Even though short-term interest rates are now increasing, investors are telling Yellen & Co., the pace of hikes is still way too slow.
The reach for yield remains a dominant theme in fixed income markets.
Here the WSJ reports that the demand for leveraged loans is on fire.
Investors are desperate for decent income and riskier companies are taking full advantage. The upshot is that the world of leveraged loans appears to be going slightly mad.
Loan sales are running ahead of the pace of the past three years, fueled by a rush of money into the sector. Retail investors have piled back into U.S. funds that specialize in loans, with more than $25 billion of inflows over the past year after two years of outflows, according to Lipper. Total assets in retail U.S. loan funds have risen to $95 billion, although that is below 2014’s peak of $112 billion. Big managers in the sector include well-known names such as BlackRock , Fidelity and Pimco.
Leveraged loans are loans issued by companies with junk credit ratings. The interest on the bonds moves up and down with the level of short-term interest rates. The floating rate nature of the bonds makes them an easy sell for brokers and fund company salesmen during periods when the Fed is hiking rates. But loading up on leveraged loans at this late stage in the business cycle when the crowd is also flooding into the asset class probably isn’t the best use of cash. If the crowd is favoring junk today, the good contrarian will look elsewhere for opportunity.
Jeremy Jones, CFA
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