April 19, 2018 / 10:01 AM / a year ago

Default, credit spread outlook sours

NEW YORK, April 19 (LPC) - Risks are mounting for more corporate debt defaults and wider credit spreads amid political and trade war worries as well as rising interest rates, according to a global survey by the International Association of Credit Portfolio Managers.

While the outlook is negative across all regions, the view is most stark for North America.

“There is no question rising interest rates, trade concerns and the US political environment, among other factors, are impacting confidence,” Som-lok Leung, IACPM’s executive director, said in a statement. “There’s a material change in tone.”

Rising US interest rates will come as corporations have bulked up on debt, making the more highly indebted companies particularly vulnerable when their costs start to escalate.

The Federal Reserve started raising rates in December 2015, hiking six times so far. Two more rate increases from the Fed are expected this year, followed by at least three more next year.

Trade tariffs are at early stages and ripple effects are being scrutinized, as is the impact of last year’s US tax cuts on the federal budget deficit.

The US and China, for example, have proposed tariffs of tens of billions of dollars against each other, igniting tensions about a potential trade war and stoking market volatility.

These varied concerns drove down IACPM’s 3-month credit spread outlook index to a reading of minus 56.2 in the first quarter from minus 22.0 in the fourth quarter of last year.

The last time this view on spreads was more negative was in the second quarter of 2008, in the midst of the financial crisis, when the index was minus 69.1, according to IACPM.

IACPM’s 12-month credit default outlook index eroded to minus 47.2 in the first quarter from minus 30.3 the prior quarter. This default index was last lower in the third quarter of 2016, at a minus 48.1 reading.

Negative numbers indicate an expectation credit spreads will widen and defaults will escalate.

“At least in the US, we may have reached a turning point,” said Leung. “We’re seeing a slowdown in corporate profits and increasing debt. We started seeing this towards the end of last year and many survey respondents now say the real question is when will we feel the broader impact.”

IACPM is an association of more than 90 financial institutions in over 20 countries. (Reporting By Lynn Adler Editing by Michele Sierra)

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