(Bloomberg) — Funds that invest in US leveraged loans had one of their biggest weekly outflows in years as prices briefly plunged the most since March 2023’s regional banking crisis.
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Outflows were $3.07 billion in the week ended Aug. 7, according to data from LSEG Lipper, building on prior-week outflows of $59 million that were just the second withdrawal this year. JPMorgan Chase & Co. had estimated leveraged-loan funds lost around $2.3 billion from Aug. 1-6, which it said was poised to be the largest weekly outflow since January 2019.
The weaker-than-expected July US employment report last week caused tumult across markets globally, raising concerns about a recession and fueling debate on how quickly the Federal Reserve may need to ease monetary policy.
That market sentiment is the “worst possible environment” for loan funds, said Bill Zox, a portfolio manager at Brandywine Global Investment Management. Leveraged loans, which are priced against a benchmark financing rate, tend to fall out of favor as interest rates decline.
“Investors in loan funds tend to be more tactical,” Zox said. “Once you see the rate cuts actually materialize, you’ll probably continue to see more outflows.”
Economic angst has subsided, with stocks rebounding further on Thursday after data showed US jobless claims last week tumbled the most in nearly a year.
Average prices in the secondary market for loans, after logging their two biggest declines since March 2023, rose by the most since then on both Tuesday and Wednesday, according to a Morningstar LSTA index.
New-issue activity is also picking up, with five new offerings announced after a rare Monday without any launches.
LSEG Lipper also said funds that invest in US high-yield corporate debt lost $1.2 billion in the latest week, but investors poured $1.71 billion into short and intermediate investment-grade bond funds in the period.
Room for inflows should continue increasing across the board, according to Bank of America strategist Yuri Seliger. “Returns are going to be a lot more attractive,” he said. “A combo of stronger returns and Fed cuts will be greater for inflows.”
–With assistance from Josyana Joshua.
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