(Bloomberg News) Investors are pouring record amounts of money into loans, seeking floating-rate debt to protect themselves from the threat of rising interest rates tied to U.S. Treasuries.
Mutual funds that focus on investing in leveraged loans had $569 million of inflows last week, building on a record $3.1 billion in December, said JPMorgan Chase & Co. in a Jan. 7 report, citing Lipper FMI data. The third week in December was the most on record, with $1.05 billion added, according to researchers led by Peter Acciavatti in New York.
Institutional loan buyers are also funneling more money into loans on concerns that rising interest rates will erode the value of other investments, said David Frey, a managing director of New York-based Highbridge Capital Management LLC. Ten-year Treasuries lost 5.59 percent last quarter, the biggest drop since the second quarter of 2009, when they declined 6.19 percent, according to Bank of America Merrill Lynch data.
"This served as a 'wake-up call' for many fixed-income investors, who were reminded of the duration risk and potential capital losses they face on their fixed-income portfolios," he wrote in an e-mail. "They are now viewing loans as an attractive alternative given the floating-rate benefits."
Last month's inflows into loan-focused mutual funds were almost twice the prior record, JPMorgan said. Over the last four weeks, $3 billion has flowed into funds that target loans, the researchers wrote. That compares with $1.8 billion for funds investing in high-yield bonds and outflows of $1.4 billion from those that buy investment-grade bonds.
Seeking Adjustable Rates
"You're seeing investors, certainly advisors like me, rotating away from more traditional fixed-income" assets and "looking at bank loan funds because they're essentially adjustable rates," said Lon Morton, chief executive officer of Morton Capital Management, which oversees $1 billion of assets and has headquarters in Calabasas, Calif.
Companies are likely to meet increased demand by issuing more loans to refinance existing debt, Frey said. While he expects "significant high-yield bond issuance" this year, he said companies will opt to sell more loans, partly because they can pre-pay them more easily.