The concerns of U.S. institutional fixed-income investors have shifted away from weak economic activity and toward the effects of higher interest rates, oil price volatility, weak creditor protections and event risk, according to a new survey from Fitch Ratings.

The survey, conducted in June, revealed a more upbeat outlook for the overall U.S. economy as concern over weak economic activity fell relative to the December survey. Industry level outlooks also registered a modest improvement and just 4% of survey participants placed corporate defaults over the next 12 months at significantly higher than current low levels.

However, anxiety over deteriorating structural protections was evident as investors characterized covenants as increasingly inadequate across both the investment grade and speculative grade corporate sectors, it reports. Shareholder-friendly strategies are also expected to remain a high risk to the U.S. credit markets, as companies use their cash to placate investors rather on capital expenditures or debt reduction.

Fitch notes that investor responses on specific event risks revealed some surprising results. The share of investors placing housing market disruptions as a high risk factor to U.S. credit markets, for example, contracted from 31% to 24%. However, the share of investors placing a hedge fund collapse as a high risk factor moved up to 17% from 12%.

“The results of this recent credit investor survey are interesting in that they point to a relatively improved view of fundamentals but also show that anxiety over structural declines, deal trends, and event risk persists and in some cases has grown,” says Mariarosa Verde, managing director, Fitch Credit Market Research. “Important concerns such as these, especially when expressed by senior money managers, tend to affect credit availability and credit terms.”

In the leveraged loan market, weakening covenant protection was the number-one risk factor cited by respondents. “Aggressive use of proceeds, the number-one risk factor cited in the December 2006 survey, remained a prominent investor concern, coming in at number two in the June survey,” says William May, senior director of Fitch Credit Market Research. “Clearly, the high volume of debt-funded LBO, M&A and other shareholder-friendly transactions, is on investors’ minds.”

With respect to specific sector views, investors were most negative on the consumer cyclical and financial sectors with more than 50% of respondents believing that the two will experience credit deterioration in the next 12 months. With regard to investment areas, investor views of emerging markets continued to improve while concern grew for collateralized debt obligations.

The survey also addressed credit derivative U.S.age. “Twelve percent of respondents considered their firms’ use of derivatives extensive, the highest share recorded since the survey was launched,” said James Batterman, senior director of Fitch Credit Policy. “In addition, participants increasingly reported using credit derivatives to pursue speculative strategies.”

The survey was conducted in June of 2007 and includes responses from 105 senior investors at traditional asset management firms, insurance companies, pension funds, hedge funds and banks. Firm-wide fixed income assets under management ranged from less than US$20 billion to portfolios in excess of US$100 billion.