Convertibles quiet ahead of long weekend, feel heavier after jobs report; Xilinx eases

By Rebecca Melvin

New York, Sept. 2 - Word that the U.S. economy added no new jobs in August renewed recession fears and caused the broader markets to sell off, leaving convertible market players likely to be adjusting deltas on individual names Friday, but little else in terms of convert action, sources said.

When the market shifts, players will adjust the amount of stock they hold against convertible bonds. When stock prices drop, players buy back shares and lighten their deltas.

It was impossible to know the extent to which players were buying shares on Friday, but one thing was sure, they weren't trading any convertibles to speak of.

"It's difficult to detect. They are changing their deltas. But there is nothing going on in convertibles, a New York-based trader said.

"It's dead. I've done nothing all day," a second New York-based sellside trader said, adding that he was looking forward to the three-day weekend in observance of Labor Day.

The feeling was unanimous. No one was sad to say good-bye to August, and players were ready to take a break, wondering expectantly what September would bring.

"September will be interesting," one New York-based trader said.

Xilinx Inc. was a name that traded a few times on Friday, and the Xilinx 3.125% convertibles were lower on an outright basis and came in about 0.25 point on a dollar-neutral basis amid no particular news.

Allegheny Technologies Inc. was another name that was weak, with the Allegheny 4.25% convertibles due 2014 printing at 134.631, down 5.805 points on the day, according to Trace data. But it wasn't known at what stock price that trade occurred.

Equities fell, with losses accelerating in the afternoon after dismal jobs data. The Dow Jones industrial average fell 253 points, or 2.2%, to 11,240.26, after dropping 120 points, or 1%, on Thursday. The S&P 500 stock index dropped 30 points, or 2.5%, to 1,173.97, after dropping 14.5 points, or 1.2% on Thursday. And the Nasdaq Stock Market shed 66 points, or 2.7%, to 2,480.33, after moving lower by 33.4 points, or 1.3%, on Thursday.

Nonfarm payrolls were unchanged last month with the government sector continuing to shed jobs, while the private sector added only 17,000 jobs, the Labor Department said Friday.

Expectations were for the addition of 70,000 jobs to payrolls. The unemployment rate held steady at 9.1%.

Unimproved unemployment puts more focus on president Barack Obama's speech next Thursday in which he plans to unveil new measures aimed at resuscitating the job market. But there is plenty of skepticism about what the government can do to create jobs.

September market uncertain

As for what it means for convertibles in September, after a weak June, July and August, traders queried were uncertain.

"The jobs data is terrible," a New York-based trader said. "I have no idea what it means for convertibles. I think we're going to be led by what happens in high yield. Fund flows into the outrights is what is going to drive everything; nothing else."

The possibility of another round of quantitative easing by the Federal Reserve was also bandied around, but in response to that possibility, one trader said, "That's a joke."

And if convertibles go the way high yield goes, high yield goes the way European sovereign debt goes.

"That is going to depend on Europe. The real problems will come out of there," a New York-based trader said, discounting the impact that the U.S. jobs situation will have.

"If you see defaults in Italy, that's going to be a little bit of a scenario. If they take a real leg lower, they'll take the rest of the world with it," the trader said.

Headlines to watch include how Germany is responding to the pressure to help keep its fellow euro zone neighbors afloat.

"Is Germany going to be willing to put them on their back?" the trader said about Italy. "Ultimately, the big move is going to be from that. A lot of people are looking at that."

On Friday, high yield was about 0.5 point lower across the board. "Everything is lower, but it's not active enough to be tumbling. Everything is down," the trader said.

Xilinx down 0.25 point

Xilinx's 3.125% convertibles due 2037 were seen at 106.75 versus an underlying stock price of $29.90, which was down about 0.25 point on a hedged, or dollar-neutral, basis, according to a New York-based trader.

On an outright basis, Trace data recorded the paper having traded at 106.7, which was down 3 points on the day.

Shares of the San Jose, Calif.-based chipmaker were down $1.07, or 3.5%, at $29.75 near the market close.

"They were maybe a quarter weaker on the day," the trader said, "But I wouldn't make too much of it; it's very light volume, and this is a long-dated, high-delta, low-premium name that doesn't move too much dollar neutral."

"On an absolute dollar price, it moves with the stock. For a hedge fund, it's a reasonable slow mover," the trader said.

The trader noted three customer sales and one transaction in which they bought.

As stocks sold off, there were outright sellers. But it was impossible to know if it was reflective of what the market actually looks like given the low volume, sources said.

Mentioned in this article:

Allegheny Technologies Inc. NYSE: ATI

Xilinx Inc. Nasdaq: XLNX

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