Morning Commentary: Junk firms ¼ to ½ point; short covering, portfolio cleanups eyed

By Paul A. Harris

Portland, Ore., Dec. 12 – The junk index was ¼ point to ½ point better on Wednesday, according to a New York-based bond trader.

Trading volume betrayed characteristics of late-year low liquidity, the source said, adding that there appeared to be some short covering taking place and possibly some investors doing some end-of-year adjustments to their portfolios.

High-yield ETFs were turning in robust Wednesday morning performances, in line with equities. The iShares iBoxx $ High Yield Corporate Bd (HYG) was up 0.49%, or 40 cents, at $83.44 per share at mid-morning.

Headline news impacting junk was muted, the trader said.

Trading was halted in the shares of Parker Drilling Co. as the market anticipates a pre-packaged Chapter 11 filing, the trader said.

However, Parker Drilling’s bonds, which have been trading in the high 50s, had not moved, the source added.

BMC Software's 9¾% senior notes due September 2026 have been pretty active, the trader said, spotting them at 94¼ bid on Wednesday, up from 93 5/8 bid on Tuesday, perhaps up with the market or on short covering.

The $1,475,000,000 issue came earlier in the year at par.

Although there were concessions on what investors perceived as an aggressive covenant package, the deal that ultimately cleared the market was anything but investor friendly, a buyside source asserted recently.

With the technicals of the junk bond market conspicuously weak, heading into 2019, investors are migrating toward paper that is secured, or that came with covenants perceived to afford bond buyers with adequate protection, sources say.

Those bonds tend to be trading near, or in some cases above new issue prices, sources say.

Bonds with less security and/or lax covenants, meanwhile, tend to be languishing well below issue prices.

Meanwhile the primary market remained quiet on Wednesday morning and is expected to remain quiet until 2019, sources say.

Along with market volatility and weak technical forces characterized by continued negative cash flows from the dedicated junk bond funds, a pending decision on interest rates, expected from the Federal Reserve Bank’s Federal Open Market Committee in the middle part of the Dec. 17 week, is serving to inhibit issuers.

Outflows moderate

The daily cash flows of the dedicated high-yield bond funds remained well in the red on Tuesday, a trader said.

However, Tuesday's outflows, although hefty, were more moderate than those reported in the two previous sessions.

High-yield ETFs sustained $227 million of outflows on Tuesday, the trader said. That compares to $606 million of outflows on Monday and $313 million of outflows on Friday.

Actively managed high-yield funds sustained $175 million of outflows on Tuesday, compared to $215 million of outflows on Monday and $475 million of outflows on Friday.

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