Convertibles firmer; shorter-dated issues holding up; Peabody, longer-dated names weaker

By Rebecca Melvin

New York, July 8 - Trading in the convertible bond market remained very light on Monday but firmer as market players appeared to be back in action from the holiday weekend. Still, participants were cautious due to the recent moves in Treasury markets.

Some market players had anticipated a softer convertible bond market Monday on the heels of a stronger-than-expected June jobs report that pushed Treasuries down and rates sharply higher Friday. But the bond market regained some of its footing on Monday, helping things out somewhat, sources said.

"The bond market was back a little," a New York-based trader said. He noted, however, that liquidity was still low.

Market players "are re-establishing their thoughts on names that look a little different from when they were last in the office," one trader said, anticipating that activity would pick up on Tuesday and the rest of the week.

"With so many people being out last week, guys are just trying to figure out where things are," the trader said.

But another source said that the market seemed more active, with some two-way flow and more transparency.

"Shorter-dated names like those with maturities in the 2014 and 2016 range are doing better than longer-dated names, a New York-based convertibles analyst said.

Anything of 30-years duration or longer, whether of high or low credit quality, is weaker, he said, adding that there didn't appear to be any sector trading patterns.

Gilead Sciences Inc.'s 1% bonds due 2014 and 1.625% convertibles due 2016 were noted as holding up better.

Navistar International Corp., which matures in 2014 and was trading weaker in the middle of last week, seemed to be holding its own again on Monday in the 98 context after dipping midweek last week.

"With the stock higher, they look very much in line," a New York-based trader said.

DDR Corp., a shopping mall real estate investment trust based in Ohio, was on the Trace volume tape, and "looking a little better" as the market seems to continue to like this solid, REIT credit believed to be able to withstand any downward shocks in the market.

But Peabody Energy Corp.'s long-dated 4.75% convertibles remained weak despite sharply higher shares of the St. Louis-based coal mining company. Shares climbed 5%, while the bonds looked unchanged to lower.

For a second straight day, the top volume name according to Finra's Trace data was Molson Coors Brewing Co.'s 2.5% convertible, which matures at the end of July and which trades around par currently.

The Treasury 10-year note closed up 20/32 in price to yield 2.64%, which was down 9 basis points, retracing about a third of its jump on Friday.

Despite some stabilization, the bond market remained vulnerable to further weakness as investors have been exiting from bond funds, analysts said.

Bond yields spiked Friday after the U.S. Labor Department's monthly employment report showed that the U.S. added 195,000 jobs in June, which was much better than expected, and boosting expectations that the Federal Reserve will start scaling back its bond purchases before the end of the year.

Earnings season gets under way on Monday with the earnings release of Alcoa Inc. after the market close, while banks including Wells Fargo & Co. report second-quarter results early Friday.

Stocks gained again. The Dow Jones industrial average jumped 88.85 points, or 0.6%, to 15,224.69; the S&P 500 stock index climbed 8.6 points, or 0.5%, to 1,640.46; and the Nasdaq stock market gained 5.45 points, or 0.2%, to 3,484.83.

Shorter-dated names firmer

Gilead Sciences' 1% convertibles due 2014, or the C notes, and 1.625% convertibles due 2016, or the D notes, were not heard in trade but were mentioned as issues that will be able to ride through the rate storm unhindered, sources said.

The securities were seen in trade last month at about 217 each when shares were lower at $48.83. On Monday, shares of the Foster City, Calif.-based biopharmaceutical company closed unchanged at $53.32.

"Shorter-dated and deep in-the-money names are far away from the bond floor, and the farther away from the bond floor, the less the impact there is in a rate move environment like this," a New York-based trader said.

"For bond-like names, with little equity sensitivity, the rate move is more dramatic, and they are going to have more movement than deep in-the-money names trading more like equity," the trader said.

Navistar's 3% convertibles due 2014 closed at 97.625 bid, 98 offered versus a share price of $29.08, according to one New York-based trader, and he said they looked in line with shares that were up 18 cents, or 0.6%, at $29.26.

DDR's 1.75% convertibles due 2040 were also seen a little better, a second New York-based trader said. He quoted them at 117.5 to 118.25 in late-afternoon trading.

Peabody weak

Peabody Energy's 4.75% convertibles due 2066 were seen flat to weaker at 66 bid, 67 offered. That was compared to a 66.75 as both a bid and an offer on Friday, a New York-based trader said.

Shares were sharply higher however, up 72 cents, or nearly 5%, at the close to $15.37, and they were higher from that level during the session as energy names were generally better with the broader equity markets ahead of Alcoa's kickoff of second-quarter earnings season.

The Peabody bond is a long-dated bond with no puts and seen as particularly rate sensitive.

Alcoa, Wells Fargo eyed

Alcoa's 5.25% convertibles due 2014 were last seen at 128.625 on Monday, which was compared to 126 last Wednesday, according to Trace data.

Shares of the Pittsburgh-based aluminum producer ended the session up 11 cents, or 1.4%, at $7.92 and rose in after-hours action by another 1%.

The company posted better-than-expected earnings after the close, citing better sales and productivity for the improvement.

The company had a net loss for the quarter ended June 30 of $119 million, or 11 cents per share, compared to a loss of $2 million, or break even per share, for the same period a year earlier.

Excluding one-time items, Alcoa reported $76 million, or 7 cents per share. Analysts were expecting earnings of 6 cents a share.

Revenue fell 2% to $5.85 billion.

On Friday Wells Fargo will report. The company's 7.5% preferred shares were seen as unchanged on Monday from the heavy action they have seen lately.

"Prices fell rather dramatically in the last three weeks. But they are quiet with little inquiry today," a trader said on Monday.

Mentioned in this article:

Alcoa Inc. NYSE: AA

DDR Corp. NYSE: DDR

Gilead Sciences Inc. Nasdaq: GILD

Molson Coors Brewing Co. NYSE: TAP

Navistar International Corp. NYSE: NAV

Peabody Energy Corp. NYSE: BTU

Wells Fargo & Co. NYSE: WFC

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