By Frances Yue
Investors can expect equity-like returns from the corporate bond market for much less risk than stocks for the foreseeable future as interest rates in the U.S. stay elevated, said veteran investor Howard Marks, co-founder and co-chair of Oaktree Capital Management.
The macroeconomic environment is shifting where it was from 2009 to 2021, when interest rates were either ultralow or declining, into an era when interest rates are normal, Marks said in a Wednesday webcast with David Rosenberg, former chief North American economist at Merrill Lynch and now president of Rosenberg Research & Associates.
Since March 2022, the Federal Reserve has raised its key policy rate 11 times, from close to zero to a range of 5.25% to 5.5%, the highest level in 22 years, to combat inflation.
Going forward, the fed-funds rates are likely to be lower than where they are today, but they’re unlikely to be as low as they were from 2009 to 2021, said Marks. The fed-funds rates are likely to stay in the range of 2% to 4% in the coming years, instead of 0% to 2%, Marks said.
Marks said he is confident that interest rates will not go down 2,000 basis points from here as they did in the 40 years after 1981, when the Fed, led by Paul Volcker, raised the fed-funds rate to a peak of 20%.
Read: End of 40-year era of falling interest rates is crucial ‘sea change’ for investors: Howard Marks
From 2009 to 2021, the ultralow-interest-rate environment was ideal for asset owners, borrowers and leveraged buyers. However, “strategies that were the best performers in that environment should not be counted on to be the best performers in the new environment,” Marks said.
“Today the returns on fixed income or debt or credit, whatever you want to call it, are much higher than they have been for at least 20 years,” he said.
“In fact, today you can get equity-type returns from credit, while the S&P averaged 10% a year for the last 100 years. You can get high single digits or low double digits from a diversified, well-selected credit portfolio, and that’s the big change,” he said.
The yield on the two-year Treasury bill BX:TMUBMUSD02Y on Wednesday stood above 5%, while the 10-year Treasury note BX:TMUBMUSD10Y was above 4% at close to a 16-year high, according to MarketWatch data.
Marks also highlighted the importance of cash. “My experience has told me that sometimes cash is king when nobody else has any and assets are available cheap,” he said. “I think we’re heading into a period when cash is king now, and we’re very excited about the prospects.”
Read: Howard Marks says he’s made five great market calls in his career. Here’s how he did it
-Frances Yue
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09-09-23 1432ET
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