With withdrawals by retail players persisting through the summer months and beyond, assets at U.S. funds investing in leveraged loans shrank by $950 million in September — the largest monthly decline since the risk-off retail investor retreat from the segment in March.
After eking out two months of growth, this puts the total net asset value of loan funds under management at $88.95 billion — the lowest it has been since April and just $1 billion shy of March's plunge to $87.89 billion.
The near-$1 billion drop in the total net asset value of prime funds comes as the recovery of leveraged loan prices in the secondary market slowed dramatically, with September registering a 33-basis-point increase, versus a 121-bps gain in August and a 176-bps advance in July.
Also driving the market-value equation, outflows from funds that report weekly to Lipper FMI amounted to $1.2 billion. September, though, was met with a material increase in CLO demand, with new-issue volumes surging to $11.47 billion, according to LCD, helping to fill the void.
Given the low-rate environment and the degree of Fed support in favor of high-yield and investment-grade bonds, floating-rate loans have not been the asset class of choice for much of 2020. Though, with the 10-year yields rising to 0.81% on Oct. 7, leveraged loans did see a return to positive inflows in the week ending Oct. 14, to $181 million — its highest reading in the black since mid-January.
With leveraged loan performance trailing fixed-income since the onset of the coronavirus, a still-weak net supply picture supporting valuations could make the asset class attractive once again in terms of price appreciation, with only 42% of the market priced above 98, versus 78% at the beginning of the year. Of course, accounts are keeping a close eye on U.S Treasury rates, particularly if 10-year yields move above 1%, a level that could bring a more steady return to inflows, feedback suggests.
Significant fiscal stimulus under a united Democratic government — an election scenario that markets are increasingly pricing in — could put upward pressure on Treasury yields, asset manager BlackRock said in an Oct. 26 report downgrading U.S. Treasurys to underweight.
"The potential for fiscal spending — particularly in a Democratic sweep election outcome — could spur higher yields and a steeper yield curve," the report reads.