Risk-on junk bond rally continues; Carnival above water; Carvana short-duration notes jump

By Paul A. Harris and Abigail W. Adams

Portland, Me., May 26 – The domestic high-yield primary market remained idle on Thursday with no expectations for activity during Friday’s pre-holiday shortened session.

However, there are expectations for a substantial pickup in the calendar in the return from the holiday weekend given the recent strength in the market.

The risk-on rally continued on Thursday as the market dialed back expectations for an aggressive rate-hike schedule from the Federal Reserve in the second half of the year.

The cash bond market shot up more than 1 point, adding to Wednesday’s 1 point increase.

The ICE BofAML US High Yield index’s returns, which were bordering negative-11% on Monday, pared their losses with returns now around negative-8%.

The CDX index returned to a 101-handle.

ETFs continued their buying spree on Thursday with several offers-wanted-in-competition lists circulating the market.

However, there were some bids-wanted-in-competition lists with “people trying to sell in an up market,” a source said.

Carnival Corp.’s 10½% senior notes due 2030 (B2/B) shot above water on Thursday with the notes now trading with a strong premium to their issue price.

Carnival’s outstanding issues also rallied in the lift-a-thon with the cruise line operator’s 6% senior notes due 2029 also jumping in high-volume activity.

Carvana Co.’s recently priced 10¼% senior notes due 2030 (Caa2/CCC) improved in active trading.

However, the company’s 5 5/8% senior notes due 2025 (Caa2/CCC) remained the preferred tranche for buyers with the notes shooting up 5 points.

The badly battered retail space also continued to improve with Macy's Retail Holdings LLC’s senior notes making large gains after strong earnings.

Meanwhile, funds continued to see outflows for the week ending Wednesday with high-yield mutual and exchange-traded funds losing $236 million, according to the Refinitiv Lipper Fund Flow Report.

While inflows were negative over the course of the week, ETFs have seen strong inflows over the past two sessions.

Primary eyed

The high-yield primary market remained idle on Thursday, and is unlikely to reactivate in the abbreviated Friday session ahead of the extended Memorial Day holiday weekend, sources say (the Securities Industry and Financial Markets Association is recommending a 2 p.m. ET Friday close).

New issue business is expected to see a meaningful pickup during the post-Memorial Day week, sources say.

The forecast calls for a big issuance week in the investment-grade market, they add.

And a $1 billion deal from a high-yield energy name is also in the works for the week ahead, according to a buyside source.

Thursday marked the sixth consecutive session that saw the primary market put up a goose egg.

The most recent dollar-denominated issue came on May 18 when Carnival Corp. priced a $1 billion issue of 10½% senior notes due June 2030.

Carnival above water

Carnival’s new 10½% senior notes due 2030 shot above water on Thursday for the first time since the notes priced at par on May 18.

After closing the previous session at 99¾ bid, par ¼ offered, the 10½% notes opened Thursday at 101 and continued to climb as the session progressed.

They were wrapped around 102 heading into the close with a yield of 9.98%.

There was $18 million in reported volume.

While Carnival’s new notes made strong gains on Thursday, the cruise line operator’s 6% senior notes due 2029 were the most active in the capital structure.

The 6% notes jumped 2 points to close Thursday at 85 with the yield now 8.95%.

The notes were the most actively traded in the secondary space with $39 million in reported volume.

Buyers have been eyeing bonds that have been trading in the 80s with deeply discounted notes offering a better total return than a higher coupon note trading near par, a source previously said.

Carvana gains

While Carvana’s struggling 10¼% senior notes due 2030 improved alongside the broader market on Thursday, the used car e-commerce company’s short-duration 5 5/8% senior notes due 2025 remained the preferred tranche for buyers.

The 10¼% notes were up 1 point to close Thursday at 89 with the yield now 12.47%.

There was $21 million in reported volume.

The notes have improved over the past week after hitting an all-time low of 84½.

The $3.275 billion issue priced at par on April 27.

While Carvana’s new issue improved, its shorter-duration 5 5/8% senior notes due 2025 jumped.

The 5 5/8% notes were up more 5¾ points to close the day at 87¼ with the yield now 10¼%.

There was $12 million in reported volume.

Retail lifted

Some badly battered retail names continued to see large gains with Macy’s announcing a surprise earnings beat after the close of equity markets on Wednesday.

While volume was light, Macy’s 6 3/8% senior notes due 2037 rose 3¾ points to 82¾ with the yield 8.47%.

The department store chain’s 4½% senior notes due 2034, which had been under pressure in the run-up to earnings, closed Thursday on a 74-handle.

The notes traded down to a 67-handle in anticipation of weak earnings.

The retailer not only beat earnings expectations but raised its profit forecast with the company reporting strong demand.

Nordstrom’s 5% senior notes due 2044 continued to make large gains with the notes adding another 4¼ points to close Thursday at 80½, according to a market source.

Fund flows

High-yield ETFs saw $452 million of daily cash inflows on Wednesday, according to a market source.

It's the second straight big daily inflow for the ETFs, following Tuesday's $589 million inflow.

The high-yield ETFs were the main driver in Thursday's big rally in the junk bond market, a trader said.

The JNK ETF climbed 1.6% on Thursday, and is up 3.9% week to date, a trader said.

Meanwhile actively managed high-yield funds sustained $235 million of outflows on Wednesday, the source said.

News of Wednesday's daily flows was followed by a Thursday afternoon report that the combined funds sustained $236 million of net outflows in the week to Wednesday's close, according to Refinitiv Lipper.

Indexes

The KDP High Yield Daily index rose 41 points to close Thursday at 57.79 with the yield now 6.39%.

The index was up 53 points on Wednesday, 3 points on Tuesday and 57 points on Monday.

The ICE BofAML US High Yield index jumped 133.6 bps with the year-to-date return now 8.388%.

The index was up 85.2 bps on Wednesday, 2.6 bps on Tuesday and 17.5 bps on Monday.

The CDX High Yield 30 index rose 54 bps to close Thursday at 101.38.

The index was up 92 bps on Wednesday, 16 bps on Tuesday and 69 bps on Monday.

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