NEW YORK, Nov 2 (LPC) - US bank loan funds had the biggest weekly outflows in three years as October’s bruising equity market selloff cooled investors’ appetite for risk assets.
Investors pulled US$1.5bn from loan funds in the week ending October 31 in the biggest outflow since December 2015, according to Lipper. Loan funds have been robust this year with only seven weeks of outflows in the 44 weeks of 2018 so far.
The Invesco Senior Loan ETF (BKLN), the biggest bank loan exchange-traded fund, had its largest one-day outflow since its inception of US$178m on October 26. Bank loan ETFs lost a total US$700m in the week ending October 26, in their largest exit on record, according to JP Morgan.
“In October, investors shifted to a risk-off investment approach focused more on Treasuries and short-term investment grade bonds,” said Todd Rosenbluth, director of ETF and mutual fund research at CFRA. “However, we think the economy remains strong and expect risk taking that typically occurs in the fourth quarter to occur in the remainder of the year.”
A spokesperson at Invesco declined to comment.
After a three-day winning streak in the stock market this week, bank loan funds started to regain new money on October 31 after experiencing massive outflows. Loan funds had about US$70m in inflows on October 31, US$34m of which were loan ETFs, according to JP Morgan.
Despite a tough month, loans still provided returns of -0.04% in October, which significantly outperformed the S&P 500 (-6.84%), high-yield (-1.63%), and investment-grade (-1.26%), according to JP Morgan.
The US secondary loan market has also shown signs of weakness amid the market volatility and risk-off sentiment. The SMi100, an index that tracks the 100 most widely held loans, fell to 98.35 on November 1, down from 98.87 on October 1. The percentage of US loans trading over par has dropped with around 33% of loans currently trading above face value, compared to 48% at the start of October.
However, a relatively benign default environment, rising interest rates, and attractive returns compared to other asset classes is expected to continue to fuel strong demand for floating-rate loans in the run up to the end of the year. (Reporting by Yun Li Editing by Tessa Walsh and Jon Methven)