Assets under management at U.S. leveraged loan funds jumped by more than $6 billion in February, the most in a monthly reading since December 2016, as inflation fears and rising rates continue to fuel a rotation by investors toward variable-rate debt.
According to LCD and Lipper, the $6 billion increase in assets under management has pushed the total net asset value of U.S. prime funds over $100 billion for the first time since the punishing nearly 25% drop in March 2020 during the global markets crisis.
The total net asset value of loan funds, at $104.9 billion, is now $12 billion shy of the pre-pandemic February level of $117 billion with the market continuing to claw its way back from the $29 billion lost last March.
After two years dominated by outflows, loan mutual funds and ETFs are riding the wave of a recent back-up in U.S. Treasury yields and investors seeking to lock in interest payments that would correlate with future increases in the underlying benchmark rate.
In fact, the only redemption among the weekly reporters to Lipper was during the first week of the year, when a scant $10 million was withdrawn from the segment. There have been net inflows in 13 of the 14 weeks through March 10, totaling $8 billion, including a pair of billion-dollar-plus readings in early January.
As noted, U.S Treasury yields continued to march higher in February. Beginning the year at 0.93%, the 10-year U.S. Treasury rate had climbed to 1.44% by the end of the month.
Going forward, while the median committee during the March 16-17 FOMC meeting conveyed an expectation for no rate hikes through the end of 2023, the $1.9 trillion relief bill and prospect for strong economic growth data and inflation could spur further Treasury sell-offs. In fact, the 10-year hit a near-14 month high of 1.74% on March 19.
Leveraged loan fund flows, of course, have high correlations with rate changes, and loans would typically be expected to outperform fixed income assets during periods when Treasuries are rising. In the two-months through February-end, the S&P LSTA Leveraged Loan Index had returned 1.78%, compared to 0.73% in the ICE BofA US High Yield Index, and negative -3.15% in the ICE BofAML US Corporate Index (High Grade).
By the end of February, the weighted average bid of the S&P/LSTA Leveraged Loan Index was 97.78, the highest reading since November 2018, 159 basis points higher than at the end of 2020 and 103 bps higher than Feb. 23, 2020.
Aside from retail demand, which represents a relatively small portion of the overall demand for leveraged loans, the U.S. CLO market is off to its strongest start to a year since the Great Financial Crisis thanks to falling liability costs, resurgent leveraged loan issuance and attractive relative value of the vehicles. Through March 22, the 2021 new-issue CLO market had already hosted 74 deals, totaling $36.1 billion — the busiest opening quarter of a calendar year and more than double the issuance from the first quarter of 2020.