Market So Flat, Even Fed Can't Cause Waves


The secondary market was fairly flat last week, as was much of the fixed income market, although there was some activity in select names.

The market had been firming up a little over the past couple of weeks, but the onslaught of new issues - which subsided as of the end of last week - put some pressure on the existing names as buyers prepared to make room for the new debt.

Adelphia traded down about a half a point last week, but was still in the high 90s.

Pillowtex Corp., the second-largest home textile manufacturer, was cited as one that is expected to see a drop in the coming weeks, in the wake of a third quarter loss of $11.1 million, compared with a net income of $15 million last year. That was a net loss of $1.45 per share, coming in much higher than the expected loss of 45 cents per share. The stock has fallen almost 90% since the beginning of the year and the bonds, one investor said, could dip down to the 20s.

Iridium didn't see much improvement on its $1.45 billion of high yield debt from the news that Motorola agreed to pay off $743 million of Iridium's bank debt. The 14% bonds are trading at 8.5. They had been in the high 80s at the beginning of the year.

In August, after struggling for months to reorganize its capital structure, Iridium defaulted on $1.55 billion in credit facilities and applied for bankruptcy protection. Still unknown is what will now happen to the remaining $800 million portion of Iridium's bank debt.

Rate Hike Has Little Effect on Market

Even Alan Greenspan had little effect on trading last week. While analysts and investors spent weeks debating whether the Federal Reserve would raise short-term interest rates at its Open Market Committee meeting last week, when the Fed finally did hike rates a quarter-point to 5.25%, the high yield market barely even hiccuped.

Trading on the secondary market remained flat and cash outflows from mutual funds continued.

"Everyone was calling it a coin toss in terms of which way the Fed was going to go, but now it's obvious they're simply reeling back the second rate decrease from last year," said Eric Stephenson, director at Fitch IBCA.

Many investors, including Kathleen Gaffney, co-manager of the Loomis Sayles High Yield Fund, expected the hike, and said it would neither have any long-term effect on the high yield market nor change its character.

"In the short run, the market gets excited and unsettled a little bit about where rates are going to go," she said. "I [expected] the rate hike in November and perhaps another in the first quarter of next year, but that's already priced into the market. I don't think there'll be too much damage from a rate hike, but the overriding factor is that there's excess capacity, and that takes time to absorb."

Although the rate hike may not sharpen anyone's appetite for junk, it may, however, cause spreads to widen further in order for issues to price. Coming to market with a new deal in the next six weeks is not going to be easy.

"The market is not going to allow any blind issuance into the marketplace, just to have cash sitting on the balance sheet," said Stephenson. "There's a very cautious market tone going into the first quarter."