Junk bonds close with weekly loss; Ford, Royal Caribbean return gains; Charter below par

By Paul A. Harris and Abigail W. Adams

Portland, Me., Aug. 19 – The primary market remained idle on Friday with risk aversion setting in as the market reassessed its rate-hike expectations on the back of hawkish comments from several Federal Reserve officials.

The renewed selling pressure combined with late-summer thin liquidity may put the primary market on hold until after Labor Day, sources said.

Meanwhile, it was a red day in the secondary space with the cash bond market down ½ to ¾ point as the market reassessed the Federal Reserve’s pivot and again priced in more aggressive rate hikes.

While Treasury yields remained inverted, they resumed their climb with the five-year once again pushing past a 3% yield and the 10-year again brushing up against it.

The secondary space logged its first red week of August with the ICE BofAML US High Yield index down more than 1 point – the majority of losses occurring during Wednesday’s and Friday’s sessions.

The strong performance of recent issues began to weaken with Ford Motor Co.’s 6.1% senior green notes due 2032 (Ba2/BB+) falling back to par and Royal Caribbean Group’s 11 5/8% senior notes due 2027 (B3/B) breaking below a 101-handle.

Charter Communications, Inc. subsidiary CCO Holdings, LLC’s recently priced 6 3/8% senior notes due 2029 (B1/BB-) were also under pressure in heavy volume with the notes again falling well below par.

Primary doldrums

Liquidity was thin on Friday, as befits the closing hours of a week in the late-summer junk bond market, sources said.

The primary market remained idle.

A suspect narrative that had the Fed slowing its forecast rate increases as a palliative for a weak economy has given way to a much more likely scenario that the central bank will follow through with the increases it has telegraphed in an effort to get ahead of inflation that clearly remains too high, sources said on Friday.

The increased likelihood of a further 75 basis points increase to the Fed Funds rate, following the ones in June and July, served to dampen the vigorous risk appetite that was on display throughout most of the past week in the capital markets, sources said.

Renewed risk aversion could close an August issuance window which saw $8.1 billion of freshly minted junk bonds clear the market in the month to Friday's close, whereas just $2 billion priced in all of July, sources say.

Given the market's traditionally thin late-summer liquidity and the possibility that risk-aversion is once again taking hold of the markets, summer new issue business may have now run its course, and further activity might have to await the conclusion of the Labor Day (Sept. 5) holiday weekend, the traditional summer-fall boundary in the bond market, a high-yield bond portfolio manager said on Friday.

Ford flat

Ford’s 6.1% senior green notes due 2032 gave back their gains from the previous session with the notes closing Friday wrapped around their issue price.

The 6.1% notes fell about ¾ point in heavy volume.

They were changing hands in the 99 7/8 to par 1/8 context heading into the market close, according to a market source.

There was $31 million in reported volume.

The notes were trading at their lowest level since the $1.75 billion issue, which priced at par, broke for trade on Tuesday.

While the 6.1% notes were unable to break above a par-handle, they were able to hold above their issue price with the notes closing the previous session in the par 5/8 to par 7/8 context.

The notes were expected to struggle if the BB-index widened, especially given the amount of Ford paper in the market, a source said.

Royal Caribbean weaker

Royal Caribbean’s 11 5/8% senior notes due 2027 gave back some of the strong gains made in the secondary market with the notes breaking below a 101-handle on Friday.

The 11 5/8% notes fell ¾ point to trade in the par ¾ to 101 context heading into the market close, a source said.

There was $13 million in reported volume.

The notes have largely maintained a 101-handle since the $1.25 billion issue priced at par on Aug. 15.

Charter below par

Charter’s recently priced 6 3/8% senior notes due 2029 fell well below par in active trading on Friday.

The 6 3/8% notes were off about 1 point to close the day at 98 7/8, the lowest close for the notes since they priced, according to a market source.

The rate-sensitive notes have wavered between a 99- and a par-handle since the $1.5 billion issue priced at par on Aug. 4.

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.

Indexes

The KDP High Yield Daily index dropped 35 points to close Friday at 56.88 with the yield now 6.63%.

The index was down 3 points on Thursday, 36 points on Wednesday and 9 points on Tuesday after gaining 3 points on Monday.

The index posted a cumulative loss of 71 points on the week.

The ICE BofAML US High Yield index fell 54.4 basis points with the year-to-date return now negative 8.64%.

The index inched up 7.5 bps on Thursday, fell 51.9 bps on Wednesday and 15.8 bps on Tuesday after gaining 18.3 bps on Monday.

The index posted a cumulative loss of 96.3 bps on the week.

The CDX High Yield 30 index fell 91 bps to close Friday at 101.14.

The index gained 11 bps on Thursday after falling 63 bps on Wednesday, 47 bps on Tuesday and 9 bps on Monday.

The index posted a cumulative loss of 199 bps on the week.

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