Convertibles suffer worst month since September 2002, Citigroup says

New York, May 7 - The convertibles market saw its worst performance in September 2002 in April, losing 2.4% in the month, according to a review of monthly performance by Citigroup analyst Adrian Miller.

He described the month as "challenging" for market participants.

He noted that the both stocks and corporate bonds were weak, with equities losing 1.6% as measured by the S&P 500.

However convertibles did not manage to outperform their underlying stocks, which lost 4.3%.

Contributing to the losses was a "no-bid" atmosphere, the result of low secondary trading volume in response to the "skittish equity market and an overhang of rising interest rates," Miller wrote.

Low new issue volume - Citigroup put the month's total at $2.5 billion - did little to help interest in the market either.

On the plus side, equity volatility rose, helping "buffer the decline in convertible market's weighted average delta."

Also giving some support to convertibles was the relatively good performance of the high-yield bond market, which only lost 0.3% in the month as its spreads narrowed 55 basis points.

Miller added that it was not only outright investors who found the going tough in April.

Convertible arbitrage investors also lost ground, with early indications suggesting the strategy lost 1.5% to 1.8% in the month, Miller said.

Outright investors lost an average of 2.7% in the month, based on the performance of open-end mutual funds.

But Miller noted that performance was skewed and 56.9% of funds actually beat the market.

Among sectors, health care was the only industry to show a positive return, at 0.6%, thanks to a "robust" 0.9% performance in its biotech component. OSI Pharmaceuticals' "stellar" performance was the catalyst for the group, Miller said, rising strongly on good news about its lung cancer drug Tarceva. Advanced Medical Optics was also a strong performer.

In the other direction, telecom was the biggest contributor to convertibles' weak performance with a 6.2% decline.

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