Morning Commentary: Credit outperforms equity as three-day stock market rally ends

By Paul A. Harris

Portland, Ore., March 27 – With stock indexes plunging into the red on Friday morning, following a three-day rally that saw the Dow climb over 5,000 points off last Monday's lows, credit was outperforming equity, according to a New York-based trader working from home.

Credit was down ¼ point to ½ point, but hanging in, following Thursday's substantial rally, the trader said.

With the Dow down 3.75% at mid-morning, the iShares iBoxx $ High Yield Corporate Bd (HYG) was actually up 0.5%, or 38 cents, at $77.21 per share.

Hedge funds, which tend to have capital locked in place so that they have not had to raise cash, but are instead able to put cash to work, continue to focus on the upper tier of high-yield bonds, crossover names and fallen angel names, where they are seeing some bargains, the trader said.

For example, hedge funds have been eye-balling bonds of fallen angel oil producer Occidental Petroleum Corp., especially those at the front end of the maturity curve, the trader said.

The Occidental Petroleum 4.1% senior notes due February 2021, set to mature less than a year hence, were 79 bid, 80 offered on Friday, with an implied yield of 33%, the trader said.

The Occidental Libor plus 125 basis points floating-rate senior notes due August 2021 were trading in the high 60s, implying a yield of around 48%, the source added.

The hedge funds are seeing these phenomenal yields on bonds with near-term maturities, and thinking that the company should be able to cover them, the trader said.

When the new high-yield index emerges at the beginning of the month, Occidental Petroleum figures to be the second biggest name in the index, behind the Charter Communications constellation of issuing entities, the trader added.

Notwithstanding the possible technical merits of a fallen angel oil producer whose debt securities are trading at eye-popping yields, the fundamentals of the energy sector continued to deteriorate on Friday.

The barrel price of West Texas Intermediate crude oil for May 2020 delivery had fallen 5.44%, or $1.23, to $21.37 by mid-morning.

Thursday inflows

The dedicated high-yield bond funds saw $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 saw $2.028 billion of outflows in the week to the Wednesday, March 25 close, according to Lipper US Fund Flows.

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