Retail loan investors return as rate rises near

Fri Feb 27, 2015 11:09am EST
Email This Article |
Share This Article
  • Facebook
  • LinkedIn
  • Twitter
| Print This Article | Single Page
[-] Text [+]

By Lynn Adler and Lisa Lee

NEW YORK (Reuters) - Retail investors are returning to bank loan mutual funds following seven straight months of outflows, with the Federal Reserve more clearly signaling an interest rate hike and higher secondary loan market prices starting to attract momentum buyers, investors and strategists said.

The first weekly inflows of $130 million broke a 31-week streak of outflows in the week ending February 18. Although net flows turned negative again with $118 million withdrawn in the week ending February 25, they have moderated and are seen turning positive with Fed rate hikes nearer, these sources said.

Fed Chair Janet Yellen's congressional testimony this week increased confidence that the central bank will raise interest rates this year for the first time since 2006, although Yellen refused to be pigeon-holed on precise timing.

Floating rate loans provide a natural hedge against rising interest rates. Retail accounts poured $81 billion into bank loan funds for 95 straight weeks until April 2014, Lipper data shows, before global economic concerns and crashing oil prices held U.S. interest rates low for longer than most economists anticipated.

When the interest rate rise failed to materialize, retail accounts started a seven-month exodus that saw around $36 billion pulled from loan funds until the pace slowed this month, according to Lipper.

"Retail investors capitulated over the summer on rising interest rates," said Leland Hart, head of BlackRock's bank loan team. "A rate rise will likely have to stare them right in the face because people have waited so long for it to happen."

Whether rates rise in June, or in September or October as some economists predict, higher interest rates are now within sight after several false starts that triggered selling in the loan market, strategists agree.

Fears of over-valuation in the leveraged finance market are also subsiding, spurring the gradual return of retail investors to leveraged loans.   Continued...

U.S. Federal Reserve Chair Janet Yellen testifies before a House Financial Services Committee hearing to receive the semi-annual report on Monetary Policy and State of the Economy, on Capitol Hill in Washington February 25, 2015. REUTERS/Jim Bourg