WASHINGTON: US leveraged-loan funds had their biggest-ever weekly outflow as investors dumped corporate debt across the board on concern that the tariff-spurred market turmoil will hit the economy.
An estimated US$6.5bil was pulled from the funds in the week ended last Wednesday, according to data from LSEG Lipper, as prices on the risky debt hit their lowest since mid-2023.
The previous record outflow of US$3.6bil was set in December 2018.
The loan market is getting hit by outflows amid expectations that the US Federal Reserve (Fed) will be forced to cut interest rates earlier than expected, while a cohort of credit investors may be looking to add liquidity to their portfolios in the volatility.
Global markets have whipsawed in recent days, as investors have tried to price the effects of President Donald Trump’s tariff decisions.
As a result, leveraged loans have become one of the worst-performing credit asset classes.
A Bloomberg index tracking such debt in the United States has sunk 0.96% year-to-date, accounting for both price gains and interest payments.
Floating rates
Since these loans pay floating rates, they generate less income as yields fall.
“Floating-rate is the worst place to be in this market,” said John McClain, portfolio manager at Brandywine Global Investment Management. “Investors were looking for big bucks with a soaring economy and may be getting a double whammy of lower base rates and higher credit spreads as uncertainty freezes the real economy.”
Exchange-traded funds (ETFs) tied to leveraged loans have also seen outflows, with investors yanking nearly US$2.5bil from a pair of two large ETFs tied to US leveraged loans last week.
The Invesco Senior Loan ETF – the largest fund tracking corporate floating-rate debt – saw a US$1.4bil exodus in a recent four-day trading stretch, the largest outflow in that timespan since its 2011 inception, according to data compiled by Bloomberg.
It saw minor inflows in the latest session, after Trump announced a 90-day pause on most tariffs.
The SPDR Blackstone Senior Loan ETF saw US$1bil in outflows, also marking a four-day record.
The exodus is exacerbated by the floating-rate nature of leveraged loans.
The Fed has maintained higher base rates in recent years, but the heightened possibility of rate cuts is prompting investors to ditch loans, which diminish in value if rates are cut.
“Bank loans have the double whammy of credit risk and floating-rate exposure,” said Winifred Cisar, the global head of strategy at CreditSights Inc. “As recession fears rise and Fed rate cutting bets amp up, investors are going to move to safer plays.”
Investors are dumping other products tied to leveraged loans, too.
The Janus Henderson AAA CLO ETF, which invests in the highest-rated type of bonds known as collateralised loan obligations (CLOs), saw about US$1.18bil of withdrawals in the past three sessions, according to data compiled by Bloomberg. CLOs are the biggest buyers of new bank-led leveraged loans.
Shunning debt
By and large, investors are shunning all types of corporate debt.
Funds for short and intermediate investment-grade bonds had outflows of US$6.08bil during the same week, a third-straight week of net withdrawals and the most since May 2022, according to LSEG Lipper.
Meanwhile, US high-yield bond funds had their biggest weekly outflow in almost 20 years as investors pulled a net US$9.63bil, LSEG Lipper data showed.
Inflows the previous week were US$271.3mil.
Junk-bond yields hit a 16-month high earlier last week and spreads reached their widest since June 2023, capping a brutal sell-off fuelled by the April 2 announcement of the highest tariffs in over a century on foreign goods.
The pause on some tariffs last Wednesday briefly helped erase some of the losses.
Investors are also fleeing the iShares iBoxx High-Yield Corporate Bond ETF and the Bloomberg High-Yield Bond ETF – the two biggest of their kind – in droves.
Cash outflows reached almost US$2bil for both vehicles in the first three sessions of last week, according to data compiled by Bloomberg.
Cashing out
Some investors, meanwhile, may simply be cashing out of the most liquid trades, exaggerating the ETF outflows, as markets continue to see broad-based selling pressures, according to Grant Nachman, founder of Shorecliff Asset Management.
The outflows may not be a clear-cut signal of Fed rate cuts, Nachman said.
“I believe some investors would rather raise cash by selling loan ETFs that are only down a few percent, rather than crystallise losses on equities that could be off 20% or more in this drawdown,” said Nachman.
“I think short-term moves in loan ETF prices right now have very little to do with fear of rate cuts. Fed chair Jerome Powell indicated he might struggle to cut rates if tariffs prove inflationary.” — Bloomberg
