The first quarter of 2010 was a volatile one, with an early year sell off followed by another run toward Dow 11,000.  As usual, news filled the air, with such notable events as Ben Bernanke being reconfirmed as Chairman of the Federal Reserve, ongoing discussion of increased government regulation of the financial markets, the health care bill debate come the bill’s eventual passage, and disquiet surrounding the prospects for select European economies (most notably Greece) all flirting with center stage for investor attention. 

Despite the often-disquieting noise, the Dow Jones Industrial Average gained 4.1% in the first quarter—its best first-quarter performance since 1999.  The broad-based S&P 500 rose 4.9%, though it remains some 25% below its all-time high.  And the Russell 2000 advanced an impressive 8.5%, handily outpacing the other two market yardsticks.

Like the broader stock indexes, convertibles advanced nicely in the first quarter of the year, with the Value Line’s All Convertibles Total Return Index gaining 4.2% for the month and 5.0% for the quarter.  The volatility of the stock market and the turbulent news trends helped to drive investors to the convertibles market, as these securities often offer stock-like returns with reduced levels of volatility due to their bond-like qualities.  At the end of the day, convertibles outpaced both the Dow and the S&P, though they fell short of the impressive 8.5% gain from the Russell 2000.  Value Line’s Especially Recommended convertibles rose 2.6% in March and 5.7% for the quarter.  In the meantime, the stocks underlying the convertibles in our database climbed over 11% (excluding dividends) in the quarter. 

The convertibles market was vibrant in the quarter, though March was a particularly strong month for new issues.  Indeed, 14 new issues, with an issue size totaling about $4.3 billion, were priced in March alone.  That brought the year-to-date total for new convertible issuance to around $6 billion.  Unfortunately, a number of convertible securities were redeemed via company buybacks, exchanges, voluntary and forced conversions, maturities, puts and cash mergers.  The net effect was a slight reduction in the overall size of the convertibles market.