By Lynn Adler
NEW YORK, June 16 (Reuters) - Investors grappling withtrillions of dollars of negative-yielding bonds in Europe andJapan are seen increasingly seeking U.S. leveraged loans forhigher returns, similar to their push into corporate debt,portfolio managers said.
Yields are negative on a record share of global debt, andcould slide further if the UK votes on June 23 to exit theEuropean Union.
With the European Central Bank muscling in as one of thebiggest buyers of European corporate bonds, pressuring yieldsdown, investors have even more reason to cross into U.S. marketslooking for alternatives.
"We are definitely seeing interest in credit from Europeanand Japanese investors right now, across the credit spectrum -from high yield to loans - as they look to deploy capital atmore attractive yields," said Jonathan DeSimone, managingdirector at Bain Capital Credit.
That reach will increasingly extend to loans as well asbonds issued by low-rated U.S. companies, the managers said.
"We haven't seen tangible evidence of European buying yet inthe loan market, but it's a definite possibility because clearlythe world is on a quest for yield given where rates are globallyin Europe and in Japan," an investor said.
The value of government bonds yielding less than zero hit arecord high $8.3 trillion with Europe's share rising, accordingto JP Morgan, even before benchmark 10-year German borrowingcosts went negative on June 14 for the first time.
"The ECB coming in and buying corporate bonds will continueto bring rates down," the investor said. "The German bund wentnegative, and certainly if there is a Brexit then rates in thecontinent are likely to go even more negative."
JP Morgan said Japan accounted for almost two-thirds of thebonds trading with negative yields, Reuters reported.
Japanese investors have been buyers of U.S. leveraged loanproducts, especially the most senior parts of CollateralizedLoan Obligation funds, and are also seen stepping upparticipation.
U.S. leveraged loan yields overall average about 5.6percent, 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 overseasinvestors can get on domestic bonds. U.S. leveraged loan fundsreturned 4.13 percent, while high-yield funds returned 5.73percent, this year through June 14, according to Lipper. U.S.corporate debt funds rated BBB, which are low ratedinvestment-grade funds, returned 6.78 percent.
Yields on safe-haven U.S. Treasury debt, meantime, hitfour-year lows earlier on Thursday. Ten-year notes yielded about1.6 percent in mid-afternoon trading.
Regardless of the Brexit vote outcome, market volatility isexpected to persist globally, driven by factors including anemicglobal growth and the looming U.S. presidential election.
Volatility will put a ceiling on investment overall. And lowU.S. interest rates could keep overseas investors favoringhigh-yield U.S. bonds over leveraged loans until the FederalReserve does raise interest rates.
Leveraged loan rates are pegged to floating rates, and manyinvestors have been reticent to load up before the Fed resumesthe rate hiking it started last December.
"There's still a preference for high-yield bonds rather thanloans because of the perceived liquidity in the high-yieldmarket and with the Fed on hold loans are just not asattractive," said Kevin Lyons, head of credit and fixed incomefor hedge funds at Aberdeen Asset Management.
The Fed on Wednesday kept rates unchanged, but signaled itstill plans two rate hikes before year-end and now sees threehikes annually starting next year. The December 2015 rateincrease was the first in nearly a decade. (Reporting by Lynn Adler; Editing By Michelle Sierra and JonMethven)
