Investors have poured into funds buying U.S. loans over the past week, hoping to profit from higher interest rates as the Federal Reserve prepares to tighten monetary policy to fight inflation.

Funds invested in U.S. loans fell by $1.9 billion in the week to Wednesday, the largest weekly increase for the asset class in five years, according to flows tracked by data provider EPFR.

The U.S. central bank is preparing to enter the lending market Cancel pandemic stimulus Measures were taken and interest rates raised for the first time since December 2018.FOMC minutes December meeting Indicating that policymakers may raise interest rates sooner than previously expected.

Traders bet the Fed will three or four times According to the futures market, it is about 1% this year.This view in U.S. financial markets has strengthened, data show employment increase and Consumer prices soar, cementing investor expectations for a hawkish central bank turn.

“I think we may have reached an inflection point. The question is no longer ‘whether’ interest rates will go up, but ‘how fast and how high,'” said Jeff Bakalar, head of the leveraged credit group at Voya Investment Management. “Every time that happens, the lending market becomes a safe haven.”

Lending is seen as more immune to a shift in Fed policy than corporate bonds, as coupons paid to investors rise and fall with the benchmark rate.interest corporate bondsIn contrast, it is fixed and does not change over time. This means that as interest rates rise, loan returns flowing back to investors also rise, while bond prices tend to fall.

Total returns on a widely watched U.S. leveraged loan index run by loan syndicates and trade associations rose 0.5 percent this year, pushing the average price of a loan to 99 cents, the highest level in more than seven years. year.

Those returns beat the performance of the benchmark S&P 500 stock index (down more than 2%) and high-yield corporate bonds (down 0.6% this year), according to Ice Data Services.

recent volatility in financial marketsInvestors have restructured portfolios to accommodate higher interest rates, putting pressure on corporate bond funds. Funds buying high-yield bonds redeemed $1.6 billion in the past week, the first outflow since early December.

“Lending provides investors with two much-needed features in 2022 — interest rate protection and relatively stable performance,” Citi analysts Michael Anderson and Philip Dobrinoff wrote in a note. The first week of 2022 is a harbinger of continued volatility, so lending should be a compelling investment.”

Investors show less interest in one corner of financial markets benefit Consumer prices have risen over the past year: less inflows into inflation-linked bond funds. These funds saw inflows of about $40 million, down from $1.1 billion the previous week.

The modest increase suggests that despite a sharp rise in consumer price inflation in December reported this week, investors Fed’s Commitment Tighten monetary policy to curb inflation.

Barclays analysts Michael Pond and Jonathan Hill wrote in a note to clients: “The Fed appears to be more sensitive to realized inflation data than it has been in the past, and it has been stronger. “The talk of tightening monetary policy should lower forward inflation expectations, if deemed credible and effective.”