Nordstrom, Gap under pressure in high-yield secondary market after earnings; Ford active

By Paul A. Harris and Abigail W. Adams

Portland, Me., Nov. 24 – The dollar-denominated junk primary market remained dormant, as expected, on pre-Thanksgiving Wednesday.

Meanwhile, the secondary space remained weak although trading volume was extremely light ahead of the long weekend.

“A lot of people are out today,” a source said.

With the new issue pipeline drying up, large, liquid issues and earnings-related news were the primary drivers of activity in the secondary space.

Nordstrom, Inc.’s capital structure was under pressure following a large earnings miss.

While volume in the name was light, Gap, Inc.’s 3 5/8% senior notes due 2029 were also down following a sizeable earnings miss.

Ford Motor Co.’s 3¼% senior green notes due 2032 (Ba2/BB+/BB+) were active with the notes weaker over the past few sessions alongside the broader market.

Last month of the year

As to what’s ahead for early December and the run-up to 2022 in the junk primary market, an investor said that the best answer would be “Not too much.”

“It’s been a long year,” said the portfolio manager, who agreed to speak on background.

“We’ve had record issuance.”

In fact, year-to-date issuance to the Thanksgiving hiatus comes to $487 billion, pushing ever closer to the $0.5 trillion mark, and leaving the old record, 2020’s $435 billion, far behind.

There are signs of fatigue, the investor said, noting that lately high-yield mutual funds and ETFs are sustaining outflows, and there are classes of investors who had been active in the junk market, such as crossover investors, who are not presently involved.

The spread in the Merrill Lynch High Yield index moved to 332 basis points from 308 bps, earlier in the month, the investor noted.

And the dealers, themselves, are cutting back on risk.

“If people had their druthers the year would end today,” the manager said.

Asked what implications, if any, President Joe Biden’s nomination of Jerome H. Powell to stay on as chair of the Federal Reserve Bank would have for the junk bond market, the investor said that the decision appeared to be a benign one.

“It’s the devil you know,” said the portfolio manager, who added that the White House appears to have come to the conclusion that at this point in time the less changed, the better.

Nordstrom, Gap under pressure

In the secondary market, Nordstrom’s capital structure was under pressure on Wednesday following a large earnings miss.

The 5% senior notes due 2044 were the most active issue for the retailer.

After falling 3 points on Tuesday following the release of earnings, the notes dropped another 2¾ points, sources said.

The 5% notes stood poised to close Wednesday at 96.

There was about $20 million in reported volume.

Another issue, Nordstrom’s 4¼% senior notes due 2031, sank 3¼ points to close the day at 97¾. There was about $11 million in reported volume.

The 4¼% notes closed out the previous week at 102.

The department store chain’s stock dropped 20% following disappointing numbers.

While volume was light, Gap’s 3 5/8% senior notes due 2029 sank 2 points to close Wednesday at 96½.

The retailer also reported a large earnings miss and cut its forward guidance, a source said.

Both retailers cited supply chain disruptions as the reason for the disappointing quarter.

Ford weakens

Ford’s recently priced 3¼% senior notes due 2032 were active on Wednesday with the notes coming in slightly.

The 3¼% notes were changing hands in the 99¾ to par context during Wednesday’s session, a source said.

There was $21 million in reported volume.

The notes have grown weaker over the past few sessions. They were trading in the par to par ½ context the previous week.

Ford priced a $2.5 billion issue of the 3¼% notes at par on Nov. 8.

$1.09 billion Tuesday outflows

High-yield ETFs sustained a whopping $1.09 billion of outflows on Tuesday, according to a market source.

Outflows from the junk ETFs have been steady, according to the source.

Tuesday’s big outflow follows a $424 million outflow on Monday and a $357 million outflow on Friday.

Actively managed high-yield funds were in the green on Tuesday, posting $15 million of inflows on the day.

Indexes

The KDP High Yield Daily index sank 41 points to close Wednesday at 67.35 with the yield now 4.19%.

The index was down 4 points on Tuesday and 4 points on Monday for a cumulative loss of 50 points.

The CDX High Yield 30 index shaved off 3 basis points to close Wednesday at 108.63. the index was down 5 bps on Tuesday and 28 bps on Monday for a cumulative loss of 36 bps.

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