Morning Commentary: Junk opens lower amid stock sell-off as inflation concerns resurface

By Paul A. Harris

Portland, Ore., Aug. 19 – The high-yield bond market opened ½ point lower on Friday as hope for a kinder, gentler Federal Open Market Committee appears to be fading, a portfolio manager said.

With the yield of the 10-year Treasury pushing 3% (2.996% at mid-morning), up around 10 basis points, and the S&P 500 stock index off 1.11%, the iShares iBoxx $ High Yield Corporate Bd (HYG) share price was down a hefty 1.05%, or 82 cents, at $76.92.

“Investors have been hoping that weaker economic data might cause the Fed to ease up a bit on rates,” the portfolio manager said.

However recent data don't provide much support for such an outlook, the source noted, adding that investors are having to reconcile themselves to the possibility of a third consecutive monthly increase of ¾% to the benchmark Fed Funds rate.

Prices of recently issued bonds were tending to reflect the move of the market, sources said.

The Ford Motor Co. 6.1% senior green notes due August 2032 (Ba2/BB+) were 99¾ bid, par ¼ offered on Friday morning, the portfolio manager said.

They were par 5/8 bid on Thursday, and so were lower on a price basis.

However, the bonds, which came at par in a high-grade-style execution on Tuesday, were trading Friday at a spread of 329 bps, which, given the rise in Treasury rates, was 15 bps tighter on the morning, the investor asserted.

The Royal Caribbean Cruises Ltd. 11 5/8% senior notes due August 2027 (B3/B) perhaps better characterized the move of the junk market on the day, the source said.

Those notes were par ¾ bid on Friday morning, half a point to 5/8 of a point lower after going out Thursday at 101 3/8 bid.

The upsized $1.25 billion issue (from $1 billion) priced at par on Tuesday.

Market liquidity was thin on Friday morning, as befits a late summer Friday, sources said.

The primary market remained idle.

Given the possibility that price improvements seen in high-yield bonds – as well as in stocks – over the past week amounted to a “bear market rally,” it is conceivable that summer new issue business may have run its course, and further issuance activity might have to await the conclusion of the Labor Day (Sept. 5) holiday weekend, the traditional summer-fall boundary in the bond market, the investor said.

Thursday fund flows

High-yield ETFs saw $128 million of daily cash inflows on Thursday, according to a market source.

That snapped a two-day run of substantial outflows, totaling $1.17 billion, from the junk ETFs.

However actively managed high-yield funds sustained $199 million of outflows on Thursday, the source said.

News of Thursday’s daily cash flows follows a Thursday afternoon report that the combined funds saw $1.46 billion of net inflows for the week to the Wednesday, Aug. 17 close, according to Refinitiv Lipper.

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