With many growing skeptical of a Federal Reserve rate hike, investors have largely shunned floating rate senior bank loan exchange traded funds this year, but the asset is slowly gaining traction ahead of renewed rate speculation.
Corporate bonds with interest payments that rise and fall with market benchmarks are down almost 40% this year after a series of false starts fueled speculation that the Fed would push off a rate hike, reports Mike Cherney for the Wall Street Journal.
The PowerShares Senior Loan Portfolio (NYSEArca: BKLN), the largest bank loan-related ETF, has experienced $233.5 million in net outflows year-to-date, according to PowerShares.
Since the senior loans have rates that adjust periodically, the floating-rate loans offer investors an alternative method of earning yields with little or no interest-rate risk. Additionally, due to their floating rate component, bank loans are seen as an attractive alternative to traditional corporate bonds in a rising rate environment.
Many investors remain cautious on floating-rate debt as they expect the Fed to only gradually inch up rates, with mixed economic data at home and volatility overseas.
Consequently, investors have turned back to high-yield bonds that offer a better deal. Now that volatility is dissipating and risk is back on, investors are piling back onto junk bond ETFs. For instance, the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) recently garnered their largest daily inflows on record. [Junk Bond ETFs Attracting Record Inflows]
There is a “benign rate outlook that seems to have crept into the market over the last couple of months,” Joe Lynagh, who manages a T. Rowe Price Ultra Short-Term Bond Fund, said in the WSJ article. “You have a lot of question marks.”