Morning Commentary: Junk opens lower following big Monday slide; funds see outflows

By Paul A. Harris

Portland, Ore., March 15 – The high-yield bond market opened 1/8 of a point to Ό of a point lower on Tuesday following a big drop on Monday, according to market sources.

The Merrill Lynch US High Yield Master II Index (H0A0) dropped 91 basis points on Monday, according to a portfolio manager, who acknowledged that Monday had been a difficult day in the junk bond market.

“It was tough to sell at bids,” the investor remarked.

The average price of the index fell to 95.48, down from Friday's 96.42, the manager said.

When the dust settled from Monday's drop, the year-to-date return of the index was negative 6.25%.

The index has returned negative 2.74% thus far in March.

For a particular bond that quantifies the present heaviness of the high-yield market, sources have been pointing to the Twitter, Inc. 5% senior notes due March 2030 (Ba2/BB+).

The notes priced at par in a big $1 billion issue on Feb. 23, the day before Russia invaded the Ukraine, when the market's chief worry was worsening inflation and what the central banks might do in an attempt to address it.

To a certain extent the market's heightened inflation concerns were priced into that deal, sources say.

On Tuesday morning the Twitter 5% note was 97 bid, and 35 bps wide to the 306 bps spread at pricing, the portfolio manager said, adding that the problem is not with the credit.

Twitter is an upgrade candidate, the investor asserted.

Hence the Twitter 5% note's 3-point drop since pricing on Feb. 23 primarily reflects the condition of the market, sources say.

In contrast to Twitter, News Corp.’s 5 1/8% senior notes due February 2032 (Ba1/BB+), which priced at par just two weeks earlier (Feb. 8), when the market's inflation narrative was less severe, have sustained more serious damage, a sellside source said.

Having traded as high as 101 after pricing, the News Corp. 5 1/8% notes were being marked generically at 94.5 late Monday, the source said.

Perhaps it was to be expected that Monday's drop – 2 points to 3 points in certain sectors, traders said – put a chill into the new issue market.

The active calendar contains a single deal.

SPX Flow Inc. (Redwood Star Merger Sub. Inc.) is shopping a $570 million offering of eight-year senior notes (Caa2/CCC) – initial guidance in the high 8% to 9% area – on a roadshow set to wrap up on Thursday.

There are other deals to be done, pending market conditions, sources say.

The most recent issue to clear the market came Monday.

Crown Americas LLC priced a $500 million issue of senior notes due April 2030 (Ba3/BB-) at par to yield 5Ό% in a drive-by.

Those bonds were wrapped around the new issue price on Tuesday morning, according to the portfolio manager, who likes the issuer but ultimately felt that the deal was priced too aggressively.

To recount, the deal – oversubscribed, and playing to significant or better reverse inquiry – came into the market with initial guidance of 5Ό%. It was subsequently talked wide to that guidance, in the 5 3/8% area (there were limit orders at 5 3/8%, sources say), only to ultimately be priced at 5Ό%, the tight end of the wide-to-guidance talk.

Monday outflows

The dedicated high-yield bond funds sustained $379 million of net daily outflows on Monday, according to a market source.

High-yield ETFs saw $277 million of outflows on the day.

Actively managed high-yield funds sustained $102 million of outflows on Monday, the source said.

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