Episode summary
Rates
The Memo by Howard Marks
· · Hosts: Kelly Evans · Guests: Wayne Dahl
Summary
Wayne Dahl argues that the sharp rise in rates is being driven less by policy moves than by a repricing of inflation, growth, and term premium. He says expectations for the Fed funds rate shifted from falling to as low as 3% by the end of 2027 to near 5%, with energy prices doing much of the work on the inflation side while stronger growth and capex keep pressure on longer-dated yields.
He draws a distinction between the front end and the long end of the curve. In his view, higher Treasury yields at 10 years and 30 years have been driven mainly by real yields, not inflation expectations, because investors are demanding more compensation for growth, deficits, and reduced foreign demand. He also notes that AI-related capex, especially from large investment-grade hyperscalers, is competing directly with government bonds for capital.
For credit investors, Dahl says the environment is still attractive because duration is short and yields are higher, even if spreads are not especially wide. He sees value in high yield, floating-rate credit, and selected structured credit like non-agency residential mortgage-backed securities and CLOs, while warning that higher rates are starting to strain borrowers and consumers through weaker real wages, slower housing, and rising interest burdens.
Key takeaways
- Wayne Dahl says policy-rate expectations have shifted sharply higher, from as low as 3% for end-2027 to near 5%.
- He argues the long end of the curve is being driven more by real yields, growth, deficits, and capital competition than by inflation alone.
- Dahl says AI capex is absorbing capital that might otherwise have gone into long-dated government bonds, especially through high-grade issuers.
- He thinks short-duration credit still offers attractive income, with many high-yield bonds yielding north of 8% and quality remaining solid.
- Dahl warns that higher rates are increasing stress for borrowers and consumers even as existing consumer debt is partly insulated by fixed-rate structures.
Notable quotes
“there's definitely been a shift in inflation expectations since the beginning of the year”
“expectations are up near 5% for the end of 2027”
“that movement higher in rates has all been attributed to movements in real yields”
“a lot of that is from the AI capex story”
“we have definitely seen a flattening in the yield curve”
How the episode opens
Hello and welcome to the insight by Oak Tree Capital. I'm Harry Whitelaw. In September, we saw the first Fed rate hike in 3 years, defying initial expectations for 2026 to be a year of declining interest rates.
Government bond yields have been volatile with a rise not just in Treasury yields but also the likes of UK guilts, French oats, and Japanese government bonds. Today we'll look at what's going on with interest rates and what it all means for credit. To help with that, joining today we have Wayne Dahl, co-portfolio manager for Oak Tree's global credit strategy.
Wayne, great to have you here.
It's great to be here. Thank you, Harry. So Wayne, why don't we start by looking purely at policy rates before we get on to the movement in bond yields.
We've seen unanticipated central bank hiking this year. What's really driven that? Well, there's definitely been a shift in inflation expectations since the beginning of the year, and that has definitely moved those expectations for rates, as you said, from falling to as low as 3% by the end of 2027 to now expectations are up near 5% for the end of 2027.
So, yes, definitely a significant shift higher in those policy rate expectations. And is it just energy prices or is this a broader inflation story? Inflation overall is definitely higher, but gas and energy are certainly the largest contributors to that number.
If we look at the latest PCE data which came out for August, gas and energy prices are up just under 30% year-over-year. Whereas most of the other broad categories in the PCE data, headline, core, goods, services are all up between three and three and a half. So not a great story overall, but energy is certainly that large contributor.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- fed rates
- credit markets
- opportunity set
- interest rate outlook
- finding value
Companies and tickers mentioned
- Oaktree Capital Group
Watch the episode
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
The Memo by Howard Marks, this episode and its artwork belong to Oaktree Capital Management. Octagon is not affiliated with the show; this page is an independent summary.
