Convertibles quiet amid equity sell-off; Yahoo! resilient in risk-off trade; Medicines up

By Rebecca Melvin

New York, Sept. 1 – Trading of U.S. convertibles was muted on Tuesday as summer doldrums continued amid a steep sell-off in equities.

“Convertibles were remarkably quiet given what is happening in the broader markets,” a New York-based trader said during the session.

Convertibles held in and many higher-grade credit names actually expanded in a flight-to-quality trade, a Connecticut-based trader said.

U.S. stock markets dropped straight down at the open and closed near their session lows for the first session of September. The S&P 500 stock index closed down 58 points, or 3%, at 1,913.85.

The sell-off – which hit international stock markets as well – came on the heels of economic data out of China that showed weaker manufacturing activity than expected.

Convertibles energy names also remained quiet despite a steep drop in oil prices.

About the only convertible bond trading notably was Yahoo! Inc.’s 0% convertibles, which were flat to higher on an outright basis, but better on swap, as the common stock of the Sunnyvale, Calif.-based internet company moved lower. The Yahoo! convertibles also traded actively on Monday.

Another name that was trading well in a continuation of Monday’s action was Medicines Co., and that company’s two convertible bonds extended swap gains. The bonds jumped on Monday on both an outright basis and on swap after news of a positive early study for the Parsippany, N.J.-based health care company’s cholesterol drug.

Other higher-grade credit names doing better included Intel Corp. and Microchip Technology Inc.

They were better on the overall risk-off, or flight-to-quality, trade, a market source said.

Intel’s 2.95% convertibles due 2035 traded off in the 114 to 116 range intraday but ended right about unchanged at 117.5, with the common shares of the Santa Clara, Calif.-based chip giant down 72 cents, or 2.5%, at $27.82.

The Intel 3.25% convertibles due 2039 traded last at 143, which was off only a point or so on an outright basis.

Microchip’s common stock fell $2.16, or 5%, to $40.34, but the Microchip 2.125% convertibles due 2037 traded actively at 166, which was down from 173 previously, and also at 163.

The CBOE volatility index surged to as high as 33.82 and settled up at 31.40, which was higher compared to 27 on Monday. The VIX has averaged in the low teens for much of the last several years.

China’s official manufacturing purchasing managers’ index for August fell to 49.7 from 50.0 in July, its lowest level since August 2012, and marking a contraction.

Another important data point this week is the U.S. monthly non-farm payrolls report set to be released on Friday. Traders are watching that to see if the Federal Reserve might begin to lift rates from near 0%, where they have stood for about a decade.

Still trading for the rest of the week was expected to get even quieter approaching this weekend’s Labor Day holiday.

Yahoo! strengthens

Yahoo!’s 0% convertibles were seen trading around 103.5, which was flat to higher on an outright basis compared to 102.875 bid, 103.875 offered on Monday, but better on swap, sources said.

Yahoo! shares fell 64 cents, or 2%, to $31.60, extending a 2.7% loss on Monday.

“They look very rich to me,” a Connecticut-based trader said of the Yahoo! convertibles. But there is a flight-to-quality trade under way that has propped them up.

A second trader said “More Yahoos trading today.” He noted that the Yahoo! bonds are now 0%, with a premium of 72%, which is implying a 51% vol.

Leap vol. is trading 32%, he noted.

“This is a very rich bond. Valuations are still holding despite the weak tape, and despite not very much trading,” he said.

The bonds expanded about a point in the week to Monday.

Medicines extends gains

The Medicines’ convertibles were trading again and continue to expand on hedge.

They expanded another 0.5 point on swap after expanding 2 to 3 points on Monday, a trader said.

Medicines’ 1.375% convertibles due 2017 were up a point or so on an outright basis on Tuesday, changing hands at 153.4, according to Trace data, after surging more than 20 points on Monday.

Medicines shares were off a few cents at around $41.00, after surging 22% on Monday.

Medicines’ drug development partner Alnylam Pharmaceuticals Inc. announced that its investigational RNAi therapeutic lowered cholesterol up to 83% with a mean maximum reduction of up to 64%, plus or minus 5%, in an early stage study.

Mentioned in this article:

Intel Corp. Nasdaq: INTC

The Medicines Co. Ltd. Nasdaq: MDCO

Microchip Technology Inc. Nasdaq: MCHP

Yahoo! Inc. Nasdaq: YHOO

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