Carnivals And Pixie Dust.

Junk bonds just snapped a six-week streak of outflows and they did it in style.

High yield funds took in $7.09 billion in the week ended April 1, according to Lipper data out Thursday. That’s a new record.

Earlier, JPMorgan said investors were pouring money into junk on the back of the $2 trillion government aid package aimed at bolstering the economy amid the fallout from coronavirus containment measures. Sentiment is also getting a boost from the Fed’s foray into corporate bond buying and the hodgepodge of new liquidity facilities rolled out over the past several weeks.

The high yield index entered distressed territory for the first time since the GFC last month, as spreads topped 1,000bps.

But things have turned around. In fact, junk had rallied for six consecutive days on the heels of the worst performance since 2008. Spreads tightened some 200bps over that stretch.

That, even as high yield isn’t eligible for the Fed’s corporate bond buying programs. “The volume of distressed bonds may have increased by the most ever last month, but we’re off the peak – at least for now”, Bloomberg’s Sebastian Boyd wrote Thursday, adding that “Jay Powell’s pixie dust seems to have done a lot of the work [given that] the number of distressed issuers with bonds trading on TRACE peaked at 892 on March 23, the day the Fed announced its corporate bond buying”. The figure is 725 now.

It’s worth noting that Carnival raised $4 billion this week in a three-year issue with an 11.5% coupon. Carnival is paying more than single-B borrowers, a testament to the fact that while, technically speaking, the company is IG, it’s a distressed name for obvious reasons. The deal was run off a junk syndicate desk, apparently. And yet, it was upsized from $3 billion and demand was voracious.

The good vibes didn’t stop IG funds from seeing yet another week of big outflows, though, albeit not the kind of outright exodus witnessed during the previous two weeks.

That’s particularly notable coming as it does amid a veritable bonanza of US IG issuance.

In any event, the market seems much more sanguine about the outlook for junk now, despite a looming recession and the prospect of a default cycle. Go figure.


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4 thoughts on “Carnivals And Pixie Dust.

  1. Buying CCL debt yielding >10% makes sense if you think the company will make it through. Better than an E&P company HY bond.

  2. I guess that’s cool if they’ll never need cash flow or anything related to running their business. This sort of changes the basic structure of Capitalism to not have a profitable entity. If it works, the roaring 20s will be here soon!

    1. For hospitality and food services businesses, usually about 70% of opex is directly related to operating the hotel, restaurant, etc. Marketing expense is not fixed. A good portion of capex is deferrable.

  3. This all feels like a set-up as the eye of the storm.

    That’s said, the MMT flow of funds into the real economy will at some point light a fire under languid inflation. Risk assets will likely skyrocket based on this and a massive fed balance sheet. 2023 is looking very promising!

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