High yield trading stabilizes amid Fed announcement, but new issue activity remains on pause

Buyers resurfaced in the high yield market over the last two days, as higher-quality names in particular bounced off the lows reached last week, said several high yield traders and investors. The stabilization is somewhat in contrast to the volatility in the equity market, which surged yesterday but shed much of the gains today after the Federal Reserve announced a 50bps emergency rate cut.

Still, high yield investors’ concerns that the Fed doesn’t have much room left to lower rates in the case of a longer economic contraction has kept the pace of secondary trading slow, according to five market participants.

Today’s emergency rate cut follows three smaller cuts in 2019 totaling 75bps that were meant to armor the US economy against a slowdown and offset the impact from Chinese trade tensions.

Following the announcement, the Dow Jones Industrial Average fell 2.94% or 786 points to 25,917.41, compared to yesterday’s nearly 1,300-point gain to 26,706.17.

Rate-sensitive high yield bond issues from HCA HealthcareKraft Heinz and Charter Communications traded up after the Fed announcement.

HCA’s Ba2/BB- USD 2.7bn 3.5% senior unsecured notes due 2030 recovered to 98.625 to yield 3.659% yesterday from a low of 97.5 to yield 3.791% last week, according to MarketAxess. The notes ticked up further today to 99.625 to yield 3.543%.

Kraft’s Baa3/BB+ USD 3bn 4.375% senior unsecured notes due 2046 recovered to 94.53 to yield 4.74% from a low of 90.94 to yield 4.998% last week, according to MarketAxess. The notes traded as high as 98.095 to yield 4.499% today.

Charter’s Ba1/BBB- USD 2.8bn 4.8% senior secured notes due 2050 traded as low as 106.332 to yield 4.41% last week before bouncing back to trade at 109.153 to yield 4.252% yesterday, according to MarketAxess. The notes jumped after the today’s rate announcement to 112.953 to yield 4.044%.

Overall, the average spread over Treasuries for bonds in the BofAML ICE HY index reversed course yesterday and tightened to 497bps, from 504bps on Friday (28 February). Over the course of last week, the index had widened substantially, from 366bps on 21 February.

However, as far as primary issuance goes, investors deem the window effectively closed until the market stabilizes for at least a few more days, three of the sources said.

“It may be weeks or a couple months until the deals that do come do better than expected and some sense of where deals can clear starts to emerge,” one of the sources said.

S&P Global Ratings said in a research note published today that the speculative grade bond market could be at the start of a new-issue “freeze” period, given a “a surge in risk aversion driven by ongoing economic disruptions to supply chains, tourism, and education and many large firms’ guidance for lower earnings as a result,”

Outside of recessions, late 2018 marked the longest period without speculative-grade transactions in the US, at 49 days, S&P said. “It is possible another 45-day period of low-to-no issuance could occur. It is certainly reasonable to expect risk-pricing to experience further volatility and potentially another step-up in spreads,” the report went on.

Cleveland-Cliffs’ newly issued USD 725m secured bond due 2026 softened to trade at 100.625 to yield 6.6% from after breaking at 101.5 yesterday, according to MarketAxess. The only high yield bond deal to launch last week, the notes initially allocated yesterday at 98.783 to yield 7%, wide of initial whispers in the mid-6% area.

Bellwether E&Ps Southwestern Energy and MEG Energy came off their recent lows from last week, in tandem with strengthening crude oil prices. WTI recovered to USD 47.33 per barrel today, from USD 44.76 per barrel on Friday (28 February).

Southwestern’s USD 500m 7.5% senior unsecured notes due 2026 traded yesterday at 78.563 to yield 12.66% from trades at 75 to yield 13.686% last week. The notes climbed further today, to 80.5 yielding 12.127%, according to MarketAxess.

MEG’s USD 800m 7% senior unsecured notes due 2024 bounced yesterday to 97 to yield 7.874% from lows of 94.75 to yield 8.55% last week. The bonds strengthened today, changing hands at 97.155 to yield 7.827% today, according to MarketAxess.

Meanwhile an OPEC meeting scheduled for Thursday could result in production cuts and ease pressure in the oil and gas space, two of the sources said.

2020 Debtwire

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