Some mutual fund managers, like those at Fidelity Investments and Eaton Vance Corp. who can choose multiple asset classes to invest in, are increasing exposure to high-yield debt by investing in bank loans.
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Bank loans use high-yield corporate debt as collateral with an interest rate tied to a benchmark, usually Libor. Bank loan funds were wildly popular during 2010 and 2011.
Bank loan funds have seen over $3 billion flow in over the past two months. That’s about twice as much as for the entire year at this point.
Investors like bank loans since they are considered safe fixed-income instruments that can benefit as interest rates rise.
Because bank loan rates rise as interest rates rise, there is little duration risk.
But if the economy turns downward, bank loans will be one of the first assets that are sold. At this point, that risk is seen as minimal compared to the risk of principal erosion of bonds due to rising interest rates.