Morning Commentary: Junk gyrates as more Fed support arrests early Wednesday market dive

By Paul A. Harris

Portland, Ore., March 18 – Plunging U.S. stock futures prices triggered another circuit breaker suspension of trading before the Wednesday open in New York, traders said.

Again the Federal Reserve Bank rode to the rescue, breaking the fall of plunging stock prices by mid-morning.

Among the Fed's most recent moves was the establishment of a Primary Dealer Credit Facility to facilitate the availability of credit to businesses and households. It follows Tuesday’s Commercial Paper Funding Facility, set in place to shore up liquidity in the commercial paper market.

Although high-yield bond traders were seeing selective post-Fed buying, there was no real conviction, said a New York-based trader, who was working remotely as part of the company’s response to the developing Covid-19 pandemic.

Investors were trying to work out where prices ought to be, and junk bonds were decisively lower on Wednesday morning.

Quality high-yield paper was down 2 to 3 points, average names were down 3 to 6 points, and the riskiest paper in the market was off another 5%.

Headlines sparked some of the trading.

Bonds of Tesla Inc. dropped in price after the Alameda County, Calif., sheriff ruled that the company’s Fremont car factory is not an essential business and therefore could only maintain minimum basic operations, not including new car manufacturing.

The Tesla 5.3% senior notes due August 2025 were down 6 points on Wednesday at 81½ bid, the New York-based trader said.

Prior to the sheriff's ruling, Tesla employees had expected to keep working during the Bay Area's coronavirus shelter-in-place order.

Elsewhere, Refinitiv bonds fell further on Wednesday on continued investor apprehensions concerning deal risk.

The Refinitiv US Holdings Inc. 6¼% first-lien senior secured notes due May 2026 were down a point at 98 5/8 bid.

Those bonds traded on Tuesday at 99½, according to a market source.

Investors are concerned that the London Stock Exchange Group’s planned acquisition of Refinitiv from Thompson Reuters Corp and investment funds affiliated to Blackstone Group Inc. may fall victim to the unfolding human health and economic catastrophe.

Bonds of sports marketing firm Diamond Sports Group, LLC, an indirect subsidiary of Sinclair Broadcast Group, were under pressure related to the global suspension of most sporting activities to combat the pandemic.

The Diamond Sports Group/Diamond Sports Finance Co. 5 3/8% notes due August 2026 were down 3½ points at 67½ bid on Wednesday, according to the trader, who noted that the paper priced in a $3.05 billion issue at par last July.

Tuesday outflows

The dedicated high-yield bond funds sustained $272 million of net outflows, heavily weighted to the real money accounts, on Tuesday, according to a market source.

Actively managed high-yield funds, the asset managers – said to represent the “real money” in the junk bond market – saw $625 million of outflows on the day.

High-yield ETFs, on the other hand, saw solid inflows of $353 million on Tuesday, the source said.

With only Wednesday’s fund flow totals remaining to go into the tally, the combined high-yield funds are tracking around $2 billion of net outflows for the week that will conclude with Wednesday's close, according to the market source.

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