OREANDA-NEWS. The U.S. Fitch Fundamentals Index (FFI) slid to -2 during 3Q15, its lowest level since 4Q09. Concerns over global growth, a potential U.S. rate hike and low commodity prices took their toll on investors' risk appetite, pushing the FFI's CDS Outlook score into negative territory.

'Despite stability in the index's mortgage and banking subcomponents, the negative turn in the aggregate FFI indicates that credit conditions, which are important for sustained economic growth, may become less favorable going forward,' said Bill Warlick, Senior Director, Macro Credit Research.

The benign credit environment, characterized by persistently low interest rates and tepid economic growth, has kept the FFI at neutral for several years. However, risk aversion spiked in August given market turmoil surrounding China's currency devaluation, uncertainty over the direction of U.S. monetary policy, and increasing high yield defaults. Average recoveries on defaulted bonds fell sharply, further elevating concerns over credit quality.

Aggregate CDS spreads widened 8% year-over-year in 3Q15, with spreads widening most for energy and natural resources companies. Oil and gas companies saw spreads widen 61% quarter over quarter, while basic materials spreads were wider by 41% in the same period. Telecom industry CDS spreads were wider by 37%.

'The capital markets remained generally accommodating to U.S. corporates earlier this year as investors continued their search for yield,' said Warlick. 'However, the significant shift in risk sentiment in 3Q put the brakes on high-yield issuance in September, and could challenge refinancing plans and raise borrowing costs across the board if it continues.'