Morning Commentary: Junk climbs another ½ point in follow-on to Thursday’s big rally

By Paul A. Harris

Portland, Ore., May 27 – High-yield bonds were ½ point better in ultra-thin trading ahead of Friday’s early close, according to a portfolio manager.

That follows a Thursday rally which saw dollar-denominated bond spreads undergo their biggest improvement since 2020, sources say.

Ten-year government paper was yielding 2.73% on Friday morning, a dramatic drop from its 3.19% peak on May 8.

The dramatic drop in Treasury yields may be signaling that the pace of inflation is slowing, the investor said.

“It's possible that the Fed won't have to keep its foot on the brake forever,” the manager remarked, adding that while inflation's pace may be slowing it is liable to remain persistent.

With the S&P 500 stock index up 1.55% at mid-morning, the iShares iBoxx $ High Yield Corporate Bd (HYG) share price was better by 0.68%, or 54 cents, at $80.02.

Among dollar-denominated cash bonds, the Carnival Corp. 10½% senior notes due June 2030 (B2/B) were 102 bid, 102½ offered on Friday morning after trading Thursday at 101¾, according to a bond trader.

The oversubscribed $1 billion deal, the most recent dollar-denominated issue to clear the market, came at par on May 18.

Elsewhere the Frontier Communications Holdings, LLC 8¾% first-lien secured notes due May 2030 (B3/B/BB+) were up slightly on the day at 105 bid, 105½ offered, the trader said.

The upsized $1.2 billion issue (from $800 million) priced at par on May 9, coming with 2¾% more coupon, and with security that is superior to the Frontier Communications 6% second-lien notes due January 2030, which priced at par last October.

The new issue market remained quiet, as expected, ahead of Friday’s early close and the extended holiday weekend (the Securities Industry and Financial Markets Association is recommending a 2 p.m. ET Friday close).

Business in the bond market should pick up in the post-Memorial Day week, sources say.

As the investment-grade market braces for what is expected to be a high-volume week of issuance, at least one big junk deal is in the headlights.

Watch for a $1 billion offering from a high-yield energy name in the week ahead, advised a buyside source, who declined to furnish any additional information.

Earlier Friday the euro-denominated junk market was also rallying, sources said.

The closely followed iTraxx Crossover index, comprised of the 75 most liquid sub-investment-grade entities, was 12 basis points tighter on the day, at 428 bps bid, after tightening by 26 bps on Thursday, a London-based syndicate banker said.

The new Volvo Car AB 4¼% green bonds due May 2028 (expected ratings Ba1/BB+) were par 3/8 bid on Friday morning, a point above new issue price, an investor said.

The €500 million issue priced Tuesday at 99.353 to yield 4 3/8%, playing to strong enough demand that the Sweden-based luxury carmaker was able to pare its concession to a risk-averse junk bond market to ¼ point from 3/8 point, a trader reckoned.

More big ETF inflows

The high-yield ETFs saw $768 million of daily cash inflows on Thursday, according to a market source.

It was the third consecutive big daily inflow to the junk ETFs, which saw inflows of $452 million on Wednesday and $589 million on Tuesday, the source said.

Actively managed high-yield funds, however, saw $310 million of outflows on Thursday.

News of those daily flows trails a Thursday report that the combined funds saw $236 million of net outflows in the week to the Wednesday, May 25 close, according to Refinitiv-Lipper.

The junk funds have sustained $36.6 billion of year-to-date outflows, according to the market source.

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