When it comes to corporate bonds, the reward for risking an early call just isn't what is used to be.

Hungering for every basis point, corporate bond buyers have been swapping the peace of mind of call protection for the added yield of bonds that can be called away early.

That has whittled away the spread between callable and noncallable issues in recent months, making some investors wonder just how attractive callable issues are.

"In general, convesity is fairly in-expensive in the corporate market, both within sectors and across sectors," said Glenn Henricksen, portfolio manager at New York Life Insurance Co. The contraction in spreads "has been happening since the beginning of the year, but now it's getting totally ridiculous."

Call features play an important role in the relative performance game, and two bonds that are identical except for call features perform differently when interest rates change.

The price volatility of a callable bond depends on the price volatilities of the noncallable bond and the call option. If say, interest rates decline, the call option a bondholder sold to an issuer increases in value. Because the call option price is subtracted from the noncallable bond price, this reduces the relative price appreciation of the callable security.

Now, "if the market rallies, the callables will underperform the nocalls because you'll start running into the call prices," Mr. Henricksen argued.

With that in mind just yesterday, he swapped his Texas Utilities Electric Co. 9-1/2s of 2016, which are callable in December, for the utility's 9-3/4s of 2021, which are not callable until 2001. Up front, the swap cost him two basis points.

"But that's tons of call protection, and minus two [basis points], in my mind, is practically for free," he said.

Ian MacKinnon, head of Vanguard Group's fixed-income department agreed, saying, "We have been of the opinion that calls have never been appropriately priced in the market."

In May, investors picked up about 20 basis points for risking an early call, he said. Now, that spread can be as little as five basis points.

"If you believe interest rates are not going to be volatile, then you're willing to accept a greater potential for calls," Mr. MacKinnon said. "And on the corporate side, if you think there's an expectations that rates are going to stick around for a while ... you tend to be a yield maximizer. I don't know if that a wise thing or not.

Now, "you're really only getting five basis points for going down 100 basis points in coupon, and historically that's not much pick up," he explained. At this point, "we'd be going the other way."

To be sure, callable issues are becoming rare animals in the new-issue market. With the absolute level of interest rates so low this year, issuers have tried to trim their financing costs even more with non-call features. So in 1991, more than 85% of new corporate issues have been noncallable for life.

But just last week, Long Island Lighting Co. paid 30 basis points less for long-term bond financing than it did in May, even though the new issue offered just five years of call protection instead of the previous sale's 30-year bullet maturity.

"The new-issue market is still heavily skewed toward noncallable paper, but I don't think we've gotten to the saturation point," said Barbara Kenworthy, portfolio manager at Dreyfus Management Inc. "I've found that in some cases, you can actually get significantly wider [yield] pick-ups by going into callable paper. In other issues, callable and noncallable paper are trading almost on top of each other."

BUt "it's one thing to buy stuff that's callable that's trading below par, below it's call price," Mr. Kenworthy said. "A couple of weeks ago, you could find reasonably attractive callable paper, but I have not seen any of that paper recently."

Marsha Zercoe, fixed income manager Provident Capital Management in Philadelphia, noted investors have been willing to buy callable paper because "volatility has been low for the past three years, with volatility in the 10-year [area of the curve] at maybe about 10%."

But "you're on the wrong side of the fence if your buying callables" and that pendulum starts to swing back, she said, adding, "I'd be selling all my callables now."

Most corporate bonds wound down a quite session little changed yesterday.

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