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Treasury Yields Driving Investors to Loans, Barclays Says

The recent increase in benchmark Treasury yields to the highest level since October is reviving investor appetite for loans, according to Barclays.

“Investor interest in loans is more closely related to Treasury yields as an indicator of overall rate risk in the marketplace, rather than Libor as a contributor to loan coupons,” Barclays analysts led by Bradley Rogoff, head of credit strategy in New York, wrote today in a research note.

Leveraged loans, a type of floating-rate debt tied to the London interbank offered rate, have returned 4.35 percent this year, according to the Standard & Poor’s/LSTA U.S. Leveraged Loan 100 Index. Retail investors renewed their interest in the asset class in recent weeks following a rise in Treasury yields, Barclays said in the report.

“On days when Treasury yields rise, risk assets such as leveraged loans are likely to experience spread compression and positive returns,” the analysts wrote. “Rising Libor rates, on the other hand, do not necessarily signal an increase in investor risk appetite and, thus, do not tend to lead to positive loan returns.”

Three-month Libor, the rate that banks say they pay for three-month loans in dollars, is 0.47 percent today, according to the British Bankers’ Association. That compares with 0.58 percent at the beginning of the year.

U.S. Yields

Yields on 10-year Treasury notes increased six basis points, or 0.06 percentage point, to 2.22 percent at 3:17 p.m. in New York, according to Bloomberg Bond Trader prices. They reached 2.40 percent on March 20, the highest since October.

Loan mutual fund flows have been positive for four straight weeks, the longest winning streak since July, Barclays said in the report. The strongest inflows ever came in the first six months of 2011, when three-month Libor was at record lows, Barclays said.

Loan prices closed at 93.84 cents on the dollar yesterday, the highest level in almost eight months, according to the S&P/LSTA U.S. Leveraged Loan 100 Index. Prices have climbed about three cents this year from 90.75 cents on Dec. 30. Leveraged loans are a type of speculative-grade debt rated below BBB- by S&P and lower than Baa3 by Moody’s Investors Service.

“Time will tell whether the recent spike in retail interest outlasts what is increasingly looking like a very fleeting rise in interest rates,” the Barclays analysts wrote.

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