NEW YORK--(BUSINESS WIRE)--The tightening of CDS spreads included in the Fitch Fundamentals Index (FFI) indicates that investors might be willing to take on a touch more risk, although at a measured pace.
The FFI gauges trends in the U.S. economy by monitoring changes in fundamentals across key sectors every quarter. The index leverages Fitch's vast proprietary data on mortgages, credit cards, corporates and banks to build a detailed picture of the health of the US credit markets.
Overall, the Q1 2014 FFI remained stable at +2. The CDS quarter-over-quarter score was neutral in Q1, signaling no significant change in investor risk appetite.
Within the overall CDS score, however, higher risk tolerance pushed the Fitch Solutions CDS index 7% tighter over the first quarter and 27% tighter than a year earlier. The change reflects investors' continued search for yield in fixed-income assets even after the Federal Reserve started tapering its quantitative easing program in December. This measure has tightened for seven consecutive quarters, beginning in 2Q12 when strong risk aversion related to the eurozone crisis was evident.
The first quarter move in the Fitch CDS index primarily reflected a slight decline in the pace of tightening, rather than a departure from the longer term trend. Investor sentiment remains broadly positive and most investors continue to project further declines in default rates, suggesting there has been no material reduction in risk appetite.
Strong investor demand has also fueled heavy issuance volumes in the debt markets, particularly in high-yield bonds and leveraged loans, and some less creditor-friendly structures.
Default rates on high-yield bonds and leveraged loans remained very low in the first quarter of this year. The seemingly insatiable demand for leveraged finance assets at the low end of the ratings spectrum is leading to rising bond and loan valuations, including an increasing number of 'CCC' rated issues now trading above par. Much of this is driven by investors' increasingly positive outlook on the US economy.
Our Fixed Income Investor survey, published April 9, showed 89% of surveyed investors believe annual GDP growth will be 2% to 3% this year, the strongest consensus on the macro outlook in two years. Fitch forecasts US economic growth to accelerate from 1.9% last year to 2.8% this year and 3.1% next year as the economy has gained momentum and downside risks have eased.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
Applicable Criteria and Related Research:
Fitch Fundamentals Index 1Q14
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746196
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