Investors should turn to leveraged-loans to preserve income as volatility in the high-yield bonds sparks outflows, according to JPMorgan Chase & Co., the second-largest underwriter of the debt in the U.S.
Record money flowing into funds that purchase floating-rated debt and issuance of collateralized loan obligations has supported senior ranking debt in the face of a bond sell-off in the last two weeks, the New York-based lender said in a report yesterday as it it’s overweight loans this month versus bonds. Returns of 0.12 percent on the Standard & Poor’s/LSTA 100 index outpaced U.S. junk bonds for the first time in six months, which lost 0.5 percent in May.
Bonds sold by companies in the U.S. suffered losses on concern that Federal Reserve policy makers may consider reducing stimulus measures that had fueled demand for higher yielding debt. Loans funds have received record deposit on expectations the debt will deliver positive returns during a period of rising rates.
“Loan prices are being supported by demand for floating rate instruments amid concerns about QE tapering,” JPMorgan strategists led by Jan Loeys wrote in the report. “This is helping to keep the loan market particularly steady in the face of higher volatility in high-yield bond markets. A strong payroll report on Friday will likely further hurt HY bonds and support their floating rate counterparts.”
On May 22, Federal Reserve Chairman Ben Bernanke said the Fed could slow the pace of its $85 billion of bond purchases in its “next few meetings,” in testimony to the Joint Economic Committee of Congress in Washington.
Since then, U.S. junk bonds have lost 2.3 percent, to trim gains this year to 3 percent, Bank of America Merrill Lynch index data show. That compares with a 2.6 percent advance for the S&P/LSTA 100 index this year.
Investors added $930 million last week to funds that purchase loans, pushing year-to-date deposits to more than $28 billion, according to a May 30 report from Bank of America Corp. That represents an increase of about 36 percent in net assets for the year, outperforming funds that purchase credit assets such as U.S. and emerging market corporate debt. CLO issuance climbed to $35 billion for the year at the end of last month, according to S&P Capital IQ Leveraged Commentary & Data.
BlackRock Inc.’s iShares iBoxx High Yield Corporate Bond exchange-traded fund reported investor redemptions of 3.3 million shares, or about $305 million, from the fund June 4, its biggest one-day outflow on record.
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.