Credit investors continued in 1Q15 to push spreads lower against a backdrop of rising interest rate risk and generally weak global economic growth fundamentals, pushing the Fitch Solutions US All-Industry CDS index to a new post-crisis low. Energy company CDS spreads took the hardest hit against a backdrop of falling oil prices.Measured year over year, the CDS index fell by 8.4%, reaching its lowest level since 2Q07.The cost of insuring corporate credit remains well above pre-crisis levels, but the index has now fallen to just over 100bp, breaking through to double-digit levels at times during 1Q15 and down from a peak level of over 600bp during the height of the financial crisis in 4Q08.Investor risk appetite has grown even as the U.S. Federal Reserve (Fed) has moved closer to raising short-term interest rates. Improving labor market conditions have led Fed officials to openly discuss a tightening of policy later in 2015 although weaker macro data, evident in 1Q15, may push the date of the first rate hike out further.The reach for yield continued in 1Q15 while the rapid appreciation of the US dollar cut into export competitiveness and threatened to erode corporate earnings and cash flow. Still, the long-running low interest rate environment has kept corporate default rates at very low levels.Refinancing conditions for US corporates remain very favorable and we believe a continuation of benign credit conditions, possibly supported by a delay in the start of Fed tightening, could drive spreads even lower through 2015.Lower spreads were not seen uniformly across all industries in 1Q15. The cost of insuring credit in sectors independent of energy including healthcare, industrials, and telecoms has continued to fall. And oil and gas spreads have tightened from recent wide levels seen in January (over 170 bps) as West Texas Intermediate crude oil prices have stabilized around $50 per barrel.
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