Morning Commentary: Junk bonds tumble ½ point in early going; fund outflows continue

By Paul A. Harris

Portland, Ore., Feb. 4 – With the 10-year Treasury yield mounting a meaningful assault on the 2% mark and equities remaining in the grip of volatility, the high-yield index was off ½ point on Friday morning, according to a trader in New York.

Ten-year government paper was yielding 1.93% at mid-morning, up well over 9 basis points following a Labor Department report marking the U.S. unemployment rate at 4%, versus the 3.9% that economists were projecting.

With the S&P 500 stock index off 0.5% at mid-morning the iShares iBoxx $ High Yield Corporate Bd (HYG) share price was down a substantial 0.83%, or 69 cents, at $83.40.

Traders continued to plow through what has been a strong and steady stream of bids-wanted-in-competition (BWICs), many of them from the junk ETFs, the New York trader said.

Bonds priced late Thursday by Condor Merger Sub, Inc., in support of the leveraged buyout of McAfee Corp., were well below issue price on Friday morning, the trader said, marking the Condor Merger Sub 7 3/8% senior notes due February 2030 (Caa2/CCC+) at 98¼ bid, 98¾ offered.

The downsized $2.02 billion issue (from $2.32 billion) priced at par. The McAfee deal previously underwent an even bigger downsize when it eliminated a $1 billion tranche of secured notes and shifted those proceeds to its bank loan deal.

In what became a mass flight of issuance to the bank loan market from the junk bond market, three of Thursday’s issuers shifted a combined $1.9 billion to bank loans from proposed bonds.

Another of Thursday’s big M&A deals, the PMHC II, Inc. (Prince International Corp.) $756 million 9% senior notes due February 2030 (Caa2/CCC+), which traded well on the break – wrapped around 101 late Thursday – were par bid, par ¾ offered on Friday morning, sources said.

The Prince deal also underwent a big downsize, from $1.256 billion, as the issuer elected to withdraw a proposed $500 million tranche of secured notes from the market and shift those proceeds to a bank deal.

Outflows

The cash flows of the leverage markets mirror Thursday’s mass migration of cash to loans from bonds.

In the week to the Wednesday, Feb. 2 close, the dedicated high-yield bond funds sustained a whopping $4.04 billion of net outflows, the largest outflow since March 2021, according to market sources.

In the past four weeks the junk funds sustained outflows totaling $11.2 billion, or 4% of assets under management, the most significant since the week ending Aug. 16, 2014.

The dedicated bank loan funds, meanwhile, saw $1.32 billion of net inflows in the week to the Feb. 2 close.

That follows the back-to-back record weekly inflows of $2.01 billion and $2.25 billion.

In the past four weeks the bank loan funds have seen $7.4 billion of net inflows, or 8.2% of assets under management.

Loan funds saw a record $9.5 billion of net inflows in the month of January 2022.

For the same period, the dedicated high-yield bond funds sustained $10 billion of net outflows, market sources say.

The most recent high-yield fund flow news tallies an additional $428 million of daily net outflows from the junk funds on Thursday, according to a market source.

High-yield ETFs saw $328 million of outflows on the day.

Actively managed high yield funds sustained $100 million of outflows on Thursday, the source said.

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