Market relief over the reopening of the federal government and extension of U.S. borrowing authority has failed to reverse the pessimism of credit portfolio managers, who see U.S. credit conditions tightening, credit spreads widening and a rise in corporate defaults over the next three months.

In the quarterly survey of the International Association of Credit Portfolio Managers, the Credit Spread Outlook Index for both North American investment-grade and high-yield debt moved downward. Investment-grade tumbled from -2.2 at the end of the second quarter to a -23.4 in the latest reading, and high-yield credit moved from - 20.09 to -30.4

In contrast, Europe's credit outlook has stabilized, the IACPM reports, with managers forecasting investment-grade improving from -7.7 to a positive 11.1 and high-yield moving up from -23.3 to land at neutral.

"The differentiation between the U.S. and Europe is meaningful," Som-lok Leung, executive director of the International Association of Credit Portfolio Managers, said in a press release. "The emerging view is that the U.S. is deeper into the credit cycle than Europe. In contrast to Europe, credit portfolio managers have switched from an optimistic view on interest rates in the U.S. at the beginning of the year to a more pessimistic view now."

The credit outlook survey is conducted at the beginning of each quarter among members of IACPM, an association of credit portfolio managers at 89 financial institutions (including large commercial and investment banks, insurance companies and asset managers) in 17 countries in the U.S., Europe, Asia, Africa and Australia.

The global, aggregate major markets credit spread outlook moved from -13.3 to -11.0 — which despite being an improvement, still represents the second-worst outlook index figure since December 2011.

Survey results are calculated as diffusion indexes, which show positive and negative values ranging from 100 to minus 100, as well as no change which is in the middle of the scale and is recorded as "0.0." Negative numbers indicate the extent of expectations of higher defaults. The degree to which respondents anticipate improved credit conditions, fewer defaults and narrower spreads pushes figures into positive territory above zero on the index.

Survey respondents said the Federal Reserve's continuing of its bond-buying program led to a relief rally in credit markets, resulting in tightening spreads, which they say have come in too far in light of underlying weakness in the U.S. economy, according to IACPM.

"Neither interest rates nor credit defaults can go any lower, so the next move would have to be higher rates and, in turn, a larger number of defaults," the IACPM release stated.

Although 34% see a coming rise in corporate defaults, 44% see no change and 21% expect a decline.

The U.S. index numbers have fallen dramatically since a December 2012 survey showing a 38.8 index score on investment grade and 34.8 on high-yield credit, the highest levels since December 2010. They are also below September 2012 levels for investment grade and high-yield credit.

"Our members are clearly concerned about the U.S., pointing out that many companies have avoided defaults with very low interest rates but they will no longer be able to do that when rates go up," said Leung. "At the same time, Europe is showing signs of stabilizing with civil unrest ebbing and balance sheets in better shape."

For example, the report states, the credit default outlook index for European corporate debt has risen from -48.8 at the end of last June to zero in the latest survey (worldwide, the index is at -13.2, compared to -32.4 in June). "Survey respondents may not be convinced Europe's problems have been resolved, but they appear to be at least contained," the IACPM release stated.

The IACPM 12-month global credit default outlook index improved, but remains in the red with a -6.9 index score on expectations on whether aggregate default rates for corporate, retail/consumer mortgage and commercial real estate will improve or not over the next year, compared with -35.6 from last June.

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