Morning Commentary: Trader sees resilience in junk bonds as volatility throttles up

By Paul A. Harris

Portland, Ore., Feb. 18 – Cash bonds opened basically unchanged on Friday, market sources said.

At mid-morning the iShares iBoxx $ High Yield Corporate Bd (HYG) share price was up 0.14%, or 12 cents, at $82.89.

With central Europe in the grip of geopolitical tension throughout the past week, and higher interest rates perceived to be just beyond the reach of the headlights' glow, the high-yield market held in surprisingly well, according to a bond trader working from home in the New York area on Friday.

Although the yield to worst of the junk index is 21 basis points wider on the week, and the year-to-date return of that index is 83 bps lower, cash bonds are basically unchanged, the trader said.

The Mednax, Inc. 5 3/8% senior notes due February 2030 (Ba3/B+) were wrapped around 98 on Friday morning, unchanged on the week.

The $400 million issue priced at par on Feb. 2.

The recently minted News Corp. 5 1/8% senior notes due February 2032 (Ba1/BB+) were 101 bid, 101½ offered, unchanged.

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

The bond complex of Bombardier Inc. is generally better by about half a point trailing news that the Montreal-based aerospace company is using cash from its balance sheet to redeem a $200 million portion of its 7½% senior notes due 2024 and a $200 million portion of its 7½% senior notes due 2025.

Although news on the market's retail cash flows has been dire (more below) there is good evidence that there continues to be institutional cash to put to work in high-yield bonds, the trader said.

“It's surprising how well the market has held in, given the news headlines we've been seeing,” the trader remarked, adding that notwithstanding those headlines junk is better bid than offered.

Of course, one underlying factor in that bid/offer dynamic at play among existing issues is the fact that the week came and went with no deals pricing and no active new issue calendar taking shape, the trader noted, adding that the absence of a primary market throughout the week – which carried into the Friday session – has also been a surprise, since the word in the market is that there are deals to be done.

Fund flows

High-yield ETFs posted their fourth consecutive day of positive cash flows with a $76 million daily inflow on Thursday, according to market sources.

It follows $194 million of inflows on Wednesday, $672 million of inflows on Tuesday and $351 million of inflows on Monday.

Those inflows come on the heels of a six-week period in which the high-yield ETFs sustained aggregate outflows in excess of $11 billion.

Actively managed high-yield funds sustained $22 million of daily outflows on Thursday.

News of Thursday's daily flows trails a Thursday report that the combined funds sustained $3.55 billion of outflows in the week to the Wednesday, Feb. 16 close.

It is the latest in a string of consecutive weekly outflows that now stretches back six weeks, and totals $16.7 billion, or 6.1% of assets under management.

It is the most significant run of outflows since the period ending March 25, 2020, a source said.

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