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

May 17 (Bloomberg) -- Investors poured $870 million this week into funds that purchase bank loans, according to Bank of America Corp.

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.’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. 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