Morning Commentary: Convertibles quiet amid stock volatility; Redwood Trust losses mount

By Abigail W. Adams

Portland, Me., June 17 – It was a quiet morning in the convertibles secondary space as the bulls and the bears battled in equities.

While equity markets were strong at the open, there was selling into the rally, which drove indexes briefly into negative territory.

Indexes were mixed shortly before 11 a.m. ET with tech companies and small cap stocks outperforming after leading losses in Thursday’s sell-off.

The Dow Jones industrial average was down 45 points, or 0.15%, the S&P 500 index was up 0.06%, the Nasdaq Composite index was up 0.95% and the Russell 2000 index was up 1% shortly before 11 a.m. ET.

There was $57 million in reported convertibles trading volume about one hour into the session with no name seeing concentrated trading activity.

Losses continued to mount for Redwood Trust Inc.’s recently priced 7.75% convertible notes due 2027 with the notes now trading on an 84-handle, a source said.

The notes were changing hands at 84.25 versus a stock price of $6.90 early in the session.

The yield was now north of 12%.

Redwood’s stock was $6.77, flush with Thursday’s close, after wavering between gains and losses early in the session.

The REITs convertible notes were destroyed in Monday’s sell-off when they dropped 8 points outright and continued to trend lower throughout the week.

Redwood priced a $200 million issue of the 7.75% convertible notes at par on June 6.

While market conditions have deteriorated across sectors, surging mortgage rates have destroyed the valuation of REITs, a source said.

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