IFR International - 21.07.2018

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Rising interest rates, trade

wars erode credit outlook

„ US/EUROPE IACPM survey says outlook is weakest for North America

Corporate credit spreads are seen widening

and defaults will likely escalate as interest rates

climb and global trade wars loom, according to a

quarterly survey by the International Association

of Credit Portfolio Managers.

The outlook is weakest for North America,

where the economic expansion is seen far along

and the Federal Reserve has already raised

interest rates seven times since late 2015, and is

expected to hike twice more this year.

“In the US and the rest of North America,

it’s a classic inflationary environment,” IACPM

executive director Som-lok Leung said. “As

interest rates rise, one would expect to see

wider spreads and higher defaults and, in

fact, this is a trend we’ve seen for the past few

months.”

IACPM is an association of more than 100

financial institutions in 21 countries.

Rising interest rates pose a particular threat to

highly indebted companies, and those needing

to access capital markets as borrowing costs

increase.

IACPM’s three-month credit spread outlook

index sank to minus 66 in the second quarter

from minus 56.2 in the previous quarter.

The outlook was last this negative a decade

ago during the financial crisis, when the reading

was minus 69.1 in the second quarter of 2008.

Negative numbers indicate an expectation

that credit spreads will widen and defaults will

increase.

IACPM’s 12-month credit default outlook index

fell to minus 51.1 in the quarter from minus 47.2,

the most negative reading since minus 52.8 in

the second quarter of 2016.

FEWER DEFAULTS

The survey found slightly less negative views for

Europe.

“While the European Central Bank has

announced an end to quantitative easing in

December, it also says it will keep its key lending

rate at 0% until next summer,” Leung said.

“Spreads may widen because they have

nowhere else to go, but there’s no rush to see

significantly higher default rates.”

A smaller 56% of those surveyed expect

increased defaults over the next year in Europe

than the 66% of respondents that expect rising

defaults in North America.

Hanging over the credit markets globally

is also the threat of trade wars, which are

inflationary and could drive up defaults, as well

as the ripple effects of Brexit, the association

said. Those surveyed said it is too soon to predict

the ultimate impact of either situation.

The International Monetary Fund warned on

Monday in its World Economic Outlook update

that growing and sustained trade conflicts are

increasingly likely. It said the US is particularly

vulnerable to a slowing of exports due to

retaliatory tariffs from trading partners.

Lynn Adler