U.S. loan funds recorded their biggest weekly inflow, surpassing records set in the last two weeks as concern about rising interest rates draws buyers to the floating-rate debt, according to Bank of America Corp.
Investors added $1.5 billion into funds that purchase loans made to the neediest companies, the Charlotte, North Carolina-based bank said in a report yesterday, exceeding $1.3 billion of deposits made last week. The debt has gained for almost nine straight months, bringing the total tally of assets added in the period to about $14 billion.
“Loan inflows had started to pick up a lot toward the end of last year and it has to do with people worried about rising interest rates,” Chris Hays, a credit strategist at Bank of America, said in a telephone interview. “In such a scenario this is a natural place to go to. They also offer higher yield than most other fixed-income asset classes that investors can choose from.”
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.
The average yield of 6.03 percent on loans has dropped by more than 80 basis points since June, JPMorgan Chase & Co. data show. The Standard & Poor’s/LSTA U.S. Leveraged Loan 100 Index, which tracks the average bid price on the 100 largest dollar-denominated first-lien leveraged loans, has climbed in the last two days to 97.26 cents yesterday, rising for the first time this month.
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.