By Abigail W. Adams
Portland, Me., Nov. 30 – The convertible space was again quiet on Thursday as the Senate debated the GOP tax plan and personal consumption expenditures were reported as lower than target inflationary figures.
Despite the uncertainty surrounding inflation, the Federal Reserve is signaling it will increase interest rates in December.
Yields on the Treasury’s 10-year note and 30-year bond increased a basis point on Thursday after the Bureau of Economic Affairs reported that personal consumption expenditures rose 0.1% in October and the core index rose 0.2%.
However, some remained wary of the impact macro factors will have on the convertible securities market.
“We’re all just basically waiting for the market to crack,” a trader said, in reference to the lack of activity in the market. “Everyone keeps saying it will, but they’ve been saying that for years.”
Lam Research Corp.’s 2.65% convertible notes due 2041 and 1.25% convertible notes due 2018 solidified their Wednesday nosedive with active trading on Thursday that was more than 50 and 30 points lower than trades earlier in the week.
Convertibles from other semiconductor companies were actively traded with slight drops as confidence in the future growth potential of semiconductor companies began to shake.
Workday Inc.’s 0.25% convertible notes due 2022 and Square Inc.’s 0.375% convertible notes due 2022 continued to be active as the notes moved in lockstep with their underlying equities.
Macro-skepticism
The marketplace for convertible bonds remains quiet as it has all month with focus turning towards Capital Hill and the Federal Reserve to bolster lackluster trading activity, market sources said.
As the Senate moves towards a vote on the tax bill, some sources were hopeful that the convertible securities market would be one of its beneficiaries.
The tax plan includes lowering the corporate tax rate to 20% and scaling back deductions for corporate interest expenses.
Reducing corporate interest deductions may help spur new issuance of convertible notes, a market source said. Corporations may find convertible bonds an attractive alternative to high-yield bonds if the proposal is successful, a market source said. Because of the conversion option, convertibles carry lower coupons than straight corporates.
The Federal Reserve’s indication that interest rates will continue to rise is also welcome news to the market, despite concern over the flattening of the yield curve and overall macro credit risk, a market source said.
Others were less optimistic about the prospects of the market picking up.
“Everyone keeps saying this is it, the inflection point is coming, but they literally said that in 2012,” a market source said.
Semiconductors in focus
Semiconductor companies were in focus during Thursday’s trading session with some chip makers taking a nosedive and others faltering after a report warned the spectacular rise of the semiconductor industry was coming to an end.
While some sources have said the semiconductor industry will continue to have large upside potential well into the future, others felt investors would be wise to be cautious.
The convertibles and underlying shares of semiconductor companies stand poised for large losses if the cycle were to turn, a market source said.
Lam Research’s 2.65% convertible notes due 2041 – an issue which had nosedived on Wednesday – solidified that plunge by trading in the 582 to 588 range throughout the session on Thursday before ending the day at 582.714, according to Trace data.
The notes saw a 52 point decrease from Wednesday’s closing trade of 634.37, according to Trace data. The notes were trading between 573 and 584 on Wednesday prior to the closing trade.
The company’s 1.25% convertible notes due 2018 also continued their downward spiral and were trading in the 320 to 323 range before closing the day at 316, according to Trace data.
The notes had been in the 350 range prior to a Morgan Stanley report that questioned the future growth potential of semiconductor companies. Lam stock also continued to fall ending the day at $192.33, a decrease of 1.19%.
Teradyne Inc.’s 1.25% convertible notes due 2023 saw some action in the convertible space but with little movement in trading price. The 1.25% notes from the developer and supplier of automatic test equipment used by semiconductor manufacturers was trading in the 139 to 141 range before closing the day at 139.108, according to Trace data.
The convertible notes were trading in the 144 to 147 range in the lead up to the report. Teradyne stock was also down closing the day at $40.47, a decrease of 0.86%.
Micron Technology’s 3% convertible notes due 2043 also saw some activity during Thursday’s session, making some gains but slipping by the end of the day. The notes traded to a high of 155 but ended at 148.8, according to Trace data.
Micron stock also slipped down to $42.39 at market close, a decrease of 3.09%.
More Workday and Square
Workday’s 0.25% convertible notes and Square’s 0.375% notes continued to see action as the notes moved in line with their underlying equity. Workday again took the cake with the most trades of the day, according to a market source.
After a two-week rise, Workday’s 0.25% notes slipped below par and were trading in the 98 to 99 range as company stock decreased 1.87% to $104.55 in early trades. Trading in that range continued throughout the session with the notes closing the day at 98.8, according to Trace data.
Workday stock continued to slip ending the day at $103.01, a decrease of 3.31%.
After losing 14 points on Wednesday, Square’s 0.375% note regained some ground and was trading up 4 points to 183, as company stock was up 3.44% to $40.48 in early trades.
The notes took a turn for the worse and ended the day at 178.75, as the company’s stock lost some of its footing. Square stock ended the day at $39.22, an increase of 0.23%.
Mentioned in this article:
| Lam Research Corp.: | Nasdaq: LRCX
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| Micron Technology: | Nasdaq: MU
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| Teradyne Inc.: | NYSE: TER
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| Workday Inc.: | Nasdaq: WDAY
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| Square Inc.: | NYSE: SQ
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