Morning Commentary: Junk opens stronger; new Carnival Cruise 10½% notes sharply higher

By Paul A. Harris

Portland, Ore., May 20 – The high-yield bond market opened ¼ point better on Friday, in line with stronger equities, according to market sources.

With the S&P 500 stock index up 0.3% at mid-morning, the iShares iBoxx $ High Yield Corporate Bd (HYG) share price was up 0.29%, or 22 cents, at $76.73. Approaching midday, however, the S&P 500 had turned negative along with other equity indexes.

Bonds priced by Carnival Corp. in a big Wednesday drive-by, only to break lower and take a conspicuous tumble, were sharply higher on Friday.

The Carnival 10½% senior notes due June 2030 (B2/B), which came at par in a $1 billion issue, were par ½ bid, 101 offered on Friday morning after going out Thursday wrapped around par, a trader said.

Those notes started Thursday at 98½ bid, 99 offered, the source recounted, at a loss for a catalyst that could explain such a dramatic upward move.

It could be a technical bounce or short covering, the trader suggested without a lot of conviction.

“Everything feels oversold,” the source asserted. “We may be bottoming out here.”

As the third week in May comes to a close, there's no shortage of negative indications, the trader conceded, adding that junk tends to be wider on a spread basis and lower on a price basis.

The composite spread of the Merrill Lynch US High Yield Master II index (H0A0) has now crossed above 500 basis points for the first time since Nov. 4, 2020, the source said.

However, there is still a lot of cash to be put to work in junk, and there has been no calendar, the trader said.

An inventory of the past month's primary market activity quickly bears out that last assertion.

Since April 20, five issuers have priced a total of six tranches of dollar-denominated junk, raising just under $7.25 billion.

For comparison, April 20, 2021 to May 20, 2021 saw $56.4 billion in 92 tranches.

Alleviation of the issuance drought was nowhere to be seen on Friday morning, however.

There was no new issue news, and the active calendar remained empty.

Fund flows

High-yield ETFs saw a very healthy $460 million of daily cash inflows on Thursday, according to a market source.

Actively managed high-yield funds were negative on the day, sustaining $214 million of daily outflows on Thursday.

News of those daily flows trails a Thursday report that the combined funds saw $2.61 billion of net outflows in the week to the Wednesday, May 18 close, according to Refinitiv-Lipper.

That extends year-to-date outflows to $36.4 billion, according to the market source.

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