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Why leveraged loan inflows continue to support loans, downside limited

US Leveraged Loan Flows 2013-07-5Enlarge GraphLeveraged loan flows have remained positive and strong for months now

Weekly fund flows gauge investor interest in an asset class. They serve as a momentum indicator to confirm trends or spot reversals.

Over the past few weeks, high yield fund flows have seen record outflows, while leveraged loans have continued at a steady pace of approximately a $1 billion in inflow per week. The high yield outflows were the result of the high yield market correction triggered by Bernanke’s post-FOMC (Federal Open Market Committee) comments.

The correction in the bond market overflowed into the leveraged loan market, causing loan prices to drop as well—though to a lesser degree. Read why leveraged loans have followed the trend in high yield bond markets to learn about the key drivers of why leveraged loans were sucked into the high yield turmoil.

Fund flows provide price support for loans

Despite the loan price drop, the decline was far less than the drop in bond prices. Fund flows were partially responsible for the robustness of leveraged loan prices. While high yield funds saw outflows of $12 billion from end of May through June, the leverage loan funds saw inflows to the tune of approximately $5 billion. Last week, leveraged loan funds saw inflows of $992 million, roughly in line with the $1.1 billion seen the week before. This implies that investors continue to keep their faith in leveraged loans—and structurally, this makes sense. As rates continue to increase, the floating interest rate paid by leveraged loans will rise accordingly and boost interest income.

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