The era of low interest rates is over, heralding a “sea change” in a world where investors would be better off allocating most of their assets to the credit market, according to Oaktree Capital Management co-founder Howard Marks.

Marks, who made his name in distressed debt, said the past 13 years has been a “difficult, dreary, low-return period” for credit investors, including Oaktree, because low rates reduced potential returns under heightened risks. 

But those days seem more aligned with a distant past, after benchmark yields on government and corporate debt surged to multiyear highs this month as the Federal Reserve signals the highest interest rates in decades will stay elevated for longer to curb inflation. Yields on non-investment-grade corporate bonds more than doubled since early 2022 to close to 9%.

“For a number of reasons, ultra-low or declining interest rates are unlikely to be the norm in the decade ahead,” Marks wrote in a note published on his company’s website Wednesday. “If this really is a sea change—meaning the investment environment has been fundamentally altered—you shouldn’t assume the investment strategies that have served you best since 2009 will do so in the years ahead.”

Marks said he wrote the memo exclusively for clients in May but decided to make it public as the theme discussed becomes more relevant in recent months. Over the years he’s gained a wide following for his investment memos, which cover the markets, international affairs and other topics. 

If higher rates are here to stay, “credit instruments should probably represent a substantial portion of portfolios ... perhaps the majority,” he wrote. 

Yields on junk bonds and leveraged loans are now comparable to the average annual return of about 10% in the S&P 500 Index over nearly 100 years, and private loans offer even more yield, he of noted.

“Thanks to the changes over the last year and a half, investors today can get equity-like returns from investments in credit,” he wrote. 

To make the point why he favors credit over stocks, he recalled a meeting in December at a non-profit investment committee, which aimed to earn an annual return of about 6%.

“Sell off the big stocks, the small stocks, the value stocks, the growth stocks, the U.S. stocks, and the foreign stocks” he wrote about his comments at the meeting. “Sell the private equity along with the public equity, the real estate, the hedge funds, and the venture capital.  Sell it all and put the proceeds into high yield bonds at 9%.”

While acknowledging that wasn’t a “serious” suggestion, Marks said the comments were meant to highlight that credit markets now offer yields that exceed many investors’ return requirements.  

Marks said borrowing costs may stay permanently higher than previous years, in part because the Fed may have realized that it’s a mistake to stick with “ultra-low” interest rates for too long, a policy that “distorts” behavior of market participants. 

“Will asset ownership be as profitable in the years ahead as in the 2009-21 period?” Marks wrote. “Will leverage add as much to returns if interest rates don’t decline over time or if the cost of borrowing isn’t much below the expected rate of return on the assets purchased?” 

“Whatever the intrinsic merits of asset ownership and levered investment, one would think the benefits will be reduced in the years ahead,” he said.

This article was provided by Bloomberg News.