A survey conducted by the International Association of Credit Portfolio Managers (IACPM) shows that credit investors believe credit spreads will widen along with the number of defaults.
That is a different tune from the one survey respondents sung in January, when they believed credit spreads would actually tighten.
One way to look at the results is credit defaults are real events in the economy, while credit spreads are the markets pricing of that risk, said Som-lok Leung, executive director of the IACPM. In this case, survey respondents not only believe credit defaults will rise but also think the market will demand a greater return in the form of wider spreads. Even as defaults were predicted to rise, the forecast for spreads was coming in. Now, in the last survey, we have a sea change with the risk of default and the expectation for pricing that risk finally heading in the same direction.
Participants in the survey, dubbed the Credit Outlook Index, are asked a simple question: Do you think spreads and/or defaults will go up, go down or stay the same? If more respondents say spreads will widen or defaults will increase, then the index heads in the negative direction starting from zero. If more respond positively, the numbers head the opposite direction. The index ranges from 100 to -100.
The overall Credit Spread Outlook index for the first quarter was -19, while the Major Credit Default Outlook index for the same time was -95.3. The Credit Spread Outlook was 4.9 for the fourth quarter of 2008.