(Reuters) - Investors pulled money from U.S.-based leveraged loan funds in the latest week ended Wednesday, extending their weekly cash withdrawals since November, according to Refinitiv’s Lipper research service on Thursday.
For the week ended Wednesday, U.S. leveraged loans posted more than $714 million in outflows, with a four-week moving average of over negative $716 million, Lipper said.
Leveraged loans are floating-rate financial instruments, so investors piled into the market over the past two years when the Federal Reserve was in rate-hiking mode. “However, some investors have started to sell their holdings of leveraged loans recently as doubts have risen about how much higher short-term interest rates actually will rise,” Jay Bryson, global economist at Wells Fargo Securities said in a report.
“Moreover, the evident deceleration occurring in the economy could negatively affect the ability of some highly levered companies to adequately service their debt obligations, which has also contributed to some nervousness in the leveraged loan market.”
The Federal Reserve’s so-called firm pause in its interest-rate hiking cycle erodes the incentive to buy loans as their floating rate nature is seen as a hedge against rising rates.
“With a kinder, gentler Federal Reserve, investors appear to be less concerned with imminent interest rate hikes and inflation - both considered to be a catalyst for investors to embrace adjustable-rates funds,” said Tom Roseen, head of research services at Lipper.
The slow-Fed backdrop has been favorable toward other parts of the credit markets including investment-grade and high-yield junk bonds. U.S.-based investment-grade corporate bond funds attracted $1.95 billion in the week ended Wednesday, their fourth consecutive week of inflows, Lipper data showed.
U.S.-based high-yield junk bond funds posted inflows of roughly $284 million in the week ended Wednesday, their fourth straight week of inflows, Lipper said.
“If the long end of the curve is not expected to rise ..., high yields and other corporates can gain some traction,” Roseen said. “Over the last several months, investors were sure we had another two to three rate hikes ahead of us. Now that is less certain.”
For their part, U.S.-based stock funds posted $1.85 billion of outflows in the week ended Wednesday, following two consecutive week of inflows, Lipper data showed.
“Despite a good week in the equity market, it appears that investors are willing to sit back and see what type of agreement that can be made in the US/China trade talks,” Roseen said.
Reporting by Jennifer Ablan; Editing by Tom Brown and Cynthia Osterman