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The Insight: Conversations – Credit Picker’s Market with Wayne Dahl, Robert O’Leary, and Mark Jacobs

The Memo by Howard Marks

Wed Oct 04 2023



Volatile Interest Rate Environment:

  • Market expected interest rates to end 2023 at about 4.5% but dropped to below 4% after Silicon Valley Bank challenges.
  • Currently, interest rates are at a level of about 5.5%.
  • The market has come around to the idea that interest rates will be higher for longer, leading to a slow shift higher throughout the year.

Performance of High-Yield Bonds:

  • High-yield bonds have performed well this year and are positive on the year.
  • They have outperformed their coupon due to the ability to offset some of the move higher in interest rates with credit risk.
  • Credit spreads have compressed about 90 basis points while five-year interest rates are up roughly 60 basis points, contributing to their extra performance.

Reasons for Spread Widening:

  • The economy has performed better than anticipated, leading to increased confidence in credit markets.
  • Some investors focused more on yield rather than spreads, resulting in altered spread landscapes.
  • Focus on good credit selection is important as companies with too much leverage or declining earnings may face increased stress if interest rates stay higher-for-longer.

Opportunistic Credit Landscape:

  • Opportunistic credit arises when a company is unable to access syndicated financing and needs alternative financing options.
  • Liquidity and maturities are catalysts driving urgency among borrowers.
  • Greater supply and demand divergence is expected in middle parts of the country compared to coastal markets.

Private Credit Opportunities:

  • Large rescue financings are being privately negotiated, providing opportunities for private credit investments.
  • Liquid credit investing requires careful consideration of deficient documents and defending oneself against actions from other parties.
  • Availability of private opportunities in opportunistic credit is currently high.

Real Estate Opportunities:

  • Industrial sector has been outperforming due to strong supply-demand fundamentals driven by e-commerce sales growth and global supply chain retooling.
  • Divergence in industrial sector performance is expected between coastal and non-coastal markets.
  • Core assets in core markets are on sale, offering attractive buying opportunities.

Misconceptions about Real Estate Market:

  • Not all commercial real estate is distressed or falling in value; high-quality assets in strong markets with good supply-demand fundamentals still perform well.
  • Valuations for these assets have adjusted and present compelling value propositions.

Unaddressed Trend in Real Estate:

  • The antiquated process of measuring shelter costs that flow into the calculation of CPI leads to miscalculations and lag effects.
  • Shelter costs make up a significant portion of core CPI but aren't reflecting current moderation trends.

Volatility and Opportunities in Real Estate:

  • Expect higher volatility and constant divergence across sectors and product types.
  • Goal is to avoid losers by taking advantage of limited liquidity and negative perceptions to buy discounted high-quality assets with downside protection.