Morning Commentary: Junk opens weaker; Renewable Energy bonds spike on acquisition

By Paul A. Harris

Portland, Ore., Feb. 28 – High-yield bonds opened ¼ point lower on Monday, according to market sources.

The global capital markets continued to gyrate as the final day of February got underway, rocked by geopolitical uncertainty revolving around Russia's all-out invasion of the Ukraine, and a perception taking hold among investors that the situation in central Europe is unlikely to stay the Fed's hand from bringing as much as a 0.5% increase in the benchmark Fed Funds rate during the month ahead.

However, high-yield ETFs were generally holding in against the volatility, according to traders, who were seeing offers-wanted-in-competition (OWICs) outnumber bids-wanted-in-competition (BWICs) at mid-morning.

One trader attributed the early Monday strength of the junk ETFs to massive inflows of cash, which that market cohort saw on Friday.

With the Dow Jones industrial average down slightly more than 300 points at mid-morning, the iShares iBoxx $ High Yield Corporate Bd (HYG) share price was flat, off a penny, or 0.1%, at $83.60.

Bonds of Renewable Energy Group, Inc. soared 8 points on news that Chevron, in a bid to beef up its renewable energy portfolio, will acquire the biodiesel producer for $3.15 billion, a trader said, marking the Renewable Energy 5 7/8% senior secured green notes due June 2028 at 108¼ bid, 108¾ offered.

Meanwhile the junk bonds of Occidental Petroleum Corp. traded higher on news that the company reported that its earnings and revenue for the fourth quarter of 2021 handily beat analysts' estimates.

Also on Monday, Occidental announced a $2.5 billion cash tender offer from two pools of its notes.

The Occidental Petroleum 3½% senior notes due August 2029 had just traded north of 99½ bid, 99 5/8 offered at mid-morning, up 2½ points, a trader said.

The moves of Renewable Energy and Occidental Petroleum took place as energy prices continued to rally.

Mid-morning saw the barrel price of West Texas Intermediate crude oil for April 2022 delivery up $3.16, or 3.45%, at $94.75.

However, away from the situational trading in Renewable Energy and Occidental Petroleum it was not apparent that junk bonds in the energy sector were riding the commodities prices higher, the trader said.

Away from those situations trading was conspicuously quiet, the source added.

Among new-ish issues, the Twitter, Inc. 5% senior notes due March 2030 (Ba2/BB+) were slightly lower on the morning at par 3/8 bid, the trader said, adding that very few bonds had changed hands in the early going on Monday.

Those notes were par 1/8 bid, par 5/8 offered on Friday.

The $1 billion bullet deal priced at par last Wednesday, the first junk bond issue to clear the market in two weeks.

Elsewhere, the Carvana Co. 5½% senior notes due April 2027 were down a point on the morning.

On Monday the market heard that Carvana plans to acquire the Adesa physical auction business from KAR Global for $2.2 billion in cash.

The new issue market remained ghostly quiet on Monday morning, and the active forward calendar was empty, with volatility sidelining potential issuers, sources said.

ETFs see Friday inflows

High-yield ETFs saw a whopping $1.22 billion of daily cash inflows on Friday, according to a market source.

Those inflows were at least part of the reason that traders were seeing more OWICs than BWICs in the early going, sources said.

Actively managed high-yield funds sustained $250 million of outflows on Friday, the source added.

Notwithstanding the healthy $970 million of net inflows to the combined funds on Friday, the dedicated high-yield bond funds are trailing a seven-week run of outflows totaling $17.7 billion, the most significant run of outflows since the period ending March 25, 2020, the market source said, adding that the year to-date cash flows of the junk funds are now negative $18.9 billion.

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