LPC: Rising retail demand boosts US secondary loan rally

Fri Sep 30, 2016 12:14pm EDT
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By Lisa Lee

NEW YORK, Sept 30 (Reuters) - A recent influx of retail investors into the US leveraged loan market, driven by the prospect of near-term interest rate hikes and rising Libor rates, is helping to push secondary prices higher as loans continue to offer good relative value compared to high-yield bonds.

Retail investors, individuals who invest via bank loan funds rather than institutional investors such as pension funds and endowments, have been targeting the US leveraged loan market since August as signs indicate that the Federal Reserve is intending to raise interest rates.

This has prompted nine weeks of inflows into the asset class, which continues to offer good yields as returns in other products grind lower in a volatile environment driven by political considerations and macroeconomic concerns.

This is the longest stretch of loan inflows into bank loan mutual funds since a 95-week inflow ended in April 2014 as a rate rise grew less likely. The influx of cash, however, is exacerbating a lack of supply in the primary market and driving secondary prices higher.

Average bids in the overall secondary market climbed to 96.96 on September 28 to its highest level since October 2, 2015, and the SMi100, which tracks the 100 most widely held loans, rose to 99.09 on September 28, according to LSTA/Thomson Reuters LPC Mark-to-Market Pricing.

"It's the combination of Libor rising and expectations that the Fed is signalling a rate increase at the end of the year. Generally, that makes investors more focused on floating rate assets overall, and loans in particular," said Steven Oh, global head of credit and fixed income at PineBridge.


Retail investors often use floating rate loans - which pay a spread over Libor - to hedge portfolios against rising interest rates. Although the Federal Reserve kept the federal funds rate steady last week, many expect it to rise in December.   Continued...