Amid the recent slide of bank and corporate bonds, brokerage bonds have fared best, powered by fresh reports of strong earnings.

Bonds of Morgan Stanley Dean Witter & Co., Lehman Brothers, and Goldman Sachs Group Inc., all of which operate on fiscal quarters ending May 31, have had their best market stretch since last July, before the Russian bond default stunned the markets.

"All the positive results from the recent record earnings seem to have been factored into these securities firms' pricing," said John Otis, a bond analyst at Bear, Stearns & Co. in New York.

Securities firms' bonds have historically traded at higher yields, and therefore lower prices, than money-center bank paper because brokerages are perceived as having less diversified revenue streams and riskier trading operations. But as banks and securities firms move into each other's lines of business, pricing on their debt is converging.

"The businesses are converging," said Stanley T. August, an analyst at First Union Capital Markets. "You tend to think over time the spreads would too."

For example, one analyst quoted yields on offers of Morgan Stanley notes maturing in 2007 in the range of 118 basis points above comparable U.S. Treasuries on Tuesday. Merrill Lynch notes maturing in 2009 were at 129, and Goldman's were at 130. The yields, which are inversely related to prices, were in the same range as those of Citigroup, at 119; Bank of America, at 121; and Chase Manhattan Bank, at 126.

Morgan Stanley announced last week that its earnings had grown 42%, to $1.95 a share, in its fiscal second quarter, up from $1.37 a year earlier. Similarly, Lehman Brothers announced earnings of $2.09 a share for the same period. The increase-though only 2%-trounced the consensus estimate of $1.68 a share. Goldman reported earnings of $1.30 a diluted share, up 30% from pro forma results the year before, when the company was still privately held.

Brokerages have benefited from a big rebound in trading and are still reaping big gains from initial public offerings.

They also have had "a much faster bounce-back from 1998 problems" than expected, said Winnie Cheng, an analyst at Bank of America Securities in Charlotte, N.C.

Moreover, brokerages retain the upper hand over commercial banks in mergers and acquisitions, analysts said.

"What you are really seeing is, investors are looking for relative comparative advantage," said Allerton G. Smith, an analyst at Donaldson, Lufkin & Jenrette in New York. "The M&A fees give it to the brokers rather than the banks."

Nevertheless, year-2000 compliance issues may later this year prompt investors to scurry for the less volatile bonds of the money-center banks, said Bear Stearns' Mr. Otis.

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