Weekly inflows are a good gauge of demand in the leveraged loan market. Strong inflows show a healthy market since they provide the basic backdrop for new issuance volume. The new volume, in turn, causes a repricing of all similar loans, since the sub-investment grade debt markets in the U.S. are driven by relative value and not as much by a spread to government benchmarks (e.g. Treasuries), as is the case in Europe and U.S. investment grade markets.
Year-to-date inflows in the leveraged loan market have surpassed those of the high yield bond market by a factor of 22x. Given the uncertainty in the timing of an interest rate hike by the Federal Reserve, investors have favored loans. Unlike the market risk inherent in the fixed coupon of bonds, the variable interest rate of loans has negligible market risk, so prices are not affected significantly when interest rates change.
Indeed, leveraged loan prices are prone to increases when rates increase, since the interest rate, which is based on a floating benchmark, increases with interest rates.
Inflows remain high, but may be showing slight weakness
Leverage loan inflows have remain positive year-to-date. After a slow January, inflows averaged above $1 billion since February. Over April and May though, the inflows have slowed down, posting values below $1 billion more frequently.
Inflows for last week were $871 million, down from the $1 billion inflow the prior week. Inflows have oscillated between $800 million and $1.1 billion over the past two months.
The issuance side is showing weakness (see High yield issuance continues to increase, spike likely unsustainable), which, along with the reduced inflows, may be a sign of weakness.
If the equities market outperform during the summer months, then the interest in leveraged loans may dissipate significantly. On the other hand, if equities remain weak, then leveraged loans will be a good place to park cash to avoid susceptibility to unexpected interest rate hikes.
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