Morning Commentary: Convertibles weaken further amid market turmoil; Lukoil drops

By Rebecca Melvin

New York, Dec. 16 – U.S. convertibles were palpably weaker early Tuesday amid weak credit and the ongoing slide in oil prices. Russia’s tumbling ruble and that nation’s efforts to curb the move by raising interest rates sent reverberations through the markets.

Convertible “bonds are down 1 point delta neutral. It’s finally seeped into all sectors instead of being contained in oil and E&P companies,” a New York-based trader said.

At the same time, trading volumes were thin. “There is not a lot of trading, so it’s hard to gauge how bad it is,” the trader said.

OAO Lukoil’s 2.625% convertibles have fallen sharply in the past week, and early Tuesday, the convertibles of the Moscow-based oil and energy company were seen at 93.5, which represented a 17% yield to maturity.

“This is a sub-year piece of paper, maturing in June 2015, so you see how dislocated we are,” the trader said.

Other convertibles that saw some trading action albeit light were Priceline Group Inc. and Red Hat Inc., and there was a continuation in action on Monday’s headline names, American Realty Capital Properties Inc. and Isis Pharmaceuticals Inc.

The Isis bonds were one of the few names that were not lower as traders stepped in to buy a bond that is considered pretty cheap, a trader said. The Isis convertibles were quoted at 104.41 versus an underlying share price of $55.75.

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