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David Rosenberg is the head of liquid performing credit at Oaktree, where he serves as a co-portfolio manager for the firm’s high yield bond, investment grade, and global credit strategies. He has more than 20 years of experience working in leveraged finance at the firm.

Here, Rosenberg discusses why he feels we’re in a “credit picker’s market,” the long-forecasted recession that has yet to come, and the challenges with investing in AI debt.

1. As we close out 2025, what surprised you most about the credit markets, either pleasantly or in a way that kept you up at night?

This was a strong year for credit, with the market proving resilient — despite macro noise, higher-for-longer rates, and geopolitical uncertainty. Rather than slowing, demand accelerated and spreads remained attractive. While repricings played a role, ‘new money’ volumes pushed higher from the 2023 lows. This reinforced how credit has become a core allocation for investors.

Also, in a year when private and liquid credit were often framed as rivals, we saw the two converge. Direct lending and broadly syndicated loans increasingly served as complements, creating a healthier, more symbiotic ecosystem for both issuers and investors.

2. You’ve described this as a credit picker’s market. What traits are you looking for in companies that justify that view?

When I describe this as a credit picker’s market, what I mean is that the dispersion beneath the surface is significant, and fundamentals matter more now than they have at any point in recent years.

We’re looking for companies with real, durable business models — businesses that demonstrate normalized growth prospects, consistent cash-flow conversion, and tangible capital investment. Many businesses are facing pressure as customers and counterparties take a wait-and-see approach in response to tariff uncertainty. That dynamic is likely to weigh on sales over the next few quarters.

As credit investors, we’re focused on companies that can navigate those realities without stretching their balance sheets or overestimating their growth trajectories.

3. Spreads stayed stubbornly tight all year despite mixed macro signals. Do you see that holding in 2026, or are we due for a reset?

For a decade, yields were so low that investors needed spread compression to achieve total return — so the playbook was simple: when spreads were wide, you bought; when they were tight, you sold. But today, with yields at ~7–8%, the calculus is different.

So today, and likely in 2026, the question is less, ‘Are spreads too tight?’ and more, ‘Do you need a total-return kicker when income is already doing the heavy lifting?’ For many allocators, the answer is no.

That supports tighter spreads for longer — though it doesn’t eliminate volatility. Spreads are justified by the high quality of the market, so it will require an event to push widening from here.

4. Borrowers have spent years shoring up liquidity and balance sheets in preparation for a slowdown that has yet to arrive. How durable do you think that preparation really is if conditions cool off next year?

We’re seeing evidence that the system is beginning to unstick. In broadly syndicated loans, new issue, mid-single-B spreads have tightened from roughly 375bps a year ago to under 325bps today. Spread compression — despite muted volume — has helped the LBO math work again, and deal flow is improving.

The liquidity companies built up during the past few years has been meaningful, but the real durability test will come as new issuance accelerates and refinancing windows open more widely.

5. When spreads are tight but the data is softening, where do you still feel compensated for taking risk?

While spreads are tight, they’re reasonable relative to the risk today. In High Yield, for example, this is the highest quality market, as measured by credit rating, we have seen in a decade. We’re finding more relative value in Europe, where technicals are supportive and fundamentals are stabilizing. CLOs — particularly BB tranches — stand out with yields near 10% for risk that we find compelling.

RMBS also remains an attractive diversifier. The structural lack of housing supply, driven in part by the gap between legacy 3% mortgages and today’s 6% mortgage rates, has created real price stability. That translates into strong loan-to-value dynamics and yields comparable to high yield but with a differentiated risk profile.

6. New-issue markets woke up in 2025, and expectations call for a further pickup next year, especially around M&A. How are you thinking about the quality of deal flow likely to hit in early 2026?

We remain firmly in protect-the-coupon mode and expect that posture to continue into 2026. With yields well over 7%, investors don’t need to be heroic — they simply need to earn the income and avoid giving it back through defaults. Our focus is on credits with reliable payment profiles while we wait for the next period of volatility to unlock more attractive opportunities.

We are not chasing risk or stretching for yield; instead, we are prioritizing durability and downside protection as new issuance accelerates. There will be some very large LBOs coming to market at the start of next year, and the size of these structures should create some good opportunities to invest.

7. AI has become part of the underwriting conversation for nearly every credit. How do you assess which companies are genuinely positioned to benefit versus those that are threatened by the development?

As Howard Marks noted in his recent memo on AI, the challenge is finding good opportunities to fund AI with debt.

World-changing technologies like AI are typically funded with equity or cash flow of a company given the high risk of success. We will be focusing more on companies where there is a cash flow stream we can underwrite and avoiding those where all the profitability is yet to come.

Plus, in technology, it is difficult to identify the clear winners as they may not even exist yet given the high obsolescence of these products.

8. Lower-rated borrowers have enjoyed unusually strong access to capital. Do you expect that to continue in 2026, or is this where we finally see real separation?

We are already seeing clear signs of market bifurcation. BB-rated credits are trading in the low-200s, single-Bs in the low-300s, while CCCs sit closer to 1,000 bps, with very little dispersion in between.

In this kind of environment, the temptation to move down the quality spectrum to enhance portfolio yield can be strong. But this is precisely when discipline becomes most important. As we look ahead to 2026, we expect credit selection to play an increasingly decisive role, and for weaker borrowers to begin feeling the cumulative effects of the last rate cycle.

9. Everyone loves to make New Year’s Resolutions. What’s your credit market resolution for 2026?

If I had a New Year’s resolution for the credit markets in 2026, it would be to stay disciplined and truly appreciate the scale of the capex cycle we’re entering.

I think we’re shifting into a period where growth will increasingly be driven by capex-heavy sectors. AI data centers are a big part of that, but they’re not alone: we’re seeing rising defense spending, reshoring of supply chains, major investments tied to the energy transition, and massive fiber and telecom buildouts.

Collectively, these themes represent trillions of dollars of capital investment that will need to be financed. For firms like Oaktree, as we stay disciplined, this can be a multi-year opportunity.

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