Sober Look | Sep 25, 2012 03:18AM ET
High Yield corporate loans (sometimes also called "institutional," "syndicated," "leveraged," "par," or "bank" loans) continue to be in high demand. And it's not only hedge funds and CLOs (see post ) who like this product. Retail investors are piling in as well. Institutional loan mutual funds' assets under management are close to record, as inflows stay high.
If inflation picks up for example, most expect these assets to compensate them for the loss in real value (although the risk is that the dovish Fed keeps short-term rates low in spite of inflationary pressures). Also because these loans are senior secured, there is more protection (collateral) than is offered by HY bonds in case of default. And default rates have been relatively low recently.
Just as mortgage REITs (discussed here), most of these loan funds run some leverage. The EFR fund prospectus clearly says: "Performance results reflect the effects of leverage resulting from the Fund's issuance of Auction Preferred Shares" (a form of debt). Which means that if the loan index is down, this fund would be down much more.
As spreads stay low and investors reach for yield, demand for leveraged product - even at the retail level - is going to become commonplace in fixed income.
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