Convertibles end week on a quiet note; new Cubist issues little changed; Liberty bid 'marginally higher'

By Rebecca Melvin

New York, Sept. 6 - Convertibles players were eyeing a big picture that was essentially unchanged on Friday despite a disappointing August jobs report, its implications for Federal Reserve tapering and developments surrounding possible military action against Syria.

Trading was quiet and paper was called mostly unchanged to mark the end of the holiday shortened week, market players said.

The week's three new issues, including two from Cubist Pharmaceuticals Inc. and an exchangeable from Liberty Interactive Corp. into shares of HSN Inc. remained in focus.

Cubist's new 2018 and 2020 notes were weighed down by the underlying shares of the Lexington, Mass.-based biopharmaceutical company but were essentially unchanged on the day. Shares moved lower in early trade and didn't turn around immediately with the broader market. Although shortly before 2 p.m. ET the stock turned positive.

Liberty's exchangeable was marginally higher on the bid side at 101.625 bid, 102.125 offered versus an underlying share price of $55.71, a syndicate source said.

Elsewhere, Tesla Motors Inc.'s 1.5% convertibles were active in trade and slightly lower outright with the underlying shares of the electric car maker. But on a dollar-neutral, or hedged, basis, the Tesla bonds were "marginally higher," a New York-based trader said.

Tyson Foods Inc.'s 3.25% convertible was trading "a good amount" on Friday, which was the first day of its 20-day averaging period as the bond matures Oct. 15, a New York-based trader said. That paper was trading very close to parity or at about 0.1 point below parity, at 174.787 versus an underlying share price of $29.34 late Friday.

Elsewhere, trading action was light. In addition to see-saw action in the broader markets that kept some convertibles players quiet, the Rosh Hashana holiday on Thursday and Friday curtailed some trade, a New York-based trader said.

Treasury 10-year notes rose in early action, sending the yield down 11 basis points to 2.89%, but the bonds fell back by midday and then regained ground into the close.

The rise came after the Labor Department's monthly employment report showed that the United States added 169,000 jobs in August, which was less than expected, and job tallies in the previous two months were revised lower than previous estimates.

The gain for July was revised down to 104,000 jobs from 162,000, and the gain for June was revised down to 172,000 jobs from 188,000.

The unemployment rate dropped to 7.3% but is being driven lower as the rate of participation declines. The participant rate dropped to 63.2%, the lowest since August 1978, from 63.4%.

Economists had expected payrolls to rise by 180,000 jobs in August and the unemployment rate to tick down to 7.4%.

"The big picture hasn't changed really," a New York-based convertibles analyst said. Currently, the convertible "market is very equity driven, especially given the run higher in equities so far this year," he said.

"Long-dated convertibles sold off on the back of the rate move [higher], but everything else has held pretty well."

If rates continue to creep up, then the long-dated convertibles will continue to come in, he said. But at the same time, the pace of new issuance, which is already $7 billion ahead of full year 2012, should sustain.

"We continue to believe that as rates inch up, convertibles are looking incrementally better," the analyst said, estimating that full-year 2013 issuance could reach about $40 billion.

A second convertibles source concurred with "the rate story," adding that convertibles' typically short duration is a positive in the current environment.

Cubist little changed

Cubist's 1.125% convertibles due 2018, or the As, were quoted at 105 bid, 105.5 offered versus an underlying share price of $63.98. That compared to a quote at 104.75 bid, 105.75 offered with the underlying shares at $63.98 at the end of Thursday.

Cubist's 1.875% convertibles due 2020, or the Bs, were quoted at 103.5 bid, 104 offered, with the shares at $63.98, compared to 103.375 bid, 104.375 offered with shares at $63.98 at the end of Thursday.

Cubist shares moved around but ended near the flat line, down a dime at $63.88, compared to a nearly 3% gain on Thursday.

"The new issues opened marginally lower with lower shares," a source said.

Liberty exchangeable edges up

Liberty Interactive's new exchangeables were called 101.625 bid, 102.125 offered versus an underlying share price of $55.71, compared 101.5 bid, 102 offered versus an underlying share price of $55.00 at Thursday's close, a syndicate source said.

HSN shares, the exchangeable entity, closed up 25 cents, or 0.5%, at $55.25.

"There was a marginal change on the bid," the syndicate source said.

The new exchangeable has a low 30% delta, indicating that market players are not shorting a lot of stock against the bond.

Tesla 'marginally higher'

Tesla's 1.5% convertibles were active and quoted at 151.5 bid, 152 offered versus an underlying share price of $167.00.

Tesla shares were down on Friday and ended off $2.33, or 1.4%, at $167.73 in lighter-than-average trade.

That was off on an outright basis from about 153 but "marginally higher dollar neutral from yesterday," a New York-based trader said.

Mentioned in this article:

Cubist Pharmaceuticals Inc. Nasdaq: CBST

HSN Inc. Nasdaq: HSNI

Liberty Interactive Corp. Nasdaq, LINTA, LINTB

Tesla Motors Inc. Nasdaq: TSLA

Tyson Foods Inc. NYSE: TSN

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