Fixed-Income Money Managers Sour on Market Outlook

Fixed income money managers are increasingly gloomy about the investment outlook, according to the latest Fitch Ratings/Fixed Income Forum Survey.

Responses from the latest survey completed in June place hopes of stabilization for the housing and credit markets deeper into 2009, and reveal new worries about inflation and oil price volatility.

In addition, the failure of a financial institution continued to lead investor votes as a high risk to the outlook for the credit markets. The recent failure of IndyMac Bancorp Inc. and government efforts to boost confidence in Fannie Mae (FNM) and Freddie Mac (FRE), events that occurred after the survey was conducted, certainly illustrate that investor concerns regarding the state of US financial firms have been justified, Fitch says.

Not surprisingly, given expectations for continued credit deterioration across industrial, consumer and financial sectors, investors do not anticipate any near-term rebound in issuance in the hard- hit leveraged finance space or in most structured finance asset classes.

Highlights of the Survey:

• Half of investors surveyed believe a recession is highly likely in the US over the next 12 months, and roughly two-thirds believe the credit markets will stabilize no earlier than 2009 or later.
• Nearly all respondents placed stability in the housing market as a 2009 or later event.
• More than 90% of investors placed confidence in financial institutions’ disclosure of mark-to-market losses and home price stabilization as either important or critical in promoting market stability.
• Just one-third considered government-driven mortgage remedies to be either important or critical. In addition, 85% of investors considered further Fed easing not important or even harmful in promoting stability.
• Opinions on the outlook for financial institutions were deeply divided, with 46% of investors expecting further deterioration and 44% expecting some improvement in credit quality.
• Nearly all participants expecting moderately higher to significantly higher corporate debt default rates over the next 12 months.