Here’s a question in the debt markets: Why do institutions keep pouring cash into US speculative-grade corporate loans, while mutual fund buyers can’t flee fast enough?

Investors from pensions to hedge funds are piling into collateralised loan obligations (CLO) at a near record pace this year, buying debt backed by pools of the loans that’ve been sliced into pieces of varying risk and return. At the same time, individuals keep yanking money from loan mutual funds, bringing the year-to-date withdrawals to $7.9 billion (Dh28.9 billion), according to data compiled by Wells Fargo & Co.

It’s understandable for individual investors to be wary of these high-yield loans, which aren’t regulated as securities and trade in an antiquated process of phone calls, messages and, sometimes, faxes. While buyers may emerge fairly quickly, it takes almost three weeks on average to settle trades, compared with three days or less for many bonds.

“This suggests that there can be a substantial timing mismatch between investor redemptions from daily liquidity mutual funds and the subsequent selling of loans by fund managers,” Barclays analysts Bradley Rogoff, Eric Gross and Anthony Bakshi wrote in a report.

Of course, many of these funds have revolving credit lines, hold bonds and more cash to ensure investors can get repaid in a timely fashion during a period of big outflows, even if it takes a little longer to complete trades.

And mutual fund investors may return to the debt if they start having faith that benchmark yields will rise steadily as inflation picks up and the US economy accelerates. These loans have floating rate benchmarks, which may be more of a draw if the Federal Reserve actual hikes interest rates for the first time since 2006 this year.

“I would expect if rates keep rising, and especially as we get close to the first rate hike, to start seeing somewhat consistent loan inflows,” Adam Richmond, a credit strategist at Morgan Stanley, said in an email message.

The issue of daily redemptions isn’t a big concern for buyers of CLOs, which lock up investor money for longer periods of time. Institutions have bought $56.5 billion of such deals this year, approaching last year’s record pace of $60.8 billion in the first six months of the year, Wells Fargo data show.

Riskiest slices

Apollo Global Management is currently marketing a $1.1 billion CLO that’ll be 2015’s biggest, according to a person with knowledge of the deal.

The motivation for these buyers comes down to a very simple desire: returns in yet another year of historically low yields amid a seventh year of record Fed stimulus. Institutions can earn a higher yield on the top-rated portions of these deals than other similarly rated assets, while hedge funds and others receive fatter premiums to buy the riskiest slices.

Mutual fund investors, meanwhile, pulled $423 million in the past week, showing they don’t have faith in the loans just yet, Wells Fargo data show.

Aside from all the technical risks of how easily and quickly you can trade, there’s a more fundamental concern as well: corporate defaults have already started to tick up, and they could accelerate if economic growth were to slow.

Perhaps individuals will start trickling back to this $800 billion debt market, following the lead of big debt buyers who still need returns in an era of financial repression. For now, they’re still seeking shelter from these risky assets.