Despite the recent decline in 10-year U.S. Treasury yields, which often is seen as an indicator of weakened economic confidence, assets under management at mutual funds and ETFs investing in the U.S. leveraged loan segment increased for an eighth consecutive month in June.
According to data from LCD and Lipper, mutual and exchange-traded funds added a net $5.29 billion to their cash coffers, bringing loan fund AUM at the end of June to $126.4 billion, an 18-month high.
In May, the value of retail holdings finally returned to pre-pandemic levels after plunging almost 25% during the market crash of March 2020. But they have yet to claw back the substantial declines from late 2018, when outflows began apace on rate-cut expectations and what would be the start of a sustained and significant decline in U.S. Treasury yields.
Loans, which periodically reset to a spread over a base rate, and therefore usually attract inflows during a rising-rate environment, clearly benefited from the rise in Treasury yields that began last August. And though interest rates have reversed course in recent months, after the 10-year U.S. Treasury yield moved back above 1% on Jan. 6 (having languished for nearly 10 months below this key support level), the loan asset class has featured 27 uninterrupted weeks of inflows through July 14.
Looking ahead, with the 10-year U.S. Treasury yield back at a five-month low of 1.19% on July 19, a 55-basis-point drop from the March 19 high, loan investors are again faced with the question of how far the rates rally can go. The brief, July 19 dive in equities aside, the persistent increase in the rate of inflation has piled pressure onto Fed policymakers — though Federal Reserve Chairman Jerome Powell assured a House committee on July 14 that the largest increase in consumer prices in nearly 13 years will not affect the post-pandemic recovery nor alter monetary policy, at least in the near term.
Retail fund inflows for the week ended July 14 slowed to $393.9 million (one of the lighter inflows for the year, as inflows have averaged about $790 million per week).
Providing tailwinds for inflows to the asset class are the tight valuations in the fixed-rate high-yield bond market, where the yield-to-worst in the S&P U.S. High Yield Corporate Bond Index has stayed below 4% for 46 of the past 47 trading sessions, having dipped below this level for the first time ever in February.
A final note: retail demand represents a relatively small share of the overall demand picture in the leveraged loan market, where CLOs are, by far, the dominant buying base in accounting for 72% of market demand as of June 2021, and these vehicles are setting a record pace for issuance in 2021. According to LCD, there has been $88.5 billion of CLO volume from 182 deals in 2021 through July 19, versus $40.3 billion from 92 deals in the same period in 2020.