The Next Stage of the Credit Cycle with Oaktree’s Poli
Sep 19, 2024
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Danielle Poli, co-portfolio manager of Oaktree's Diversified Income Fund, shares her insights on the shifting credit landscape following recent Federal Reserve rate cuts. She discusses the surprising resilience of corporate credit despite high inflation and rising interest rates. Danielle delves into the explosive growth of the private credit market and its impact on traditional financing. With a focus on navigating market volatility, she highlights the importance of liquidity, adaptive strategies, and evolving trends in the BBB bond market.
The Federal Reserve's recent rate cuts signal potential opportunities in the credit cycle, prompting investors to reassess market assumptions.
Despite some segments facing credit quality degradation, the overall high yield market shows improved quality with a higher percentage of double B rated bonds.
Deep dives
The New Credit Cycle
An ongoing shift in the credit cycle is becoming evident, especially following the Federal Reserve's recent rate cuts. These adjustments mark a pivotal moment, suggesting potential opportunities and risks for investors. Despite expectations of increased defaults tied to rising interest rates, actual outcomes have been surprisingly stable with credit spreads remaining low. This scenario encourages a reassessment of market assumptions and investor strategies as the landscape evolves.
Expanding Credit Options for Businesses
Companies now have a wider array of credit options than ever before, allowing for flexibility in securing funding. From syndicated bonds to private loans, businesses can leverage various financial instruments based on their unique needs. This boom in credit varieties can provide companies with tailored solutions but also introduces complexities for investors trying to navigate the landscape. The diversity in funding mechanisms implies that the traditional views on credit exposure need to adapt accordingly.
Navigating Investment Quality in a High Yield Environment
Despite a robust high yield environment, the conversation around asset quality remains critical. Factors such as the high percentage of double B rated bonds in the high yield market suggest improved quality compared to past cycles. While some market segments, particularly leveraged loans, face credit quality degradation, the overall metrics indicate a healthier market landscape. Understanding nuanced trends in ratings and borrower profiles is essential for making informed investment decisions.
The Influence of Macroeconomic Policies
Macroeconomic factors play a vital role in shaping credit markets, as evidenced by recent fiscal policies and the Fed's actions. The swift recovery from potential recession scenarios has led to increased corporate refinancing efforts, improving overall credit stability. This dynamic influences investor perceptions, with some questioning the inevitability of future recessions given recent outcomes. As credit environments continue to evolve, a keen focus on these macro trends will remain essential for optimizing investment strategies.
This week, the Fed cut benchmark rates by 50 basis points. Lower financing costs should be a relief for companies that need to borrow in the form of bonds or loans. But, the weird thing about the previous few years of high rates and high inflation is how much corporate credit has defied expectations. While defaults increased slightly, there wasn’t a huge wave of bankruptcies. And most companies haven’t really had trouble finding financing, with a smorgasbord of options available to them — including from the booming private credit market. So what happens now that the Fed is lowering rates? In this episode, we speak with Danielle Poli, co-portfolio manager of Oaktree’s Diversified Income Fund and a founding member of the firm’s investment committee, about how she sees the next leg of the credit cycle unfolding, and how she decides between a multitude of potential investments in the space.