Morning Commentary: Convertibles secondary eyes Fed decision; Redwood Trust on downtrend

By Abigail W. Adams

Portland, Me., June 15 – It was a quiet morning in the convertibles secondary space as equity markets firmed ahead of the Federal Reserve’s afternoon announcement on Wednesday.

The market has undergone a dramatic repricing over the past three sessions with the dovish forecasts for rate hikes that drove the late May rally suddenly replaced with expectations for a 75 basis point rate increase to be announced Wednesday.

While the market has largely priced in the 75 bps increase, some sources still see it as unlikely.

However, some sources were also doubtful a 50 bps rate increase would lead to a rally.

Even with Wednesday’s strong start for risk assets, “the market feels so bearish, who knows if it will snap back,” a source said.

The Dow Jones industrial average was up 248 points, or 0.82%, the S&P 500 index was up 1.02%, the Nasdaq Composite index was up 1.37% and the Russell 2000 index was up 1.25% shortly before 11 a.m. ET.

There was $50 million in reported volume about one hour into the session with few names seeing concentrated trading activity.

Redwood Trust Inc.’s recently priced 7.75% convertible notes due 2027 continued its strong downtrend with the notes now trading on an 86 handle.

The 7.75% notes were changing hands at 86.75 early in Wednesday’s session with the yield now 11.291%.

Redwood Trust’s stock was $7.13, a decrease of 2.6%, shortly before 11 a.m. ET.

The notes, which priced at par on June 6, have been on a downward spiral since breaking for trade.

While the notes were able to hold par on their aftermarket debut, they drifted lower to close the previous week at 96.

The notes were demolished in Monday’s sell-off and dropped to an 88-handle as the 30-year mortgage rate surged.

“That’s how bad it is, especially in the REIT world,” a source said.

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