US loan fund assets under management fell by $4.95 billion in August, to $115 billion, snapping a streak of nine consecutive months of growth. Funds that offer weekly data show that outflows have continued in September.
Snapped streak
Prior to August, the nine months of loan fund growth was tied for the eighth-longest growth streak for loan funds per Morningstar data extending back to the beginning of 2003. All of the growth streaks lasting nine months or more occurred during periods when the fed funds rate was steady or rising. More than half of the streaks began with the fed funds rate below 1%.
The longest streak of contraction at loan funds came during a period when rates were cut by 0.50%. On the other hand, the fourth-longest streak of monthly declines in AUM occurred as rates rose a whopping 4%.
Rates and fund flows
Per Morningstar data dating back to January 2003, there have been 173 months of asset growth and 86 months when AUM fell, or two steps forward for every step back. As the streaks noted above suggest, loan fund growth tends to be cyclical. While assets have fallen in just one-third of months, 71% of those months were immediately followed by at least one additional month of contraction.
In August, weak employment data solidified consensus around the first cut to the fed funds rate since the onset of the Covid-19 pandemic in March 2020. The 50 bps cut on Sept. 18 came later in the year than most investors had expected, though investors are still pricing in three more quarter-point cuts by the end of the year and five to follow in 2025, according to CME Group. The Fed’s own dot plot suggests a median estimate of two more in 2024 and four in 2025. By all accounts, it appears the US is at the beginning of a rate-cutting cycle.
Loan funds have generally shed assets during such cycles, which have included the Global Financial Crisis and the onset of the pandemic. This one may be different, of course, with no such crisis immediately at hand.
Loan funds versus high-yield funds
Weekly loan fund flows have been negative in seven of the last eight weeks. By contrast, high-yield funds have posted inflows in seven of the last eight (and, in fact, 11 of the last 12). This squares with the logic that fixed-rate assets are attractive to investors in falling-rate environments, while floating-rate assets are vulnerable due to diminishing returns from reductions in the underlying Sofr base rate. There are no certainties, however, and given the extent to which rate cuts have been widely expected for some time, a degree of market pricing should already be baked in.
Keep clipping
While the $4.95 billion decline in loan fund AUM was the largest since March 2023, secondary loan prices have generally stabilized after a volatile start in August. September has followed a similar pattern to much of the year, with returns largely if not wholly boosted by coupon clipping. Loans have returned 0.58% on the month, but the market value return has been -0.04%.
Mutual funds bore the brunt of August’s loan fund contraction, with assets falling by $4.9 billion, to $96.2 billion. AUM at ETFs fell by $0.1 billion, to $19.1 billion. Collectively, the funds account for a 9% share of the Morningstar LSTA US Leveraged Loan Index.
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