Morning Commentary: Junk powers higher after FOMC comments; California Resources up 3 points

By Paul A. Harris

Portland, Ore., Dec. 18 – Trailing Wednesday’s news that Fed policy-makers appear poised to hold the line on rates into the intermediate future, junk bonds staged a massive rally in the early going on Thursday, sources said.

Cash bonds were up as much as 6 points off lows posted Monday, powered by a combination of short covering and real-money buying, according to an investor.

“I don't think I have ever seen anything like this,” the source remarked.

The JPMorgan index posted a 7.58% yield to worst on Thursday morning, down from 7¾% on Wednesday.

“People thought we were headed for 8%,” said the investor.

“I don't think that’s going to happen now.”

California Resources rallies

Badly beaten-up bonds in the energy sector were enjoying the market tailwind headed into the New York mid-morning, sources said.

The closely watched California Resources Corp. 6% senior notes due Nov. 15, 2024 were up 3 points at 89 bid early on, according to a trader.

The investor saw them at approximately the same level around the same time.

However sagging crude oil prices whittled at the California Resources paper, the investor said, noting that the barrel price of West Texas Intermediate crude oil was settling at $56.71, toward the New York mid-morning, after starting the day $1.75 higher.

In the wake of the lower oil price, the California Resources 6% notes were 86 bid, 87 offered, the investor said.

The $2.25 billion deal priced at par in a massive $5 billion amount of issuance that came in three bullet tranches (Ba1/BB) on Sept. 11 and traded as high as 104½ bid in the immediate aftermath.

The rising tide appeared to be lifting all boats in the energy sector and beyond, with bonds from DISH, J.C. Penney Co. Inc., Numericable Group SA, T-Mobile and Hercules up as much as 6 points from deepest lows seen earlier in the week.

Flows remain mixed

Fund trackers reckon that dedicated high-yield funds may have sustained as much as $6 billion of total outflows in the correction that lasted into the early part of the present week.

However daily flows were mixed on Wednesday, the most recent session for which data was available at press time.

High-yield ETFs saw $465 million of inflows on Wednesday, while actively managed funds saw $645 million of outflows, the source said.

The massive negative flows notwithstanding, players were off the sidelines on Thursday, with buyers outnumbering sellers five-to-one, a source said.

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