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Loan funds attract new money as interest rates rise

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State Street Corp Updates

Investors have invested more money in bank loan funds over the past week than at any time in more than a year as rising interest rates have increased the attractiveness of fixed income assets. variable compared to traditional bonds.

Loan funds posted net inflows of $ 925 million in the week to Wednesday, the largest in 55 weeks, according to EPFR Global.

The flows came the same week the benchmark 10-year Treasury yield hit a seven-year high above 3%, and after short-term rates rose sharply this year, in line with rate hike expectations. from the Federal Reserve.

Loans generally pay a variable rate, which increases with the underlying rates. In contrast, rising rates erode the value of fixed-rate securities.

Funds that invest in high yield bonds, which pay a fixed rate, suffered outflows of $ 1.3 billion last week, the EPFR said.

“We’ve certainly seen a lot of interest,” said Matthew Bartolini, head of SPDR Americas research at State Street Global Advisors, citing “the rising rate environment, particularly on the short end of the curve where the [Federal Reserve] has a lot of influence ”.

The US central bank has been raising short-term rates since December 2015, but the pace has picked up over the past year and a half, pushing short-term rates higher. The US three-month Libor rose to 2.33% from 1.45% at the same date last year. Interest on bank loans is usually tied to Libor.

Bank loans tend to take priority over other forms of borrowing, which puts them at the top of the pecking order for payments in the event of a business failure. But these investments are not without risk, especially in times of high demand.

“We have been optimistic, but we are starting to get more cautious,” said Max Gokhman, head of asset allocation at Pacific Life Fund Advisors. “There were a lot of new issues in the first quarter. The problem when borrowers take on more variable rate debt as a percentage of their total liabilities is that it accelerates their inability to pay that variable rate coupon.

The value of the US leveraged loan market broke the $ 1 billion mark for the first time in recent weeks, raising concerns in some quarters. Lending standards can deteriorate when demand is strong, and so-called light covenants, which offer less protection to investors, accounted for 80% of the total issued in April, according to S&P Global.

Elsewhere in EPFR data, which covers the week ended Wednesday, funds investing in Chinese stocks have attracted $ 545 million in new cash, eight straight weeks of net inflows. This is the longest streak since the first quarter of 2013.

Funds that buy stocks in the Greater China region, which includes Hong Kong and Taiwan as well as the mainland, have attracted more than $ 300 million, the most since June 2015.

Investors said enthusiasm for the Chinese economy and the inclusion of domestic Chinese equities, known as A-shares, in the MSCI Emerging Markets benchmark next month outweighed concerns about trade tensions with the United States.

US equity funds also had a good week, with net inflows of $ 8.8 billion, a nine-week high, while emerging market bond funds remained under pressure. Net repurchases of the latter amounted to $ 1.27 billion.

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