CAM High Yield Weekly Insights

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were $0.5 billion and year to date flows stand at -$5.9 billion. New issuance for the week was $7.3 billion and year to date HY is at $222 billion, which is up 20% over the same period last year.

(Bloomberg) OPEC Says ‘Extraordinary’ Steps Needed for Stable Market in 2018

• Oil producers are succeeding in re-balancing an oversupplied market, though they may need to take further steps to sustain the recovery into 2018, OPEC Secretary-General Mohammad Barkindo said.
• Saudi Arabia and Russia are currently leading consultations between the Organization of Petroleum Exporting Countries and other major suppliers about the future of their agreement to cut oil output, Barkindo said Sunday in New Delhi. The pact expires in March, and oil producers are debating whether to extend it later into the year.
• “There is a growing consensus that, number one, the re-balancing process is underway,” he said after meeting with Indian Oil Minister Dharmendra Pradhan. “Number two, to sustain this into next year, some extraordinary measures may have to be taken in order to restore this stability on a sustainable basis going forward.”
• Barkindo didn’t elaborate on what those additional measures could be and if they would include the main proposal currently on the table — an extension of the existing cuts by up to nine months — or something else. Venezuela has suggested making deeper cuts, but that’s considered unlikely given the political challenges of getting all members to agree unanimously.

(Phone Arena) Sprint and T-Mobile expected to announce merger details this month

• Rumors about the Sprint/T-Mobile merger continue to make headlines, but that won’t go for too long now. Apparently, the carriers are currently ironing out the final details of the deal, so we could have an official announcement laying them out sometime this month.
• The companies have reached the point where they need to decide on the exchange ratio that will determine Sprint’s valuation, one of the last steps before the merger could be officially announced.
• Sprint and T-Mobile continue to discuss non-cash items, such as the location of the HQ that will shelter the leadership of the new entity resulting from the merger.
• People with knowledge of the matter claim that a traditional breakup free will most certainly not be included in the final agreement as to avoid the risk of US regulators rejecting the merger, much like the merger deal between Comcast and Time Warner Cable Inc.
• Last but not least, both carriers want to go ahead with the merger as quickly as possible and finalize a deal agreement that can be released at the same time with the quarterly earnings, which is meant to help them avoid confusion over the status of the deal.

(Bloomberg) Callability and Duration Characteristics of HY Market

• Over $500 billion of high yield bonds trade above their next call prices, reflecting the market’s extended rally. Communications and consumer staples debt leads subindexes with about $197 billion of the total, including debt from Altice, Charter and T-Mobile US. Health-care names, including Valeant and HCA, are among the non-cyclicals with the highest amount of debt trading above call.
• The current environment, with modified duration to maturity at almost 120% of effective duration, historically portends a high probability for negative price returns in subsequent months. Partly that’s because the relationship is largely driven by changes in effective duration and, in turn, the negative convexity characteristics of the high yield market, given widespread use of call features. Periods of negative total returns are rarer given the impact of overall carry.
• In negatively convex environments, the relationship between prices and yields changes: bonds become less sensitive to further spread or rate compression, but more sensitive to extension risk should the market-required yield widen substantially.
• Almost 60% of the bonds in the Bloomberg Barclays U.S. Corporate High Yield total return index with a duration of less than three years may be sensitive to potential extension risk should spreads widen significantly. On a yield-to-worst basis, these are bonds where the embedded call feature has resulted in the effective duration being at least one year less than the modified duration to maturity. In dollar terms, this is a little over $300 billion, more than half of which has an effective duration below one.

(Bloomberg) Trump Cuts Off Health-Insurer Subsidy, Threatening Obamacare Chaos

• President Donald Trump’s administration took its most drastic step yet to roll back the Affordable Care Act, cutting off a subsidy to insurers hours after issuing an executive order designed to draw people away from the health law’s markets.
• Late Thursday, the administration said it would immediately stop paying what are known as cost-sharing reduction subsidies. The payments — which are the subject of a legal dispute — go to health insurers in the Affordable Care Act to help lower-income people with co-pays and other cost sharing. Without them, insurers have said they’ll dramatically raise premiums or pull out of the law’s state-based markets.
• The White House said the Department of Justice and the Department of Health and Human Services concluded that there is no appropriation for cost-sharing reduction payments to insurance companies under Obamacare.
• The payments will stop immediately, with no transition period, Acting HHS Secretary Eric Hargan and Centers for Medicare and Medicaid Services Administrator Seema Verma said in a statement. The next payments were due next week.