Professional portfolio managers aren’t hoping for great conditions in the credit markets over the near term, as most feel that higher inflation and rising interest rates will drive defaults, according to the latest outlook from the International Association of Credit Portfolio Managers.
As of March, the 3 Months Credit Spread Outlook for five-year investment grade products had reached 28.9, sliding deeper into negative territory, reflecting the outlook for IACPM members in North America. Some 42% of respondents said that spreads would widen, according to the AICPM survey.
For the same time period some 59% of respondents from North America expect corporate defaults rates to increase over the next 12 months, putting the index at 57.6, according to the study. Only a combined 42% of respondents either expected credit default rates to remain unchanged or drop.
These outlooks have only worsened since the organization last surveyed its members in December 2021.
European professionals’ outlook was even gloomier. No survey respondents from that region said they expect defaults to decline. Just 23% said they would remain unchanged over the next 12 months. A huge majority, 77%, said they felt credit default rates would increase.
Fifty-three percent of European respondents said credit spreads on the iTraxx Europe five-year would increase, while 31% said they would remain unchanged. The credit index was 50.0
The outlook for high yield spreads fared worse, for both North American and European professionals, with the index reading -62.2 and -69.0, respectively.
On average across North American, European, Asia and Australian professionals, 59% of respondents said they expect corporate credit default rates to increase. Fifty-seven percent said they expect higher credit default rates for retail/consumer mortgages, while a 63% increase in credit default rates is the average expectation for commercial real estate.
Credit market trends like higher inflation and rising interest rates are not the least of professional portfolio managers’ concerns when it comes to defaults, according to Som-lok Leung, executive director of the IACPM. He added, “playing a major role … will be supply chain issues which have increased from pandemic related problems to include the impact of the war in Ukraine, which is affecting the global supply of metals, soft commodities, auto parts and, of course, natural gas and oil.”
