Morning Commentary: Junk starts September on firm footing; funds sustain modest outflows

By Paul A. Harris

Portland, Ore., Sept. 1 – September got underway with the high-yield bond market on firm footing, sources said.

Junk opened unchanged to up perhaps 1/8 of a point, a trader said.

For the first time in two weeks trading volumes were above average on Tuesday, the last day of August, driven by the normal re-balancing of indexes, sources noted.

With the major U.S. stock indexes turning in mixed performances – but essentially flat – at Wednesday mid-morning, the iShares iBoxx $ High Yield Corporate Bd (HYG) share price was flat to slightly better at $87.87, up a nickel, or 0.06%.

The junk market appears to be heading into September in good shape, a high-yield portfolio manager commented on Wednesday morning.

Around mid-July high-yield spreads widened to 345 basis points from 305 bps earlier in the month, the investor said, attributing that widening to the pandemic, but also to what was then a formidable summer new issue calendar.

They have now halved that widening, the manager said.

Spreads hit an all-time low of 304 bps on July 1, then widened to 346 bps by July 19.

They were still at 345 bps on Aug. 19.

Now they are at 322 bps, the investor said.

Recent levels on a couple of distressed energy bonds are indicating that things are moving in a positive direction, according to the investor.

Talen Energy Supply, LLC’s 10½% senior guaranteed notes due January 2026 were 42½ bid on Wednesday morning.

Those had traded down to just under 40.

The PBF Holding Co. LLC/PBF Finance Corp. (PBF Energy Co. LLC) 6% senior notes due February 2028 were off their lows and were 63½ bid, 65 offered on Wednesday morning.

Those had hit levels around 50, the investor said.

Those improvements were underway before Hurricane Ida piled into oil and petrochemical operations in Louisiana, the investor noted.

What impact the hurricane will have on high-yield credits with exposure to the disaster remains to be seen, the source added.

High-yield chemical companies impacted by the hurricane report they are in pretty good shape, in terms of the conditions of their plants, and are waiting to assess factors that will impact their business, such as supply disruptions, the investor said.

Meanwhile, September began quietly in the new issue market, with no issues announced and none expected to price, and with sources forecasting that the primary market will remain closed through the Labor Day holiday weekend which gets underway following Friday's close.

Tuesday outflows

The dedicated high-yield bond funds sustained $120 million of net daily outflows on Tuesday, according to a market source.

High-yield ETFs saw $134 million of outflows on the day.

Actively managed high-yield funds were in the green on Tuesday, posting $14 million of inflows on the day, the source said.

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