Leveraged Loans Are Better Value Than Junk Bonds, Investor Says
(Bloomberg) -- U.S. junk bonds look expensive after their prices have jumped since last year, and buying leveraged loans is a better bet now, according to Vancouver-based money manager Leith Wheeler Investment Counsel Ltd.
The firm has been increasing its exposure to loans relative to high-yield bonds since the middle of last year, as it has found loans trading with higher yields than bonds, said Dhruv Mallick, a portfolio manager. That’s true even if the two forms of debt are of similar quality, he said.
Earlier this month, for example, CommScope Holding Co. borrowed a seven-year loan with a floating rate equivalent to a fixed yield of 6.068 percent, according to data compiled by Bloomberg. It also sold seven-year notes, also senior secured, with a yield of 6 percent.
“The loan was issued at a cheaper rate than the secured bond, which makes no sense,” said Mallick. “So we bought the loans.”
The fund manager in the middle of last year had about half of its multi-strategy credit funds in high-yield bonds, and half in leveraged loans. Now about 65 percent are in loans, a figure that was around 70 percent in December and might come back to 60 percent in the coming weeks, Mallick said. Leith Wheeler oversees around C$20 billion ($15.1 billion) of assets.
As money managers have grown more assured that the Federal Reserve is pausing rate hikes, many have been going in the opposite direction -- buying fixed-rate bonds and getting out of floating-rate loans. Investors have pulled money out of leveraged-loan funds for 13 consecutive weeks, according to Lipper. For the last three weeks, they’ve been pouring money into junk-bond funds, including a $3.86 billion of inflow earlier this month that was the biggest since July 2016.
High-yield bonds have gained 5.4 percent this year through Friday, compared with 3.2 percent for leveraged loans.
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