Credit portfolio managers forecast credit spreads to widen during the Q1 2022, and expect defaults to increase the most during the second half of 2022, according to the International Association of Credit Portfolio Managers (IACPM) credit outlook survey released on January 13.
Labor and supply-chain issues, coupled with rising inflation and higher interest rates, but not the surge of the omicron variant of COVID-19, are shaping a slightly more negative view of managers’ portfolios, respondents said.
“They’re keeping an especially close eye on highly leveraged companies, though, because they are the most vulnerable to rising rates and a slowing economy,” said Som-lok Leung, executive director of the IACPM.
In December 2021 the IACPM polled its global members about their perceived direction of credit spreads and default rates for the next three months. For Q4 20212, the credit spread outlook index reading was -42.2 versus -31.0 in Q3 2021, according to the IACPM’s findings. For Q2 and Q1 of 2021, expectations were positive, with readings of 4.9 and 13.2, respectively.
Among North American portfolio managers, the outlook on five-year investment-grade credit is -24.1, still in negative territory, compared with -20 as of Q3 2021. As of December 2021, the outlook for high-yield credit is expected to be vulnerable, falling to -42.9 from -36.7 in Q3 2021.
As for how European portfolio mangers see movement of credit spreads, the iTraxx 5Y dropped to -52.2 in Q4 2021 from -32.1 in Q3 2021. Europe’s crossover index dropped to -54.5 from -35.7, for the same periods respectively.
Negative numbers signal that credit conditions are assumed to worsen, while positive numbers mean that conditions are expected to be better.
“The forecast for wider spreads is a direct result of central banks tightening credit,” Leung said.
For instance, the Bank of England just recently raised a key rate and the Federal reserve is strongly signaling its plans to raise rates in 2022, Leung said.
As for default expectations on retail consumer mortgages, 87% of respondents expect default rates to move up or remain unchanged.
Despite the declining sentiment, all is not negative. The managers surveyed, who manage corporate loan portfolios at banks, insurance companies and other places are slightly positive about retaining risk in their portfolios.
For instance IACPM’s Diffusion Index for Retained Risk rose to 12.8, up from 7.3 at the end of the last quarter.
Banks are in a good capital position compared with the Great Recession of the ‘00s, said Leung.
“They have a huge amount of capital which they can’t just sit on,” Leung said. “They’re under enormous pressure to deploy it.”
The survey is conducted among IACPM’s more than 129 member institutions, which consists of credit portfolio managers in 26 countries including the U.S., Asia, Europe, Australia and Africa.
