Leveraged-Loan Funds Record $870 Million of Inflows, BofA Says

Investors poured $870 million this week into funds that purchase bank loans, according to Bank of America Corp. (BAC)

The increase brought deposits this year to about $25 billion, pushing the asset’s gains to more than 32 percent, the Charlotte, North Carolina-based bank said in a report yesterday. Invesco Ltd. (IVZ)’s PowerShares Senior Loan fund, started two years ago as the first loan ETF, reported the creation of 8.1 million shares this week, valued at more than $200 million.

Loan inflows matched the weekly pace seen through this year even as U.S. high-yield funds recorded their second-highest outflow of 2013, Bank of America said. Investors pulled $400 million from high-yield funds, on the back of about $520 million of redemptions from junk-bond exchange-traded funds, according to the report.

Speculative-grade bond yields, which had dipped 54 basis points below those on leveraged loan, have contracted to 25 basis points less than loans this week, according to JPMorgan Chase & Co. (JPM) data compiled by Bloomberg. A basis point is 0.01 percentage point.

The price of leveraged loans was at 98.85 cents on the dollar yesterday, about the highest since July 2007, according to the Standard & Poor’s/LSTA U.S. Leveraged Loan 100 Index. The average yield of 5.53 percent on loans has dropped 3 basis points this week.

Leveraged loans are a form of high-risk debt that carry ratings of less than Baa3 by Moody’s Investors Service and below BBB- at S&P.

The floating-rate debt has gained 3.2 percent this year, S&P/LSTA index data show. Junk bonds have returned 5.3 percent, Bank of America Merrill Lynch Index data show.

Barclays Plc. strategists raised their forecast on junk-bond returns to a range of 6 percent to 8 percent, up from an earlier forecast of 4 percent to 6 percent. The increase was prompted by signs of greater “reach for yield” and estimates that Treasuries will be little changed at year-end, the strategists led by Brad Rogoff and Jeffrey Meli, wrote in the report today.

To contact the reporter on this story: Sridhar Natarajan in New York at snatarajan15@bloomberg.net

To contact the editor responsible for this story: Faris Khan at fkhan33@bloomberg.net

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