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Investors favor leveraged loans, but equities may come back soon

Senior Credit Analyst

Dose of rates realism, September 2–6 (Part 9 of 9)

(Continued from Part 8)

Fund flows weak, but resilient

Fund flows have started to show investors favoring loans over bonds for many weeks now. Last week saw an inflow of $728 million, which is much smaller than the $1.2 billion the previous week.

While this was the lowest volume in eight weeks, as well as the first below $1 billion over the same period, the inflows remains sizable versus the neutral to negative flows in the high yield (JNK) and investment grade-bond (BND) markets.

Investor focus may start to shift away from fixed income

This points to investor’s preference for floating instruments given the high interest risk embedded in bonds, which pay fixed coupons and drop in price when rates increase. The upcoming FOMC meeting will be key and will likely move fixed income markets. Leveraged loans offer exposure to the fixed income markets but without the duration (interest rate sensitivity) risk.

However, the focus away from fixed income may start to accelerate in coming months as investors focus back on equities if the economy continues to accelerate. Last week already saw a strong inflow into European equities, which will compete for investors’ capital.

Nonetheless, as most portfolios have a fixed income component, it would be advisable to be invested in loans in coming months to benefit from interest rates.

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