Morning Commentary: Junk slightly weaker; XPO Logistics dollar bonds hold in against Treasury move

By Paul A. Harris

Portland, Ore., June 5 – Junk bonds opened slightly weaker on Friday.

Cash bonds were down an eighth of a point with a big move in Treasuries, according to a bond trader.

The yield on 10-year government paper shot up by 10 basis points to 2.41% on the back of a report from the U.S. Labor Department that non-farm payrolls rose by a better-than-predicted 280,000 in May.

XPO Logistics holds in

Amid the volatility in Treasuries, the new XPO Logistics Inc. 6½% senior notes due June 15, 2022 (B1/B) were basically holding in at issue price, according to a portfolio manager who played the deal.

The bonds were 99½ bid, par offered on Friday morning.

The deal, which priced at par in a $1.6 billion tranche on Thursday, played to $2.5 billion of orders, the investor said.

Better-rated, longer-dated bonds were not faring nearly as well, the manager said.

The Micron Technology, Inc. 5½% senior notes due Feb. 1, 2025 were 96½ bid, 97¼ offered on Friday morning.

That paper is off 6 points in the past month, the investor said, adding that they were 103 bid on April 23.

“That's being caused by the move in Treasuries,” the buysider asserted. “It’s not a credit issue. The company has more cash than debt.”

The higher the credit quality, and the longer the duration, the uglier the picture gets, the investor said.

Treasuries were yielding 2.41% on Friday, whereas they were 1.67% on Jan. 30 of this year, the source recounted.

“Right now if you're in Treasuries, or even if you're in high-grade paper, you're getting crushed.”

Uncertainty is causing the volatility in Treasuries, the portfolio manager said.

There is uncertainty surrounding a possible rate hike, although Friday’s strong jobs number suggests there will be one this year, probably in September, the source said.

There is also uncertainty about the U.S. economy, which seems to be doing OK, but not necessarily great.

There is uncertainty with respect to energy prices.

“And then of course you have Greece,” the portfolio manager added.

Quiet primary market

Volatility in Treasuries has also created some chop in the high-yield primary market, sources say, noting that the June 1 week saw its share of deal downsizings and restructurings, and in some cases price talk hikes among transactions which played before high-yield investors.

At the Friday open only one deal was parked on the active calendar.

Harsco Corp. talked its $250 million offering of five-year senior notes (Ba1/BB/BBB-) to yield 6% to 6¼% on Wednesday.

Books were scheduled to close late Wednesday, and the deal was set to price Thursday but was pushed into the Friday session.

There should be news on the deal later Friday, an informed source advised.

Citigroup, Credit Suisse, HSBC, JPMorgan, MUFG, RBC and U.S. Bancorp are the joint bookrunners.

Outflows on Thursday

Meanwhile the cash flows of the dedicated high-yield funds were negative on Thursday, the most recent session for which data was available at press time, according to a market source.

High-yield ETFs saw $271 million of outflows on Thursday, the source said.

Actively managed funds saw $105 million of outflows.

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