Linux – route packets through hardware loopback interface, not lo

My embedded Linux board has 3 interfaces:

• eth0 – For all outbound traffic
• eth1 – A hardware loopback (traffic leaves board, but comes immediately back in the same port)
• lo – Standard loopback interface

ifconfig reveals the following:

eth1      Link encap:Ethernet  HWaddr AA:BB:CC:DD:EE:FF  
          inet addr:169.254.1.1  Bcast:169.254.255.255  Mask:255.255.255.255
          UP BROADCAST RUNNING MULTICAST  MTU:1500  Metric:1
          RX packets:0 errors:0 dropped:0 overruns:0 frame:0
          TX packets:0 errors:0 dropped:0 overruns:0 carrier:0
          collisions:0 txqueuelen:1000 
          RX bytes:0 (0.0 B)  TX bytes:0 (0.0 B)
          Base address:0x8000 

lo        Link encap:Local Loopback  
          inet addr:127.0.0.1  Mask:255.0.0.0
          inet6 addr: ::1/128 Scope:Host
          UP LOOPBACK RUNNING  MTU:16436  Metric:1
          RX packets:14 errors:0 dropped:0 overruns:0 frame:0
          TX packets:14 errors:0 dropped:0 overruns:0 carrier:0
          collisions:0 txqueuelen:0 
          RX bytes:1561 (1.5 KiB)  TX bytes:1561 (1.5 KiB)

And, route yields:

Kernel IP routing table
Destination     Gateway         Genmask         Flags Metric Ref    Use Iface
169.254.1.1     *               255.255.255.255 UH    0      0        0 eth1
A.B.C.96        *               255.255.255.240 U     0      0        0 eth0
127.0.0.0       *               255.0.0.0       U     0      0        0 lo
default         A.B.C.110       0.0.0.0         UG    0      0        0 eth0

I can ping the eth1 interface's assigned IP, like so:

PING 169.254.1.1 (169.254.1.1): 56 data bytes
64 bytes from 169.254.1.1: seq=0 ttl=64 time=0.143 ms
64 bytes from 169.254.1.1: seq=1 ttl=64 time=0.067 ms

But, all of the packets appear on the lo interface, not eth1, according to the ifconfig reported RX/TX counters.

Why? Is the traffic really ingressing and egressing the eth1 port, but being accounted under the lo interface? Or, is the traffic really all flowing through lo?

Thanks!