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Is the Bank-Loan Sell-Off Temporary?

Michael Rawson, CFA

Mike Rawson: The biggest surprise in fund flows so far in 2014 has been inflows into bond funds. Last year we saw sharp outflows from bond funds as interest rates began to rise and investors began to anticipate a further rise in interest rates. In fact, in 2013, we saw $80 billion leave intermediate-term bond funds. So far in 2014, about $12 million has gone back into these funds, as interest rates have stabilized and even come down in some cases, and as the stock market appears to be fully valued. So, it's forcing our investors to reconsider their allocation to bond funds.

One of the categories which was really popular last year, bank-loan funds, have actually seen outflows more recently. Again, as interest rates have stabilized, investors are less concerned about the rise in rates. Bank loans hold appeal in a rising-rate environment because they are less sensitive to a rise in interest rates, and they have some credit risk, which would likely perform well if the economy improves.

Although investors have pulled money out of bank-loan funds, I think they could go back into bank-loan funds if interest rates start to go up again.