Morning Commentary: Junk stages broad rally as buyers step in; funds see big Tuesday outflows

By Paul A. Harris

Portland, Ore., June 29 – The high-yield bond market staged a broad rally on Wednesday, with cash bonds generally up a point from Tuesday’s close, according to a trader.

Energy names were up 2 points.

High-yield ETFs were sharply higher at mid-morning. The iShares iBoxx $ High Yield Corporate Bd (HYG) was up 1.07%, or 89 cents, at $83.97 per share. The SPDR Barclays High Yield Bond ETF (JNK), at $35.29 per share, was up 0.94%, or 33 cents.

The rally extended well beyond the energy sector, the trader said, adding that in addition to short covering there were buyers in the market.

The Western Digital Corp. 10½% senior notes due April 1, 2024 were up 2 points.

The bonds of Dell, Inc. – both the investment-grade rated secured paper and the speculative-grade unsecured notes – were up a point, the trader said.

In the basic materials sector, bonds of ArcelorMittal were up 2 to 4 points. Earlier in the day the Luxembourg-based steel manufacturer announced it reduced its debt load by tendering for $576.3 million of its notes due in 2020 and 2021.

Meanwhile the bonds of New York-based metals manufacturer Alcoa Inc. were also sharply higher, the trader said, adding that the Alcoa 5 1/8% notes due Oct. 1, 2024 were up 3½ points at 99 bid.

The market saw a big sell-off trailing last week’s Brexit news but appears to be recovering, the trader remarked, adding that there seems to be an expectation that leaders in the United Kingdom and the European Union might find a way to keep trade and financial agreements intact while going their separate ways on immigration policy.

The primary market remained dormant on Wednesday morning, as it has been throughout the week. However given the present stability, the dealers are expected to restart the new issue market in the week ahead, following the extended Independence Day holiday weekend.

Big outflows

Although junk rallied throughout the day on Tuesday, the cash flows of the dedicated high-yield bond funds were negative, the trader said.

In the case of actively managed funds, they were dramatically negative.

Asset managers, or actively managed funds, saw a whopping $1.3 billion of outflows on the day.

High-yield ETFs sustained $490 million of outflows on Tuesday.

“It did not feel like that,” the trader commented on Tuesday’s negative daily flows. “The market has cash.”

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