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In a timely memo posted last week titled " Gimme Credit", Howard Marks, co-chairman of Oaktree, explains why he believes credit investments remain attractive despite historically narrow yield spreads. He focuses primarily on high-yield bonds but notes his observations apply to credit investments broadly.

Credit markets have performed exceptionally well recently, with the ICE BofA US High Yield Bond Index returning 8.2% in 2024 and 13.5% in 2023. These strong returns stemmed from a combination of high starting yields and price appreciation as investors recognized value in credit and anticipated interest rate cuts.

Today's narrow credit spreads

The central question Marks addresses is whether today's narrow credit spreads* - roughly 290 basis points between high-yield bonds and comparable Treasuries -are adequate compensation for the risk. While this spread is historically tight, Marks argues, several factors suggest it may still be sufficient:

1. Historical spreads have proven more than adequate. From 1986-2024, high-yield bonds outperformed 10-year Treasuries by 269 basis points annually, even after accounting for defaults. 2. The default rate has averaged 3.5% historically, with investors typically losing about two-thirds of their investment in defaults. This translates to annual credit losses of about 230 basis points - less than the current 290 basis po......................

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