Quiet market mulls impact of Bush mortgage move; funds see $83 million inflow, first in 12 weeks

By Paul Deckelman

New York, Aug. 31 - President George Bush's announcement Friday that the federal government will step in to help homeowners hurt by the current mortgage-lending crisis was greeted with caution by a generally quiet market. While one trader said he had seen some gains in several issues of Residential Capital Corp., a major lender active in the troubled subprime mortgage business, others said that they saw a lot of quotes, but little or no real trading action.

The news also seemed to not have much impact on the bonds of such homebuilders as Beazer Homes USA Inc., Hovnanian Enterprises Inc. or Technical Olympic USA Inc.

Outside of whatever activity did take place among the mortgage lenders, United Rentals Inc. bonds were seen up around 2 points in apparent reaction to the late-Thursday news that the company's chairman, Bradley Jacobs, has resigned his post, as part of the company's pending acquisition by Cerberus Capital Management.

The high-yield primary market, as could be expected, remained in its long summertime coma heading into the long Labor Day holiday break, which saw U.S. debt markets closing by 2 p.m. ET on Friday and completely closed on Monday. Several traders and other market-watchers said they had seen no new issues price, or any announcement of new deals. Primaryside activity is expected to pick up once new-deal participants put away their swim trunks and get back to work in September.

Funds see first inflow in 12 weeks

And just in time for the hoped-for return of the new-deal market, investors started actually pumping money back into the junk universe, rather than taking it out.

Word circulated Friday that the weekly high yield mutual fund flow numbers compiled by AMG Data Services of Arcata, Calif., were showing their first inflow in 12 weeks. Sources familiar with that report told Prospect News that in the week ended Wednesday, $83.4 million more came into the funds than left them.

That inflow followed 11 straight weeks of outflows, including the $379.7 million which flowed out of the funds in the previous week, ended Aug. 22. During that long losing streak, a total of approximately $3.8 billion flowed from the funds, completely erasing the roughly $1.6 billion of cumulative inflows which had built up in the first half of the year and then continuing deep in the red.

On a year-to-date basis, counting the latest week's totals, high-yield funds which report weekly rather than monthly, have racked up $2.108 billion of red ink as investors have pulled money out of the junk market and other perceived risky asset classes, including global and domestic equities and emerging markets debt, to head for the high ground of other perceived safer investments, notably U.S. Treasuries, in the face of the credit crunch which started in the subprime sector. The sudden capital flight helped to put an abrupt end to a high-yield new-issues boom which up through late June was rolling along at a potentially record-breaking pace, fueled by a spate of capital-intensive leveraged buyouts and other merger and acquisition events announced in the first half of the year.

While the weekly-reporting funds have been bleeding money all over the place since late June, funds which report on a monthly basis to AMG, on the other hand, have seen $4.454 billion of inflows year to date. The latest week's figure in this category was unchanged from the previous week.

Hence the aggregate flows, which tally both the weekly and monthly reporting funds, also remained well in the black to Wednesday's close, at $2.346 billion, up from the prior week's $2.263 billion total.

Market participants will study the unexpected weekly inflow, in hopes of determining whether it was a harbinger of a change in the junk market climate, or merely a fluke. While numerically speaking, inflows have now been seen in 20 weeks out of the 35 since the start of the year, versus 15 weekly outflows, the momentum - which saw the big $1.6 billion bulge of cumulative inflows build up over the first half of the year, only to melt away like ice under the blazing summer sun - has now clearly moved into the negative column, with the exception of this most recent week.

The flow of money into and out of the junk bond funds is seen as a generally reliable market barometer of overall high yield market liquidity trends - although they only comprise 10% to 15% of the total monies floating around the high yield universe, far less than they used to - because there is no reporting mechanism to track the movements of other, larger sources of junk market cash, such as insurance companies, pension funds and, most recently, hedge funds.

Most see little gain from Bush, Bernanke

Clearly the major story of the day was the twin efforts by president Bush and Federal Reserve chairman Ben S. Bernanke to calm the jittery financial markets, which sought concrete steps from U.S. authorities to limit the mortgage lending crisis which has roiled the mortgage, banking and housing industries over the past few months. Those hopes got a boost when Bush announced that he would allow the Federal Housing Administration to help homeowners who are delinquent on their mortgages - although he said there would be no bailouts for "speculators." Meanwhile, Bernanke, in a long-awaited major speech later in the day, declared that the U.S. central bank will "act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets" - although he stopped short of specifically promising the cut in interest rates that some financial market participants had been hoping for.

The impact on the financial names which have been the hardest hit of late was mixed. The split-rated 6¼% notes due 2016 of Countrywide Financial Corp., the nation's largest mortgage lender, which had closed around the 88.5 area on Thursday, opened more than a point below that and never managed to break above 88 in sluggish dealings. They were finally quoted going out at 87.5. However, the 8.05% notes due 2027 of its affiliate, Countrywide Capital III, gained 3 points on the session to 90 bid - but with only one trade seen in it all day reported.

A trader saw Residential Capital Corp. as "the name of the day," quoting the big mortgage lender's 6 3/8% notes due 2010 as having traded in a 2 point bid range between 75.5 and 77.5 and "ending near the highs." He said there had been "a lot of volume" in the issue, and also said that ResCap's 6 7/8% notes due 2015 were up between ½ and 1 point at 75.5 bid, also on "good volume."

He attributed the gains to Friday morning's statement by Bush that the government, through the Federal Housing Administration, would help out homeowners who have fallen way behind on their mortgage payments, but said that "it really started with the comments in [The Wall Street] Journal, reporting what Bush would say. Even before the opening, futures were higher."

At another desk, ResCap's 6.13% notes due 2008 were quoted more than 2 points better at 83.5 bid.

ResCap's corporate parent, GMAC LLC, was also seen better, its 6¾% notes due 2014 up ¾ point at 85, while its 6 7/8% notes due 2012 gained 1 point to end at 88.

Other traders, however, saw things differently, One noted that there were "few or no trades," seeing the ResCap 7 1/8% notes due 2008 at 82.5 bid, 83 offered, on "just two trades of over $1 million. It was better, but not a lot to go on.

"On a day like today, you could have one trade for $1 million bonds at some level - but it would probably be meaningless by Tuesday."

Several other traders said they really had not seen much of ResCap, or any other issue for that matter, commenting on the slowness of the market.

The first trader acknowledged there was only limited impact on bonds of homebuilders like Beazer Homes, which might have been expected to firm on positive mortgage-sector news, given the way the fortunes of the mortgage and homebuilding industries are so closely intertwined.

Beazer was "maybe quoted a point higher, or not even that, half a point," at 79 bid, 81 offered for its 8 5/8% notes due 2011. Hovnanian Enterprises "doesn't seem much better, nor did Standard Pacific Corp. Homebuilder stocks "might have ticked up - but bonds didn't."

Another trader saw "a lot of quoting" in Technical Olympic, WCI and Beazer - "but no trades."

Bush is letting the FHA, which insures mortgages for low- and middle-income borrowers, guarantee loans for delinquent borrowers, allowing them to avoid foreclosure and refinance at more favorable rates. Another trader said that while this may be helpful from a psychological perspective in calming popular fears and restoring a level of confidence in the economy, there is some feeling that the steps didn't really amount to all that big a deal.

"It basically helps some of the subprime lenders, which I guess ResCap is - but the FHA market is not that big, and there's are a lot of things you have to have in place before you can qualify for a loan."

He said "it's going to help a few of these people who may have gotten hoodwinked by some of these situations with low teaser rates - but you've got to be 90 days in default before you can even get that." While conceding that the steps outlined are "a start, with somebody at least saying they're going to do something - I don't think it helps as far as any future money to be provided to supply the growth that we've had."

United Rentals better as CEO exits

Apart from the mortgage and housing-related names, United Rentals' 7% notes due 2014 were better, up 2 points to 104.5.

The Greenwich, Conn.-based equipment rental company said after the close on Thursday that co-founder Bradley Jacobs had resigned as chairman of its board of directors, a post he had held since 1997. The executive change comes against the backdrop of the pending $4 billion acquisition of United Rentals by affiliates of Cerberus Capital, a deal announced in July which is expected to close in the fourth quarter.

Overall, traders said, nothing else was happening. "Everything was closed for business," said one.

"Not a darn thing was going on, other than the equity rally [on Bush and Bernanke's statements], and nothing with bonds. There was no trading, no new deals, no earnings and no numbers that could move the market.

"The Street was completely closed by 10:30."

Another trader saw the widely followed CDX index of junk bond performance up ¼ point at 95-951/2. Among other stock indexes, the Banc of America Securities High Yield Broad Market Index was up 0.04% on the day, with a year-to-date return of 0.70%. The KDP High Yield Daily Index was up 0.07 at 78.37, its yield edging down 2 basis points on the day to 8.32%.

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