What goes up comes crashing down: Bonds in the doghouse (Part 3)

While both Treasuries and high yield bonds lose steam, leveraged loans see steady inflows

Leveraged loans (BKLN) have been able to remain relatively steady in the wake of the recent mass outflows from the high yield bond–focused mutual funds. The loan funds joined the increased wave of inflows within fixed income markets and saw a record $1.8 billion inflow two weeks ago.

Last week, despite the reversal of fund flows in the high yield bond market (JNK), loan funds continued chugging along with the over-a-billion weekly inflows that have characterized the loan market.

US Leveraged Loan Flows 2013-08-06Enlarge Graph

Loan fund inflows continue—rain or shine

Last week, loan funds had $1.3 billion in inflows. While this is lower than the $1.8 billion record the prior week, it’s actually quite a home-run compared to the $1 billion inflow of high yield bonds.

The steady inflows every week have totaled over $33 billion year-to-date, dwarfing the over $4 billion in outflows for the high yield bond market (HYG). While loans won’t give a massive return to investors by year end, they have become a safe place to park cash.

It seems that loans are finally starting to lose correlation with bonds, which makes sense in this market environment given their different interest rate payment structures. Since bonds pay fixed interest rates, they’re subject to duration risk, while loans pay a floating interest rate that theoretically should adjust with higher interest rates.

To learn some reasons why leveraged loans had disconnected from their fundamentals, read here.