Convertibles ease as market watches rates; D.R. Horton well bid, adds on hedge; Take-Two lower

By Rebecca Melvin

New York, June 24 - Convertible bonds were mostly lower on light volume on Monday as market players watched Treasuries slump early in the session, but recover in afternoon action.

"It was weaker earlier, but rates have come back. Although they may not have really come back," an East Coast-based buysider said.

U.S. Treasuries pared early declines and yields fell back after an early spike, as the market remains volatile amid the prospect of the tapering of the Federal Reserve's bond-purchasing program. Also weighing on the markets Monday was interbank liquidity in China, which is looming as a significant problem, sources said. Stock markets in the United States and internationally swooned.

The benchmark 10-year Treasury notes were up 1/32 in price to yield 2.54% late in the day after rising to as high as 2.66%, up nearly 1% and the highest since August 2011.

With that backdrop, and given that it was a summer Monday, trading volume was typically light.

"Nothing got whacked today," a New York-based analyst said.

There was select buying and selling of convertibles, the analyst said, noting that deep-in-the-money, put names were "holding up really well."

One such issue, D.R. Horton Inc.'s 2% convertibles due 2014, traded lower outright but were higher on a dollar-neutral basis as its stock was somewhat lower during the day but recovered in the afternoon to end essentially flat.

Take-Two Interactive Inc. bonds were also active and they were down sharply. Take-Two shares closed down 3.4%.

Cemex SAB de CV traded lower in action that extended into Monday from Friday. The Cemex 3.25% convertibles due 2016 traded around 113, which was down from 114.25 bid, 115 offered on Friday.

The convertible bond market had traded anemically on Friday as market players primarily sat on the sidelines anticipating further downside after last week's Fed meeting that signaled a future end to QE3 and an ongoing move higher in rates.

The S&P 500 stock index fell 19.34 points, or 1.2%, to 1,573.09; the Dow Jones industrial average dropped 139.84 points, 0.9%, to 14,659.56; and the Nasdaq stock market closed down 36.49 points, or 1.1%, to 3,329.76.

D.R. Horton adds on hedge

D.R. Horton's 2% convertibles due 2014 were seen at 158.375 bid, 159.375 offered versus an underlying share price of $20.20, a New York-based convertibles analyst said late in the day.

That was a 7 to 8 point drop outright, but the convert climbed 0.375 point on a dollar-neutral, or hedged, basis, tracking on a 93% delta.

The paper is currently held on a delta of about 90% to 95%, the analyst said.

Shares of the Fort Worth-based homebuilder rebounded in afternoon trading from early weakness for a gain of 18 cents, or 0.9%, at $20.92.

"It was better bid than being offered," the analyst said, adding that the bond trades slightly over parity, by about 1.8 to 2 points.

The D.R. Horton convertible is not far from maturity and so is less rate sensitive than, for example, a three-year piece of paper, the analyst said.

As for the overall market, it was affected by the negative tone of the broader markets, but there was "no indiscriminate selling, which you would expect with equities selling off and how credit has performed," the analyst said.

Nevertheless, "people are starting to wonder when the knife is going to stop falling," the analyst said, noting that the S&P 500 stock index has fallen 5% in the last week. Typically, investors don't want to step in if the drop is going to continue, he said.

"They are wondering how much lower things can move, as well as how credit will hold up," he said.

A trader said of the D.R. Horton convertibles: "Realized vol. has been good in this bond."

Take-Two lower in active trade

Take-Two's 1% convertibles 2018, which priced earlier this month at a discount to par, slumped further to 95.75 versus an underlying share price of $14.65. That was down more than a point outright, but it wasn't clear how the securities did on a hedged basis. Traders queried said they hadn't traded that bond.

Take-Two shares fell 51 cents, or 3.4%, to $14.53.

The new bonds traded "on decent volume," a New York-based trader said. But the older Take-Two 4.875% convertibles due 2014 were also changing hands.

Mentioned in this article:

Cemex SAB de CV NYSE: CX

D.R. Horton Inc. NYSE: SHI

Take-Two Interactive Inc. Nasdaq: TTWO

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