Fund managers were slightly less optimistic about the direction of credit spreads and credit default rates for next year, a perspective that applies globally and across most industries, according to third quarter credit outlook forecast from the International Association of Credit Portfolio Managers (IACPM). .
Although the survey results indicate that credit conditions are currently considered highly favorable, the intractable problems of COVID-19, such as the spread of the delta variant and persistent supply chain disruptions, and the likelihood of high interest rates has fund managers worried that corporate defaults may increase over the next 12 months.
“We have had very few business failures this year and it cannot go on forever,” said Som-lok Leung, Executive Director of IACPM. “Interest rates go up a bit and [COVID-19] is going to be there for a while, but none of this is catastrophic. It’s more of a return to normal. The stimulus may be coming to an end, but the levels of liquidity and other support are still high and businesses are still surviving. ”
Credit portfolio managers moderately reduced risk in their portfolios due to sentiment. The IACPM index for retained risk is positive at 7.3, but this is down from last quarter’s positive reading of 20.5.
The IACPM survey identified other issues that weakened sentiment among fund managers, including:
● rising energy prices
● supply chain issues
● higher yields on the bond markets
● questions of whether inflation is temporary or longer term
● Comments from the Federal Reserve on the potential interest rate hike
The expected direction for corporate default rates in North America is minus -14.7 on an index scale of -100 to 100, where 0 means no change. The forecast for defaults in Asia is -17.4, but European corporate defaults are more promising at -6.3, a reading comparable to Australia’s -5.6. The IACPM Global Credit Default Outlook Index, which covers all regions of the world, is negative at -16.2.
Respondents also expect credit spreads to widen in the next quarter, especially in high yield markets. Some 50% of survey respondents said they believe high yield spreads will widen in North America, while 37% expect them to stay at the current rate. Forty-three percent of those polled saw no 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’s stimulus measures that injected liquidity into the market, according to its findings.