Morning Commentary: Crude rally lifts oil-related bonds as junk tracks equities higher

By Paul A. Harris

Portland, Ore., Jan. 4 – A substantial rally in crude oil prices lifted bonds in that sector in the early going on Friday, according to a New York-based trader.

The barrel price of West Texas Intermediate crude oil for February 2019 delivery was up 3.36%, or $1.58, at $48.67 at mid-morning. To contextualize the rally, WTI finished 2018 at $45.41, after hitting a recent bottom of $42.53 on Christmas Eve.

The California Resources Corp. 8% senior secured second-lien notes due December 2022, a big liquid issue employed by high-yield bond investors for the purpose of tracking crude oil prices in the index, rallied to 73½ bid, up from 70 bid, 71 offered on Thursday, the trader said.

Elsewhere among on-the-run bonds from the oil patch, the EP Energy LLC (Everest Acquisition Finance Inc.) 8% senior secured 1.5-lien notes due February 2025 traded at 80 on Friday morning, up a whopping 6 points, the trader said.

Bonds of offshore oil and gas transportation services provider Bristow Group were up a point, the source added.

The high-yield index was up ¼ point to ½ point on thin volume, trailing a big rally in stock prices, with the Dow Jones industrial average up 575 points at mid-morning.

Away from energy-related names, the distressed bonds of PetSmart Inc. were rallying, the trader said, spotting the Argos Merger Sub Inc. (PetSmart) 7 1/8% senior notes due March 2023 at 62 bid, up 3½ points on the morning.

In addition to some short covering, and possibly some hedge funds doing a bit of early year buying, ETFs were buyers on Friday morning, sources said.

All in all, volume has been thin in the new year, the New York-based trader remarked.

Thursday outflows

The daily cash flows of the dedicated high-yield bond funds were negative on Thursday, according to an investor.

High-yield ETFs sustained a substantial $781 million of outflows on the day.

Actively managed high-yield funds saw $90 million of outflows on Thursday.

News of Thursday's daily flows trails a Thursday afternoon report that the combined funds sustained $628 million of net outflows in the week to Wednesday's close, according to Lipper US Fund Flows.

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