Risk-on sentiment returns; CDX sees largest single-day gain in four years; energy outperforms

By Paul A. Harris and Abigail W. Adams

Portland, Me., Jan. 4 – While the primary market remained dormant on Friday, a risk-on sentiment returned to the secondary space, which saw sudden and dramatic gains during Friday’s session.

The CDX High Yield 30 index saw its largest single-day increase in four years with credit spreads tightening about 35 basis points, a market source said.

With a strong jobs report, a dovish tone from the Federal Reserve, and optimism around pending U.S.-China trade talks a dramatic reversal occurred Friday.

The dramatic swing was expected by some sources who said the market was bound to recover just as suddenly and drastically as it sold off.

The energy sector was a major benefactor of the improved tone with junk bonds from California Resources Corp., Whiting Petroleum Corp., EP Energy Corp., and Oasis Petroleum Inc. gaining 4 to 5 points.

The health care sector also saw a large upswing with Bausch Health Cos. Inc.’s and Teva Pharmaceutical Industries Ltd.’s junk bonds leading the charge.

The primary

Heading into the first weekend of the new year, with three 2019 market sessions in the book, the year's first primary market trade was nowhere in sight, an investor said on Friday.

Still, this source liked what he was seeing as the Friday close neared, with the Dow Jones Industrial Average advancing 3.25% on moderate volume on the day, and the barrel price of West Texas Intermediate crude oil – the driver of the energy sector that represents 15% of the high-yield index – advancing 2.42%, or $1.14 to $48.23 in intraday trading, $5.77 above recent lows in late December.

The rally in crude is telling you that the market expects a trade deal with China, said the investor whose portfolio includes both high-yield bonds and bank loans.

“The high-yield market has repriced itself, and the Fed is out of the way if numbers aren't good,” the source asserted, alluding to Federal Reserve Bank chairman Jerome Powell's Friday statement that the Fed will be patient with respect to future rate hikes in light of low inflation.

Heading into the weekend, the glass appeared half full to this investor.

“To get more downside you would have to assume the economy is going into recession,” the source asserted.

Nevertheless, the abbreviated New Year's week came and went with no trace of an active new issue calendar, the investor conceded.

There is a list of names highly familiar to the market that have 2019 maturities to address, though none of them will necessarily refinance by means of the junk bond market, the investor said.

Elsewhere syndicate bankers mention a modest pipeline of committed financings that are expected to come in the first quarter of 2019.

The rebound

The dramatic sell-off seen in the final weeks of the fourth quarter could just as quickly reverse itself, a market source said.

A considerable reversal was seen on Friday with credit spreads tightening 35 bps, the CDX index posting its largest single-day gain in four years and high-yield ETFs up over 1%.

“It’s ridiculous,” a market source said. “Nothing is down and it’s all because of the Federal Reserve and what [Federal Reserve Chairman Jerome Powell] said.”

A strong jobs report, Powell’s dovish talk on future interest rate hikes, and optimism surrounding a trade war truce contributed to the surge in the junk bond market.

While ETFs saw a brutal sell-off in the final weeks of December, buying pressure pushed funds up on Friday.

The iShares iBoxx $ High Yield Corporate Bond Fund ETF closed Friday at $82.39, an increase of 1.68%. More than 37 million of the shares were in play on Friday versus the 90-day average of 4 million.

The SPDR Bloomberg Barclays High Yield Bond ETF closed Friday at $34.11, an increase of 1.64%.

Almost 30 million of the shares changed hands during Friday’s session versus the 90-day average of 4 million.

Energy outperforms

The energy sector was a major benefactor of the improved tone on Friday with several names that have been under pressure since the sell-off in crude oil futures in mid-October posting single day gains of 4 to 5 points.

California Resources 8% senior notes due 2022 rose 5¼ points to trade up to 75 5/8, a market source said.

The notes were the major volume mover in the secondary space with more than $48 million of the bonds on the tape.

Whiting Petroleum’s 6 5/8% senior notes due 2026 were up 4 5/8 points to trade up to 92 5/8 with more than $27.5 million on the tape.

EP Energy’s 8% senior notes due 2024 were up 5½ points to 79¾ with more than $9 million of the bonds on the tape.

Oasis Petroleum’s 6¼% notes due 2026 were up 4½ points to 92 with more than $12 million of the bonds on the tape.

While crude oil futures continued their upward momentum on Friday, they remained below the closely watched $50 threshold.

The barrel price of WTI crude oil for February delivery shot past $49 early in Friday’s session, a gain of more than 4%. However, crude oil futures settled at $47.96, an increase of 87 cents, or 1.85%.

While crude oil futures remained below the $50 threshold, oil and gas names jumped on strong economic data that assuaged recession fears, a market source said.

Health care on the rise

The health care sector also saw major gains during Friday’s session with junk bonds from Bausch Health. and Teva Pharmaceutical leading the charge.

Bausch’s 6 1/8% senior notes due 2025 were up 3¼ points to 91 with more than $40 million on the tape by the late afternoon.

The Quebec-based company’s 9% senior notes due 2025 were up 2 5/8 points to 103 3/8 with more than $18 million of the bonds on the tape.

The specialty pharmaceutical company formerly known as Valeant redeemed its 5 5/8% notes due 2021 on Dec. 31.

Teva continued to post gains in high-volume activity. Teva’s 3.15% senior notes due 2026 rose 2½ points to 81 1/8 with $38 million of the bonds on the tape.

Teva’s 6¾% notes due 2028 rose 2 7/8 points to par ½ with $17 million on the tape.

Teva’s junk bonds were also making gains on Monday after the company settled patent infringement litigation with Amgen.

Thursday outflows

The daily cash flows of the dedicated high-yield bond funds were negative on Thursday, according to an investor.

High yield ETFs sustained a substantial $781 million of outflows on the day.

Actively managed high yield funds saw $90 million of outflows on Thursday.

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

With the ETFs actually seeing $535 million of inflows during that period, actively managed high yield funds ended the most recent week deep in the red, sustaining $1.16 billion of outflows in the week to Wednesday's close, the trader said.

It was the seventh consecutive week of outflows from the combined dedicated high yield bond funds, with a cumulative total of $11.6 billion during that period, the source added.

And with the entire time period now in the book, the combined funds saw $20.2 billion of net outflows in the fourth quarter of 2018, and a record $46.3 billion of outflows for the year, the trader said.

Indexes skyrocket

Indexes closed out the first week of 2019 with a meteoric rise on Friday.

The KDP High Yield Daily index rose 70 basis points to close Friday at 67.44 with the yield now 6.91%.

The index was up 1 bps on Thursday and 7 bps on Wednesday for a 78 bps gain in the new year.

The ICE BofAML US High Yield index jumped 109.9 bps with the year-to-date return now 1.294%. The index was up 11.7 bps on Thursday and 7.8 bps on Wednesday.

The index launched 2019 on strong footing after closing 2018 with a year-to-date return of negative 2.265%.

The CDX High Yield 30 index marked its largest single day gain in four years on Friday. The index jumped 137 bps to close Friday at 102.8.

The index was down 37 bps on Thursday and 22 bps on Wednesday for a cumulative gain of 78 bps in the new year.

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