Secondary ends wild week on firm footing; Occidental, Ford stay in focus; U.S. Steel drops

By Paul A. Harris and Abigail W. Adams

Portland, Me., March 27 – While the domestic high-yield primary market remained shuttered for its third straight week, sources were hopeful activity would soon resume, provided markets remain stable.

Meanwhile, the secondary space closed out a wild week on firm footing with credit spreads continuing to narrow and the cash bond market moving out of distressed territory.

High-yield exchange-traded funds continued to rise on Friday with the iShares iBoxx $ High Yield Corporate Bond fund seeing its largest three-day gain in history this past week.

While credit markets improved, rating downgrades continued to pour in at a dizzying pace.

Ford Motor Co.’s and Occidental Petroleum Corp.’s senior notes remained in focus with the notes continuing to improve as the bonds transfer to high-yield accounts.

While the overall market continued to firm, U.S. Steel Corp.’s senior notes were among Friday’s major losers as the company announced a series of measures to combat the financial impact of the coronavirus pandemic.

Credit outperforms

Credit outperformed equity on Friday, market sources said.

As the Dow Jones industrial average dropped 4%, the iShares iBoxx $ High Yield Corporate Bd (HYG) closed 0.22% higher on the day, up 17 cents at $77 per share.

However, the dramatic stock market rally, which saw the Dow close Thursday more than 5,000 points above last Monday's lows, had run its course by Friday, giving way to renewed volatility in equities.

On Thursday, as the price of the high-yield index rose $2.22, its largest-ever daily price increase – easily eclipsing the previous record of $1.79 on Oct. 14, 2008 – a syndicate banker said that new issue activity was possible in the March-April crossover week ahead, the caveat being that the global capital markets maintain some semblance of stability.

Friday's drop in the Dow came in spite of the U.S. House of Representatives passing a historic $2 trillion stimulus package, which President Donald Trump swiftly signed into law.

Away from the stimulus enacted to assist American citizens and businesses in coping with the ongoing Covid-19 pandemic and its massive economic fallout, coronavirus headlines ran bleak to alarming on Friday, as the United States was heard to have the highest number of coronavirus cases of any country in the world, surpassing China, and United Kingdom Prime Minister Boris Johnson tested positive for the infection.

Improved

The high-yield secondary space was again firm on Friday with credit spreads continuing to narrow even as equities ended the day in the red.

Spreads were tightening 20 to 50 basis points on Friday after a wild week that launched with the cash bond market in distressed territory, sources said.

Credit spreads peaked at 1,090 bps on Tuesday but have since tightened to the 900s, according to a BofA Global Research report.

High-yield ETFs had a much more dramatic tightening over the past week, sources said.

The iShares iBoxx $ High Yield Corporate Bond fund gained 11% over a three-day period, marking its steepest ascent in its history, according to the BofA Global Research report.

While improved, the secondary space remains volatile with spreads moving a combined 800 bps in both widening and tightening over the past three weeks.

Ford in focus

Ford’s senior notes continued to dominate activity in the secondary space with the notes improving as they move into high-yield hands.

Ford’s 4.389% senior notes due 2026 gained a little more than 5 points to close Friday at 81, according to a market source.

The bonds had more than $26 million in reported volume during Friday’s session.

Ford’s 5.113% senior notes due 2029 gained 3 points to close the day at 81¼ with more than $23 million in reported volume.

The automaker’s short-duration notes were up more than 7 points on Friday.

Ford’s 5 7/8% senior notes due 2021 rose 7½ points to 96½.

The 5.596% senior notes due 2022 were up 7 ½ points to 90½.

The 2.979% senior notes due 2022 were up 7½ points to 87.

Hedge players, in particular, have been eyeing short-duration notes from higher-quality credits and fallen angels due to their large yields and good likelihood they will be covered, a market source said.

Ford became the largest fallen angel in history this past week after S&P Global Ratings slashed the automaker’s rating to junk.

Ford’s approximately $35.8 billion of debt will soon move to the high-yield index.

Occidental Petroleum improves

Occidental Petroleum’s junk bonds continued to improve on Friday.

The 2.7% senior notes due 2022 rose 3¼ points to 70.

With more than $28 million in reported volume, the bonds were among the most actively traded in the secondary space.

However, the 2.9% senior notes due 2024 were largely unchanged in high-volume activity with the notes continuing to trade in the 55 to 55½ context.

The 2.9% notes had more than $23 million in reported volume.

Occidental’s senior notes have been active and posting gains throughout the week with the Houston-based oil producer becoming a fully junk rated company on Thursday.

U.S. Steel drops

While the overall market continued to firm on Friday, U.S. Steel’s junk bonds were among the major losers of the session.

The Pittsburgh-based steel producer’s 6¼% senior notes due 2026 dropped 7 points to 63¾, according to a market source.

The 6 7/8% senior notes due 2025 were also down about 7 points to 68 1/8.

U.S. Steel announced a series of cost-saving measures to offset the financial impact of the coronavirus on Friday.

The company announced plans to idle operations in Indiana, Illinois, Ohio and Texas, reduce its capex budget by $125 million, which will delay construction at its Mon Valley Works project and delay other planned projects, and lay off up to 850 workers.

U.S. Steel also announced it was drawing down $800 million from its revolving credit facility.

S&P downgraded U.S. Steel’s rating on its unsecured debt to B- from B on Friday due to weaker market conditions for steel. (See related article in this issue)

$670 million Thursday inflows

The dedicated high-yield bond funds had $670 million of net inflows on Thursday, according to a market source.

All of that amount and more went into the high-yield ETFs, which saw $865 million of inflows on the day.

Actively managed high-yield funds sustained $195 million of outflows on Thursday, the source said.

News of Thursday's daily flows follows a late Thursday afternoon report that the combined funds had $2.028 billion of outflows in the week to the Wednesday, March 25 close, according to Lipper US Fund Flows.

The most recent of the weekly outflows is the most moderate outflow in the past five weeks, the market source said, giving those totals as $2.9 billion, $4.94 billion, $5.13 billion and $4.2 billion.

The year-to-date net cash flows of the dedicated high-yield bond funds come to negative $16.7 billion, the source said.

The European dedicated high-yield bond funds had €1.4 billion of outflows in the week to Wednesday's close, according to a market source there.

Indexes mixed

Indexes closed Friday with gains and all posting cumulative gains on the week.

The KDP High Yield Daily index rose 59 bps to close Friday at 60.40 with the yield now 4.84%.

The index jumped 199 bps on Thursday, 156 bps on Wednesday and 78 bps on Tuesday after a 19 bps drop on Monday.

The index saw a cumulative gain of 473 bps on the week.

The ICE BofAML US High Yield index gained 122 bps with the year-to-date returns now negative 14.351%. The index rose 275.9 bps on Thursday, 140 bps on Wednesday and 92 bps on Tuesday after dropping 183.3 bps on Monday.

The index staged a significant rebound after breaking past the negative 20% year-to-date return threshold on Monday.

The index was up 629.9 bps on the week.

The CDX High Yield 30 index sank 211 bps to close Friday at 94.96. The index jumped 309 bps on Thursday, 200 bps on Wednesday and 512 bps on Tuesday after dropping 70 bps on Monday.

The index posted a cumulative gain of 740 bps on the week.

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