Morning Commentary: Junk flat as financials remain in focus; funds see Friday outflows

By Paul A. Harris

Portland, Ore., March 20 – High-yield bond market participants in the United States took to their desks on Monday morning with global markets gyrating on news that Swiss bank regulators wiped out $17 billion of Credit Suisse bond debt and subsequently helped facilitate the sale of Credit Suisse to Swiss rival UBS, according to a bond trader in New York.

The market remains focused on the financials, said the trader, adding that cash bonds were unchanged at mid-morning, and the high-yield index was up ¼ of a point at that time.

High-yield players were scrambling to weigh positions in tier 1 bank capital, the source said.

They were also scrambling to take measure of the debt securities of troubled San Francisco-based commercial banking company First Republic Bank, the trader said.

On Monday morning, Moody’s Investors Service said it downgraded First Republic’s long-term issuer rating and local-currency subordinate ratings to B2 from Baa1, and its preferred stock non-cumulative rating to Caa1(hyb) from Baa3(hyb), and kept them on review for downgrade.

The downgrades reflect the erosion of the bank’s financial profile “and the significant challenges First Republic Bank faces over the medium term in light of its increased reliance on short-term and higher cost wholesale funding due to deposit outflows,” Moody's said.

S&P said it cut First Republic’s issuer rating to B+ from BB+, its senior unsecured issue rating to B+, the subordinated issue rating to B-, and the preferred stock issue rating to CCC.

With the Dow Jones industrial average up 0.98% at mid-morning, the iBoxx $ High Yield Corporate Bd (HYG) share price was better, up 0.14% at $73.47.

The DISH Network Corp. 11¾% senior secured notes due November 2027 (Ba3/B+), one of the new year's benchmark issues, were trading in odd lots at 93¾ bid, 94½ offered, unchanged from Friday’s close, the trader said.

Last Thursday those bonds were 94 5/8 bid, 94 7/8 offered, according to a market source.

The $1.5 billion deal, an add-on, priced at 102 on Jan. 17.

Fund flows

The dedicated high-yield bond funds saw $484 million of net daily cash outflows on Friday, according to a market source.

High-yield ETFs sustained $459 million of outflows on the day.

Actively managed high-yield funds sustained $25 million of outflows on Friday, the source said.

The combined funds have seen $13 billion of net outflows year to date, according to the market source.

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