Morning Commentary: Junk opens lower; Ford's new bonds slog back toward issue prices

By Paul A. Harris

Portland, Ore., Jan. 6 – Junk bonds opened the Thursday session down 1/8 point as interest rates have now pushed through the wides seen in 2021, a trader said.

The yield of the 10-year Treasury has now widened 20 basis points since trading commenced in the new year, according to a crossover trader.

The moves in rates, exacerbated by hawkish December Fed minutes that were released on Wednesday, are causing the junk bond market to undergo repricing, sources say.

Higher rated, lower coupon speculative-grade bonds are especially sensitive to the move in rates, they add.

A case in point is the $2 billion two-part unsecured deal (Ba2/BB+) that Ford Motor Credit Co. LLC brought on Wednesday.

The Ford Credit 2.3% notes due February 2025 were straddling their issue price at 99¾ bid, par 1/8 offered at mid-morning on Thursday. Late Wednesday they were 99¾ bid, 99 7/8 offered.

They came in a $1.25 billion issue that priced at 99.999.

The 2.9% notes due February 2029 were 99 1/8 bid, 99½ offered at mid-morning, up from 99 bid, 99 3/8 offered earlier in the day.

They came in a $750 million issue that priced at 99.998.

When the wrapper came off the new Ford Credit deal on Wednesday morning both tranches were being discussed at premiums to the company's existing issues with similar maturities. As books began building (at one point they were heard to have been pushing the $10 billion mark across both tranches) those premiums continued to thin, causing demand to fade, sources said.

Compounding the tight pricing was the move in rates following the release of minutes from the mid-December meeting of the Federal Open Market Committee warning of an increase in the benchmark Fed Funds rate sooner than later in 2022, and a corresponding effort to shrink the Fed's balance sheet, implying asset sales, sources said.

One other deal priced on Wednesday, and it, too, was lagging its issue price in Thursday trading.

The Realogy Holdings Corp. 5¼% senior notes due April 2030 (B2/B+) were 99½ bid, 99¾ offered on Thursday morning.

The twice-upsized $1 billion issue (from $550 million, then $900 million), which priced at par, traded as low as 99¼ bid, 99¾ offered post-break.

On deck for Thursday is VodafoneZiggo Group Holding BV, which is expected to price approximately $2.1 billion equivalent of 10-year senior secured sustainability-linked notes (expected ratings B1/B+/BB) in benchmark tranches of dollar-denominated notes talked in the 5% area and euro-denominated notes talked in the 3½% area.

The dollar-dominated tranche was heard to be playing to $1.5 billion of orders on Thursday morning, a trader said.

Some of those, however, were limit orders specifying yields in the range of 5 1/8% to 5¼%, the source added.

ETFs see outflows

High-yield ETFs sustained $920 million of daily outflows on Wednesday, according to a market source.

Actively managed high-yield funds, meanwhile, were well into the green on Wednesday, seeing $215 million of inflows on the day.

As the market awaits a weekly report on the cash flows of the asset classes later on Thursday from Refinitiv Lipper, the combined junk funds are tracking $657 million of net inflows for the week that concluded with Wednesday’s close.

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