Morning Commentary: High-grade convertible notes continue to weaken in early trading

By Abigail W. Adams

Portland, Me., May 24 – Convertible issuers remained at bay early Wednesday with the primary market again dormant as selling accelerated in equities amid continued gridlock in U.S. debt ceiling negotiations.

Hopes for new deal activity before the week draws to a close were diminishing alongside the market’s optimism about an agreement.

The Dow Jones industrial average was down 193 points, or 0.58%, the S&P 500 index was down 0.74%, the Nasdaq Composite index was down 0.95% and the Russell 2000 index was down 1.28% shortly before 11 a.m. ET.

While no new paper has entered the space since May 17, there was an uptick of trading activity early Wednesday with investment-grade issues continuing to drive volume.

However, investment-grade paper continued to lose strength as markets eyed the growing potential for a government default with several issues now trading below par.

Duke Energy Corp.’s 4.125% convertible notes due 2026 (Baa2/BBB) gave back all outright gains with the notes now trading on a 99-handle.

The notes were changing hands at 99.5 in heavy volume early Wednesday, the lowest outright level for the notes since the $1.73 billion issue priced at par in early April.

There was $22 million in reported volume.

Duke Energy’s stock was trading at $91.05, an increase of 0.40%, shortly before 11 a.m. ET.

The 4.125% convertible notes have largely traded in the 101 to 102 context since hitting the secondary space.

However, they have been on a downtrend since last week with the notes falling below par during Tuesday’s session.

CMS Energy Corp.’s 3.375% convertible notes due 2028 (Baa2) also dropped below par in early trading.

The notes were seen at 99.75 early in the session.

There was $19 million in reported volume.

CMS’ stock was trading at $58.60, down 0.051%, shortly before 11 a.m. ET.

The 3.375% notes were trading north of 102 until last week when investment-grade names started to weaken.

The notes were driven below par in late-session trading on Tuesday, marking their lowest level since the $800 million issue priced at par on May 1.

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