Loan Funds Add Deposits as High Yield Sees Departures, BofA Says

Investors added $1.5 billion this week into funds that purchase leveraged loans in the U.S., following record inflows last week, according to Bank of America Corp.

The deposits for the funds this year are now at $42 billion, making the debt the fastest growing segment among various asset classes, according to a report published yesterday by the Charlotte, North Carolina-based bank. U.S. speculative-grade bond funds reported outflows for the first time in five weeks, losing $582 million, as investors reacted to widening relative yieds, according to the report.

“We expect demand to remain strong until supply builds up sufficiently or spreads compress enough to entice issuers to re-price their loans,” Barclays Plc credit strategists led by Bard Rogoff, wrote in a research note today.

Funds that invest in senior-ranking floating-rate debt gained 1 percent last month, the most since January, Standard & Poor’s/LSTA index data show. Prices on the largest, first-lien loans snapped six straight days of declines to increase 0.03 cent to 98.27 cents yesterday, index data show.

Spreads on junk bonds climbed to 463 basis points more than similar maturity government bonds, from 450 basis points on July 23, Bank of America Merrill Lynch index data show. A basis point is 0.01 percentage point.

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. Investors have made deposits into loan mutual funds every single week over the last year, Bank of America data show.

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