interest rates nor credit defaults can go any lower, the next move would have to be higher rates and a larger number of defaults.

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