Morning Commentary: Junk edges higher as Bank of England announces pending bond purchases

By Paul A. Harris

Portland, Ore., Sept. 28 – A slouching high-yield bond market pivoted and went higher on Wednesday morning following the announcement of a new bond-buying effort from the Bank of England (BOE), according to a trader in New York.

Junk was 1/8 of a point better following the BOE announcement, after opening the day as much as half a point lower, the trader said.

Following a massive migration from risk in the fixed-income market, earlier in the week, sentiment appeared mixed, possibly indicating more than a little investor uncertainty, the source said.

With traders having plowed through the year's highest volume of bids-wanted-in-competition lists (BWIC) on Tuesday, BWIC and offers-wanted-in-competition (OWIC) volumes were essentially equal, following the BOE, according to the trader.

In Europe, the closely followed iTraxx Crossover index, comprised of the 75 most liquid sub-investment grade euro-denominated entities, tightened by 10 basis points following the BOE announcement, after opening 2 bps wider on Wednesday, a London-based debt capital markets banker said.

To recap, the BOE announced it would carry out temporary purchases of long-maturity government bonds, beginning Wednesday, following a massive sell-off in fixed income and a big depreciation in the relative value of the pound sterling that were set off by the announcement of sweeping tax cuts by the government of prime minister Liz Truss.

Financial authorities around the world, including the International Monetary Fund, wasted little time in labeling the proposed cuts as inflationary, sources recounted.

Investor uncertainty stems from the fact that the BOE's asset purchases come at the same time that it is increasing interest rates in order to lower inflation, currently measured at a year-over-year rate of 9.4%, to an eventual target of 2%, sources say.

The BOE official announcement, giving information about the asset purchases, reiterated that 2% target.

Initially the prices of dollar-denominated cash bonds appeared basically unchanged, on the heels of the BOE, the New York-based trader said.

The Royal Caribbean Cruises Ltd. 8¼% secured notes due January 2029 (Ba3/BB-) were 98½ bid, 99 offered on Wednesday morning, while the 9¼% unsecured guaranteed notes due January 2029 (B3/B+) were 99 bid, 99½ offered, both basically unchanged, the source said.

Those notes priced at par, in tranches sized at $1 billion apiece, last Thursday, with investors gravitating toward the unsecured guaranteed paper on a perception that the guarantee involves assets that are superior to those backing the 8¼% secured notes, sources said.

Elsewhere the Ford Motor Co. 6.1% senior green notes due August 2032 (Ba2/BB+) were somewhat better on Wednesday morning at 88½ bid, 88¾ offered, after closing Tuesday at 88 bid, 88½ offered, the trader said.

The Ford 6.1% green notes came at par on Aug. 16 in a $1.75 billion high-grade-style execution.

The only primary market news on Wednesday morning came from Europe.

Verisure Holding AB talked its €500 million offering of senior secured notes due 2027 (B1/B) at par to yield 9¼% to 9½%, on top of initial guidance.

Books were scheduled to close Wednesday.

Meanwhile, investors await an update on the Connect Holding II LLC/Brightspeed $1.865 billion offer of seven-year senior secured notes (B2/B/B+) backing the carve-out acquisition of the Lumen Technologies fixed-line assets by Apollo Global Management.

Initial talk had the Brightspeed deal coming with an 8% coupon to yield in the low 10% area, with pricing expected late this week. Some market-watchers have been looking for that talk to push higher, however.

The perception in the market is that the deal has good covenants, the trader said, but added that investors have also been professing a belief that the proposed bond's initial pricing is a little snug.

Tuesday outflows

The dedicated high-yield bond funds sustained $489 million of net daily outflows on Tuesday, according to a market source.

High-yield ETFs saw $377 million of outflows on the day.

Actively managed high-yield funds sustained $112 million of outflows on Tuesday, the source said.

With only Wednesday's daily fund flows numbers remaining to go into the tally the combined funds are tracking $2.32 billion of net outflows for the week that will conclude with Wednesday's close, according to the market source.

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