Morning Commentary: Liquidity continues to thin as holidays approach, new Talos continues higher

By Paul A. Harris

Portland, Ore., Dec. 22 – High-yield debt was a touch softer in the early going on Tuesday as market liquidity continued to decline ahead of the approaching year-end holidays, traders said.

With the Dow off 0.3% at mid-morning the iShares iBoxx $ High Yield Corporate Bd (HYG) was up eight cents, or 0.09%, at $86.45 per share.

As crude oil prices declined for the second straight session, bonds of QEP Resources Inc. gave up some of the phenomenal price appreciation that came in the wake of news that the company would be acquired by Diamondback Energy Inc. in an all-stock deal valued at $2.15 billion.

The QEP 5 5/8% senior notes due 2026 were 109½ bid on Tuesday morning after closing Monday at 110 1/8 bid, having rocketed 20 points Monday on the merger news.

Elsewhere, bonds sold in mid-December in a deeply discounted deal from Talos Energy Inc. continue to improve, a trader said.

The Talos Production Inc. 12% second-priority senior secured notes due January 2026 (B3/B+/B) were 94½ bid on Tuesday.

The upsized $500 million issue (from $400 million) priced at 91 last Thursday, amid what appears to have been the final burst of high-yield issuance for 2020.

Apart from specific situations, trading activity was thin, with overnight flows around 50% of normal volume, according to a trader.

“...And morning activity was leisurely, at best,” the trader added.

Investors are focused, now, on a change in administration, as the United States prepares to inaugurate Joseph R. Biden Jr. to be the republic's 46th president.

Until the end of the year trading volume will remain very thin, as investors appear to want to maintain their present positions until 2021, the trader said.

$144 million Monday inflows

The dedicated high-yield bond funds had $144 million of net inflows on Monday, according to a market source.

Actively managed funds saw $165 million of inflows on the day.

However high-yield ETFs were negative, sustaining $309 million of outflows on Monday, the source said.

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