Morning Commentary: Junk holds in as stocks cave; funds see $475 million weekly outflows

By Paul A. Harris

Portland, Ore., Dec. 1 – The high-yield bond market maintained a premium of ½ point or more following a recessionary PMI print for November, which sent the Dow tumbling at mid-morning, according to a sellside source in New York.

The Institute for Supply Management reported Thursday that economic activity in the manufacturing sector contracted in November for the first time since May 2020 after 29 consecutive months of growth.

The November PMI print was 49, down from 50.2 in October, and lower that economists’ forecast of 49.8.

It's just barely recessionary, the sellsider said.

But it shifts investors' attention away from inflation and toward economic contraction.

On the heels of the PMI report the Dow had dropped 1% by mid-morning on Thursday after rallying more than 2% on Wednesday following remarks from Fed chairman Jerome Powell suggesting that the central bank might moderate the magnitude of rate increases in its ongoing effort to cool inflation.

With respect to the PMI there is positive news for the bond market in that a contracting economy relieves upward pressure on rates, the sellsider asserted.

However, it's probably not good news for issuers thinking about raising capital in the high-yield new issue market because economic weakness erodes investors' appetites for risk assets, the source conceded.

Indeed, the junk new issue market, which has been completely idle since the end of the Thanksgiving holiday weekend, remained so on Thursday morning.

Among existing issues, the Neptune BidCo US Inc./Nielsen Holdings plc 9.29% senior secured notes due April 15, 2029 (B2/B/BB) were up 5/8 of a point at mid-morning at 96½ bid, 96 7/8 offered, the sellsider said.

The $1.96 billion issue, backing the buyout of Nielsen, priced at 92.294 to yield 11% on Nov. 8.

Meanwhile, a debt exchange announced Tuesday by the Mohegan Tribal Gaming Authority, which would see about $475 million of its outstanding 7 7/8% senior notes due 2024 exchanged for about $500 million of new 13¼% senior notes due Dec. 15, 2027, set the stage for a 4½ point improvement in the Mohegan Gaming & Entertainment 8% senior secured notes due February 2026, which were 94 bid, 94¼ offered on Thursday morning, according to the sellside source.

Fund flows

The dedicated high-yield bond funds saw $484 million of net inflows on Wednesday, according to a market source.

High-yield ETFs saw $574 million of inflows on the day.

Actively managed high-yield funds were negative on the day, sustaining $90 million of outflows on Wednesday, the source said.

As the market awaits a report on the weekly cash flows of the various asset classes, expected to come Thursday afternoon from fund-tracker Refinitiv Lipper, the combined funds are tracking $475 million of net outflows for the week to Wednesday's close, according to the market source.

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