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Money Management

Credit managers’ outlook on year turns decidedly negative – IACPM survey

Credit portfolio managers believe credit spreads will widen and credit defaults will rise this year due to a litany of concerns, including rising interest rates, trade concerns and the U.S. political environment, according to the fourth-quarter survey from the International Association of Credit Portfolio Managers.

The Credit Spread index jumped to -56.2 for the next 12 months in the most recent reading taken at the beginning of April, from -22 at the end of last year. The Credit Default index for the next 12 months is -47.2, down from -30.3 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.

The outlook for North American high-yield spreads was especially one-sided, with 79% of respondents expecting spreads to widen over the next three months. The index fell to -76.5 from -39.4 the previous quarter.

Som-lok Leung, IACPM executive director, said in a telephone interview that the results of this quarter's survey were "decidedly much more negative than it has been in recent quarters."

"Even though the number has been negative for the past 12 to 18 months, it's been close enough to zero," Mr. Leung added. "This is decidedly negative."

Mr. Leung pointed out that the North American high-yield outlook is the lowest it's been since 2008.

In the U.S., survey respondents are concerned about such factors as rising interest rates, recently proposed trade tariffs and last year's tax cuts.

Rising interest rates are problematic because corporate debt has risen over the last several years, making highly leveraged companies vulnerable. And although the proposed trade tariffs are another worry, IACPM members are discovering that in many cases, the tariffs may not actually be imposed. Last year's tax cuts are also a concern as IACPM members consider the impact of those cuts on the federal budget deficit.

The outlook for Europe is also negative but somewhat less so than the U.S. Some 44% of survey respondents expect credit spreads to widen over the next three months, but 50% of respondents believe investment-grade spreads will remain unchanged. The Europe corporate section of the index fell to -45.7 from -8.8 in the quarter. Similarly, 49% of respondents expect defaults to rise over the next 12 months, while 49% think they will stay at current levels, with the index at -37.5, down from -13.8.

"The fact that things don't look as negative in Europe is pretty significant. The (European Central Bank) is on a slightly different path than the (Federal Reserve). Business policies in Europe are very different than what they are in the U.S.," said Mr. Leung.

In Asia, the outlook is also negative, but more than half of survey respondents believe defaults will remain unchanged, while 44% think they will rise, producing an index reading of -40.7, similar to -42.1 the prior quarter.

The survey is conducted among IACPM members, which consist of credit portfolio managers at more than 90 financial institutions in 20 countries.