Convertibles quiet ahead of Thanksgiving as positive data lifts shares; investors cautious

By Rebecca Melvin

New York, Nov. 24 - Despite a surfeit of economic data that lifted equity markets on Wednesday, there was little action in the convertible bond market, as expected, the day before the long holiday weekend for Thanksgiving.

Stock and bond markets were schedule to be closed Thursday, and were scheduled to have an early close on Friday at 1 p.m.ET.

"It's to be expected," a New York-based sellside trader said of Wednesday's session. "This market has been subdued for quite awhile now; the new issue market is still quiet, and people want to protect what they have."

A second sellsider agreed: "I feel like we've come to the time in the year when no one wants to rock the boat by taking any added risk."

He suggested that the market will probably see selling into strength, with participants taking profits and buying only rock-solid credits to ride out the remainder of year.

There was no new issuance in the convertibles market this week, contrary to expectations that there might be a deal or two on Monday, and notable secondary market action amounted to Amgen Inc. improving slightly on a dollar-neutral basis on Tuesday after some stockholders raised doubts about a potential acquisition and positive earnings news spurring action in Tyson Foods Inc.'s and Tech Data Corp.

However, even earnings news wasn't enough to generate trading action in every case. Medtronic Inc. was conspicuously quiet after the Minneapolis-based medical device maker reported a drop in its fiscal second-quarter profit and lowered guidance for its second half, citing the weak economy for lower sales and stiffer pricing competition.

"If anything Medtronic traded less than it usually does," a New York-based sellsider trader said.

Liquidity lacking

Given the lack of liquidity it was hard to say how convertibles were performing. They weren't trading and there was little price discovery through quotes of different markets, so whether convertibles, which didn't notch reciprocal gains for those seen in equities, were doing better or worse on Wednesday or whether they would pop on Monday in a delayed reaction to stock action wasn't clear.

"Outright names might jump," a New York-based sellside trader said, referring to convertibles that trade more like credit or straight debt, and might move up with stocks on Monday.

"There are so few outright names in the market now that are equity sensitive, I really don't know if we'll see a move on Monday," he said.

A second sellsider said: "It really depends on the issue. Some things got better on a dollar-neutral basis on Tuesday, and whether that continued into today, I can't really tell. There were odd-lot trades here or there, but little to speak of."

Only about $230 million of convertibles had changed hands by mid-afternoon Wednesday, according to Trace data, one sellsider said.

Strong economic data

Gains in stock markets were notched on the back of strong economic data.

"Don't you love it? One day the world is ending, and the next day, everything is perfect. We go from one extreme to the other, and they net out to zero," a sellsider said referring to significant losses in stock markets on Tuesday and gains on Wednesday.

On Wednesday, investors were cheered by the Labor Department's report that initial claims for state unemployment benefits fell 34,000 last week to a seasonally adjusted 407,000, which was the lowest since mid-July 2008, and well below economists' expectations for a drop to 435,000.

In addition, the Commerce Department said consumer spending rose 0.4% in October, increasing for a fourth straight month, after a 0.3% gain in September. Economists had expected spending to increase 0.5% last month.

Data that wasn't so positive on Wednesday was a second report from the Commerce Department that showed durable goods orders fell 3.3%, the largest decline since January 2009, after jumping by 5% in September. Economists had expected durable goods orders to be flat in October.

Excluding transportation, orders dropped 2.7%, the biggest fall since March 2009, after a 1.3% increase in September, and economists had expected orders excluding transportation to rise 0.6% in October.

Finally, the U.S. Commerce Department also released a home sales report, which showed that the pace of U.S. single-family homes sales fell unexpectedly in October by 8.1% to a 283,000 unit annual rate.

The median sale price for a new home dropped a record 13.9% last month from September to $194,900, the lowest since October 2003. Compared to October last year, the median price fell 9.4%, the largest drop since July 2009.

Amgen active, steady

Amgen's 0.125% convertibles due 2011 was among the session's most active traders on Wednesday and they were steady at about 99.75.

"They haven't moved," a New York-based sellside trader said. The longer-dated Amgen 0.375% convertibles weren't active.

Shares of the Thousand Oaks, Calif.-based drugmaker were slightly higher at $53.83, which was up 23 cents, or 0.4%, on the day, compared to a 2% decline on Tuesday.

Shares were lower on Tuesday after shareholders Invesco Ltd. and RCM Capital Management were reported to doubt the wisdom of Amgen's rumored interest in buying Actelion Ltd., a Swiss drugmaker that specializes in cardiovascular treatments.

Mentioned in this article:

Amgen Inc. Nasdaq: AMGN

Medtronic Inc. NYSE: MDT

Tech Data Corp. Nasdaq: TECD

Tyson Foods Inc. NYSE: TSN

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