Investors stepped up their risk appetite on the bonds side in June, pursuing the prospect of higher yield as Federal Reserve policy remains uncertain, according to data from State Street. Last month, fixed income exchange traded funds saw nearly $25 billion in flows, with investors ramping up exposure to long-term government bonds to the tune of more than $6 billion, the asset manager found. However, investors were also content to ramp up credit risk, directing more than $1.
6 billion into ETFs with underlying bank loans and collateralized loan obligations, State Street found. "Those funds have now had 13 consecutive months with inflows, taking in over $18 billion during that time frame as investors seek out exposures with limited rate volatility amid elevated rate risks from evolving monetary policy," wrote Matthew Bartolini, head of SPDR Americas Research at State Street Global Advisors, in a report last week. Chasing yield Both bank loans and CLOs are plays on today's higher interest rate environment.
Big institutional investors can purchase bank loans – which lending institutions make to companies – and benefit from the loans' floating coupon rate. These coupons offer attractive yields as rates stay high. The bank loans are typically below investment grade, but they are secured by the assets of the borrower – and that typically means the lender is at the top of the list to get paid in the event the borrower goes bankrupt.
CLOs are similar to bank loans: These are poo.
