Convertibles quiet after holiday; 'soft' market eyed after job report pushes rates higher

By Rebecca Melvin

New York, July 5 - Market players Friday anticipated a softer market in convertible bonds on Monday on the heels of a stronger-than-expected June jobs report that pushed Treasuries down, raising rates.

Friday's session remained quiet, however, on the heels of Thursday's July Fourth holiday that encouraged an extended holiday weekend for many and doused liquidity.

"We haven't really traded anything," a New York-based trader said. "But I suspect it will be soft with the rates move."

The negative impact of higher rates was expected to hit some of the newer real estate investment trust convertible issues and homebuilders, in particular, as well as longer-dated names, traders said.

Among these names are Greenwich, Conn.-based mortgage loan investor Starwood Property Trust Inc., with its $400 million of 4% convertible notes due 2019, which priced on June 27, and $525 million 4.55% convertible due 2018, which priced in February, as well as Santa Monica, Calif.-based Colony Financial Inc.'s $175 million of 5% convertible senior notes due 2023, which priced in April.

Along with longer-dated paper, some issues deemed rich in terms of valuation, were also seen as likely to come down. WellPoint Inc., which is in the health care space, may come down, for example, based on its current valuation, a New York-based trader said.

"Things should be lower," the trader said about Monday's session. "It will be interesting to see how much lower."

As for Friday's session, liquidity was very low, market sources said. But issues seen in action in addition to gold names that were weaker with a drop in gold prices were mostly higher-grade convertibles that trade around par.

Newmont Mining Corp.'s 1.25% convertible due 2014, which has been a focus of trade this week, was lower, dropping to 100.875 to 101, from 101.125 to 101.5, according to Trace data. Shares of the Denver-based gold mining concern fell sharply.

Gold prices dropped as the better-than-expected jobs report left investors more ebullient and less apt to seek safe-haven assets.

Moving the opposite way, Navistar International Corp. traded better, along with higher shares early in the session to as high as 98.293, but a low print appeared in midafternoon at back to near flat at 95.29.

Molson Coors Brewing Co.'s 2.5% convertible, which matures at the end of July, was trading again at about par.

The Treasury 10-year note fell in early trading, sending its yield up 19 basis points or 20 bps in early trade to nearly 2.69% from 2.556%, its highest level since August 2011.

The Labor Department's monthly employment report showed that the U.S. added 195,000 jobs in June, which was much better than expected, and hiring in the previous two months was also revised higher than in previous estimates. The economy gained 70,000 more jobs in May and April than initially reported.

The unemployment rate remained unchanged at 7.6%, however, as more people entered the workforce.

For June, economists had expected payrolls to rise by 165,000 jobs and for the unemployment rate to tick lower to 7.5%. The report pointed in favor of the Federal Reserve starting to scale back its bond purchases before the end of the year.

A couple of market sources are pegging September as the start of the Fed's scale back and the magnitude is predicted to be by about $15 billion to $20 billion.

The tone was quiet on Wednesday's shortened, pre-holiday session, and the tone mixed with low liquidity ahead of the anticipated jobs report.

Friday's level of activity was worse than that. "It's' really quiet," a New York-based trader said. The main item of business was "fielding calls."

Stocks fluctuated, but ended solidly to the upside. The Dow Jones industrial average jumped 98.18 points, or 0.6%, to 15,080.74; the S&P 500 stock index climbed 9.7 points, or 0.6%, to 1,625.11; and the Nasdaq stock market gained 20.42 points, or 0.6%, to 3,464.09.

WellPoint eyed

WellPoint's 2.75% convertibles due 2042 were seen at about 125.5 versus a share price of $81.10, based on trades on Wednesday.

Shares of the Indianapolis-based health benefits company were higher by 29 cents on Friday at $81.38.

The WellPoint convertible was seen moving down at least 1 point to 1.5 points.

The move would be "based on the valuation," a trader said. "If interest rates are higher, convertibles are going to be lower."

"It will be interesting to see what the follow through is," he said.

Mentioned in this article:

Colony Financial Inc. Nasdaq: CLNY

Molson Coors Brewing Co. NYSE: TAP

Navistar International Corp. NYSE: NAV

Newmont Mining Corp. NYSE: NEM

Starwood Property Trust Inc. Nasdaq: STWD

WellPoint Inc. NYSE: WLP

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