Morning Commentary: Year’s biggest week winds down; junk spreads cling to 2023 tights

By Paul A. Harris

Portland, Ore., Sept. 15 – The junk bond market opened 1/8 of a point higher on Friday, a bond trader said.

High-yield spreads opened the Friday session at year-to-date tights, according to an investor, who cited data from the Merrill Lynch U.S. High Yield Master II Constrained index.

The index was trading at a composite spread of 380 basis points at Friday’s open, the source said, 7 bps tighter on the month and 103 bps tighter since the beginning of the year.

Meantime, a burst of late-week economic data asserting that inflation remains on the march in the United States, sent the stock market lower by mid-morning and took some wind out of the junk bond market’s sails, sources said.

With the S&P 500 stock index off 0.87% at mid-morning, the iShares iBoxx $ High Yield Corporate Bd (HYG) share price was down 0.33%, or 24 cents, at $74.68.

However, the big news in the junk bond market is that 2023’s biggest issuance week to date was winding down on Friday morning.

The primary market generated a $9.5 billion face amount of new speculative-grade bonds, eclipsing the $8.5 billion that priced during the week of Feb. 6.

The week’s $9.5 billion total comes to nearly as much as that of the entire month of August ($10.3 billion), the bond trader reflected.

In fact, the Sept. 11 week was the biggest in nearly two years, according to Prospect News data.

Locating a week that generated a greater amount of dollar-denominated new issue volume requires turning back the calendar pages to the week that got underway on Nov. 15, 2021, which saw $11.9 billion.

Conceding that it was a big week in the new issue market, the high-yield portfolio manager remarked that the market appears to be taking its burst of new bonds in stride.

“Nothing appears to be trading higher by an enormous amount,” the investor said, but added that nearly everything that priced seems to be holding at or just above issue prices.

The new Bausch + Lomb Corp. (Bausch + Lomb Escrow Corp.) 8 3/8% senior secured notes due October 2028 (B1/B-/BB) were 101 bid, 101 3/8 offered on Friday morning, after pricing at par in a $1.4 billion issue on Thursday, the manager said.

A sellside source told Prospect News that the Bausch + Lomb deal played to $3.5 billion of demand across 115 accounts.

Elsewhere, Thursday’s other super-size deal, Freedom Mortgage Corp.’s $1.3 billion two-part issue of senior notes (B2/B/B+), did enjoy robust overnight price appreciation, the investor said, marking the Freedom Mortgage 12% notes due October 2028 and its 12¼% notes due October 2030 both at par 3/8 bid, par 5/8 offered.

Both priced at 98.

The rejiggered Freedom Mortgage deal – which the investor found attractive enough to play – more than doubled in size after launching early in the week as a single $600 million tranche of five-year paper.

On the heels of the week’s furious first four days, primary market news dried up on Friday.

However, look for a big week ahead, sources say.

In addition to the $3.5 billion of business already stationed on the active forward calendar, watch for Worldpay to show up with $4 billion equivalent of secured notes in dollars and euro, a deal that had been expected during the Sept. 11 week but will show up in the week ahead, the portfolio manager said.

JPMorgan will be at the helm for Worldpay and will have another four deals in the Sept. 18 week, the investor said.

Fund flows

High-yield ETFs sustained substantial daily cash outflows of $227 million on Thursday, according to a market source.

Actively managed high-yield funds saw $24 million of inflows on the day, the source said.

News of Thursday’s daily cash flows follow a Thursday afternoon report that the combined high-yield funds saw $81 million of net inflows for the week to the Wednesday, Sept. 13 close, according to fund-tracker Refinitiv Lipper.

It was the third consecutive positive weekly flow for the junk funds, which saw inflows totaling $1.5 billion during that interval, according to the market source, who spotted the year-to-date cash flows of the dedicated high-yield bond funds at negative $11.7 billion.

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