The leveraged-loan market is so hot in the U.S. that it just broke one record and is nearing another set during a buyout boom a decade and a half ago.
High inflation is driving investors into the space, since leveraged loans have floating interest rates that become more appealing when the Federal Reserve hikes borrowing costs — which the central bank is preparing to do.
Retail investors are piling into loan funds. They added a record $2.25 billion to them in the week ended Wednesday, according to Refinitiv Lipper.
And the flood of demand drove loan prices this week to the highest level since July 2007, approaching the all-time high set in 2005, according to an S&P/LSTA index.
Collateralized loan obligations, the largest buyers of leveraged loans, are furiously purchasing as well to fill hundreds of warehouses — industry jargon for the credit lines banks extend to help form CLOs — slated to become new deals. Wall Street research outfits predict another massive year for issuance after the all-time high set in 2021.
In addition, investors have been turning away from bonds and equities and toward leveraged loans as Treasury yields continue to rise, according to analysts at Citigroup Inc. “We anticipate persisting loan inflows given the ongoing Treasury curve repricing,” analysts led by Michael Anderson wrote in a note.