Morning Commentary: ETFs are the drivers as low liquidity dogs junk market, trader says

By Paul A. Harris

Portland, Ore., Aug. 3 – Low liquidity related to risk aversion, as well as to the late summer season, were at play in the high-yield bond market on Wednesday morning, according to a bond trader based in New York.

As a result, bid-offer spreads are wide and trading volume is low, said the trader, who marked the broad market unchanged to perhaps slightly lower at mid-morning.

With the S&P 500 stock index up 0.85% at that time, the iShares iBoxx $ High Yield Corporate Bd (HYG) share price was up 0.17%, or 13 cents, at $77.68 per share.

ETFs, which have been the drivers of the late summer market, closed as better sellers on Tuesday and had yet to come off of the sidelines on Wednesday morning.

For example, said the trader, ETF-driven lists of offers-wanted-in-competition (OWICs) lifted the bonds of fire retardants supplier Perimeter Solutions – the EverArc Escrow Sarl 5% senior secured notes due October 2029 – by 5 points on Tuesday.

However, those bonds fell by just as much on Wednesday morning, the source added.

Financial headlines provided meager kindling for the junk bond market on Wednesday morning, the source said.

News that Lexington, Ky.-based bubble wrap supplier Sealed Air Corp. reported revenues that missed analysts' expectations caused its bonds to be marked lower on the morning.

The Sealed Air 4% senior notes due December 2027 were marked ¼ point to ½ point lower, although they did not appear to be trading, the source said.

The company posted revenue of $1.42 billion in the second quarter versus forecasts of $1.45 billion.

Trading has also pretty much dried up in the most recent dollar-denominated deal to clear the market, the trader said.

The Avient Corp. 7 1/8% senior notes due August 2030 (Ba3/BB-) were 103¼ bid, 103¾ offered on Wednesday morning, the source said, adding that flippers have now been pretty much taken out of the picture, and those who purchased the bonds to hold them appear to have tucked them away.

The $725 million issue priced at par a week ago.

The new issue market remained becalmed on Wednesday morning.

Following a week of “radio silence,” news surfaced on Tuesday on $1.3 billion of debt financing offers in the market supporting Stonepeak's $2.7 billion acquisition of Lumen Technologies' Latin American operations.

With the bridge loan supporting the acquisition now having funded, dealers are keen to syndicate the debt, which is in the market from issuing entity Patagonia Holdco LLC, and are thus deepening discounts.

The OID on an $800 million term loan swooped to 82 from 90 on Tuesday, with commitments due Wednesday.

However, fresh color on the adjacent bond deal has been scarce.

The discount on the Patagonia $500 million offering of seven-year non-call three-year senior secured first-lien notes (B1/B+) is believed to have deepened into the low 80s, down from the 86 area, a debt capital markets banker said.

The deal appears to have a stronger following among emerging markets investors than among high-yield accounts, sources say.

Mixed fund flows

The daily cash flows of the dedicated high-yield bond funds were mixed on Wednesday, according to a market source.

Actively managed high-yield funds saw $305 million of inflows on the day, the source said, adding that those inflows were broad-based.

However high-yield ETFs posted negative cash flows on Wednesday, sustaining $217 million of outflows on the day, according to the market source.

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