Investors Embrace Bank Loan Funds

As inflation continued to run below the Federal Reserve Board’s long-term objective of 2%, many members of the Federal Open Market Committee opined at its September policy meeting that the near-term risks to the economic outlook appear to be roughly balanced, with economic activity improving and labor market conditions strengthening. These were some of the most hawkish comments in its policy statement the committee had used in quite some time, and investors appeared to be taking to heart the likelihood of an imminent rate increase. According to the CME Group’s FedWatch Tool, investors priced in a 65% chance the Fed will raise rates by at least 25 basis points in December.

For the fund-flows week ended October 12, 2016, fund investors were taking a wait-and-see approach to investing ahead of the release of the Fed’s policy meeting minutes, Alcoa’s unofficial kickoff of the third quarter earnings season, and September’s nonfarm payrolls report. For the week investors were net redeemers of mutual fund and exchange-traded fund (ETF) assets, withdrawing a net $16.0 billion. Ahead of the cutoff for implementation of the new money market fund reform rules on October 14, the majority of the outflows were witnessed by money market funds, which experienced $10.6 billion of net redemptions during the week and brought their year-to-date net redemptions to $165.5 billion (eclipsing the $110.4 billion of net outflows witnessed by equity funds).

While investors have been net purchasers of taxable bond funds, injecting some $122.0 billion net so far this year, these funds witnessed their first week of net redemptions (-$2.1 billion) in four during the most recent flows week. However, interest in floating-rate bank loan funds seems to be on the rise, with the group witnessing net inflows for an eleventh straight week, taking in $415 million net. While the group is still in net-redemption territory, suffering $3.4 billion of net outflows for the year thus far, the tide appears to be changing.