| NEW YORK
NEW YORK May 24 Investors worldwide poured $1.2
billion into corporate loan funds based in the United States in
the latest week as signs the Federal Reserve could scale back on
stimulus sparked fears of rising U.S. interest rates, according
to Bank of America Merrill Lynch.
The inflows in the week ended May 22 elevate this year's
total cash gains into loan funds to $26.6 billion, according to
Bank of America Merrill Lynch, which cited figures from
fund-tracking firm EPFR Global. Corporate loans - also known as
leveraged loans - are protected from rising interest rates by
being pegged to floating-rate benchmarks.
Federal Reserve Chairman Ben Bernanke told Congress on
Wednesday that the central bank could reduce the pace of its
asset purchases at one of its "next few meetings" if the U.S.
economic recovery looked set to maintain momentum. Minutes from
the Fed's latest April 30-May 1 meeting showed, however, that
some officials were open to reducing stimulus by as early as
The Fed is buying $45 billion in Treasury bonds and $40
billion in agency mortgage bonds per month in an effort to spur
hiring and lower long-term borrowing costs. The central bank
plans to keep stimulus in place until the U.S. unemployment rate
falls to 6.5 percent or inflation breaches 2.5 percent.
Some investors believe that the Fed gave clear signals that
it will taper its easing program this year. "What the Fed is
doing is telling the market, 'prepare yourselves'," said Michael
Temple, senior vice president at Pioneer Investments. "They're
sending up trial balloons."
Temple said interest rates will rise as investors sell bonds
in anticipation of a scaling back in Fed easing, which he thinks
the Fed could begin doing in the fourth quarter of this year. He
has a "short" bet against the 10-year Treasury in his Pioneer
Absolute Return Credit Fund, and said he likes
corporate loans for their protection against rising rates.
The Standard & Poor's/LSTA U.S. Leveraged Loan 100 Index,
which tracks the largest institutional leveraged loans, has
earned a 3.2 percent return this year, and has a current
yield-to-maturity of 5.02 percent. The yield to maturity is the
rate of return expected on a bond if it is held until maturity.
High-yield junk bonds, which are not protected from rising
interest rates, have outperformed corporate loans so far this
year while offering higher yields. The Barclays US Corporate
High Yield Index has earned a return of 5.01 percent this year.
The yield-to-worst on the index, which fell to a record low of
4.97 percent on May 7, has since risen to 5.4 percent. Rising
yields indicate falling prices.
Yield-to-worst indicates the lowest potential yield on a
bond without the issuer defaulting.
Funds that hold high-yield debt pulled in $1.1 billion in
new cash in the latest week, showing an increase in demand from
the prior week's meager $100 million in cash gains, according to
Bank of America Merrill Lynch and EPFR Global.
The latest gains into high-yield bond funds, however, are
still middling compared to consistently high inflows into the
funds last year, said Christopher Hays, credit strategist at
Bank of America Merrill Lynch. High-yield bond funds globally
attracted a record $72 billion in new cash in 2012, according to
Bank of America Merrill Lynch and EPFR Global.
The latest inflows into loan funds and high-yield bond funds
accounted for more than half of the total inflows of $4.49
billion into all bond funds over the week, according to EPFR
Global. Those total cash gains were up from inflows of $3.4
billion into bond funds the prior week.
Stock funds, meanwhile, saw a sharp drop in demand as $7.49
billion flowed into the funds, down from big inflows of $14.16
billion the previous week. The benchmark S&P 500 fell
0.21 percent over the latest weekly period on concerns of a
pullback in Fed easing.
Investors are pulling back somewhat from U.S. stocks in
anticipation of a correction, said Michael Jones, chief
investment officer of RiverFront Investment Group. The S&P 500
had risen over 16 percent from the start of the year to
Funds that hold Japanese stocks had inflows of $3.04
billion, down from record-high inflows of $6.79 billion the
previous week. The Nikkei average had risen 80 percent from last
November to Wednesday. Shinzo Abe, who was elected Japan's prime
minister in late December, boosted the index by proposing
aggressive monetary and fiscal policies in mid-November.
The Bank of Japan announced on April 4 that it would inject
$1.4 trillion into the nation's economy in less than two years
to fight deflation. The index, which hit a 5-1/2-year high of
15,381.02 on Tuesday, rose 3.5 percent over the reporting
period. The index suffered a pullback of 7.3 percent on
Thursday, however, in its biggest one-day drop since a slide two
years ago in the wake of a tsunami.
Japanese stocks are set to recover from the latest
correction, said Jones of RiverFront, who said the nation's
stocks are undervalued. "We still think there's plenty more to
go in Japan," he said.