Must know: What drives continued inflows into leverage loan funds
The trigger could be a low-duration risk compared to high yield bonds
Last week, the leverage loan market (BKLN) had an inflow of $600 million, marking it as the 87th week in a row of steady inflows. This compares to its previous week inflows of $229 million.
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The year-to-date inflow was $4.2 billion; $1.6 billion lower than year-to-date inflow over the same period in 2013. The four-week trailing average slipped to $523 million, from $636 million last week and $804 million two weeks ago.
Unlike the high yield bond market, where investors continually reshape their thoughts about the returns on fixed-rate asset class in relation to the outcome of tapering, the leverage loan market remains the next home for risk-averse investors.
Leverage loans pay floating interest rates and since the interest payment references the LIBOR1 rate, interest rate risk is negligible in leverage loans compared to high yield bonds. Given that loan prices move up with higher interest rates, that is, lower duration risk, investors have fled bonds and continued to favor leveraged loans on the speculation of higher interest rates.
1LIBOR stands for London Interbank Overnight Rate and is the benchmark interest rate for many adjustable rate mortgages, business loans, and financial instruments traded on global financial market. Currently, the three-month LIBOR rate is 0.24%.