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Must-know: How has the debt market performed in the past week?

Part 3
Must-know: How has the debt market performed in the past week? (Part 3 of 6)

Why the S&P 500 Index hits record level of 1,900 as leveraged loans decline

S&P 500 Index

On May 23, the S&P 500 Index closed above 1,900 for the first time in history. It might have been one of the good days for the 500 large U.S. companies like Exxon Mobil Corp (XOM) and Microsoft (MSFT), which both form part of the index. Encouraging housing data and a spike in the share price of the technology giant Hewlett-Packard Co. (HPQ), which has a 1.0546% weighting in the index, helped drive the index to this new record level. However, the leveraged loans market saw its volume fade as further outflows caused the leveraged loans market to move further into negative territory.

Leveraged Loan ETFs performanceEnlarge Graph

Leveraged loans

The week ending May 23, saw withdrawals from the leveraged loans segment of $636 million. Both the mutual funds and the exchange-traded funds (or ETFs) segments met withdrawals of $587 million and $49 million, respectively. Moreover, compared to the withdrawals of $259 million during the week ending May 16, this week indicates a shift in investor preference for high-yield bonds over leveraged loans these days. Given the fact that leveraged loans are tied to the benchmark Treasury rates, which are at an all-time low, investors move to high-yield bonds in search of better returns.

The week did see $10.9 billion worth of issuance in the leveraged loan segment spread across 22 deals compared to $13.2 billion in issuance in the week ending May 16. On a year-to-date basis, the leveraged loans market saw inflows of $5.2 billion, of which $1 billion, or 19% of the sum, is ETF-related. In the same period last year, inflows were $21 billion with 14% tied to ETFs.

Investors’ takeaway

The PowerShares Senior Loan Portfolio Fund (BKLN) is a popular ETF in the leveraged loans category. Through its underlying S&P LSTA U.S. Leveraged Loan 100 Index, the ETF tracks the market-weighted performance of the largest institutional leveraged loans. The Highland iBoxx Senior Loan ETF (SNLN) is another popular ETF of the same category.

While the flows into the leveraged loans segment of the U.S. debt market have not been favorable in the past week, investments continued to flow into the investment-grade segment, which recorded healthy figures during the period. Continue reading the next part of the series to learn more.

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