Outlook for Spreads, Defaults Still Cloudy, Credit Managers Say

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Credit portfolio managers remained concerned about central banks, China, energy and Brexit; they expect spreads to coto  continue to dog credit portfolio managers, who see spreads widening and defaults increasing the fourth quarter.

In a quarterly survey by the New York-based International Association of Credit Portfolio Managers, 57% of respondents indicated that they expect wider credit spreads in U.S. investment grade debt; a higher percentage, 70%, expect wider spreads on U.S. high yield bonds and leveraged loans.

Also for the fourth quarter, 66% see rising levels of corporate defaults.

“While survey respondents, who are all members of the IACPM, don’t believe everything will turn out badly, they are focused on whether we will be able to continue staying the current course or see a downturn in one or more macroeconomic issues,” said Som-lok Leung, executive director of the IACPM, in a release Thursday.

Worries over slow growth in China, continuing troubling patches in the energy sector and the Federal Reserve’s plans for rate hikes (or otherwise) contribute to much of the anxiety, Leung noted. The British referendum vote that committed the UK to leave the European Union has worried managers of a global recessionary blowback, even outside of Europe.

The IACPM’s three-month credit spread outlook index heads into the final quarter with a reading of negative (-) 47, which points to expectations of deteriorating credit conditions for spreads and defaults. That is compared to a (-)39.7 reading in June prior to the third quarter, and the (-) 38 score recorded after the first quarter of 2016. 

(The survey results are presented in a diffusion index, with positive and negative values ranging from 100 to minus (-) 100. Positive numbers present an expectation that managers expect improved credit conditions – fewer defaults and narrower spreads – while negative numbers show a belief in short-term credit deterioration, meaning higher defaults and wider spreads.).

The default index, while also in the red at negative (-)48.1, is a slight improvement from the -52.8 in the previous survey.

“Pretty much everyone is focused on macroeconomic issues and their institution’s exposure to risky assets,” said Leung, executive director of the IACPM, in a release. “Do they have enough liquidity? Do they have enough cash? And, if they have enough cash, what do they do with it? We’ve been muddling through but, clearly, most of the challenges are still with us.”

For the European market, 72% of managers forecast wider spreads in investment grade debt, and 69% for speculative-grade debt. About 58% see Europe experiencing more defaults.

The quarterly IACPM survey polls managers at 90 financial institutions in the U.S., Europe, Asia, Africa and Australia.

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