Morning Commentary: Junk sells off post CPI; TransDigm’s new megadeal lags issue prices

By Paul A. Harris

Portland, Ore., Feb. 13 – A Tuesday morning Consumer Price Index report indicating that inflation has yet to be tamed dragged the junk bond market lower by ½ point, according to a bond trader in New York.

An outsized load of bids-wanted-in-competition, primarily from the high-yield ETFs, had traders scrambling at mid-morning, sources said.

The yield of the 10-year Treasury spiked by 11 basis points, on the morning, to 4.28%.

With the Dow Jones industrial average off 1.23% at that time, the iShares iBoxx $ High Yield Corporate Bd (HYG) share price was down 0.63%, or 49 cents, at $76.71.

Consumer prices rose 0.3% in January, according to Tuesday’s CPI report, higher that the 0.2% that analysts expected and higher than December’s 0.2% increase.

Inflation remains a worthy foe, a trader commented.

In the wake of Monday’s massive $6.2 billion burst of new issuance – the biggest primary market session in almost three years – the new deal machine remained parked along the curb on Tuesday morning.

The active forward calendar was empty.

Bonds priced in a $4.4 billion two-part Monday megadeal (Ba3/B+) from TransDigm Inc. were lagging issue prices on Tuesday morning.

The TransDigm 6 3/8% senior secured notes due March 1, 2029 were 99 3/8 bid, 99¾ offered at mid-morning, at which time the TransDigm 6 5/8% senior secured notes due March 1, 2032 were 99½ bid, 99 7/8 offered.

Both had traded as low as 99 1/8 bid, 99 5/8 offered earlier in the session, so were off their lows, according to a trader, who was marking them 3/8 of a point lower from Monday’s closing prices.

Sellers were filing in closer to the offer sides on both tranches, the source remarked.

The bonds came in tranches sized at $2.2 billion apiece, both of which priced at par in the Monday drive-by.

The TransDigm deal played to $9 billion of demand across both tranches, with that demand skewed to the longer maturity, sources said.

In the wake of Monday’s high-yield big gulp, the rabid appetite for new high-yield issues, which has been on display since the new year got up and running, may be ebbing a bit, sources say.

The word “indigestion” has crept into a couple of recent conversations with market sources.

Fund flows

The dedicated high-yield bond funds saw $350 million of net inflows on Monday, according to a market source.

High-yield ETFs saw $224 million of inflows on the day.

Actively managed high-yield funds saw $126 million of inflows on Monday, according to the market source.

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