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Loan funds see outflows for first time in 20 weeks amid trade war

New York

US BANK loan funds saw the first week of outflows after 19 consecutive weeks of inflows as market volatility triggered by the trade war dented investors' appetite for risk assets.

Investors pulled US$184.2 million from loan funds in the week ending July 4, according to Lipper. This marked the first week of outflows from loan funds since the week ending Feb 14.

The trade conflict between the US and China escalated sharply on Friday as the tariffs on the first batch of US$34 billion worth of each country's imports started. US tariffs on another US$16 billion of Chinese goods are due to go into effect in two weeks.

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President Trump also upped the ante by threatening that Washington could add another US$500 billion of tariffs, Reuters reported.

"Amid market volatility, investors are increasingly favouring bond strategies with less credit risk," said Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA. "High yield and bank loan funds incur greater credit risk. Investors are preferring safety of treasuries and other investment grade securities."

Corporate investment grade bond funds have been attracting new money for 17 consecutive weeks, while investors withdrew US$1.73 billion from high-yield bond funds last week in the third week of outflows, according to Lipper.

The tit-for-tat trade dispute is generating risk-off sentiment across global markets, including the US secondary market which is also showing signs of fatigue. Average bids for US secondary loans dropped to 98.64 on July 5 from a 2018 peak in late April of 99.01. The percentage of loans trading above face value or par dropped to 25 per cent on July 5 from nearly 60 per cent on May 1. It hit 23.5 per cent on July 2, which was the lowest figure since September 2016, according to Thomson Reuters LPC data. REUTERS