Oaktree Capital Management co-founder and co-chairman Howard Marks has said that concern about historically narrow spreads in the credit market is “very much overblown”.
The asset management veteran noted that high-yield bond indices have “significantly outperformed” Treasury bonds, even after defaults and credit losses.
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He cited data from Barclays that showed from 1986 to 2024, the 39-year period covered by Oaktree’s record, the annualised return on high-yield bonds was 7.83 per cent, compared to 5.14 per cent on 10-year Treasury bonds.
“The fact that the average high yield bond gave investors 269 bps more return per year than Treasurys tells us the historical spread was considerably more than sufficient to offset credit losses,” Marks said in his latest memo.
“Thus, the historical spread shouldn’t necessarily be the standard for adequacy, and investors might intelligently opt for high yield bonds over Treasurys even at spreads below the historical average.
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“Thus, the key question isn’t whether today’s spread is historically narrow or not. It’s whether today’s spread is sufficient to offset the credit losses that will occur.”
Marks said he believes that spread widening is “a short-term phenomenon”, akin to volatility in stocks.
“The bottom line for me – as I tell anyone who asks – is that you can’t eat spread, or spend spread, or pay pension benefits with spread,” he added. “For those things, you need returns. Spreads have to be assessed to ensure they’ll be adequate to offset credit losses, but in the end, it’s the total return that matters.”
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