No new deals in sight; trading volume light; Western Digital active; Qorvo drops; Xerox, Teva gain

By Paul A. Harris and Abigail W. Adams

Portland, Me., Jan. 3 – The primary market was dormant on Thursday with no new deals on the horizon as volatility continued to roil markets.

Despite a brutal day for equities with the Dow Jones industrial average closing the day down 660 points and the tech heavy Nasdaq closing the day down 3.04%, the secondary space was largely flat on Thursday.

While Apple and its suppliers’ stock took a beating after the company slashed its revenue forecast due to slowing iPhones sales in China, the junk bonds of companies in Apple’s supply chain held in comparison.

However, trading volume was light with many still on the sidelines attempting to figure out their next steps.

Apple supplier Western Digital Corp.’s split rated 4¾% senior notes due 2026 (Baa3/BB+) were among the most actively traded in the secondary space although the notes were largely trading flat, a market source said.

While not as active, Qorvo Inc.’s 5½% senior notes due 2026 dropped 1 point.

Xerox Corp.’s 3 5/8% senior notes due 2023 (Ba1/BB+) were again active and making gains in the secondary space after a ratings downgrade pushed the bonds to junk status in mid-December.

Teva Pharmaceutical Industries Ltd.’s 3.15% senior notes due 2026 were also on the rise on Thursday after the pharmaceutical company resolved a patent infringement dispute.

Bleak horizon

It seemed apparent on Thursday that the 2019 junk market has taken up where the 2018 market left off: in lousy condition, a syndicate banker said.

Another big fall in stock prices, and yoyo-ing oil prices have investors hanging on the sidelines, with the return of a new issue calendar seeming like a distant vision, far from clear.

The yield of the 10-year Treasury closed Thursday at 2.556%, down from an intra-session high of 2.647%, and hovering not terribly far above the high end of the Fed Funds Rate target range of 2.25% to 2.5%.

That tells you that the appetite for risk is extremely weak, the banker asserted.

A London-based syndicate official also said that, notwithstanding a perception among some European fixed income investors that the selloff in euro junk is overdone, people will nevertheless be loath to leave the sidelines until volatility subsides meaningfully.

As on Wednesday, which was the first session of 2019, a notably long timeline came into play again on Thursday. Conversations about a regeneration of the new issue calendar focused on the first quarter, and not necessarily January.

The supply chain

While Apple suppliers’ stock took a beating after the company slashed its revenue forecast, the bonds of companies in its supply chain were holding up well in comparison.

Western Digital’s 4¾% senior notes due 2026 were among the most actively traded issues in the secondary space with $20 million on the tape by the late afternoon.

The notes were largely trading flat with most trades between 87 1/8 and 87 3/8, a market source said.

About 13% of Western Digital’s revenue in fiscal year 2018 came from Apple, a market source said.

While volume was light, Qorvo’s 5½% senior notes due 2026 dropped about 1 point to 94¾.

The semiconductor company received 36% of its revenue from Apple in fiscal year 2018, according to a market source.

Qorvo slashed its revenue guidance in mid-November to between $800 and $840 million from its previous forecast of between $880 and $900 million due to an anticipated lowered demand for smartphones.

Xerox gains

Xerox’s 3 5/8% senior notes due 2023 were active and making gains in the secondary space on Thursday.

The notes rose ¾ point to 91¾, a market source said. More than $18 million of the bonds were on the tape by the late afternoon.

The former investment grade paper was downgraded to junk by S&P and Moody’s in mid-December.

S&P cited operational and business challenges and Moody’s cited concern about the ability of the company to grow its revenue base in the coming year.

Teva on the rise

Teva Pharmaceutical’s 3.15% senior notes due 2026 were on the rise after the company settled a patent infringement case with Amgen.

The 3.15% senior notes climbed 1 point to 78¾, according to a market source. More than $16 million of the bonds were on the tape by the late afternoon.

Teva agreed to make a payment of an undisclosed amount to Amgen and no longer sell the generic version of Amgen’s product Sensipar until 2021, ending litigation between the two companies.

Wednesday outflows

The daily cash flows of the dedicated high-yield bond funds were negative on Wednesday, the most recent session for which data was available at press time, a trader said.

High-yield ETFs sustained $289 million of outflows on the day.

Actively managed high-yield funds saw $295 million of outflows on Wednesday, the source said.

News of those daily flows was followed Thursday afternoon by a report that the combined funds sustained $628 million of net outflows in the week to Wednesday's close, according to Lipper US Fund Flows.

In an otherwise dire picture of the technical disposition of the junk bond market there was one ray of light, or rather two rays, the trader noted.

On the first two days of the just-concluded weekly reporting period, which unfolded during the typically dormant period between Christmas and New Years Day, there were back-to-back daily inflows to the combined high-yield funds.

The funds saw $82 million of inflows on Thursday, Dec. 27, and a hefty $363 million of inflows on Friday, Dec. 28, the trader said.

Indexes mixed

Indexes were again mixed on Thursday as they were at the start of the new year.

The KDP High Yield Daily index rose 1 basis point to close Thursday at 66.74 although the yield remained flush with Wednesday at 7.15%. The index rose 7 bps on Wednesday.

The ICE BofAML US High Yield index continued its upward momentum on Thursday with the index rising 11.7 bps with the year-to-date return now 0.195%.

The index was up 7.8 bps on Wednesday after closing 2018 with a year-to-date return of negative 2.265%,

The CDX High Yield 30 index was down 37 bps to close Thursday at 101.43. The index was also down 22 bps on Wednesday.

© 2015 Prospect News.
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