Morning Commentary: Junk bonds gap higher on tamer inflation data, ebbing bank fears

By Paul A. Harris

Portland, Ore., March 14 – High-yield bonds caught a decent or better tailwind on Tuesday morning, along with other risk assets, following a CPI print indicating that price increases and year-over-year inflation may be easing, according to market sources, who marked the high-yield CDX up 1 1/8 points to 1¼ points on the morning.

The junk index was up a point on the morning, a portfolio manager said.

With the Dow Jones industrial average up 1.1% at mid-morning, the Shares iBoxx $ High Yield Corporate Bd (HYG) share price was up a hefty 0.9%, or 66 cents, at $73.40.

The Mauser Packaging Solutions Holding Co. 7 7/8% senior first-lien notes due August 2026, representing the biggest dollar-denominated tranche so far this year, were up ½ point on the morning, a trader said.

The $2.75 billion issue priced on Jan. 30.

The markets appear poised to move ahead in the wake of last week’s catastrophic failure of Silicon Valley Bank, and the follow-on crash of Signature Bank over the weekend, sources say.

“Silicon Valley Bank's exposure to assets held for sale and assets held for maturity exceeded its tier 1 capital,” the portfolio manager said.

“That's more exposure than any of the top banks, and that's why the regulators appropriately took action,” the investor added.

Trading in SVB's deeply distressed capital structure continued to have high-yield bond traders scratching their heads on Tuesday morning.

With an impending liquidation scenario likely at hand, valuations of 49 bid, 51 offered appear too high, said a trader, who conceded that HSBC's purchase of SVB UK, which was facilitated by the Bank of England in consultation with the U.K. Treasury, was positive news but hardly sufficient to support the stronger-than-expected prices seen in the crashed institution's distressed securities.

The primary market expectedly remained shuttered on Tuesday morning, with no dollar-denominated deals having priced in the past week and a half.

However, the dealers have not gone fishing, a market source in London said, adding that there are a few issuer names in the pipeline, all of them well known, that can be ready to come when circumstances merit.

The same might be said for their counterparts in the United States, a trader said, but added that the regeneration of the dollar-denominated primary market will almost certainly wait until a firmer outlook on rates takes hold among investors.

The 10-year Treasury bond yielded 3.62% on Tuesday morning, up from below 3.44% on Monday.

Ten-year governments began the month yielding above 4.07%, a trader noted.

Fund flows

The dedicated high-yield bond funds sustained $270 million of net daily cash outflows on Monday, according to a market source.

High-yield ETFs saw $210 million of outflows on the day.

Actively managed high-yield funds sustained $60 million of outflows on Monday, the source said.

The combined funds are tracking $1.05 billion of net outflows on the week that will conclude with Wednesday’s close, according to the market source.

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