Investors are buying corporate loan funds quickly – and this should continue as they position themselves in a rising rate environment.

Why is this important: Interest on this type of debt, known as leveraged loans, increases when rates rise because it is tied to benchmarks like Libor, which can go up and down.

• Leverage loans provide liquidity to lower quality businesses when they need cash. They are also a crucial part of financing mergers and acquisitions and private equity buyouts.

What they say : Increased investor demand for these loans will allow even more buyouts as private equity firms seek to roll out the mountains of dry powder on which they sit, Paul Raskin, senior analyst at Neuberger Berman, told Axios.

The big picture: Floating rate mutual funds, a major buyer of leveraged loans, posted net inflows of $ 25 billion this year, compared to outflows of about $ 25.5 billion in the same period last year, according to financial data provider EPFR.

• The other big buyers of leveraged loans are structured vehicles called CLO (secured loan bonds), which are issued at a breakneck pace.

To note : Low default rates also make leveraged loans attractive to investors. The weakest corporate defaults were put forward last year during the pandemic, and they are expected to be historically low over the next few years, Raskin says.

The bottom line: Expect leveraged loan fund inflows to continue for the foreseeable future.