Morning Commentary: Energy droops with oil price decline; liquidity remains low; inflows continue

By Paul A. Harris

Portland, Ore., Aug. 29 – Junk bond activity was flat on Monday morning, according to a bond trader on the East Coast of the United States, amid ultra-low liquidity characteristic of late August in the high-yield market.

Declining oil prices created a drag on the energy sector, the trader said.

The barrel price of West Texas Intermediate crude for October 2016 delivery was down 1.85%, or 88 cents, at $46.76.

Against that backdrop energy was ¼ point lower, although nothing was trading, the trader said.

USG Corp.’s bonds were quoted higher on news that the Chicago-based building supplies manufacturer plans to sell its distribution unit to ABC Supply Co. Inc. for $670 million, but again nothing was actually traded, the source said.

With the Dow Jones industrial average up 0.55% at mid-morning, high-yield ETF prices were better. The iShares iBoxx $ High Yield Corporate Bd (HYG) was up 0.34%, or 30 cents, at $86.86 per share. The SPDR Barclays High Yield Bond ETF (JNK), at $36.67 per share, was also up 0.34%, 12 cents better on the morning.

Recent issues continue to be marked above issue prices, the trader said, adding that higher quality paper seems to be more in demand than bonds with lower credit ratings.

The Albertsons Cos., LLC 5¾% senior notes due March 15, 2025 (B3/B+) were 101½ bid, 101¾ offered on Monday morning.

The $1.25 billion issue priced at par on Aug. 4.

The Engility Corp. 8 7/8% senior notes due Sept. 1, 2024 (Caa1/B-), a deal that struggled a bit out of the gates, then improved, then was offered, is also now trading at a solid premium to new issue, at 101¾ bid, 102¼ offered, the trader said.

The new issue market remained shuttered on Monday, and is almost certain to remain so until the end of the upcoming Labor Day holiday weekend, the trader said.

There should be some new issue supply post-Labor Day – a forecast for $25 billion of issuance in September was heard earlier – however specific issuer names have yet to surface, the trader said.

A possible September rate move on the part of the Federal Reserve could impact the vigor of the primary market the trader said.

The daily cash flows of the dedicated high-yield bond funds were positive on Friday.

High-yield ETFs saw a substantial inflow of $224 million on the day.

Actively managed funds saw $70 million of inflows on Friday.

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