Bond analysts have grown decidedly lukewarm on Merrill Lynch & Co., though merger speculation continues to dog the firm.

Whenever rumors about Merrill resurface, spreads-the basis-point difference between the yields of Treasuries and of corporate bonds-tighten as investors snap up the securities in hopes of reaping profits.

But if Merrill were acquired, market experts said, extra basis points would be hard to come by. "Merrill continues to offer good value," said Joseph J. Labriola, head of corporate bond research at PaineWebber Inc. "However, if you are playing the consolidation game, there will be little upside."

Because of its strong fundamentals, high credit ratings, and a touch of speculation, Merrill's bonds trade expensively compared with bonds issued by other brokerages, particularly Lehman Brothers, PaineWebber Inc., and Donaldson, Lufkin & Jenrette Inc.

"Bond investors keep Merrill in their portfolios as a defensive move," said one trader. "While it's a quality brokerage, there is no upside in consolidation, and today everybody is looking for incremental yield."

Bank bond analyst Stanley T. August of First Union Capital Markets agreed.

"Merrill Lynch is definitely not a table-pounding buy," said Mr. August. "The bonds are approaching fair value. However, I would recommend it for liquidity reasons."

Liquidity is important, but a wave of consolidation in the financial services industry has increasingly made merger speculation a popular criteria for selecting bank or brokerage bonds.

Market experts maintain that Merrill's high credit ratings would also prove to be a disadvantage to bond investors who are looking to realize a gain if the company is acquired.

Merrill is rated AA-minus by Standard & Poor's and Aa3 by Moody's Investors Service.

Generally, when a lower-rated financial services firm merges or is acquired by a higher-rated firm, ratings agencies assign the higher rating to the combined entity.

"Merrill, however, is the highest-rated brokerage firm," said Mr. August. "There is no other company that is higher rated that could acquire them."

Meanwhile, bond analysts are strongly recommending other brokerage firms such as Lehman, PaineWebber, and Donaldson Lufkin that are trading cheaper than Merrill and bank bonds in general.

"Although the underlying fundamentals and the product diversity of Merrill is far greater than Lehman and Donaldson Lufkin, these companies offer greater value than Merrill," said Mr. Labriola. "In fact, the Lehman Brothers paper can be as much as 20 basis points cheaper."

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