Junk, stock divergence continues as high-yield rebounds; gaming names firm; funds lose

By Paul Deckelman and Paul A. Harris

New York, Aug. 25 - The junk bond market reversed course on Thursday, pushing mostly higher after several days on the downside.

Traders had no ready explanation for the rebound, which saw a continuation of the recent divergence between the junk and equity markets. Only this time, it was junk that jumped, while stocks got clocked.

One of the best-performing areas was in the recently hard-hit casino sector, which has lately taken its lumps on continued investor fears that the weak economy would undermine the kind of consumer discretionary spending that would fuel trips to such gambling capitals as Las Vegas and Atlantic City.

Leaders in that segment included MGM Resorts International and the former Harrah's, now going under the Caesars Entertainment Corp. moniker.

Billionaire Warren Buffett's $5 billion rescue of investment-grade financial stalwart Bank of America Corp. carried over into Junkbondland, helping such sector names as Ally Financial Inc.

But even as traders suggested that cash was being put to work in the junk market, word circulated of yet another outflow from high-yield mutual funds, which are seen as a reliable barometer of overall market liquidity trends.

The primary market remained inactive on Thursday, according to market sources. However, credit outperformed equities for the first time in several days, according to a syndicate banker who added that high-yield bonds were fairly active in the secondary market, with shorter-dated, higher-quality names better bid.

Funds off by $127 million

As Thursday's session was wrapping up, market participants familiar with the weekly AMG high-yield mutual fund flow statistics generated by Lipper/FMI said that in the week ended Wednesday, $126.73 million more left those weekly reporting funds than came into them.

It was the fourth consecutive week during which the funds were seen suffering a net loss of cash. This followed the $407.74 million outflow seen in the previous week, ended Aug. 17. Before that came the staggering $3.42 billion hemorrhage seen in the week ended Aug. 10 - the second-biggest such outflow on record - which had followed, and vastly overshadowed, the $804.25 million cash bleed seen in the week ended Aug. 3.

Over that three-week period, the funds have tallied a net loss of some $4.758 billion, according to a Prospect News analysis of the numbers. That more than offset the $2.775 billion, which had come into the funds in the four weeks before, dating back to the week ended July 6, according to the analysis.

For the year as a whole, although inflows have still been seen in 21 weeks versus 13 outflows, the pendulum has swung in the other direction when it comes to year-to-date net totals. While at one point net inflows had totaled as much as $7.82 billion recorded in the week ended May 25, according to the analysis, the recent string of sizable outflows has now driven the year-to-date figure into the red: The overall net outflow for the year so far worsened this week to an estimated $478.47 million from the previous week's $351.74 million, which had been the first negative total seen this year.

Fund flow patterns began the new year on a roll with cash infusions totaling more than $8 billion seen over a 14-week stretch from early December through mid-March, including the more than $6 billion taken in during the first 10 weeks of this year. Then, fund-flow patterns turned choppy, with two or three weeks of declines followed by several weeks of inflows, going back and forth since then.

EPFR: $937 million outflow

Another fund-tracking service, Cambridge, Mass.-based EPFR Global, whose methodology differs from AMG, reported a $937.6 million outflow from the funds in the latest week.

That cash loss followed last week's $2.21 billion cash bleed - a big loss in its own right, but one which followed and was overshadowed by the mammoth $6.71 billion outflow recorded in the Aug. 10th. Last week's loss was the single largest loss of cash from those funds since EPFR began tracking fund flows some years ago, nearly twice the size of the previous record loss, $3.51 billion in the week ended June 22.

It was the ninth time in the past 12 weeks that EPFR saw more money exiting the funds than was being put into them. Its calculations now show 23 weeks of inflows so far this year against 11 outflows.

The latest week's cash loss produced a year-to-date net outflow of $1.13 billion.

EPFR's figures and those of AMG generally point in the same direction, although their actual numbers usually differ markedly since they calculate their respective fund-flow totals very differently. EPFR, for instance, includes results from non-U.S. domiciled funds as well as the domestic funds and counts exchange-traded funds excluded from the more narrowly focused AMG tally.

Cumulative fund flow estimates, whether from Lipper/FMI or EPFR, may be revised upward or downward or be rounded off and could include unannounced revisions and adjustments to figures from prior weeks.

Analysts say the continued flow of fresh cash into junk - and the mutual funds represent but a small, though observable and quantifiable percentage of the total amount of money coming in - fueled the record new deal borrowing binges seen in both 2009 and then in 2010 as well as the robust secondary market seen both years. Those trends had pretty much continued into 2011 as well, although the market hit something of a dry patch in June, then seemed to recover in July - only to run into a brick wall so far in August.

Still cash around

A trader acknowledged that the outflows were continuing, seeming to signal weakening confidence in the junk market on the part of retail investors.

However, he pointed out that before the outflows started to take over, "we had a long, long streak of inflows." He attributed those additions to the mutual funds seen week after week after week earlier this year to "just cash chasing yield."

In recent weeks, "yield has widened out quite significantly" - the average yield to worst among high-yield bonds has ballooned to 8.598% as of Thursday, according to the Merrill Lynch U.S. High Yield Master II Index, versus 7.145% on Aug. 1, 7.407% at the beginning of the year and 6.644% on May 16, its low point for the year.

But while yields have fattened to nominally very attractive levels, he suggested, "people are being very selective."

That having been said, he opined: "There's still a lot of cash on the sidelines."

Market indicators again mixed

For a third straight session, stocks and junk bonds, which heretofore moved more or less in the same direction more often than not, as both represented risk assets for investors so inclined, were each marching to their own drummer, except that this time, stocks were headed in the wrong direction.

After three days of gains, equities slid into the red, pushed there by weakness in the European markets, like the German DAX index and higher initial jobless-benefit claims. The bellwether Dow Jones Industrial Average sank by 170.89 points, or 1.51%, completely erasing Wednesday's gains and more, to finish at 11,149.82. Broader indexes were also weaker, with the Standard & Poor's 500 down 1.56% on the day and the Nasdaq Composite off by 1.95%.

As has been the case pretty much all week, it was quite a different story in the junk market. The only difference being that in junk, more issues finished up than down. The switch to an upside bias was largely borne out by the statistical performance indicators having their third straight day of mixed results.

Although a trader saw the CDX North American Series 16 HY Index down by 11/16 of a point on Thursday at 91 5/8 bid, 91 7/8 offered, after having been unchanged on Wednesday, the other indexes were going the other way.

The KDP High Yield Daily Index broke out of a five-session slump, as it gained 24 basis points on Thursday to close at 71.55, after having weakened by 17 bps on Wednesday and having absolutely nosedived by 47 bps on Tuesday. Its yield declined by 11 bps to 8.05%, after having gone up by 6 bps on Wednesday and 17 bps on Tuesday.

The Merrill Lynch U.S. High Yield Master II Index also snapped a five-session losing streak, gaining 0.189% on Thursday, in contrast to Wednesday's 0.282% loss, its fifth straight.

Thursday's gain raised the year-to-date return to 0.910% from Wednesday's 0.719%. However, the cumulative return remained well below the peak level for the year of 6.362%, set on July 26.

A trader said that the junk market was unchanged on the opening, "but as equities turn around, so did our market," albeit in the opposite direction.

He said, "The go-go names kind of stayed in there," even though other names "kind of took it on the chin a little bit," and he saw "illiquid stuff down by between one-quarter and three-eighths of a point."

Market in a holding pattern

The trader said that "a lot of the buyside accounts we spoke to said 'we'll pick it up after Labor Day,' " which is Monday, Sept. 5.

"Other than that, a lot of junior guys are in and not making too many decisions."

He said that at his shop, "we did trade a fair amount of bonds here today - it wasn't significantly big chunks, but it was a lot of [portfolio] cleanups heading into month's end."

He noted that "everyone's waiting" to hear what Federal Reserve Chairman Ben Bernanke will say in an address scheduled for after the market close to other central bankers at an annual economic conference in Jackson Hole, Wyo., looking for any indications of whether the central bank will signal further economic stimulus amid worsening economic data in the United States.

He said that the market consensus that he was hearing was that the Fed chief would likely not announce a new round of quantitative easing through the Fed buying Treasuries, as it has done twice before this year.

"If he doesn't, I think it's already priced into the market, but it's just very, very hard to put a finger-point on this marketplace right now," considering the amount of uncertainty around.

Gaming holds a winning hand

Among specific sectors and names seen trading on Thursday, a trader said that bonds of casino operators "were better."

He saw MGM Resorts International having "a real nice day, getting back some of its recent losses," with the Las Vegas-based gaming giant's 7½% notes due 2016 "all the way back up" to an 88-89 context, which he called up 2 or 3 points on the day.

He said that MGM's big Las Vegas Strip rival, Caesars Entertainment Corp. - the former Harrah's - also did better.

He said that its 10% notes due 2018 got all the way up to 75 bid, 76 offered. "They faded going into the close," he said, "but they're still up 1 to 2 points on the day," probably going out at 73½ bid. 74½ offered.

Las Vegas-based Pinnacle Entertainment Group's 8 5/8% notes due 2017 were at least a half-point better, trading at just under 104.

Ally is improved

A trader saw Ally Financial's bonds up 1 to 2 points, opining that "a large part of that has to do with [Warren] Buffett's BofA investment."

He saw the Detroit-based automotive and mortgage lender and banking operator's 8% notes due 2031, "kind of your 'go' bond," going out at 94 bid, 95 offered, which he said was up by 1 or 2 points.

At another desk, the company's 4½% notes due 2014 traded some 2¾ points better, at 96¾ bid.

Another financial name getting a lift from that sector strength was International Lease Finance Corp., the California-based aircraft leasing arm of New York insurer AIG.

Its 5.3% notes due 2012 gained more than 2 points to end at 100 3/8 bid, while its 5 5/8% notes due 2013 were also up by a deuce at just under 97.

However, troubled Richmond, Va.-based insurer Genworth Financial's 6.15% notes due 2016 lost nearly a full point on the day, ending at 54¾ bid.

© 2015 Prospect News.
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