Morning Commentary: Convertibles market pauses following Tuesday’s stock market sell-off

By Rebecca Melvin

New York, March 22 – U.S. convertibles were relatively quiet early Wednesday as market players take a wait-and-see approach to gauge where the markets are heading following the first pullback in equities since October, a New York-based trader said.

On Tuesday, the major stock indices took a 1% or more plunge as some of the positions that had been in place since the U.S. presidential election were unwound. The pullback weighed on convertibles, but in general, the asset class has held up better than high yield in the last week or so, the trader said.

“Things have been weak and continue to be weak. The slew of repeat tech issuance has hurt a few guys,” the trader said of the convertibles space. But in general, there has not been a lot of trading and valuations have been steady, he said.

The most recent repeat tech issuance was last week’s $850 million of Tesla Inc.’s convertibles. The new Tesla 2.375% convertibles have dipped to about 97.5 on a dollar basis, but on a dollar-neutral, or swap, basis, the performance has not been so bad, and the bonds are down only about 0.5 point to 0.75 point on swap since they were issued.

The convertibles primary market has been relatively strong for the year so far, but market players are looking for “unique issuance,” the trader said. New tax legislation out of Washington could help spur those kinds of unique, new deals.

In the meantime, a wait-and-see approach has set in to determine if Tuesday was a real pullback or a minor blip. “That will determine the fate of valuations,” the trader said.

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