Morning Commentary: Sentiment better, but junk investors reticent to add late-year risk

By Paul A. Harris

Portland, Ore., Dec. 21 – The winter solstice brought a somewhat better tone to the high-yield market, according to a trader in New York.

Investors appear to be sifting through carnage heaped upon the market earlier in the week, the source remarked.

The distressed bonds of Frontier Communications Corp., which having fallen throughout most of the week, improved Friday morning. The Frontier Communications 11% senior notes due September 2025 were up a point-plus at 62¼ bid, the trader said.

High-yield ETFs were flat. The iShares iBoxx $ High Yield Corporate Bd (HYG) was unchanged at $80.63 per share at mid-morning.

Oil prices improved slightly. The barrel price of West Texas Intermediate crude for February 2019 delivery was up 28 cents, or 0.61% at $46.16 at mid-morning after dipping below the $46.00 mark earlier in the session.

Against this backdrop 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, staged a modest rebound, trading at 66¼, up ¼ point on the morning.

The leverage markets are rife with rumors of liquidations, especially the leveraged loan market, which has lately sustained record outflows of cash, leaving some observers wondering aloud whether some of the collateralized loan obligations, which have driven that market hard, may be pulling up stakes, the trader said.

Bargain hunting in energy

In the junk market, a view seems to be taking shape that some high-yield bonds have been oversold, the source noted.

Hedge funds that have survived the December melee in high-yield appear especially interested in paper from the badly mauled energy sector, with an eye toward bargains, the trader said.

However, no one seems prepared to add any risk ahead of the new year, the source added.

Meanwhile the primary market, dormant since November’s end, remained poised to slumber into the new year, with market watchers wondering if and when it might stir in January.

High-yield ETFs sustained a near-record daily outflow of $1.6 billion on Thursday, according to a market source.

Actively managed high-yield funds saw $75 million of outflows on the day.

Those daily flow numbers follow a Thursday afternoon report that the combined funds sustained $789 million of outflows in the week to Wednesday's close, according to Lipper US Fund Flows.

Despite these numbers, which continue to reflect on the negative sentiment that has taken hold in high yield, observers in the leverage markets are acutely dialed into the sentiment of the bank loan market, from which cash is lately flowing out at a record pace, sources say.

The combined bank loan funds sustained a whopping $3.3 billion of outflows in the week to Wednesday's close, according to a market source, who was also citing numbers reported by Lipper.

It was the fifth consecutive week in which outflows from the bank loan funds topped $1 billion.

That hemorrhaging continued apace on Thursday, during which the combined loan funds saw daily outflows of $765 million, the source said.

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