(Bloomberg) -- Traders rushing into exchange-traded funds that benefit from the Federal Reserve keeping interest rates higher for longer are being warned that the best days to capture soaring yields are over.
Bank-loan ETFs have attracted more than $1 billion in September — the biggest monthly inflow since June 2021 — led by the $5 billion Invesco Senior Loan ETF (ticker BKLN)’s $920 million haul, Bloomberg Intelligence data showed. Meanwhile, the largest ETF tracking collateralized loan obligations has nearly doubled in size this year.
The Fed’s resolve to keep rates at elevated levels has revived appetite for loans and notes that offer floating interest rates and pushed the 10-year Treasury yield to its highest since 2007 on Monday. Unlike the fixed payments on most conventional bonds, those on floating rates go up as benchmark rates climb, helping to preserve their value.
But while higher yields are attractive for income-oriented investors, the set-up is a “double-edged sword” because steeper rates could be tough for leveraged borrowers to handle, particularly if corporate profits get crimped in a slowdown, said Collin Martin, fixed income strategist with the Schwab Center for Financial Research.
“Higher-for-longer sentiment is likely driving bank loan inflows,” he said. “With short-term rates expected to remain at 5.25% or more for the next year or so, that translates to bank loan coupon rates of 9% or more.”
Winnie Cisar, global head of strategy at CreditSights Inc., also said that investors only just turning their attention to floating-rate debt may too late to the game.
“Floating-rate has clearly been where you’ve wanted to position for most of 2023 and all of 2022 as well, but we do think that will start to shift as you start to see some of the refinancing needs and this elevated interest-rate environment really impede floating-rate issuers,” Cisar said Friday on Bloomberg Television’s Real Yield. “When we look at the leveraged loan market, fundamentally, it’s a bit lower quality than the high-yield bond market and we think going forward, the preference should be for fixed over floating.”
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