Year opens on a down note amid equity volatility, oil price struggles; primary stays quiet

By Paul Deckelman and Paul A. Harris

New York, Jan. 4 – The high yield market opened the brand-new year on a down note on Monday ending lower after having posted gains during the previous, lightly-traded week between the Christmas and New Year’s holidays.

Traders said that Junkbondland was taking its cues from equities, which fell across the board in response to a severe stock decline in China that pulled international markets lower, although U.S. equities did manage to recoup some of their losses towards the close.

Besides the Chinese problem, stocks and bonds were also afflicted with geopolitical jitters amid worsening relations between Saudi Arabia and Iran after the Saudis hanged a Shiite cleric over Iran’s protests, sparking a mob attack on the Saudi Embassy in Tehran.

Those Mideast tensions failed to do much for world crude oil prices amid the continued supply glut; crude prices fell on Monday after having been higher late last week.

Oil and natural gas sector junk bonds were mixed, with Chesapeake Energy Corp.’s most active issue gyrating around before ending a little higher on the session

In the primary sphere, new-deal denizens reported not much doing, with no flood of issues immediately expected – at least not until the overall junk market shows signs of stability.

Statistical measures of junk market performance dropped on Monday, after having been mostly mixed or higher during the preceding few sessions, including Thursday’s – the last of 2015 – when they had been higher all around.

Monday was the first time the market measures were lower across the board since Dec. 18.

Equities a drag on bonds

In the secondary market, trading was mostly on the downside to the tune of about ½ point to 1 point, as equity troubles overhung the market.

U.S. stocks were broadly lower, taking their cue from the slide in Chinese shares.

However, a bond trader noted that stocks “closed off of their lows on the day, which was good to see –there was some buying towards the close.”

That translated to the bellwether Dow Jones Industrial Average – down as much as 447 point early in the session – finishing off a more modest 276.09 points, or 1.58, at 17,148.94. It was the market gauge’s third straight loss.

The trader continued that as far as high yield went, “the market was definitely softer – but not extremely.”

He estimated that junk might be off generically ½ point to 1 point.

But he added that he had “seen some bigger, real-money-type accounts stepping up to buy, at targeted levels. So it wasn’t just an all-out ‘I need to sell’ type of thing.”

Energy names a mixed bag

The closely watched energy sphere mostly meandered, as crude prices – which had fallen at the start of last week but had finished the week on a firmer note – again backtracked; the benchmark U.S. crude grade, February-contract West Texas Intermediate, fell by 28 cents per barrel to close at $36.76, while international benchmark Brent crude for February delivery eased by 6 cents per barrel, finishing at $37.22.

The trader said “the whole supply glut that is out there kind of put a damper on any rally driven by the geopolitical landscape we’re seeing,” particularly the worsening Iran-Saudi confrontation.

Perhaps the day’s most actively traded pure junk bond was Chesapeake Energy’s new 8% senior secured second-lien notes due 2022, which a trader saw having finished at 49¼ bid, up ½ point on the day. Its volume of over $19 million topped the day’s Most Actives list.

At another desk, a trader said the Oklahoma City-based oiler’s bonds – which it issued to holders of much of its existing junk paper in a discounted exchange offer last month – “were bouncing around from the high 47s to 49½, “ about ½ point up from where they had finished last week.”

Another market participant said Chesapeake’s 4 7/8%notes due 2022 had edged up marginally to close at 28 bid.

Among other energy names, Sabine Pass Liquefaction LLC’s 5 5/8% notes due 2025 moved up by ½ point to 85½ bid, a ½ point gain on the day. Over $19 million of the Houston-based midstream natural gas company’s paper changed hands.

On the downside, a trader saw Sabine Pass’ 5 5/8% notes due 2023 off by ¾ point, at 87¾ bid.

Austin, Texas-based exploration and production company Jones Energy Holdings LLC’s 6¾% notes due 2022 were seen down by more than 3 points, at just under 49 bid.

Canonsburg, Pa.-based coal and natural gas operator Consol Energy Inc.’s 8% notes due 2023 finished at 65 ¾ bid, down ¾ point on the day.

Indicators turn lower

Statistical measures of junk market performance turned lower on Monday, after having been mostly mixed or higher the preceding few sessions, including Thursday’s – the last of 2015 – when they had been higher.

Monday was the first time the market measures were lower across the board since Dec. 18.

The KDP High Yield Daily Index dropped by 17 basis points on Monday, ending at 63.74.

It was the index’s first loss after having been unchanged on Thursday, which followed six consecutive gains, including Wednesday’s 9 bps rise. The index was not published on Friday due to New Year’s Day.

Its yield rose by 6 bps on Monday, closing at 7.34% – its first widening after having been unchanged on Thursday and having narrowed for three straight sessions before that.

The Markit Series 25 CDX North American High Yield Index fell by 17/32 point on Monday, finishing at 100 5/8 bid, 100 11/16 offered – its first loss after being unchanged on Friday, when the index was published despite the holiday, and having risen 3/32 on Thursday.

The Merrill Lynch North American Master II High Yield index kicked off the year on a down note, retreating by 0.325%.

The index did not publish on Friday. On Thursday, it gained 0.043%, its seventh consecutive advance, finishing with a 4.643% loss for the year – the first year the index finished in the red for since 2008.

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