Although problems in Greece have injected pressures into the credit default market, a Fed rate rise could have a larger impact, says a survey. According to the International Association of Credit Portfolio Managers survey, the outlook for credit spreads was -45.2, while the outlook for defaults was -34.6. Both readings suggest that portfolio managers believe credit spreads “will widen over the next three months, as credit defaults rise over the next 12 months.”
“In some ways, Greece has been the least of our concerns,” said Som-lok Leung, Executive Director of the IACPM in a statement. “As painful as the crisis may be, certainly to Greek citizens, it doesn’t pose the same kind of threat to the global financial system that Lehman did in 2008.” And today, he added, managers “are far more worried … about the impact of potentially rising interest rates in the US and the economic and financial market turmoil in China.”
US companies have been feasting on cheap credit in the last few years of zero interest rate policy or ZIRP. And according to Markit, high yield issuers have floated three times the amount of bonds in the last five years compared to the years before the financial crisis. But with the markets increasingly pricing in a rate hike, the potential risks associated with firms having to refinance their growing bond load at more unfavorable rates has resulted in markets turning bearish against the most leveraged US companies. According to IACPM, the outlook for high yield debt is -60.0, versus 20.5 just three months ago.
“Greece is certainly producing some short-term volatility but, longer term, survey respondents are focused on structural issues,” says IACPM’s Mr. Leung. “Interest rates are at historic lows and the only direction from here is up. The only questions are when will interest rates rise and how far will they go.”
Treasurers have been paying more attention to credit default spreads as indicator, or early warning signal, in the wake of the financial crisis and the elevation of counterparty risk mitigation. And seeing sudden movements in the credit default swap market could quickly alert them to any changes in their credit-risk exposures to bank counterparties, suppliers and customers.
The problem is it’s still a challenge for many treasurers. Within the NeuGroup universe many members have admitted they do not yet have a formalized counterparty risk policy; or if they do, not very robust or specific ones. Still, it is something on their minds, and just about all members use some measurers. In many cases, NeuGroup members use a hodgepodge mix of credit ratings, CDS levels and other monitoring tools.
The IACPM survey results are “calculated as diffusion indexes, which show positive and negative values ranging from 100 to -100, as well as no change which is in the middle of the scale and is recorded as “0.0,” according to the association. “Positive numbers signify an expectation for improved credit conditions, specifically fewer defaults and narrower spreads, while negative numbers indicate an expectation of deterioration with higher defaults and wider spreads.”