In the run-up to the Fed's decision to raise the overnight funding rate, assets flowed back into leveraged loan ETFs and mutual funds. Loan fund AUM grew by $1.2 billion in August, according to Morningstar data, and inflows have continued in September. The 0.25-point rate hike on Sept. 16, to 3.75-4.00%, raises the baseline interest return on floating-rate loans.
The first rate hike in more than three years followed a surge in Treasury yields and oil prices. Ten-year Treasury yields have risen from about 4% to 5% since the war in Iran began, and inflation readings have persisted well above the Fed's 2% target. Investors expect more hikes to come.
CME's FedWatch Tool shows a better-than-50% chance of another 25 bps hike at the October meeting and a target rate of 4.50-4.75% by the end of 2027. As inflows into loan funds have resumed, outflows have increased at fixed-rate high-yield funds, including a hefty $2.5 billion withdrawal in the week through Sept. 16, according to Morningstar. Rate-hiking cycles have frequently coincided with growth in AUM at leveraged loan funds, while AUM has generally contracted in rate-cutting cycles.
The Sept. 16 rate hike ends an eight-month period of rates at a relative minimum (the last cut was in December 2025). Loans rebound, including softwarePrices for leveraged loans have been rising. The weighted average bid price added 41 bps in August, to 95.58, and inched up further to 95.68 by Sept. 21.
Software sector loans, which sold off earlier this year, have led the rally. Funds grow, index grows fasterSince the end of March, AUM at loan funds has grown by $2.7 billion, to $96 billion. Still, loan funds' share of the Morningstar LSTA US Leveraged Loan Index has slipped to 6.37%, the lowest since September 2009.
This continues a longer-term trend of loan fund AUM declining as a share of the growing universe of syndicated leveraged loans, while CLOs have grown as the dominant investors in the asset class. Weekly coverage of US and European loans, bonds, private credit, and more. This article originally appeared on PitchBook News
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