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Must-know update: Why did the leveraged loan fund flow increase?

Chanderlekha Nayar

Weekly performance review: High yield bonds and leveraged loans (Part 7 of 7)

(Continued from Part 6)

What the investors think

It is hard to gauge what investors are thinking about the leveraged loan market. Just about two weeks ago, the market frenzied for these floating interest rate loans due to increase in the Treasury rates. It was evident that the substantial money that came from the foreign land (EEM) preferred higher return from the riskier assets such as high yield bonds (JNK). (Continue reading about the leveraged loans and the high yield bonds (HYG) in An investor’s guide to the US leveraged financial market.)

Last week, the fund flows trend reversed, but the market rates also reversed. Treasury rates were down, but leveraged loans (BKLN) booked 60% higher fund inflows into the accounts. The assets posted a fund inflow of $574 million, 215 million higher than the previous week’s fund flows of $359 million.

The year-to-date inflow was $6.2 billion; $4.3 billion lower than the year-to-date inflows over the same period in 2013. The four-week trailing average slipped to $504 million, from $511 million in the previous week, but higher than $478 million two weeks ago.

Major ETFs in the leveraged loan space failed to receive the investor’s attention. The Power Shares Exchange-Traded Fund Trust II (BKLN) ETF, which tracks leveraged loan market, posted a net outflow of $16.1 million last week—quite opposite to the overall sentiments in the leveraged loan market. The one-month outflow for the ETF stood at $8.7 million. The ETF price was down by 0.36%, in line with the decline in the U.S. Treasury rates.

Another major leveraged loan ETF, Pyxis/iBoxx Senior Loan ETF (SNLN), also posted a weekly fund outflow of $1.1million. The one-month outflow was $4.89 million. The ETF comprises about 100 of the most liquid, tradable leveraged loans, as identified by Markit’s Loans Liquidity service and tracks the performance of MarkitiBoxx USD Liquid Leveraged Loan Index. The top holdings in the ETF include the Caesars Entertainment (CZR) and the Clear Channel Communications (CCMO). Clear Channel Communications (CCMO) is an American mass media company, while Caesars Entertainment Corporation (CZR) is an American public gaming corporation.

Leveraged loan outlook

There has been upside in the leveraged loan demand since the beginning of the year 2014. Investors with long-term investment horizon have favored the leveraged loan market on the expectation of interest rate spike by the Fed. The Fed is scheduled for tapering of another $10 billion assets. Under the assumption that tapering is a reflection of growth in the economy, interest rates are expected to rise. If interest rates will rise, then the bond prices will fall; however, leveraged loan investors can enjoy a higher yield as floating interest rates offered by this asset class adjust with the change in the market rates.

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