Junk bonds surge pre-Fed; First Republic gains; Medline gains; DISH improves

By Paul A. Harris and Abigail W. Adams

Portland, Me., March 21 – While the U.S. stock markets rallied and the investment-grade bond new issue market reopened in a big way on Tuesday, the high-yield primary market remained dormant, as it has now been through much of the month of March.

With rates on the move and defaults heading higher – perhaps significantly higher – high-yield bond investors face greater challenges in pricing risk, which could slow down the reopening of the new issue bourse in junkland, an investor said.

However, if the Federal Open Market Committee (FOMC) declines to raise rates at the conclusion of its March meeting, on Wednesday, and signals that it will exercise caution ahead, the high-yield primary market could regenerate sooner than later, the source added.

The preponderance of big banks – including Citigroup, J.P. Morgan and Morgan Stanley, expect the Fed to increase rates another 25 basis points on Wednesday, the investor said.

Goldman Sachs is among a minority of institutions expecting the FOMC to sit tight in March, the source added.

Meanwhile, it was a strong day in the secondary space with buyers returning to the market as the banking sector stabilized.

Headlines that JPMorgan was advising First Republic Bank on strategic alternatives and Treasury secretary Janet Yellen had pledged intervention to protect deposits at small and mid-sized banks boosted investor confidence.

The cash bond market added ½ to ¾ point while the CDX index shot up 1½ points, sources said.

While offers-wanted-in-competition lists outnumbered bids-wanted-in-competition lists, there were some real money accounts selling into the rally, a source said.

The market will be laser-focused on the Fed’s announcement on Wednesday after undergoing a dramatic repricing since Silicon Valley Bank’s collapse, which began on March 8.

Market players are currently debating a 0 to 25 bps rate increase on Wednesday with market expectations for rate cuts by the fourth quarter, a source said.

While typically a high-volatility event, the Federal Reserve’s Wednesday announcement, where it is expected to outline a new dot plot plan in response to the banking crisis, promises to be particularly explosive if market expectations are wrong.

“It will be interesting,” a source said.

Bank paper and large, liquid issues dominated the tape on Tuesday, which saw an uptick of trading activity as the market tone improved.

First Republic Bank’s subordinated notes (B2/B-) were lifted on the news JPMorgan was advising the bank on strategic alternatives.

Medline Industries Inc.’s junk bonds were among the most actively traded issues of Tuesday’s session with the notes rising alongside the broader market.

DISH Network Corp.’s junk bonds also improved after heavy selling in the capital structure over the past three weeks.

First Republic lifted

First Republic’s subordinated notes were lifted on Tuesday on reports that JPMorgan was advising the bank on strategic alternatives.

The 4 5/8% subordinated notes due 2047 jumped 2½ points to close Tuesday wrapped around 62.

There was $12 million in reported volume.

The 4 3/8% subordinated notes due 2046 rose 1¾ points to reclaim a 60-handle, a source said.

They closed the session at 60¼.

There was $8 million in reported volume.

The subordinated notes slipped on Monday as the bank’s stock plunged following another round of downgrades from credit rating agencies.

However, First Republic stock pared some of the losses on Tuesday and closed the day at $15.77, an increase of 29.79%.

Yellen’s pledge to back bank deposits and news that JPMorgan was leading a new rescue plan for the bank helped alleviate some concern about First Republic’s stability.

Medline higher

Medline’s senior notes were on the rise in heavy volume on Tuesday as buyers returned to the space.

The health care company’s 3 7/8% senior secured notes due 2029 (B1/B+/BB-) climbed ¾ point to change hands in the 85¾ to 86¼ context, according to a market source.

The yield was about 6¾%.

There was $28 million in reported volume with the issue the most actively traded of the session.

Medline’s 5¼% senior notes due 2029 (Caa1/B-/B-) gained 1 point.

The notes were lifted to the 84½ to 85 context with the yield falling to about 8 3/8%, a source said.

There was $24 million in reported volume.

While Medline’s tranches are large, liquid issues, the notes have held up well amid the blowout in credit spreads over the past two weeks.

The 3 7/8% notes and 5¼% notes both traded down to an 83-handle with heavy selling in the market following Silicon Valley Bank’s collapse.

However, the notes were quick to recover with the 3 7/8% secured notes outpacing their unsecured counterparts as rates rallied.

DISH improves

DISH paper improved on Tuesday after heavy selling in the capital structure over the past three weeks.

DISH’s 11¾% senior secured notes due 2027 (Ba3/B+) bounced off an all-time low to return to a 94-handle.

The notes gained about ½ point to close the day wrapped around 94½, a source said.

The yield was 13 3/8%.

There was $21 million in reported volume.

DISH’s 7 3/8% senior notes due 2028 (B3/B) gained 1 point to close the day at 58¾ with the yield 20½%.

There was $20 million in reported volume.

DISH’s capital structure has been under pressure over the past three weeks with the satellite broadcaster still grappling with a ransomware attack that caused widespread outages.

The negative topical news combined with heavy selling in the market dragged DISH’s senior notes to new all-time lows.

However, the notes improved on Tuesday alongside the broader market.

Fund flows

The dedicated high-yield bond funds sustained $463 million of net daily cash outflows on Monday, the most recent session for which data was available at press time, according to a market source.

High-yield ETFs had $343 million of outflows on the day.

Actively managed high-yield funds sustained $120 million of outflows on Monday, the source said.

The combined funds are tracking $407 million of net outflows on the week that will conclude with Wednesday's close, according to the market source.

Indexes

The KDP High Yield Daily index gained 20 points to close Tuesday at 50.93 with the yield now 7.5%.

The index added 3 points on Monday.

The ICE BofAML US High Yield index gained 57.7 bps with the year-to-date return now 1.95%.

The index was down 12.8 bps on Monday.

The CDX High Yield 30 index jumped 152 bps to close Tuesday at 100.39.

The index was unchanged on Monday.

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