Oaktree Capital Administration co-founder and co-chairman Howard Marks has stated that concern about traditionally slender spreads within the credit score market is “very a lot overblown”.
The asset administration veteran famous that high-yield bond indices have “considerably outperformed” Treasury bonds, even after defaults and credit score losses.
Learn extra: Oaktree’s Howard Marks makes case for elevated credit score allocations
He cited information from Barclays that confirmed from 1986 to 2024, the 39-year interval lined by Oaktree’s file, the annualised return on high-yield bonds was 7.83 per cent, in comparison with 5.14 per cent on 10-year Treasury bonds.
“The truth that the typical excessive yield bond gave buyers 269 bps extra return per yr than Treasurys tells us the historic unfold was significantly greater than ample to offset credit score losses,” Marks stated in his newest memo.
“Thus, the historic unfold shouldn’t essentially be the usual for adequacy, and buyers would possibly intelligently go for excessive yield bonds over Treasurys even at spreads beneath the historic common.
Learn extra: Howard Marks blames market volatility on emotional investing
“Thus, the important thing query isn’t whether or not at this time’s unfold is traditionally slender or not. It’s whether or not at this time’s unfold is ample to offset the credit score losses that may happen.”
Marks stated he believes that unfold widening is “a short-term phenomenon”, akin to volatility in shares.
“The underside line for me – as I inform anybody who asks – is that you could’t eat unfold, or spend unfold, or pay pension advantages with unfold,” he added. “For these issues, you want returns. Spreads need to be assessed to make sure they’ll be satisfactory to offset credit score losses, however ultimately, it’s the full return that issues.”
Learn extra: Oaktree bullish on aviation finance inside ABF market
