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Money Management

Credit managers still expect more defaults, but European optimism grows

Credit portfolio managers believe rates and defaults will increase during 2018 with the realization that global central banks' quantitative easing will end at some point, according to the fourth-quarter survey from the International Association of Credit Portfolio Managers.

The Credit Default Outlook index globally for the next 12 months is -30.3, up slightly from -36.3 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.

Compared to the previous quarter, pessimism grew for Australian corporate credit, whose credit default outlook index dropped to -29.4 from -22.2 the previous quarter. Other regions showed improvement from the prior quarter, although pessimism still reigns. The European corporate outlook index rose to -8.8 from -21.9, while North America rose to -26.5 from -41.7, and Asia to -42.1 from -47.8.

Europe's near-neutral rating, according to an IACPM news release, reflects the central bank's ongoing quantitative easing.

Among the surveyed credit portfolio managers, 42% believe North American investment-grade credit spreads will widen over the next three months, while 33% believe they will remain the same. However, for North American high yield, 58% of respondents believe those spreads will widen over the next three months, while 24% say they will remain the same,

Som-lok Leung, IACPM executive director, said in a telephone interview that the sentiment regarding North American high yield shows how the Federal Reserve's rate changes will affect spreads.

"Expectations for North American high-yield spreads widening compared to about the same results for investment-grade," Mr. Leung said. "That's the sector that's much more sensitive to interest rate changes. That's a sign that things are starting to be felt."

"Expectations for what the Fed is going to do are pretty clear," he added.

Pessimism grew among survey respondents overall regarding credit spreads, believing they will widen over the next three months. The Major Markets Credit Spread Outlook index fell to -22 in the fourth quarter compared to -18.8 the previous quarter.

European and North American outlooks went in opposite directions. The indexes for Europe and Europe crossover credit rose to -13.8 and -14.3, respectively, from -14.8 and -25.9, while North American investment-grade and high-yield indexes fell to -18.2 and -39.4, respectively, from -17.2 each.

The survey is conducted among IACPM members, which consist of credit portfolio managers at more than 90 financial institutions in the U.S., Europe, Asia, Africa and Australia.