MGM extends gains as maturity looms; Anthem slips at full delta as shares rip; Ctrip gains

By Rebecca Melvin

New York, March 18 – A dramatic reversal in markets, including the convertibles market, on Wednesday, which were lower to start and shot higher in the afternoon, seemed out of step with changes in the latest Federal Reserve policy, which demonstrates a slightly more dovish stance toward raising interest rates compared to January but is largely in line with expectations, sources said.

“I feel like everything was for sale and now everything is to buy,” a New York-based convertibles trader said of the session.

He anticipated follow-through from the momentum upward for the immediate future. It should continue at least until new data shows an uptick in inflation or some other data like stronger GDP, or until next week when more hawkish members of the Federal Open Market Committee speak and “try to talk this down.”

“But given the current moves in the European Central Bank and the Bank of Japan, and when you’ve got a surprise [rate] cut out of the Swedish central bank, there seems to be a race to the bottom, and not much preventing risk markets from continuing upward,” the trader said.

While convertible valuations were deemed to have improved overall, and “everything was up,” many of the specific convertibles in trade did not seem to be due to higher beta to Fed policy.

MGM Resorts International’s convertibles continued to move up on both an outright and dollar-neutral, or hedged, basis after the bonds surged on Tuesday. The stock vol. move was spurred by chatter that activist Land and Buildings is pushing the Las Vegas-based casino operator to convert to a real estate investment trust and spin off its real estate assets. The vol. move wasn’t indicative of the overall market, however, a trader said.

Anthem Inc.’s 2.75% convertible bonds due 2042 were up on an outright basis but lower on a hedged basis on the heaviest deltas after shares of the Indianapolis-based health benefits company shot up post Fed news.

Ctrip.com International Ltd.’s convertibles traded Wednesday and improved on a swap basis ahead of the Chinese interest site’s quarterly results expected on Thursday.

Equities were lower in the early going ahead of the policy statement but rocketed up as soon as it was released for gains on the day of about 1% for the major indices.

All eyes were on the U.S. central bank to see if more clarity would be provided on when it will make its first rate hike since taking rates to near zero in response to the financial crisis of 2008.

As expected, the Federal Reserve held rates steady at near zero and removed the word “patient” from its policy statement about raising rates. But it also modified its forward guidance related to inflation and economic health.

“The Committee anticipates that it will be appropriate to raise the target range for the Federal Funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term,” its statement read.

But the statement said that the change in forward guidance did not indicate that the committee has decided on the timing of the initial increase.

Fed chairwoman Janet Yellen said during a news conference that inflation needs to be higher.

Meanwhile, slack in the labor department continues to diminish, but gross domestic product growth has slowed from 2.5% on average in 2014, she said.

In addition export growth has weakened and will continue to drag as the strong dollar discourages overseas buyers.

Net exports will serve as a notable drag on the outlook this year, Yellen said.

MGM expands with stock vol.

MGM’s 4.25% convertibles due April 15, 2015 moved up to 119.5 on Wednesday, which was up from 116 late Tuesday, according to Trace data. The 3-point-plus gain came in tandem with a 6% rise in shares and is on top of a 9-point increase on Tuesday. The bonds mature in less than a month.

MGM ended the session up 78 cents, or 3.6% to $22.52.

In the stock vol. situation, “MGM was a little better on swap and outright,” a trader said.

Land and Buildings, an activist fund, said its spinoff plan for MGM, which also includes reducing leverage through asset sales and paying a MGM China special dividend, could unlock net asset value by as much as 70% and send MGM shares higher.

Anthem slips on hedge

Anthem’s 2.75% convertible bonds were trading below parity, or less 50 cents, as the stock ripped right after the FOMC announcement.

The bonds ended the session at about 210. The shares closed up $4.09, or 2.7%, at $157.39.

“On a 92% delta, the bonds were in line or a little better, but some of the guys lifting the market were a little heavier because of the conversion play,” a New York-based trader said.

“If you were trading closer to a full delta, you would have lost a little” the trader said.

Market players may have been heavier than the theoretical delta because they planned to convert it out at the next coupon April 15.

Ctrip better

Ctrip’s 1.25% convertibles traded at 95.875 near the end of the session versus an underlying share price of $45.70.

Shares of the Shanghai-based travel services provider gained 52 cents, or 1%, at $46.22.

“Ctrip was traded today in big size, and I think that was predominately on speculation of earnings tomorrow,” a trader said.

Mentioned in this article:

Anthem Inc. Nasdaq: ANTM

Ctrip.com International Ltd. Nasdaq: CTRP

MGM Resorts International NYSE: MGM

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.