Why this asset is due for a fresh decade-long boom

If equity investors crave appreciating share prices, then credit investors long for great yield while taking as few risks as possible. 2022 was not one of those years for either asset class. But could 2023 be the start of a fresh bull run for investors who have been left in the doldrums due to central bank policy?

Jeremiah Lane of KKR argues that even though yields have fallen slightly, they remain at very attractive levels.

"We think spreads seem fair - they're not incredibly wide but they're not incredibly tight. They appropriately reflect the fact there is still uncertainty in the economy," Lane tells me.

In the high yield market, the income opportunity is even larger with Lane explaining that the returns are at the high end of trends we've seen in the last ten years.

All this is happening as the question over a US-led global recession remains up in the air and some major money managers continue to hold an underweight call on risk positions. 

In this, the first of a brand new trio of Expert Insights, Lane shares his views on the credit market's early performance so far and where he thinks the multi-year opportunity will come from.

Note: This series of videos was taped on Wednesday February 8th 2023.

EDITED TRANSCRIPT

LW: How have credit markets started 2023?

Lane: I think that the credit markets have started the year strong. When we started the year, we were looking at available yields in the bond market of around 9% and available yields in the loan market around 10%. And they've both come in a bit to start the year, but we still see the market as very attractive. 

When you look at the market based on spread, based on available yields and based on price, we think that spreads seem fair. They're not incredibly wide, but they're not incredibly tight. They appropriately reflect the fact that there's some uncertainty in the economy, but when you look at the available yields and the available prices, they're actually quite attractive. 

And the yields that we can get in the high yield market today are top decile. Over the past 10 years, there have been moments where you could get a bit more yield, but certainly not a lot more.

LW: What effect did rate hikes have on valuations?

Lane: The changes in the Fed last year were massive and they were a persistent headwind for the market. When you go back and look at forecasts that were coming out in January of 2022, most economists were calling for three, maybe four interest rate hikes over the course of 2022. Fast-forward to the end of the year and we had multiple individual meetings where the Fed was raising rates by 75 basis points in that one meeting. 

The market was really off offsides at the start of the year, and there was a really huge adjustment that took place over the course of the year, and that was a very persistent headwind. That was really why we saw the high yield market sell off as substantially as it did. People continuously were playing catch up.

LW: Why will credit have a better year than equities?

Lane: We think that it's a really attractive time to invest in credit. And when we look at the yields that are available in credit versus the yields that have been available for the last 10 years, there's a lot more yield available in credit today than there has been for a long time. And so I just don't think that equity is set up in the same way as credit, where in credit, there's really an outlier opportunity to earn return current income and appreciation in the year or two ahead. I don't think that that same opportunity exists in equities. Equities look richer to us.