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.
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