Morning Commentary: High-grade convertibles active; Southwest Airlines down outright

By Abigail W. Adams

Portland, Me., March 12 – The convertibles primary market remained quiet early Tuesday as markets digested the latest Consumer Price Index report.

The report again came in hotter-than-expected and drove up Treasury yields.

However, equity indexes were strong on the heels of the report although the small cap index, which carries the heaviest rate risk, underperformed.

The Dow Jones industrial average was up 274 points, or 0.71%, the S&P 500 index was up 1.03%, the Nasdaq Composite index was up 1.33% and the Russell 2000 index was up 0.02% shortly before 11 a.m. ET.

“They’re just glad it wasn’t worse than last month,” a source said.

The convertibles secondary space was active early Tuesday with $166 million in reported volume about one hour into the session.

High-grade names were again the top volume movers in the space.

NextEra Energy Capital Holdings Inc.’s 3% exchangeable notes due 2027 (Baa1/BBB+) and Global Payments Inc.’s 1.5% convertible notes due 2031 (Baa3/BBB-) were again top traders although with little movement in price.

However, Southwest Airlines Co.’s 1.25% convertible notes due May 1, 2025 (Baa1/BBB) were also in focus with the notes dropping outright alongside stock as Boeing’s problems spread through the industry.

The 1.25% convertible notes were down 6 points outright as stock dropped 14% early in the session.

They were trading at 101.5 versus a stock price of $29 early in the session.

While lower outright, the notes were “holding like a rock” on hedge with the notes moving in line dollar-neutral, a source said.

Southwest’s stock was trading at $28.96, a decrease of 14.24%, shortly before 11 a.m. ET.

Stock plunged after the airline announced it would have to revise guidance for the current year due to Boeing’s delivery delays.

Boeing and Boeing supplier Spirit AeroSystems have grappled with a series of quality control issues over the past year that have impacted Boeing’s 737 Max planes program.

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