Convertibles return nearly 4% for August, marking sixth straight positive month: Barclays Capital

By Rebecca Melvin

New York, Sept. 1 - The convertibles market posted a return of 3.98% for August, marking the sixth consecutive positive month, according to Barclays Capital convertibles research analysts.

Both credit and equities drove the performance upward. In the year to date, the BarCap Convert Composite index has returned 35.04%, second only to the BarCap HY index's 40.95% return, and has significantly outperformed the S&P 500 index, which is up 14.97%, Barclays analysts Venu Krishna, Manoj Shivdasani and Peng Cheng wrote in research published Tuesday.

Mandatories were the best performer with a 6.90% return, while bond structures also delivered a favorable return of 3.30%.

The HFRX Convert Arb index was up 3.07% in August and has been the best-performing HF Strategy in the year to date with a 32.50% return.

Credit spreads mostly tighten

Non-investment-grade convertible bond spreads tightened 110 basis points from 1,043 bps to 933 bps, whereas the BarCap US HY B index widened 21 bps to 767 bps from 746 bps. Investment-grade convertible credit spreads fell to 314 bps from 346 bps while the BarCap US Credit index tightened 14 bps to 210 bps from 224 bps during the month.

The spread between non-investment-grade convertibles and the BarCap HY B index tightened sharply to 166 bps from 297 bps at the end of July.

Realized volatility continues to fall

The implied volatility of investment-grade convertible bonds with at least one year of call protection ended the month of August at 33.60%, down slightly from 33.90% at the end of July.

Option surface volatility ended the month at 37.80%, compared with 37.70% a month earlier. On the other hand, 90-day realized volatility fell sharply to 40.60% from 49.10%.

The Barclays Capital 2009 US Recommended Portfolio rose 3.68% in August, underperforming the 3.89% return for the broader BarCap Convertible Composite index. In the year to date, the portfolio has posted a 29.50% return versus 35.00% for the index.

The portfolio was changed to include UAL Corp.'s 4.5% convertibles due 2021 on Aug. 4. Amgen Corp.'s 0.375% convertibles due 2013 replaced Amgen's 0.125% convertibles due 2011 on Aug. 13, and CapitalSource Inc.'s 4% convertibles due 2034 were added on Aug. 19.

Distressed convertibles were up 14.80% in August after posting a strong 15.10% return in July. In the year to date, distressed convertibles have returned 130.90%.

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