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Pessimism mounts among portfolio managers over short-term credit conditions

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North American portfolio managers have significantly dimmed their outlooks on default and credit-spread trends over the next three months.

In a quarterly survey released Thursday by the International Association of Credit Portfolio Managers, managers overwhelmingly saw widening spreads and rising defaults in the second quarter for U.S. corporates, with high-yield assets among the most worrisome.

“The index has been slightly negative for awhile,” if not close to neutral, said Som-Lok Leung, executive director of the IACPM. “This is definitely negative, especially in the high-yield space.”

Nearly four in five credit managers (79%) responding to the survey expect spreads to widen for U.S. speculative-grade firms this summer, while the survey showed 56% peg higher spreads for regional investment-grade firms. For default trend direction, 66% are forecasting higher levels in North America.

“There’s a lot of uncertainty out there, but certainly change in central bank policy is very much at the top of the list,” said Leung, whose organizational members include more than 90 global financial institutions. “Then secondarily, in the U.S. certainly, the unpredictability of trade policy and how that will shake out is also something that is of concern.”

Widening spreads, as well as expected Federal Reserve rate hikes, will increase debt costs on speculative-grade companies that have been a large portion of the $1 trillion increase in U.S. corporate debt levels in 2016 and 2017, according to the Fed.

Leung said the U.S. outlook is more negative in the U.S. than in Europe, where 63% of respondents expect wider high-yield spreads on speculative-grade corporate debt and 49% see rising default rates. A major reason? "Politics," he said, as investors worry about the volatility and reach of a potential trade war because of tariffs enacted by the Trump administration.

The pessimistic survey results caused the IACPM’s diffuse credit-spread index to veer sharply into deep concerns over near-term credit conditions, said Leung. On its scale of +100 to (-)100, with negative numbers indicating deteriorating spread conditions for managers, the index number fell to (-)76.5, said Leung. “We haven’t seen the index this negative since about 2008,” he added.

“It is really the non-investment-grade names are the biggest concern,” Leung said. “Corporate debt has increased, and they’re going to feel the effect of interest rates, and a lot of the uncertainty and the economy. They will be more sensitive to fluctuations due to trade policies, due to all of those things that are in the air.”

The outlook for North American defaults has been negative for nearly five years, but was also at its lowest in over a year, at (-)57.9 – expanding from (-)26.5 from the first-quarter survey released in December.

The IACPM survey is a polling of more than 90 financial institutions in 20 countries, including portfolio managers at many large commercial banks, investment banks, insurance companies and asset managers.

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