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Loan Funds Take in $690 Million as Investors Seek Rate Shelter

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Jan. 25 (Bloomberg) -- Deposits into U.S. loan funds totaled $690 million this week as investors look to the asset class to shield themselves from the risk of rising interest rates, according to Bank of America Corp.

Investors have poured an average of more than $600 million a week this year into funds that purchase floating-rate debt, the Charlotte, North Carolina-based bank said yesterday in a report. The more-than $200 million of inflows on Jan. 23 was the most on a single day since November 2011, according to the report.

Investors seeking shelter from a possible increase in interest rates mean that leveraged-loan mutual funds will see a strong influx through 2013, Neha Khoda, a Bank of America strategist, wrote in the report. Investors have funneled money for 32 straight weeks into loan funds, net assets of which have increased 3.2 percent this year, according to the report.

The average yield of 5.97 percent on leveraged loans on Jan. 18 was the lowest on record, according to the JPMorgan Leveraged Loan index, which began tracking yields in 2007.

The Standard & Poor’s/LSTA U.S. Leveraged Loan 100 index climbed to 97.74 cents on the dollar yesterday, the most since July 2007. The measure, which tracks the 100 largest dollar-denominated first-lien leveraged loans, had collapsed to a low of 59.2 cents during the peak of the financial crisis in December 2008.

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

Loans, which are ranked higher up in the capital structure in case of a bankruptcy, are also better protected from rising interest rates since they are generally pegged to floating-rate benchmarks. The value of a fixed-rate security diminishes with an increase in rates.

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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