High yield fund flows weaken, loan flows remain strong through Easter holiday

US Leveraged Capital Market Flows 2013-04-02Enlarge GraphThe flows into high yield bond funds barely remained positive last week as investors continue to pour into loan funds.

Last week saw an inflow of a mere $34 million for the full week into high yield bonds, just a fraction of the $200 million inflow during the prior week. It is important to keep in mind that last week included the Easter holiday, and was thus shortened. On the other hand, leveraged loan inflows remained strong, and posted the fifth consecutive inflow over $1 billion.

Year-to-date inflows for high yield bond funds is just over $500 million. In contrast, the leveraged loan market has seen inflows of more than $13 billion. The investor preference of leveraged loans over bonds is quite evident due to their floating rate nature, and the fact that they do not suffer from interest rate risk.

In addition to bond fund flows, CLOs1 continue to absorb large investor flows. Last week five new CLOs priced ($2.4 billion), bringing 1Q13 total CLO issuance to $26 billion, which is already half the total CLO volume that printed last year.

The threat of rising interest rates, as well as an end to quantitative easing, has investors jumping into floating rate instruments such as leveraged loans. Bonds on the other hand, pay a fixed coupon and hence are subject to duration risk, which means they are sensitive to interest rate movements. When interest rates rise, bond prices fall and erode the portfolio value.

Leveraged loans can be accessed by retail investors through SNLN and BKLN, the only ETFs focused on the asset class. Investors in HYG and JNK, the two largest high yield bond funds face risks as flows continue to remain weak.

  1. Collaterized loan obligations: a securitization structure consisting of a pool of loans for which payments from several business loans varying in size are pooled together, sliced into tranches with different risk profiles and sold to various investors.