Morning Commentary: Junk slips as rates, fundamentals weigh; funds see inflows

By Paul A. Harris

Portland, Ore., Nov. 17 – The high-yield bond market opened 1/8 of a point lower on Thursday as investors, who moved into risk earlier in the week amid hopes that tamer-than-expected CPI and PPI numbers might moderate the Fed's inflation fight, began shedding that risk in light of ensuing hawkish remarks from central bankers, according to a New York-based bond trader.

The subsequent release of the Philadelphia Fed's manufacturing index, which unexpectedly fell to negative 19.4 in November, from negative 8.7 in October, took the market another leg down, traders said.

Cash bonds were 3/8 of point lower, with the high-yield CDX down ½ point at mid-morning, on the heels of the Philadelphia Fed report, the New York trader said.

The United Rentals (North America), Inc. 6% first-lien senior secured notes (Baa3/BBB-) were lower on the morning, changing hands at 99 7/8, a trader said, down from par ¼ bid, par ¾ offered 24 hours earlier.

The $1.5 billion issue priced at par to yield 5.999% on Tuesday in a highly oversubscribed deal which – credit ratings notwithstanding – was run on the high-yield syndicate desk.

OpenText, another high-profile crossover deal – this one coming off the investment-grade desk – was also lower on the morning, the trader said.

The Open Text Corp. 6.9% senior secured notes due in December 2027 (Ba1/BBB-/BBB) were par ¼ bid, par ½ offered at mid-morning, down from par ¾ bid, par 7/8 offered late Wednesday, the trader said.

The deal priced on Wednesday at par.

Although the preponderance of participation in the deal came from investment-grade- and crossover firms, straight-up high-yield accounts also turned up for the $1 billion OpenText notes sale, owing to the ongoing lack of any meaningful new issue activity in the junk bond market, the trader remarked.

Among higher beta issues, the Carnival Corp. 10 3/8% senior priority notes due May 2028 (B2/B+) were down a point on Thursday, with cruise line paper generally in retreat, according to the trader, who marked them at 102½.

The Miami-based cruise operator’s $2.03 billion junk bond deal came at 98.465 to yield 10¾% on Oct. 18.

Carnival came to the convertibles market on Tuesday, pricing a $1 billion issue of 5¾% five-year convertibles, with proceeds to address its 2024 refinancing plan.

Among distressed names, the bonds of Veritas Technologies LLC fell 3 points on Thursday morning after sustaining a 6-point drop on Wednesday, the trader said.

The Veritas US Inc./Veritas Bermuda Ltd. 7½% senior secured notes due September 2025 were trading in a context of 72 bid, 73 offered at mid-morning, according to the source, who added that the market is chalking up the steep declines to bad earnings numbers from the privately held data management company.

Meanwhile, the sound of crickets continued to pervade the new issue market on Thursday morning, the trader said.

With no fresh announcements, the only deal on the active forward calendar is the Pegasus Merger Co./Tenneco Inc. $1 billion offering of six-year senior secured notes (B2/B-), which began a roadshow at the beginning of the month, slogging against heavy investor pushback, sources say.

Although the market has been anticipating an announcement regarding covenant concessions, it has been radio silence on the Tenneco deal for a week, sources say.

Wednesday inflows

The dedicated high-yield bond funds saw $1.352 billion of net daily cash inflows on Wednesday, according to a market source.

High-yield ETFs saw $990 million of inflows on the day.

Actively managed high-yield funds saw $362 million of inflows on Wednesday, the source said.

As the market awaits a weekly report on the cash flows of the various asset classes from fund-tracker Refinitiv Lipper, the combined funds are tracking $2.6 billion of net inflows on the week that concluded at Wednesday’s close, according to the market source.

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