Economics
Leveraged Loans Are Looking ‘Scary’ to These Money Managers
- After strong outperformance, loans showing signs of weakness
- Prices could get ‘pretty nasty’ amid record outflows, PM says
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The recent weakness in the leveraged loan market isn’t a passing trend, and the asset class is set to perform even worse next year as the U.S. economy edges closer to a downturn, according to Gershon Distenfeld of AllianceBernstein LP and Eaton Vance Management’s Kathleen Gaffney.
While the risky debt has outperformed amid frenzied buying this year, cracks in investor demand are starting to emerge. U.S. leveraged loan funds saw a record outflow of $2.53 billion in the week ended Dec. 12, according to Lipper, and the pain could only worsen from here. A more dovish outlook for upcoming Federal Reserve rate hikes erodes the incentive to buy loans: their floating rate nature is seen as a hedge against rising rates.