Money managers were slightly less optimistic about the direction of credit spreads and credit default rates for the next year, an outlook that applies globally and in most sectors, according to the third quarter credit outlook forecast from the International Association of Credit Portfolio Managers (IACPM).
Although the survey results say that credit conditions are currently considered strongly favorable, intractable issues from COVID-19, such as the spread of the delta variant and lingering supply chain disruptions, and the likelihood for high interest rates have money managers worried that corporate defaults may rise over the next 12 months.
“We’ve had very few corporate defaults this year and that can’t continue forever,” said Som-lok Leung, executive director of the IACPM. “Interest rates are moving up a bit and [COVID-19] is going to be around for a while, but none of this is catastrophic. It’s more of a return to normal. Stimulus may be ending but levels of liquidity and other support are still high and companies are still surviving.’’
Credit portfolio managers moderately reduced the risk in their portfolios as a result of the sentiment. The IACPM Index for Retained Risk is positive at 7.3, but that is a drop from the positive 20.5 reading from the last quarter.
The IACPM survey noted other issues that have dampened money manager sentiment, including:
● rising energy prices
● supply chain issues
● higher yields in fixed income markets
● questions about whether inflation are temporary or longer term
● Federal Reserve comments about rising interest rate potential
The expected direction of corporate default rates in North America is minus -14.7 on an index scale of -100 to 100, with 0 signifying no change. The forecast for defaults in Asia is -17.4, but European corporate defaults is more promising at -6.3, a comparable reading to Australia’s -5.6. The overall IACPM credit default outlook index, which covers every region globally, is negative at -16.2.
Respondents also expect credit spreads will widen over the next quarter, particularly in high-yield markets. Some 50% of survey takers said they believe high-yield spreads will widen in North America, while 37% expect them to remain at the current rate. Forty-three percent of the respondents didn’t see a change in Europe but 46% expect high-yield spreads to increase.
The previous outlook provided by the IACPM was more optimistic due to the government stimulus that flowed liquidity into the market, according to its findings.
