Convertibles heavier as fear dominates tone; bank preferreds down; IG paper lower in line

By Rebecca Melvin

New York, June 21 - The convertible bond market traded anemically Friday as market players primarily sat on the sidelines anticipating further downside after this week's Fed meeting that signaled an end to QE3 and amid an ongoing move higher in rates, sources said.

Longer-dated, interest-rate sensitive convertible names remained particularly weak.

But stocks, which were lower in early trading, ended mostly higher following a 2%-plus drop Thursday. The S&P 500 stock index ended higher by 4.24 points, or 0.3%, to 1,592.43; the Dow Jones industrial average added 41.08 points, 0.3%, to 14,799.40; and the Nasdaq stock market closed down 7.39 points, or 0.2%, to 3,357.25.

Bank of America Corp.'s 7.25% series L perpetual convertible preferreds were down, but pared losses to 110 to 111 from 109. That's still down from 120 to 122 early in the week and down from 114.25 a week ago.

The most actively traded names were investment-grade issues, which were moving down in line with their underlying shares. At midsession, EMC Corp.'s 1.5% convertible due in December was the day's most active issue, according to Trace data, and it traded down 1.3 points outright to 152.64.

Gilead Sciences Inc.'s 1% bonds due 2014 and 1.625% convertibles due 2016 were both active and lower by several points outright, but still well above double par.

Intel Corp.'s 2.95% convertibles bonds due 2035 were also actively traded outright and down a point at 108.

Weakness in the high-yield bond market prompted some selling of long-dated convertible yield names. But several credit-sensitive names that sold off early in the week bounced off their lows when the broader markets were at their worst.

Peabody Energy Corp.'s convertibles sold off early in the week, but bounced off lows in the low 70s to the mid 70s, a New York-based trader said.

Dendreon Corp. traded actively on Thursday at 71, which was flat. "I was surprised they 'held in' in a crumbling market," a trader said.

Peabody and Dendreon were quiet on Friday. But Navistar International Corp., which has been trading actively for the past several days, was changing hands again on Friday at a decent clip and looked to be steady in the context of 96 bid, 97 offered.

Cemex SAB de CV's sister issues moved down a couple of points outright and were about 0.5 point lower on a dollar-neutral basis Friday.

"People are scared," a New York-based trader said. "They are waiting for [stock markets] to go multiple percentage points lower." As for the convertible market, he said outright investors have been under greater pressure than hedged players.

On the hedged side, a rise in volatility can be a good thing. Volatility jumped 23% Thursday to 20.49, the first time it closed above 20 this year. "But that only works when you have two sides to a trade. Someone has to be a buyer for the sellers," a trader said.

There weren't many buyers in Friday's market, the trader said. But then again it was a summer Friday and not a lot of conclusions can be drawn given that many players were away from their offices. "Half the people are gone," he said.

A second source concurred. "Investors are jittery with the credit markets shaken up. We started the week with equities outperforming, and post Fed comments, despite expectations of expected modest growth, the markets are more fragile."

"It feels heavier," the source said about Friday's market.

BofA preferreds pare losses

After dropping sharply early Friday, Bank of America's 7.25% series L convertible preferred pared losses, closing down only $3.00 or 0.3%, at $1,103.00. Earlier, the preferreds had been as low as $1,087.02, which was more than 1% lower.

The preferreds outperformed the common shares of the Charlotte, N.C.-based commercial bank, however. The common shares finished down 20 cents, or 1.6%, at $12.73.

The Bank of America preferreds and other convertible bank preferreds like those of Wells Fargo & Co. have been under pressure since rates began to move up May 1, a convertibles analyst said.

A week ago they were down 8 points to 10 points but they improved with a better bid when "people began catching on to how bad they were doing," he said.

There was not much activity in the preferreds on the Street Friday, he said. "They were better bid recently, but as of Friday, they were weaker again."

With a rate move in the last two to three days of 30 basis points, credit and rate sensitive names have been under pressure, he said. But the deep-in-the-money, vol. and put names have been better bid.

Peabody bounces from lows

Peabody's 4.75% convertibles due 2066 were seen around 74.5 on Friday. But they were generally offered only and fairly quiet.

"The paper was offered Thursday at 76.75, which was below the bid side from the day before. That always seems to be the story with those," the trader said.

But they bounced off the low 70s from the beginning of the week.

Cemex off by 0.5 point

Cemex's 3.25% convertibles due 2016 traded at 113 and were seen 114.25 bid, 115 offered versus an underlying share price of $9.72 on Friday. Previously they were 116 bid, 117 offered.

"They were a little more active and came in 0.5 point on hedge," a convertibles analyst said.

The bonds trade on about a 70% delta.

Cemex's 4.875% paper due 2015 traded at 108.77, which was down 1.8 points outright.

Cemex shares pared losses into the close, ending down only 11 cents, or 1.1%, at $9.82. Earlier they had been as low as $9.13.

Mentioned in this article:

Bank of America Corp. NYSE: BAC

Cemex SAB de CV NYSE: CX

Dendreon Corp. Nasdaq: DNDN

EMC Corp. NYSE: EMC

Gilead Sciences Inc. Nasdaq: GILD

Intel Corp. Nasdaq: INTC

Navistar International Corp. NYSE: NAV

Peabody Energy Corp. NYSE: BTU

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