Morning Commentary: New Carnival 10 3/8% notes trade off Tuesday highs; junk lower

By Paul A. Harris

Portland, Ore., Oct. 19 – The high-yield bond market underperformed equities on Wednesday morning amid volume in speculative-grade bonds that was very thin, according to a bond trader in New York.

Given that thin volume, a measure of the broad market is always difficult, the trader specified, but added that things looked ½ point to 1 point lower, depending upon the name.

Treasury rates tell the story of why bonds were underperforming stocks, the trader remarked.

The yield of 10-year government paper spiked above 4.1% on the heels of an inflation-infested CPI report from the United Kingdom, then fell back to 4.06%, sources said.

The only dollar-denominated deal to clear the high-yield new issue market thus far this week, the Carnival Corp. 10 3/8% senior priority notes due May 2028 (B2/B+), continued to trade above issue price but fell from levels to which it broke on Tuesday.

The new Carnival 10 3/8% bonds were 98 5/8 bid, 98 7/8 offered, down from 99¼ bid, 99¾ offered late Tuesday, the trader said.

A trader elsewhere had that paper at 98¾ bid, 99 offered.

The upsized $2.03 billion issue (from $1.25 billion) priced at 98.465 to yield 10¾% in a heavily oversubscribed transaction that saw price talk tighten by about 75 basis points between the time the deal was announced and the time it priced.

Elsewhere, news that online streaming service Netflix Inc. saw hefty subscriber growth in the most recent quarter sent its share price (Nasdaq: NFLX) zooming 15% higher, but the bonds were lower, said the New York trader, who spotted the Netflix 5 7/8% senior notes due February 2025 at par ½ on Wednesday morning, down from 101 on Tuesday.

With the Netflix bonds, the story, again, is Treasury rates, the source remarked.

The Ford Motor Co. 6.1% senior green notes due August 2032 (Ba2/BB+) were down a point on Wednesday morning at 88 bid, 88¼ offered in trading volume that was somewhat active although notably lower than Tuesday's robust volume, the trader said.

The Ford green notes, a $1.75 billion issue that priced at par in mid-August – with widening in the junk bond market already well underway – provide a decent on-the-run indicator of the market's present sentiment, sources say.

With the active forward calendar nearly empty, the high-yield new issue market failed to generate any news in the early going on Wednesday, sources said.

Fund flows

High-yield ETFs saw $440 million of daily cash inflows on Tuesday, according to a market source.

Actively managed high-yield funds saw negative flows on the day, however, as they sustained $142 million of outflows on Tuesday, the source said.

The combined funds are tracking $115 million of net outflows for the week set to conclude with Wednesday's close, according to the market source.

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