Morning Commentary: Pressured by big outflows, high-yield ETFs lead market lower

By Paul A. Harris

Portland, Ore., Feb. 28 – High-yield ETFs sustained $1.21 billion of outflows on Thursday, according to market sources.

That outflow trails record daily outflows seen in the two prior sessions, negative $1.87 billion on Tuesday and negative $1.81 billion on Wednesday.

The fast money has taken flight from risk, and it's dragging the market lower, an asset manager told Prospect News on Friday morning.

The risk is genuine, the manager conceded.

Demand for the 10-year U.S. Treasury note was of sufficient intensity that it was yielding a record low 1.17% at mid-morning.

The VIX spiked to 48 on Friday morning, the source added, noting that it was the biggest such move in that index of volatility since August 2011, when it also spiked to 48 (for context, in the teeth of the Lehman-related crisis of 2008 the VIX spiked to 80).

In the face of this volatility, however, the retail high-yield investor has been holding relatively steady, the manager asserted.

Fund flow numbers from Thursday seem to bear this out. In contrast to the huge $1.21 billion of outflows sustained by ETFs, the actively managed high-yield funds saw just $20 million of outflows on the day, a market source said.

Of the $4.2 billion of outflows the combined high-yield funds sustained in the week that concluded at Wednesday's close, $3.4 billion flowed from the ETFs, the source added.

Energy heads lower

Another force dragging junk lower is energy, the asset manager said.

The sector, already under the pressure of half a decade of depressed prices, took a broadside blast from coronavirus, which has crimped global demand for energy and sent already depressed prices tumbling lower.

The barrel price of West Texas Intermediate crude oil for April 2020 delivery was down 5.84%, or $2.75 on Friday morning, at $44.34. The price has fallen 42% since Jan. 10.

As a measure of this drag on prices, the Chesapeake Energy Corp. 11½% senior secured second-lien notes due 2025, the bond that came in a distressed exchange which the Oklahoma City-based energy company undertook late last year, was 56 bid on Friday morning. It was 80¼ bid on Feb. 20, the manager said.

The primary market remained shuttered on Friday.

Cleveland-Cliffs Inc. and Advantage Solutions Inc. are in the market with deals.

However, everything in the new issue market is on hold, awaiting the return of some stability to the capital markets, sources say.

Meanwhile Fugro NV became the first prospective issuer of 2020 to pull a deal, as it postponed its €500 million offering of five-year senior secured notes (B3/B) due to market conditions.

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