US Convertibles: Lift in stocks a relief, but not comfortable yet

By Ronda Fears

Nashville, Tenn., Sept. 24 - Convertible traders said the lift in stock prices was a relief Monday, but the market is not back to a comfortable level yet. Most of the convertible market was quiet during the session, traders said, as many were anticipating profit-takers to dominate on Tuesday. In fact, traders said some selling had already begun late in the session. Meanwhile, there was some buzz that Community Health Systems Inc. would launch its new deal this week, becoming the first to break the ice in the primary market since the terrorist attacks on the U.S.

"The tone was better. Liquidity is getting better, too," but volume was still moderate at best, said a convertible hedge fund trader in New Jersey. "Junk bonds were higher and that helped high-yield convertibles."

The market is still looking for clarity, both in stock prices and credit spreads, however.

Stocks bounced nicely Monday, but were still mostly depressed from levels before the Sept. 11 tragedy. The Dow Jones industrial average regained 367.63, or 4.46%, to 8603.44, and the Nasdaq composite rebounded by 75.85, or 5.33%, to 1499.04.

Thus, Treasuries retreated. While prices on 30-year bonds rose, which was attributed to the sharp drop in oil prices being seen as a factor that will ease inflation worries, shorter-dated paper fell. At 1500 ET, two-year notes were off 2/32 to 101 11/32, yielding 2.9%, the five-year notes were down 7/32 to 103 4/32, yielding 3.88%, and ten-year notes lost 8/32 to 102 5/32, yielding 4.72%. Thirty-year bonds rose 6/32 to 97 6/32 to yield 5.57%.

Oil prices plunged on fears that a global slowdown will suppress demand. November light crude fell $3.96 to $22 a barrel, the lowest since November 1999.

Oil stocks and convertibles also dove, but traders said there was no a big sell-offs in the group. The Anadarko Petroleum zero-coupon convertible due 2021 dropped 2.5 points on the day to 62.25 bid, 62.75 offered and the zero-coupon convertible due 2020 was flat at 97 bid, 97.5 offered, as the underlying stock lost $2.60 to $44.70.

Kerr-McGee Corp's 5.25% convertible due 2010 dropped 3.625 points on the day to 102.5 bid, 103.5 offered as the common stock dropped $2.56 to $49.44. There were reports late last week that the Oklahoma City-based firm plans to sell $1 billion to $1.5 billion of debt in two parts this week via joint lead managers J.P. Morgan and Lehman Brothers.

Devon Energy's 4.9% convertible due 2008 lost 1.125 points on the day to 96.625 bid, 97.625 offered and the 4.95% convertible due 2008 dropped 1.125 points to 97 bid, 98 offered. The Devon zero-coupon convertible due 2020 slipped 0.25 point to 44.125 bid, 44.625 offered. Devon stock plunged $4.24 to $33.10.

While much of the market saw some welcome relief from the huge slide in the aftermath of the U.S. attacks, traders said it was not widespread and is feared to be short-lived.

"We are already seeing signs that selling will prevail tomorrow," said a dealer at one of the major investment banks based in New York.

CIENA Corp. saw another huge dip although most of the fiber optic group gained ground. The CIENA 3.75% convertible due 2008 (Ba3/B+) were quoted down 3.625 points on the day to 59.25 bid, 60 offered with the common up 84c to $11.38. Lucent's 8% convertible preferreds due 2031 (Ba3/B-), which were issued at par of 1000, edged up 6.5 to 1047.25 bid, 1048.25 offered with the common closing up 48c to $5.80.

Viacom stock was upgraded by Morgan Stanley and the common and convertibles linked to the name went north. The Liberty Media 3.25% exchangeables due 2031, which convert into Viacom stock, were up 6 points on the day to 77.125 bidm, 78.125 offered while Viacom shares added $1.65 to $32.90.

NTL Ltd. gained on a Financial Times report that France Telecom, the largest NTL Ltd. shareholder, is among three bidders for the transmission towers unit of NTL The NTL 6.75% convertible due 2008 (B3/B-), which was issued at par in May, rose 5 points on the day to 40 bid, 41 offered as NTL stock gained $1.49 to $3.99. End

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