Record amounts of money are being poured into US loan mutual funds as retail investors turn more bullish on the economy and look for high yielding assets that also provide protection from interest rate rises.
More than $5bn moved from mainly low-yielding money market funds into loan funds in February – more than three times the $1.5bn inflow seen in the best month of last year, according to EPFR.
“People are looking around and asking themselves what they can buy with a respectable yield and no duration risk, and finding the list not that long,” said Scott Page, loan portfolio manager at Eaton Vance Management in Boston.
Leveraged loans carry a similar yield to “junk” bonds at about 5 per cent but are floating rate rather than fixed rate. This means they offer income that rises when interest rates go up, providing protection should central banks become less accommodating.
Demand for the asset class has also increased as investors search for high yielding assets.
There have been 36 straight weeks of inflows into loan funds starting late in the summer, when risk appetite began to improve around the world. More than $16bn flowed into loan funds over that period, according to EPFR.
The sharp spike in inflows also comes amid talk that high-yield bonds – which to some extent is a rival asset class – have become overvalued after a strong rally that has seen yields fall below 6 per cent.
Analysts say some investors have been choosing loans over high-yield bonds as a result. The yields on high-yield bonds have risen slightly from record lows and the asset class has seen several weeks of retail outflows.
“High yield bonds are very overstretched,” said Alan Capper, head of credit strategy at Lloyds Bank Commercial Banking. “At the very least I struggle to see how prices can improve from here,” he added.
Earlier in the year news broke that some of the world’s most sophisticated credit investors have been ramping up their bets against junk bonds. The list of junk-bond bears have included Apollo Global Management, Centerbridge Partners and Oaktree Capital.