LPC: Negative global yields positive for US leveraged loans

By Lynn Adler

NEW YORK, June 16 (Reuters) - Investors grappling with trillions of dollars of negative-yielding bonds in Europe and Japan are seen increasingly seeking U.S (Other OTC: UBGXF - news) . leveraged loans for higher returns, similar to their push into corporate debt, portfolio managers said.

Yields are negative on a record share of global debt, and could slide further if the UK votes on June 23 to exit the European Union.

With (Other OTC: WWTH - news) the European Central Bank muscling in as one of the biggest buyers of European corporate bonds, pressuring yields down, investors have even more reason to cross into U.S. markets looking for alternatives.

"We are definitely seeing interest in credit from European and Japanese investors right now, across the credit spectrum - from high yield to loans - as they look to deploy capital at more attractive yields," said Jonathan DeSimone, managing director at Bain Capital Credit.

That reach will increasingly extend to loans as well as bonds issued by low-rated U.S. companies, the managers said.

"We haven't seen tangible evidence of European buying yet in the loan market, but it's a definite possibility because clearly the world is on a quest for yield given where rates are globally in Europe and in Japan," an investor said.

The value of government bonds yielding less than zero hit a record high $8.3 trillion with Europe's share rising, according to JP Morgan, even before benchmark 10-year German borrowing costs went negative on June 14 for the first time.

"The ECB coming in and buying corporate bonds will continue to bring rates down," the investor said. "The German bund went negative, and certainly if there is a Brexit then rates in the continent are likely to go even more negative."

JP Morgan said Japan accounted for almost two-thirds of the bonds trading with negative yields, Reuters reported.

Japanese investors have been buyers of U.S. leveraged loan products, especially the most senior parts of Collateralized Loan Obligation funds, and are also seen stepping up participation.

U.S. leveraged loan yields overall average about 5.6 percent, Thomson Reuters LPC data shows.

Yields averaged 5.3 percent for BB-rated U.S. companies, ranked among the highest in the so-called junk bond space, according to Bank of America Merrill Lynch.

JUNK HAS EDGE

Mutual funds also offer higher returns than many overseas investors can get on domestic bonds. U.S. leveraged loan funds returned 4.13 percent, while high-yield funds returned 5.73 percent, this year through June 14, according to Lipper. U.S. corporate debt funds rated BBB, which are low rated investment-grade funds, returned 6.78 percent.

Yields on safe-haven U.S. Treasury debt, meantime, hit four-year lows earlier on Thursday. Ten-year notes yielded about 1.6 percent in mid-afternoon trading.

Regardless of the Brexit vote outcome, market volatility is expected to persist globally, driven by factors including anemic global growth and the looming U.S. presidential election.

Volatility will put a ceiling on investment overall. And low U.S. interest rates could keep overseas investors favoring high-yield U.S. bonds over leveraged loans until the Federal Reserve does raise interest rates.

Leveraged loan rates are pegged to floating rates, and many investors have been reticent to load up before the Fed resumes the rate hiking it started last December.

"There's still a preference for high-yield bonds rather than loans because of the perceived liquidity in the high-yield market and with the Fed on hold loans are just not as attractive," said Kevin Lyons, head of credit and fixed income for hedge funds at Aberdeen Asset Management (Other OTC: ABDNF - news) .

The Fed on Wednesday kept rates unchanged, but signaled it still plans two rate hikes before year-end and now sees three hikes annually starting next year. The December 2015 rate increase was the first in nearly a decade. (Reporting by Lynn Adler; Editing By Michelle Sierra and Jon Methven (NZSE: MVN.NZ - news) )