Investors are piling into US leveraged loan ETFs, betting that President-elect Donald Trump’s policies will potentially boost inflation and push the Federal Reserve to keep interest rates higher for longer.
The Invesco Senior Loan ETF (ticker BKLN) — the largest fund tracking floating-rate debt — garnered $576 million in the past week. That’s its biggest weekly haul in more than a year. The SPDR Blackstone Senior Loan ETF (SRLN), meanwhile, snapped two weeks of outflows to gain $464 million. It last saw such a hefty influx four months ago.
In another sign of exuberance, the primary market for leveraged loans is flooded with at least eight offerings on Tuesday. That includes education technology company Ellucian Holdings Inc. borrowing money to refinance debt and fund a payout to its private equity backers, including Vista Equity Partners and Blackstone Inc.
Leveraged loans have been one of the best-performing credit asset classes this year, handing investors a 7.8% return, accounting for both price gains and interest payments. Since these loans pay floating rates, they generate more income as yields rise.
Signs that inflation was remaining relatively strong in recent months, including the higher-than-expected inflation reading for September released last month, have made investors hopeful that yields will stay higher for longer than previously expected, boosting prices on the debt.
Now loans are getting another fillip from the election of Trump to the White House. His administration is expected to embrace policies like tariffs that will probably stoke inflation, spurring many strategists to project that the Fed will be slower to cut rates.
“Higher for longer is here to stay,” said John McClain, portfolio manager at Brandywine Global Investment Management. “With a presumably business-friendly environment with economic growth in the US we see leveraged loans as an attractive space to deploy capital.”
On the flip side, higher rates are pinching heavily indebted companies that cannot afford to refinance. Companies facing these pressures have been coming up with ways to circumvent some covenants, often by pitting one set of creditors against another. But with the economy expected to stay relatively strong, investors are comfortable with taking on credit risk associated with leveraged loans.
Trump, a Tailwind
Demand for leveraged loans was expected to taper off when the Fed started lowering interest rates in September. But markets have tempered their expectations over the pace and scale of the central bank’s policy-easing program, with the Fed citing risks from both unemployment and inflation as more or less balanced after cutting rates last week.
The US will probably also see a laxer regulatory environment and an uptick in corporate acquisitions under Trump, both of which bode well for leveraged loans, said Winnie Cisar, global head of strategy at research firm CreditSights.
Still, Cisar cautions against being swept up in the “everything rally of the century” after Trump’s election win. CreditSights is underweight both US investment-grade and high-yield debt, she said.
“We think it will take a bit to play out, so we’ve been recommending starting to sell credit risk into the market strength,” she said.
Companies could spend more on interest if inflation persists and the Fed keeps rates elevated, which could put pressure on those that fund themselves in the leveraged loan market, said Noah Wise, a senior portfolio manager for the Plus Fixed Income team at Allspring Global Investments.
That said, overall, the loan market will be supported by a higher nominal growth rate and stronger aftertax corporate earnings, he added.
“Trump’s election is a tailwind for these factors through lower expected corporate tax rates, less regulation, and higher inflation,” Wise said.
The recent rotation into small caps could also boost leveraged loans, said Adam Phillips of EP Wealth Advisors. The Russell 2000, which tracks small-cap companies, rose 8.6% last week, the most in more than four years.
“Many floating-rate loans are issued to smaller companies, making leveraged loans an extension of the recent ‘Trump trade’ that has boosted small-cap stocks,” Phillips, managing director of investments, said.
Ultimately, pouring into leveraged loans is a way for investors to position their portfolios to benefit from the perceived impact of another Trump administration.
“This is politically driven to an extent,” said Grant Nachman, founder of Shorecliff Asset Management. “If you think rates are going to stay elevated, you want to be in a product that captures interest rates. This is one of the purest ways retail investors could express that view.”
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