Morning Commentary: Convertible bond valuations solid as volatility rises: source

By Rebecca Melvin

Concord, N.H., Oct. 8 – Convertible bond valuations have been firm in quiet trading this past week, as market players have watched volatility pick up in the broader markets, according to an East Coast-based market source on Friday.

“Very quiet week, but valuations are firm. Credit is solid and volatility is picking up,” the source said.

On cue, stocks wavered in the early going on Friday following the release of a disappointing U.S. jobs report for September.

Payrolls added only 194,000 jobs last month, according to the Labor Department’s monthly report. That was significantly less than expected and down from August. Most forecasters were predicting that the economy would have added 400,000 jobs or more in September.

The report doused enthusiasm in equities, which fluctuated in early trade. The S&P 500 stock index was toggling the flat line and last seen down 1.39 points at 4,398.37. The index has swung at least 1% for three out of four days this past week as the U.S. debt ceiling situation, rising energy prices and China’s economic prospects have weighed on investors.

But early Friday, Sea Ltd.’s convertibles extended gains after rising in active trade on Thursday. The Sea 0.25% convertibles were up another 0.5 point to as high as 102.9. The Sea American Depositary Shares were up another $4.92, or 1.5% to $329.10 on Friday morning, after gaining 2.8% on Thursday.

The Singapore-based global consumer internet company priced $2.5 billion of the five-year convertibles with an initial conversion premium of 50% on Sept. 10.

The convertibles market overall was deemed to be firmer on better buyers among hedge players, although outright players were seen as mostly quiet.

The outright players “don’t want to sell anything because every market sell-off is met with an immediate snapback rally the very next day. The easiest course of action for outrights is to hold and do nothing,” the market source said.

Meanwhile, “hedge funds are left with no choice but to lift dealer offers, pushing prices higher and leaving dealers scrambling to replace the inventory.”

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