Morning Commentary: Market opens unchanged; junk ETFs see record outflows on Monday

By Paul A. Harris

Portland, Ore., March 22 – The junk bond market opened unchanged on Tuesday, according to a trader in New York.

High-yield bond investors are parsing a restive Federal Reserve Bank, which has most recently taken to airing concerns that the 0.25% increase in the Fed Funds rate that it introduced last week is not an adequate response to current inflation, the trader said.

Also, there are inversions in the Treasury yield curve – with the yield of three-year government paper exceeding that of the 10-year bond on Monday – watched by some as a harbinger of an approaching economic downturn, the source added.

Yields on all Treasury bonds with maturities ranging from two years to 30 years, inclusive, closed above 2% on Monday, the trader said, noting that the last time that happened was May 30, 2019.

With all of the major stock indexes in the United States and western Europe squarely in the green at mid-morning, the iShares iBoxx $ High Yield Corporate Bd (HYG) share price was flat at $81.54, down 4 cents, or 0.04%.

The Twitter, Inc. 5% senior notes due March 2030 (Ba2/BB+) were down a point at mid-morning, changing hands at 98¼, a sellside source said.

The notes traded at 99¼ late Monday, the source added.

Still the biggest deal to price since mid-February, Twitter’s $1 billion issue priced at par on Feb. 23, the day before Russia invaded the Ukraine.

The most recent junk bonds to clear the market, the SPX Flow, Inc. (Redwood Star Merger Sub, Inc.) 8¾% notes due April 2030 (Caa2/CCC+), were 95¼ bid, 96 offered versus 95¼ bid, 96¼ offered on Monday.

The $500 million issue priced at 95.183 to yield 9 5/8% last Friday following a struggle that saw the deal downsize from $570 million and undergo covenant changes, market sources said.

The new issue market remained silent as the Tuesday session got underway.

The active forward calendar contains just one deal.

Owens & Minor Inc. is in the market with a $500 million offering of eight-year senior notes (B2/B/BB-), heard to be going well.

The acquisition financing notes have initial guidance in the 7% area and are playing to an order book heard to be three-times oversubscribed, with pricing expected on Wednesday, the sellside source said.

Record ETF outflows

High-yield ETFs sustained record daily cash outflows of $2.26 billion on Monday, according to a market source.

HYG bore the brunt, sustaining $1.5 billion of outflows (9% of assets under management) on the day, the source said.

The cash flows of the actively managed high-yield funds were also deep in the red on Monday, at negative $475 million on the day.

The combined funds are tracking $1.75 billion of net outflows for the week that will conclude with Wednesday's close, according to the market source.

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