Morning Commentary: European investors eye oversold junk market; ETFs see inflows

By Paul A. Harris

Portland, Ore., Dec. 14 – The European new issue junk bond market could be staging for a meaningful regeneration of business in January – in fact, January could be a big month in the euro market – a London-based senior syndicate official said.

Investors in Europe are beginning to take the view that junk is oversold, the source added.

The European market entered correction slightly before the dollar-denominated high-yield market did so and appears on a trajectory to pull out of the current stall ahead of its American counterpart, the banker said.

Just as in the United States there are committed financing deals expected to come to market during January.

If those deals go well, January could be a busy month, the banker said.

European investors have seen that the sell-off in high yield has gone too far, and believe that the market is now attractively priced, the official asserted.

The banker also looks for global issuers, more accustomed to appearing with dollar-denominated deals, to continue showing up in the euro market in order to raise cash, a trend that emerged during 2018, as rates in the United States began their ascent.

“For investors, euros are more attractive than dollars, right now,” the source remarked.

Also, as in the United States, a big onslaught of negative geopolitical headlines – Brexit, for example – could serve to inhibit or derail the new issue market in Europe, the banker noted.

Risk-aversion eyed

Junk investors spent the latter portion of 2018 migrating away from risk, high-yield market sources say.

Risk-aversion has taken hold on both sides of the Atlantic.

One deal that illustrates this migration is Refinitiv, a merger and acquisition trade that came in four tranches – dollar-denominated and euro-denominated secured tranches and dollar-denominated and euro-denominated unsecured tranches – in mid-September.

On Friday the dollar-denominated 6Ό% first-lien notes due May 2026 (B2/B/BB+) were 98 bid, 99 offered, according to a trader in New York.

However, the dollar-denominated 8Ό% senior notes due November 2026 (Caa2/B-/B+) were 95 bid, 95Ύ offered on Friday morning.

Generic prices on the euro-denominated Refinitiv bonds point up the same dichotomy between the secured and unsecured and illustrate a preference among European investors for secured paper over unsecured.

The Refinitiv 4½% first-lien notes due May 2026 (B2/B/BB+) were generically 97 7/8 bid, 98 7/8 offered on Friday morning, the trader said.

However, the 6 7/8% senior notes due November 2026 (Caa2/B-/B+) were 93Ό bid, 94 1/8 offered.

ETFs see inflows

Junk opened softer on Friday, sources said.

Against a backdrop of weakness in equity prices and crude oil prices the CDX HY31 index of high-yield credit default swaps was 103.66 bid, 103.75 offered, down 0.146 basis point, a hedge fund manager said.

High-yield ETFs were lower, as well.

The iShares iBoxx $ High Yield Corporate Bd (HYG) was down 0.13%, or 11 cents, at $83.40 per share.

However, for the second consecutive day high-yield ETFs saw positive cash flows on Thursday, a trader said.

The ETFs saw $335 million of inflows on Thursday, trailing $465 million of inflows on Wednesday.

Those back-to-back inflows into the junk ETFs come on the heels of three consecutive big outflows, the trader said.

Those big outflows were reflected in the combined weekly outflows from the dedicated high-yield bond funds of $2.06 billion in the week to Wednesday's close.

While the ETFs saw positive flows on Thursday, the actively managed high-yield funds did not, according to the trader.

The actively managed funds sustained $200 million of outflows on the day, the source said.

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