Sentiment toward credit conditions in North American portfolio managers were slightly more negative in the latest survey from the International Association of Credit Portfolio Managers.

According to IACPM, 47% of portfolio managers expected widening credit spreads for July through September, driving the trade group’s three-month credit spread outlook index to a negative (-) 37.5 and default expectations to (-)41.2 on its diffusion index for each category that scales from +100 to -100.

By comparison, three months earlier, the credit spread index was (-27.3), while default expectation were (-)20. Negative numbers in the IACPM’s index denotes expectations for deteriorating credit conditions through higher defaults and widening spreads. Positive numbers signify expectations for improving credit conditions.

“Very few survey respondents think defaults are going to decline further,” said Som-lok Leung, executive director of the IACPM. “Indeed, 53% of respondents think defaults will remain at the same level, while 44% expect them to rise.

One potential area of concern is commercial real estate; more than two-thirds of respondents surveyed for the third quarter believe defaults will increase in this area over the next year.

“Survey respondents are keeping an eye on commercial real estate because of the potential spill over from structural changes in the retail sector,” said Leung. “As brick and mortar stores close, shopping malls are impacted and any associated debt is more vulnerable.”

The credit outlook in Europe is “somewhat brighter,” the IACPM noted, with the corporate default outlook tightening to a (-)30.3 from a (-)38.9 in the second quarter outlook. Just over half of respondents (52%) believe the European corporate default rate (both high-yield and investment grade) will remain unchanged over the next 12 months.

European credit spread changes will also be “benign,” with investment-grade companies registering a neutral 0.0 on the three-month outlook index, and crossover high-leveraged firms’ spread outlook shrinking to (-)3.1 from a (-)20.7 reading in the second quarter survey.

“The results are a bit surprising, perhaps, because of Brexit and rumblings about other potential exits from the European Union,” said Leung, according to the release. “But the UK economy has stayed on track since last year’s Brexit vote with strong employment and rising housing prices. There has also been an uptick in economic activity on continental Europe.”

The quarterly survey is conducted among IACPM members representing more than 90 financial institutions in 21 countries. They include large commercial banks, investment banks, insurance companies and asset managers.

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