How will continued investor exits affect senior loan funds?

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Nov. 26 2019, Updated 2:01 p.m. ET

Secondary market activity in leveraged loans mutual funds

Last week marked the fourteenth straight week of outflows from leveraged loan mutual funds. Net outflows from leveraged loan (BKLN) mutual funds in the week ending October 17 came in at $964 million, compared to a net outflow of $825 million in the previous week. This brings the total year-to-date net outflows from leveraged loan mutual funds to ~$8 billion.

Why the trend for investor exits continues

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Leveraged loans pay interest on a floating rate basis. So investor flows are highly sensitive to movements in rates. The Fed’s stress on continued monetary accommodation has meant no immediate prospects for higher rates. Plus, now that the FOMC (Federal Open Market Committee) is raising concerns on the impact of lower global growth, an appreciating dollar, and low inflation, rate increases appear further out. Due to these factors, the trend for investor exits has continued.

The continued easy money policy has been a key factor affecting the returns on the asset class. Monthly returns on the S&P / LSTA U.S. Leveraged Loan 100 Index came in at ~-1.0% in September, 2014. The index decreased by as much as 0.5% in the week ending October 17.

Retail investors have also been fearful due to increased risk perceptions amid higher market volatility (VXX) since late July and have pulled out funds. The Argentine and Portuguese debt crises, which came to a head in late July and early August, caused considerable market corrections in leveraged loans (BKLN) and high-yield debt (HYG) (JNK) markets. Read about it in High-yield debt funds see record outflows and bonds rally.

Primary market implications

The trend for continuous retail outflows also has other implications for the primary market. Read about these and other secondary market trends in the next section.

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