Morning Commentary: New Carnival notes steady after sharp drop; funds track outflows

By Paul A. Harris

Portland, Ore., May 19 – The high-yield bond market opened ¼ point lower on Thursday, traders said.

The year-to-date return on the Merrill Lynch US High Yield Master II Index (H0A0) closed Wednesday at negative 10.84%, its lowest level of return since April 9, 2020, a trader said.

However, with the Dow Jones industrial average off 1.1% at mid-morning, the iShares iBoxx $ High Yield Corporate Bd (HYG) share price was up 0.29%, or 22 cents at $76.22.

Bonds priced Wednesday at par by Carnival Corp. broke sharply lower into the secondary market but appeared to be holding in at a level slightly above that of Wednesday's close, a trader said.

The Carnival 10½% senior notes due June 2030 (B2/B) were 98½ bid, 98 7/8 offered on Thursday morning, sources said.

They went out Wednesday at 98½, according to a trader, who was marking them unchanged to perhaps slightly better on Thursday morning.

The $1 billion deal was heard to be playing to an order book that was 1½-times deal size early Wednesday afternoon.

It was the Miami-based cruise line's eighth pass at the primary market since the onset of the coronavirus pandemic in early 2020.

Carnival's Wednesday drive-by is unlikely to tempt any prospective high-yield issuers off of the sidelines, a trader remarked.

It was the first dollar-denominated deal to price since May 9 when Frontier Communications Holdings, LLC priced $1.2 billion of 8¾% first-lien secured notes due May 2030 (B3/B/BB+).

The Frontier bonds – perceived to have priced with a significant concession to the risk-off sentiment at play in the market – continued to hold in above par on Thursday morning: par ¾ bid, 101½ offered, a trader said.

However, they were off their highs, the source added, recounting that those bonds were trading above 102 last week.

The most recent euro-denominated deal was lower on the day but also holding in above the new issue price on Thursday morning.

The Elis SA 4 1/8% senior bullet notes due May 2027 (expected Ba2/expected S&P: BB+/confirmed DBRS: BBB) were 99½ bid, par offered, a London-based investment banker said.

Those notes, which priced at 99.447 to yield 4¼% in a €300 million issue on Tuesday, were spotted Wednesday at 100.15 bid, 100.65 offered.

The Elis deal was heard to have played to €3.3 billion of orders at close of books.

There was no primary market news on Thursday morning, and the active forward calendar remained empty.

Fund flows

The cash flows of the dedicated high-yield bond funds were mixed on Wednesday, according to a market source.

Actively managed high-yield funds saw $148 million of inflows on the day.

However high-yield ETFs sustained $342 million of outflows on Wednesday.

The combined funds are tracking $2.4 billion of net outflows for the week to Wednesday’s close, as the market awaits a weekly report on the cash flows of the various asset classes, expected later Thursday from Refinitiv Lipper, the market source said.

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