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Contributor ○○○

Bank loan and high yield fund inflows and outflows

I wonder if bank loan OEFs and CEFs become good buys after periods of outflows.

Outflows from Bank-Loan Funds during COVID-19
by Nicola Cetorelli, Gabriele La Spada, and João Santos
Federal Reserve
June 16, 2020
The COVID-19 pandemic has put significant pressure on debt markets,
especially those populated by riskier borrowers. The leveraged loan
market, in particular, came under remarkable stress during the month
of March. Bank-loan mutual funds, among the main holders of leveraged
loans, suffered massive outflows that were reminiscent of the outflows
they experienced during the 2008 crisis. In this post, we show that
the flow sensitivity of the loan-fund industry to the COVID-19 crisis
(and to negative shocks more generally) seems to be even greater than
that of high-yield bond funds, which also invest in high-risk debt
securities and have received much attention because of their possible
exposure to run-like behavior by investors and their implications for
financial stability.

...

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Participant ○○

Re: Bank loan and high yield fund inflows and outflows

I swapped FFRHX (Fidelity floating rate) for BCOSX (IG corporate) on January 3 of this year. The latter is up 5% YTD while the former is down -5%. On the other hand, if one had bought FFRHX in March at its low point, there would have been a 21% gain. Another fund is this category was LFRAX, which I bought in 2018 and sold in early 2019 after lackluster results. Good grief, that one is still down 8% YTD.

My lesson was I didn't do well over the long term chasing yield in the OEF bond funds.  Takes market timing to do really well, and It's suppsoed to be a conservative  allocation/income sector after all. BCOSX dropped about 5% in March with a 10 year return of 4.1%,  That's fine.

 

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Frequent Contributor

Re: Bank loan and high yield fund inflows and outflows

@DocWu , FR/BL act as HY when rates are not expected to rise. BCOSX is core-plus, not core/inv-gr.

YBB
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Contributor ○

Re: Bank loan and high yield fund inflows and outflows

Chasing yield is chasing risk.   The bad part about chasing risk in fixed income is that the upside potential is limited to the coupon, unlike equities which can have growth of principal.   

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Contributor ○○○

Re: Bank loan and high yield fund inflows and outflows


@Anitya wrote:

Chasing yield is chasing risk.   The bad part about chasing risk in fixed income is that the upside potential is limited to the coupon, unlike equities which can have growth of principal.   


If the loans are selling below par, capital gains are possible. According to the charts in the blog post, loan prices fell as low as 75 this year.

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Contributor ○

Re: Bank loan and high yield fund inflows and outflows


@Beliavsky wrote:

@Anitya wrote:

Chasing yield is chasing risk.   The bad part about chasing risk in fixed income is that the upside potential is limited to the coupon, unlike equities which can have growth of principal.   


If the loans are selling below par, capital gains are possible. According to the charts in the blog post, loan prices fell as low as 75 this year.


I am not increasing credit risk in my portfolio now.  I think the time to do that was March 23 and again on April 8/9 or immediately there after.   

If FFRHX is down 5% YTD, the capital gain potential is probably 5%.  Not enough of capital gain potential for me.  I would rather take my chances with QQQE or VOT and VBK and leave it there for a few years. 

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Contributor ○

Re: Bank loan and high yield fund inflows and outflows

I am on a Webinar where Invesco mentioned they expect HY default rate to climb to 10% from a historical 2.5%.   If the actual defaults touch those numbers, the extra yield would not be worth it.   Diversification is more important in fixed income than in equities. 

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Explorer ○○○

Re: Bank loan and high yield fund inflows and outflows

Speaking of bank loans, this recent M* article seems spot on about the sector.

Short version:  article questions the long term viability of the entire sector.  For various reasons, the risk/return profile is not that great and it tends to fail when needed most.

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