Morning Commentary: Junk erases early Friday gains; daily outflows reported Thursday

By Paul A. Harris

Portland, Ore., Dec. 9 – A hotter-than-expected (or hoped for) Producer Price Index report erased early Friday gains in the junk bond market, according to a bond trader in New York.

Prior to the release of the Friday report from the U.S. Bureau of Labor Statistics, the high-yield bond market was up as much as half a point, the trader recounted.

Those early gains were relinquished when the market learned that wholesale prices rose 0.3% in November, versus analysts' expectations of 0.2%, which the markets quickly parsed as an indicator that the Fed's fight against inflation is likely not winding down, and that the Fed will probably move to raise interest rates further, as that fight continues.

With the U.S. stock indexes mixed at mid-morning, the iShares iBoxx $ High Yield Corporate Bd (HYG) share price was essentially flat, up 3 cents (0.04%) at $75.07.

Bonds priced Thursday by Chart Industries, Inc., in the first junk-rated, dollar-denominated deal to price since before Thanksgiving, were unchanged at mid-morning, after being up earlier in line with the market, the trader said.

The Chart 7½% senior secured notes due January 2030 (Ba3/B+) were par 1/8 bid, par 3/8 offered, the trader said.

Those bonds, which came at 98.661 to yield 7¾% in a $1.46 billion tranche, went out at par ¼ bid, par ¾ offered on Thursday, according to a market source.

Meanwhile, the Chart 9½% senior unsecured notes due January 2031 (B3/B), also unchanged at mid-morning, were outperforming the secured paper at par ½ bid, 101 offered, the trader said.

The unsecured bonds priced at 97.949 to yield 9 7/8% in a $510 million tranche.

Although demand had been heavily skewed toward the secured notes, the unsecured notes were clearly outperforming in the secondary, the trader noted.

That counterintuitive difference in the trading of the two tranches might be chalked up to the fact that the unsecured tranche, which had been playing to $5.5 billion to $6 billion of demand, was upsized to $1.46 billion from $1.31 billion, while the unsecured tranche, playing to about $3.5 billion of demand, was downsized to $510 million from $750 million, the trader said.

Hence the supply of the higher coupon unsecured notes, which came with more than 71 additional points of OID versus the secured, were in shorter supply in the secondary market than the secured paper, the source added.

Thursday also saw Jones DesLauriers Insurance Management Inc., a broker partner of Navacord Inc., price a $300 million issue of 10½% eight-year senior notes (Caa2/CCC/CCC+) at 97.384 to yield 11%.

It was the first deal to come with triple-C equivalent ratings (“triple hooks”) on both sides of the split since mid-June.

It had a “clubby” following among fixed income investors who follow the insurance and financial sector, a relatively small component of the high-yield index, sources said.

There was no indication that the new Navacord bonds were trading on Friday morning, whatsoever, the trader said.

After Thursday's burst of action, the primary market remained quiet on Friday.

However, given Thursday's executions, with Chart Industries being a blowout, and the triple-hooks Navacord deal pricing within talk, the new issue market may have a little way left to run before the end of the year, the trader said.

Cash balances remain high, sources say.

Issuance has been historically low, the new issue calendar is empty and the pipeline is heard to be lean, they add.

With Thursday’s deals indicating pent-up demand on the part of investors, a window of opportunity for issuers could be inching open in the late going of 2022, the trader said.

Fund flows

The dedicated high-yield bond funds saw $310 million of net daily cash outflows on Thursday, according to a market source.

Actively managed high-yield funds sustained $230 million of outflows on the day.

High-yield ETFs saw $80 million of outflows on Thursday, the source said.

News of Thursday's daily flows follows a Thursday afternoon report that the combined funds saw $66 million of net inflows on the week to the Wednesday, Dec. 7 close, according to fund-tracker Refinitiv Lipper.

That weekly inflow was the sixth positive weekly cash flow in the past seven weeks for the junk funds, according to the market source, who added that over the course of those seven weeks the combined funds have seen $11.8 billion of net inflows.

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