Credit portfolio managers expect credit spreads to widen over the next three months and defaults to increase over the next 12 months, according to a second-quarter survey by the International Association of Credit Portfolio Managers.
The Credit Spread Outlook index for the next three months overall fell to -19.1 in the most recent survey, which was conducted in the beginning of July, from -3.3 three months earlier. A negative number indicates credit conditions are expected to worsen, while positive numbers mean conditions are expected to improve.
The Aggregate Credit Default Outlook index for the next 12 months, while rising to -45.4 in the most recent survey from -55.7 in the previous quarter's 12-month survey, still indicates a general pessimism regarding defaults, the survey said.
"The outlook is certainly biased towards wider spreads and rising defaults given the length of the current economic expansion and recent signs of weakness, but in reality, credit markets are tightening," said Som-lok Leung, IACPM's executive director, in a news release. "Only one factor matters — central bank activity, especially the Fed. We've had weakness in the equity and credit markets, but as soon as the Fed moves, the markets have responded."
The pessimistic outlook for credit spreads was in stark contrast to the spike in optimism that credit portfolio managers felt the previous quarter after multiple quarters of significant pessimism. The previous Credit Spread Outlook index of -3.3 had leapt from the fourth-quarter's index of -38.4.
The Credit Spread Outlook index for the next three months for North American investment-grade credit is -21.9 for the current quarter, down from zero the prior quarter and the outlook index for North American high-yield credit fell to -34.4 from -6.7 the previous quarter. Europe's index dropped to -7.7 from 3.3, and the Europe crossover index rose to -8 from -10.
The change in expectations regarding future defaults was less pronounced, and pessimism is abating slightly because defaults can't go much higher, Mr. Leung said.
"There's a big difference between bad and really bad," Mr. Leung said. "In terms of defaults, for example, rising and really rising are totally different. Defaults can't climb significantly higher at the moment because interest rates are so low."
North America's Credit Default Outlook index fell to -59.5 from -50 the previous quarter, while the indexes for all regions rose very slightly: Asia to -47.6 from -52.2, Europe to -42.4 from -47.2 and Australia to -40 from -52.4.
The survey is conducted among IACPM members, which consist of credit portfolio managers at more than 100 financial institutions in the U.S., Europe, Asia, Africa and Australia.