Mutual funds and exchange-traded funds investing in leveraged loans added another $5.5 billion to assets under management in May, bringing the value of retail holdings back to pre-pandemic levels for the first time since they plunged almost 25% during the market crash of March 2020.
The confluence of retail investors seeking returns through risk assets and protection from an expected rise in Treasury yields has spurred seven straight months of asset growth. This has brought total assets under management to $121 billion in May, according to Lipper and LCD, surpassing the $117 billion net asset value of February 2020 that preceded a staggering $29 billion outflow from the market in March 2020 amid the COVID-19 pandemic.
Assets under management at loan funds nevertheless have yet to claw back the substantial declines from the 16 months leading up to the March 2020 exodus, amid expected rate cuts. Of course, floating-rate interest payments fluctuate based on the level of an underlying rate.
At the October 2018 peak, prime funds topped $184 billion, and in the two years leading up to the peak, AUM averaged $156 billion.
In May, both increasing secondary prices and investor inflows to floating-rate loans aided the growth in prime fund values. In the four weeks through May 26, the weighted average bid of the S&P/LSTA Index climbed 27 basis points to 98.07. For the full month of May, the weighted average loan bid rose further, to 98.09, up 30 bps from April and marking the highest reading since November 2018. The average bid has risen roughly 2 points since the start of 2021 and has gained roughly 7 points in the last 12 months.
Turning to demand, for the four weeks through May 26, inflows to loans tallied $3.2 billion, down from $4.1 billion in April but roughly on par with monthly levels in the first quarter.
As for rates, U.S. government bond yields softened seven basis points from the end of April through May 28, to 1.58%, even as inflation reports showed April’s prices had increased faster than expected. While concerns of rising inflation typically leads to selling in fixed-rate debt, pushing yields higher, the Federal Reserve had insisted any price rises should be transitory.
This week, however, the Fed accelerated its timeline for rate hikes, saying it may act sooner than previously planned to start dialing back its low interest rate policy in a more hawkish tone on inflation.
During a June 16 press conference following the two-day Fed policy meeting, Chairman Jerome Powell said inflation "could be higher and more persistent than we expect," but continued to counter it would “transitory”.
The headline inflation expectation was raised to 3.4%, a full percentage point higher than the March projection, and while the majority of Fed officials now see at least one rate hike in 2023, seven members see the central bank tightening as early as next year.
Treasury yields posted their biggest one-day advance in three months on June 16, to 1.57%, extending gains from a three-month low of 1.45% on June 10.