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Assets under management at US leveraged loan funds fall anew in September

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Assets under management at US leveraged loan funds fall anew in September

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.

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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.

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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.

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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.

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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.

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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.