Investors Find Value in Low-Rated Loans

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Investors wary of lofty stock valuations and falling bond prices are turning to an unexpected haven: corporate loans with junk credit ratings.

Prices of the loans rose in recent sessions even when equities declined, and an index of the debt has returned about 1% this year—far outstripping the 0.03% delivered by junk bonds and the 2% loss posted by U.S. Treasurys.

Investors this month have funneled about $740 million into mutual and exchange-traded funds that specialize in the loans, according to EPFR Global Data. If the trend continues throughout January it would mark the first month of net inflows since September 2018.

The $1.2 trillion market for loans with below-investment grade credit ratings has been out of favor with individual investors for years and lagged behind the “everything rally” that lifted most markets to records in 2020. That gives the loans more potential upside than most Wall Street offerings in the year to come, fund managers said.

“I think we’re about to see a lot of demand for loans,” said Gershon Distenfeld, co-head of fixed income at AllianceBernstein Holding LP. The firm’s funds that specialize in high-yield bonds increased holdings of the so-called leveraged loans to about 10% in recent months from a historical average of around 4%.

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