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Ukraine Struggle Cloud Outlook for Monetary Policy Impact, Credit Defaults

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With no end in sight to the ongoing war in Ukraine and the Federal Reserve vowing to keep inflation at bay by raising rates, professional portfolio managers expect credit defaults to worsen globally by September.

None of the respondents to International Association of Credit Portfolio Managers (IACPM) membership expect a decline in defaults in 12 months, according to the latest reading from June from the Professional Association.

The outlook for the next three months and 12 months was equally bleak for both the direction of credit spreads and credit default rates. Not a single segment of the IACPM’s membership recorded an overall positive outlook, according to June’s findings, with expectations in the red across the board.

The expected direction of corporate default rates in North America is -88.9 on an index scale of -100 to 100, with 0 indicating no change. With -91.2%, Europe recorded the most negative forward reading of all the areas studied.

According to an IACPM statement, “European members of the IACPM say that due to the ongoing conflict in Ukraine, the risk of recession in Europe is particularly high for at least the next several months.”

North American respondents had their own concerns for the process, namely a possible end to historically low interest rates. While the defaults are currently very small, that may change as the year progresses.

According to IACPM executive director Mon-Lok ​​Leung, “Consumers and businesses have a cushion for now, but our members expect to see a higher number of defaults in 2023 and perhaps even 2024.”

On a more global scale, professional managers in the survey highlighted that central banks are using more aggressive monetary policy to fight rising inflation. They point to a delicate balancing act between monetary reforms that can rein in inflation, without severely curtailing reforms.

While portfolio managers are monitoring all elements of their portfolios, some areas are receiving more attention, including leveraged loans, commercial office space, healthcare, and especially senior housing, a sub-sector that is still Coping with the effects of COVID-19. pandemic, according to the IACPM.

The IACPM Aggregate Credit Default Outlook Index recorded a reading of 82.3% on the same scale.

Twenty-one percent of the respondents expect an increase in credit default rates on corporate loans. Meanwhile, 18% of respondents expect an increase in credit default rates on retail/consumer mortgages, while 19% of respondents expect an increase in credit default rates on commercial real estate.

Expected 12-month credit default rates on corporate loans averaged 83.8%. In addition, an average of 80.3% of respondents said they expect a decline in retail/consumer mortgage loan defaults and the rate for commercial real estate was 82.7%.

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