Gimme Credit

Marks contended that credit instruments, particularly high-yield bonds, present a more attractive opportunity than equities today despite yield spreads near historic lows. The concern about narrow spreads—currently around 290 basis points versus a historical normal range of 400–600 bps—is overblown, he argued, because what matters is total return, not spread width alone. High-yield bonds purchased at the worst possible moment (June 2007, when spreads hit an all-time low of 241 bps) still delivered 7.35% annualized returns over the following decade, outperforming Treasurys by roughly 3 percentage points per year, thanks to the contractual nature of coupon payments and the power of compounding. Marks noted that the high-yield bond universe's average default rate over 39 years (1986–2024) was 3.5%, with defaulting bonds costing investors about two-thirds of their stake, implying annual credit losses of roughly 230 basis points. Today's 290 bps spread would have been sufficient to offset that historical experience. He also highlighted that the credit quality of the high-yield universe has improved materially: BB-rated bonds now comprise 52.6% of the index versus 32.7% in 1999, meaning investors receive more compensation per unit of risk than in prior tight-spread environments. On private credit, Marks cautioned that the sector has never experienced a true downturn since its emergence post-2008, raising questions about whether some managers relaxed credit standards to deploy capital rapidly. He saw no systemic risk but flagged uncertainty around mark-to-market practices and forbearance behavior in a stressed environment. Comparing credit to equities, Marks noted that the S&P 500's current valuation implies ten-year returns in the low single digits, while the 10-year Treasury yield now exceeds the S&P's earnings yield—a condition unseen since the dot-com aftermath. High-yield bonds offered contractual returns well above equity expectations with far less variability.