Credit portfolio managers are more pessimistic about the outlook for credit defaults in the next 12 months but see stable credit spreads in North America and tighter spreads in Europe over the next three months, said a survey from the International Association of Credit Portfolio Managers.
The aggregate IACPM credit default index fell to -18.6 as of June 30, down from -14.6 the previous quarter.
A negative number indicates credit conditions are expected to worsen, while positive numbers mean conditions are expected to improve.
“I wouldn't say the numbers are that appreciably different (since) the indices run from -100 to 100,” said Som-lok Leung, IACPM executive director, in a telephone interview. “While it is a noticeable change, it's not huge.”
For the next three months, however, the outlook in North America is stable, with the three-month index at 0.0, while the high-yield index is 2.3.
The index for European investment-grade debt for the next three months is 15.8, while the European high-yield debt index is 18.4.
The survey questions cover different time periods for different segments.
“It's hard to imagine what would drive (spreads) tighter,” Mr. Leung said. “I think the initial difference is that default risk outlook is the underlying economy, and spreads is a whole bunch of other things: the overall market for risk, the comparison to other assets, and the things that drive asset valuations.”
Mr. Leung said that spreads that managers are predicting likely come from sources other than underlying credit risk, specifically in what he calls the “extremely high valuation of most financial assets.”
“There is this continuing reach for yield in financial assets that affects spreads and I think that's what people are predicting in the very near term,” Mr. Leung said.
IACPM members — 98 financial institutions located in the U.S., Europe, Asia, Africa and Australia — were surveyed at the beginning of July.