19 November 2017

Investors Turn To Bank Loan Funds Amid Rising Rates

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Investors are rushing back into bank loan funds for insulation against rising interest rates.

Some $5.6 billion has been pumped into bank loan funds this year, the bulk of that coming in recent weeks, according to data from Bank of America Merrill Lynch. Some $1.4 billion moved into bank loan funds in each of the past two weeks.

Bank loans, sometimes called senior loans or leveraged loans, are a type of corporate debt. Investors tend to view bank loan funds as a lower-risk alternative to high-yield bonds because holders are paid first in the event of a default. Flows into and out of these funds tend to correspond with expectations for rising rates, because the loans generally pay investors more as rates rise.

Money flooded into bank loan funds in 2013 in the months before and after the “taper tantrum” bond selloff. Money poured out quickly thereafter when the Federal Reserve retrenched with a low-for-longer rates view.

Recent flows indicate that investors are bracing for higher rates. Since the election, the yield on the 10-year Treasury note has shot to over 2.6% from near 1.8%. Earlier this month, the Fed raised short-term rates and signaled the potential for three additional increases in 2017.

Excluding bank loan funds and traditional junk bonds, investors have cut back on traditional bond fund holdings in recent weeks. Some $3.2 billion rolled out these bond funds last week following a $6.2 billion withdrawal one week earlier, according to Hans Mikkelsen at Bank of America Merrill Lynch.

In addition, demand for bank loans is evident in the discounts on floating-rate closed-end funds. The gap between the market price and net asset value of the Apollo Senior Floating Rate closed-end fund has slimmed to 5.1% from more than 15% in February, according to Nuveen CEF Connect. The same applies to similar closed-end funds, including the BlackRock Floating Rate Income Strategies Fund and the  Nuveen Floating Rate Income Opportunity Fund.

Click here for the original article in the Wall Street Journal.
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