The Blubber

The era of low interest rates is over, heralding a “sea change” in a world where investors would be better off allocating most of their assets to the credit market, according to Oaktree Capital Management co-founder Howard Marks.

The era of low interest rates has come to an end, signaling a "sea change" in the investment landscape where investors would be wise to allocate a significant portion of their assets to the credit market, according to Howard Marks, co-founder of Oaktree Capital Management.

Marks, renowned for his expertise in distressed debt, highlighted that the past 13 years have been challenging for credit investors, including Oaktree, due to reduced potential returns and heightened risks resulting from low rates.

However, recent shifts in benchmark yields on government and corporate debt, reaching multiyear highs, indicate a departure from the era of low rates. The Federal Reserve's signaling of prolonged elevated interest rates to combat inflation has contributed to this transformation. Yields on non-investment-grade corporate bonds have more than doubled since early 2022, approaching 9%.

In a note published on Oaktree's website, Marks stated, "For a number of reasons, ultra-low or declining interest rates are unlikely to be the norm in the decade ahead." He emphasized that if this indeed marks a fundamental change in the investment environment, one should not assume that the strategies effective since 2009 will continue to be so in the years ahead.

While Marks initially wrote the memo exclusively for clients in May, he decided to make it public given the increasing relevance of the discussed theme in recent months. He suggested that if higher rates are a lasting trend, credit instruments should constitute a substantial portion, perhaps the majority, of investment portfolios.

Yields on junk bonds and leveraged loans now offer returns comparable to the average annual return of about 10% in the S&P 500 Index over nearly a century, with private loans providing even higher yields. Marks highlighted that investors today can achieve equity-like returns from credit investments due to changes over the last year and a half.

To underscore his preference for credit over stocks, Marks recounted a meeting in December where he advised a non-profit investment committee to divest from various assets and invest the proceeds in high-yield bonds at 9%, targeting an annual return of about 6%.