Midday Commentary: ETF flows negative; sanguine credit picture fails to dispel bearish sentiment

By Paul A. Harris

Portland, Ore., July 3 - Heading into the July Fourth holiday, the high-yield picture remains bearish, according to a trader.

"Late last week and earlier this week we felt better," the trader said. "But feeling better means selling into strength."

Exchange traded funds have been reporting small-ish outflows thus far in the pre-Independence Day week.

On Monday ETFs reported $3 million of outflows. On Tuesday the outflows were more substantial: negative $38 million.

The trader expects another negative flow for Wednesday.

Notably, these negative flows are taking place in a bond market that is not presently facing a lot of credit worries, the trader said.

Facing higher rates

Sharply higher Treasury yields that trailed in the wake of the June 19 policy meeting of the Federal Reserve Bank's Federal Open Market Committee have high-yield investors revisiting their outlooks on interest rates, the trader said.

It was at that meeting and the ensuing press conference that Federal Reserve chairman Ben Bernanke outlined economic objectives which, if and when they are met, would prompt the Fed to begin tapering off its economic stimulus measures.

A view appears to be taking hold that the 10-year Treasury could spend the remainder of 2013 yielding between 2½% and 3%, the trader said.

Should that prove to be the case it will mean that junk issuers are going to face higher costs of capital, possibly sending opportunistic issuers to the sidelines for the foreseeable future.

Two high profile deals that came in the wake of that mid-June FOMC meeting likely point the way for issuers now measuring the new issue market, the trader said.

On June 27 Valeant Pharmaceuticals International, Inc. priced $3,225,000,000 of senior notes (B1/B) in two tranches, a $1.6 billion tranche of notes due 2018 that priced at par to yield 6¾% and a $1,625,000,000 tranche of notes due 2021 that priced at par to yield 7½%.

The following day Hercules Offshore, Inc. priced a $400 million issue of senior notes due 2021 (B3/B) at par to yield 8¾%.

The market extracted rates from both of those issuers which were substantially higher than those that were expected when the deals were announced, the trader said.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.