Investors poured $579 million into U.S. loan funds this week, the biggest weekly inflow since March 2011, according to a report from Bank of America Corp.
Floating-rate bank debt has attracted as much as $7.7 billion this year, or 14.5 percent of assets, according to the Charlotte, North Carolina-based bank. The funds have seen money coming in for 21 straight weeks and more than $7.7 billion for the year, while those that purchase high-yield bonds have reported a second week of outflows, Bank of America said.
Investors are turning to loans as prices rally, with the JPMorgan Leveraged Loan Index rising 0.1 to 186.78 yesterday, the highest on record. Money managers are seeking higher yield as sales of speculative-grade bond and loans exceeded $269 billion this year, according to a JPMorgan Chase & Co. report last month.
“This volume of inflows is the beginning of a long-term trend and not a one-time fluke,” Oleg Melentyev, a New York-based credit strategist at Bank of America, said in a telephone interview. “Expectations for higher rates remains in the market. Also, valuations have been in favor of loans over bonds for quite some time now.”
An increase in interest rates will lead to higher returns from floating-rate debt, which is usually tied to a benchmark rate. The Federal Open Market Committee said on Oct. 24 that it expects to keep the federal funds rate low through at least mid-2015, repeating a pledge from Sept. 13.
Leveraged loans and high-yield, high-risk, or junk, bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s.