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As the bond market is making record outflows, the loan market retains large inflows.
Fund flows offer insight of investors’ changing perception of various asset classes. Weekly fund flows are lagging indicators, but they are a great tool to follow the momentum of asset classes. The fixed income below investment grade classes, namely high yield bonds and leveraged loans, have been behaving in completely opposite ways given their different nature.
The bonds’ Achilles tendon is the fixed coupon, which can fall below market rates when interest rates rise, while the variable rate of loans adjusts with changes in interest rates. For this reason, the high yield market continues to bleed cash, putting strong downward pressure on bond prices. In the meantime, investors are either moving to cash or becoming comfortable in leveraged loans.
Bonds suffer, loans hold
Last week, high yield bonds had a record outflow, which was furthered this week as investors prepared for Bernanke’s statement after the FOMC meeting.
At the same time, leveraged loans continue to get inflows to the tune of $1 billion dollars a week. Last week the total reached $1.4 billion, which was even higher than the $1 billion the week prior.
While 2012 was an outstanding year for both loans and bonds, this year bonds seem to have fallen out of the race. year-to-date outflows for bonds are now over $6 billion, while the leveraged loan market inflows to year-to-date have totaled over $24 billion. The astounding part is that for all of 2012, the leveraged loan inflows barely reached $10 billion.
In the short-term, leveraged loans offer a good place to shelter cash from the interest rate risks in the bond market and the inherent volatility in equity market.
© 2013 Market Realist, Inc.