American credit market outlook

Many US credit spreads have moved sideways or even tightened recently despite analysts pointing to more reasons why corporate credit is likely to weaken next year.
"We believe that persistently high energy and commodity prices, leading to a more volatile interest rate market and a consumer downturn, pose a significant problem for 2006," analysts at Barclays Capital said in a research report released this week.
Also pressuring credit are expectations the Federal Reserve will continue raising short-term interest rates, and corporate profit growth is expected to weaken in coming quarters.
Meanwhile, weak stock prices coupled with rising corporate cash reserves imply that credit will continue to be threatened by shareholder-friendly actions and leveraged buyouts.
Credit analysts in general predict that spreads are unlikely to tighten from current levels. But they also say spreads may not widen much the rest of this year because the forces that threaten credit will take time to play out.
On the other hand, analysts are mixed as to whether credit spreads are adequately pricing in these perceived forward risks.
"Credit spreads are surprisingly resilient," said John Atkins, corporate bond analyst at economic research group IDEAglobal in New York. "They probably aren't pricing in these risks."
The spread between three-year and 10-year high-grade CDS index levels on Friday was about 40.4 basis points, which is actually a little tighter than 41 basis points on October 12, Atkins said.
The credit derivatives market is focused on five-year contracts and indexes, and may not be as good as the cash bond market at pricing in risk over varying time periods, some analysts said.
Many credit derivative indexes have been relatively stable in recent weeks.
Dow Jones' most-recent high-grade cds index had a spread of about 49 basis points on Thursday, little changed from 47 basis points on September 20 when it was launched. Dow Jones' high-yield cds index had a spread of about 410 basis points on Thursday, tighter than 434 basis points on October 6.