Garnet Capital Advisors Blog

April 2, 2014

Investor thirst for debt could push whole loan prices higher

Investors are flocking to debt, and their strong desire could push whole loan prices higher.

If these lines of credit appreciate, the development could affect loan sales. Banks might be able to fetch a greater price for their loan portfolios. In addition, potential buyers might have more interest as global markets rush to purchase debt.

Market participants favor debt
In the first quarter of this year, market participants bought $317 billion worth of bonds from companies with high ratings, according to figures supplied by data provider Dealogic and reported by The Wall Street Journal. In addition, investors put $3.1 billion into high-yield corporate bond mutual funds and $20.3 billion into U.S. investment-grade mutual funds during the period, preliminary data provided by Lipper reveals.

This contrasts with the trend of the last several quarters, as these debt funds have suffered outflows since the first quarter of 2013 ended, according to the news source. During the first three months of last year, investors put $1.9 million into funds representing high-yield debt, and $39.1 billion into ones involving investment-grade debt.

Bonds generate strong returns
Market participants have good reason to favor debt-based securities, as global bonds monitored by Bank of America Merrill Lynch indexes returned 2.7 percent this year through March 31, Bloomberg reported. This performance far surpassed the 1.45 percent loss that debt investors suffered in 2013.

Global bonds also did better than the MSCI World Index of stocks, which appreciated 1.42 percent in the first quarter of 2014, according to the news source. These debt-based financial instruments also outperformed major indices of the U.S. and the euro zone, The Financial Times reported. Several market experts noted that economic headwinds have been motivating global investors to seek out bonds instead of equities.

"So far 2014 has not followed the bullish script, the one where equities were meant to be driven higher by improving economic growth fuelled by capital expenditure, a more confident consumer and a resurgent Japan," Andrew Lapthorne of Societe Generale wrote in a note, according to the media outlet. "However, the opposite has happened."

Equities face headwinds
Cameron Watt, chief investment strategist at BlackRock's investment institute, told the news source that both the challenging economic weather conditions and the determination of the Federal Reserve to continue its tapering of stimulus have affected U.S. stocks.

As equities encounter challenges, robust investor demand has pushed bond prices higher, according to The Wall Street Journal. Between the end of December and the end of March, the price of U.S. high-yield corporate debt increased by an average of 104.5 cents on the dollar from 103.32 cents, according to Bank of America Merrill Lynch index data.

"There are massive potential macroeconomic issues that this market has powered through," Daniel Botoff, who works for UBS as managing director and head of fixed-income syndicate for the Americas, told the news source. "This market has really been resilient."

Thus far in 2014, the global asset markets have defied expectations, according to Andrew Chorlton, a New York-based money manager for a Schroders Plc. unit. He told Bloomberg that the situation of bonds outperforming equities is "contrary to what virtually every investment bank you care to mention had on their outlooks for 2014."