Why fund flows remain resilient



Positive macroeconomic data continues to drive speculation that stimulus will reduce

The leveraged loan market continues to follow the fate of the high yield bond market, but with more resilience from the fund flows side.

Volumes remain timid

Last week, issuance volumes were down to $18.4 billion across 28 deals, which was a week-over-week 23% increase in volume. Market conditions remained extremely robust, as investors preferred the loan market versus the bond market. Average new-issue yields tightened almost 15 basis points across ratings.

Most of the new issuance activity was driven by opportunistic refinancing and repricing transactions as issuers seized the robust investor appetite.

Fund flows remain resilient

Despite the drop in loan issuance, investors continue pouring money into the leveraged loan market (BKLN). Last week, inflows totaled $1.45 billion, bringing the year-to-date inflows to $36.7 billion and maintaining a fairly steady pace over the past few weeks.

The reason for the continued flows has been the preference towards low-floating-rate fixed income instruments and aversion to high-duration fixed income instruments such as high yield bonds (HYG) and, to a lesser degree, corporate bonds (BND).

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Investors seeking fixed income sources would be better served investing in leveraged loans than investing in high yield bonds (JNK). Price volatility in the market is lower, and the interest rate risk inherent in bonds due to their fixed coupon and the current market speculation on quantitative easing tapering increases the downside significantly.


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