Merrill: Convertibles best stocks in March; junk issues beat high grades, counter to straight bonds

By Ronda Fears

Nashville, April 2 - By Merrill Lynch & Co.'s account, the U.S. convertible market outperformed all major equity benchmarks in March and in first quarter, with the exception of the Russell 2000. Also of note, counter to straight bonds, high-yield convertibles are besting high-grade issues in terms of returns.

Concerns about rising oil prices, the soft job market and terrorism caused most major U.S. benchmarks to pull back during March, noted Marc Malloy, convertible analyst at Merrill, in a report Friday.

The Russell 2000 was the only equity benchmark in positive territory for the month, gaining 1%, he noted, adding that the Nasdaq slipped for the second consecutive month as the technology sector continued to lose momentum.

For March, Merrill's convertible index gained 0.37%, or 0.93% on a weighted basis, while the underlying stocks fell 1.21%. For first quarter, the index was up 4.24%, or 5.15% on a weighted basis, compared to a 5.64% gain in the underlying stocks.

From a credit perspective, high-yield issues topped high-grade issues in the convertible market, while the reverse was the case in the straight bond universe where investors favored investment-grade paper.

Speculative-grade convertibles picked up 1.0% during March, despite the underlying equities losing 0.5%. Investment-grade converts edged up just 0.2% while those underlying stocks dropped 1.4%. Conversely, the Merrill corporate bond index gained 1.0% in March, outpacing the 0.7% rise in Merrill's high-yield bond index.

The same was true for first quarter. Speculative convertibles were up 5.38% compared to a 2.47% gain in high-grade converts, while investment grade corporate bonds rose 3.3% versus a 2.23% gain for junk bonds.

From the equity angle, new issues were also outperformers.

In a separate report, Merrill convertible analyst Tatyana Hube said new issues performed well in March, returning 2.1% versus a gain of just 1% in the underlying equities. Yet, for first quarter, new issues lagged with a 9.29% gain compared with a 10.66% rise in those stocks.

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