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Hawkish central banks send leveraged loan prices to their highest levels in near 15 years

Randy Mancini 19 Jan 20
FILE PHOTO: A view of the Federal Reserve Building in Washington
FILE PHOTO: A view of the Federal Reserve Building in Washington, September 16, 2008. REUTERS/Jim YOUNG/File Photo

January 20, 2022

By Yoruk Bahceli

(Reuters) – U.S. leveraged loan prices have surged to their highest levels since 2007 as investors snap up assets that will offer compensation with central banks moving into a rate hike cycle.

Leveraged loans are often taken out by companies that have high levels of debt, usually with non-investment grade credit ratings and are often used by private equity firms to fund their acquisitions of these companies.

Unlike bonds, they pay a floating interest rate, which rises as underlying interest rates rise, making them attractive to investors at a time when central banks embark upon rate hikes.

That has exacerbated the need to snap up assets that pay out as rates rise, sending the price of the S&P/LSTA Leveraged Loan Index to its highest levels since July 2007 at 99.066 at Wednesday’s close, according to data from Refinitiv and S&P Global’s Leveraged Commentary and Data.

Investor inflows have also surged with loan funds saw the highest inflows since 2013 at $1.84 billion for the week ending on January 12, according to data from Refinitiv Lipper.

With inflation raging at 40-year highs, Federal Reserve officials have signalled they will start raising U.S. interest rates as early as March with investors expecting as many as four rate hikes this year.

(Reporting by Yoruk Bahceli; Editing by Saikat Chatterjee)