Morning Commentary: Junk gets lift as Russia appears to draw down; daily outflows abate

By Paul A. Harris

Portland, Ore., Feb. 15 – News headlines reporting that the Russian army pulled back from staging areas for what was perceived to be an imminent invasion of the Ukraine sparked a rally in Western capital markets and bumped up the junk bond market as much as 0.5 point early Tuesday morning, according to a bond trader based in New York.

With the Dow Jones industrial average up 375 points at mid-morning, the iShares iBoxx $ High Yield Corporate Bd (HYG) share price was 0.27% (22 cents) higher at $82.74.

However, some recent issues continue to trade at significant discounts to new issue prices, sources say.

Secured bonds sold last week in a megadeal from Norwegian Cruise Line Holdings Ltd. are a case in point.

The NCL Corp. Ltd. 5 7/8% senior secured notes due February 2027 (B1/B+) were 98 3/8 bid, 98 7/8 offered on Tuesday morning, according to a high-yield portfolio manager.

The $1 billion issue priced at par on Feb. 10.

That doesn't mean that those bonds were badly mis-priced, the investor asserted.

Rather, it is a reflection of how much the market has moved.

For example, the dollar price of the BofA Merrill Lynch U.S. High Yield index was 97.80 on Tuesday morning, the investor said, adding that it began 2022 at 103.28.

The BofA Merrill Lynch U.S. High Yield BB/B Rated Constrained index, which began February at a dollar price of 100.65, was 98.56 on Tuesday morning, the source added.

However, in a reflection of the fact that high-yield investors harbor a preference for high yields, Norwegian Cruise Line unsecured paper that came in the same Feb. 10 megadeal was trading at a nice premium to new issue price on Tuesday morning.

The NCL 7¾% senior unsecured notes due February 2029 (Caa1/B-) were par ½ bid, 101 offered.

The NCL unsecured paper, which came in a tranche sized at $600 million, also priced at par.

And in an indication that the investment banks are getting a grip on today's prices, the recently issued unsecured bonds from News Corp. – with top-tier speculative-grade credit ratings – also trade at a nice premium to their new issue price.

The News Corp. 5 1/8% senior notes due February 2032 (Ba1/BB+) were par ½ bid, 101 offered on Tuesday morning.

The notes priced at par on Feb. 8 in a $500 million issue.

As a reflection of how dramatically repricing has taken hold of the junk bond market, last July News Corp. might have been able to get a similarly structured deal done inside of 4%, the investor conceded.

Although the supportive backdrop in equities that was in place on Tuesday morning had been expected to rekindle activity in the new issue market, it remained dormant as the session got underway.

A lot of the refinancing business that needed to be done has already been taken care of, said the portfolio manager.

And due to ongoing, day-to-day volatility, other potential issuers likely prefer to remain on the sidelines for the time being, the investor added.

Monday inflows

The high-yield ETFs saw $351 million of daily cash inflows on Monday, according to a market source.

That inflow stemmed a torrent of negative flows which has seen the junk ETFs disgorge more than $11 billion, or 14% of assets under management, in the past six weeks, the source recounted.

Actively managed high-yield accounts sustained $245 million of outflows on Monday, the source said.

The combined funds are tracking a massive $3.24 billion of outflows for the week that will conclude with Wednesday’s close, according to the market source.

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