PodcastsThe Memo by Howard MarksThe Insight: Conversations – Credit Picker’s Market with Wayne Dahl, Robert O’Leary, and Mark Jacobs

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