Oaktree’s Marks Sees End to Junk-Bond Rally With Defaults Rising

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(Bloomberg) — Oaktree Capital Group LLC co-founder Howard Marks, a closely watched investor in high yield debt, says the rally in junk bonds can’t last.

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Current market prices are “roughly sustainable,” he said on Bloomberg TV Wednesday. “They’re not going to keep going up, yields are not going to keep coming down.”

US high yield bonds are off to their strongest start to a year since 2009, with returns of 3.89% so far, as demand bolstered by cash inflows into junk bond funds power new bond sales. Junk bond yields hover near a four-month low.

But the Federal Reserve’s rate-hike regime to stamp out inflation increases the chances for some companies to default, “a complete transformation” from the last decade, where historically low interest rates created an “easy” environment with relatively few defaults and bankruptcies, Marks said.

The corporate default rate for the last decade or so averages about 2%, compared with 4% in decades past. “I think 4% is more normal,” Marks said. “Defaults and bankruptcies should not be that scarce.”

Moody’s Investors Service expects global junk default rate to rise to 5.1% in 2023, as economic growth slows and tougher financing conditions hurt firms’ cash flow. Corporate rating downgrades, led by high-yield issuers, have been on the rise lately as the full impact of policy tightening works its way through corporate earnings and balance sheets.

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