Commentary

John P. Calamos, Sr., Chairman, CEO/CIONick P. Calamos, Sr. Exec. VP, Head of Investments, CIO
April 01, 2006
First Quarter 2006 Market Overview/Outlook and Q&A
By John P. Calamos, Sr., Chairman, CEO/CIO and
Nick P. Calamos, CFA, Sr. EVP, & CIO

Q: How are you positioned in high yield?

High-Yield and Enhanced Fixed-Income Market Overview
Together, both convertibles and high yields demonstrated the benefits of their equity sensitivity, as these asset classes far outperformed their more traditional fixed-income counterparts. The high-yield market (represented by the CSFB High Yield Index6) returned 3.09% for the first quarter of 2006, with each of the 10 economic sectors in positive territory. Industrials and Telecommunication Services provided the strongest returns, while Energy and Financials were only moderately positive. The convertible market (measured by the Merrill Lynch All U.S. Convertibles Index VXA07) provided strong returns for the first quarter, rising 5.32%. Following the full year 2005 when investment-grade issues outperformed speculative-grade issues, the investment-grade universe lagged the speculative- grade universe by a fairly large margin in the first quarter this year. Credit spreads—the yield difference between low-quality and high-quality bonds—tightened during the quarter and remain at historically narrow levels. Nonetheless, they appear fair given the strength of corporate balance sheets, the low level of default rates and the strength of the economy. Absolute yields within the high-yield space appear low, but compared to yields on higher quality issues and the overall level of interest rates, they seem appropriate.

Outlook/Positioning
We are focusing on issuers that should benefit from the current economic expansion and favoring convertible securities over straight corporate bonds. Across both types of securities, however, we favor issues that may benefit from M&A activity, equity issuance or other corporate events that may improve the overall credit quality of the issuing company. Convertible high-yield issues continue to have a meaningful allocation within the strategy and valuations remain compelling. Throughout 2005, convertible valuations were under pressure from hedge fund selling activity and a lack of volatility in the market; this pressure on valuations has created an excellent opportunity for convertible bond holders. Performance in the first quarter was bolstered by the beginnings of valuation improvements. We believe convertible valuations will improve further and return to more normal historical levels. Our portfolios have the potential to benefit from this opportunity by positioning assets in securities that offer the most attractive risk/reward characteristics within the high-yield universe.

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Index Definitions:

1 The S&P 500 Index is an unmanaged index generally considered representative of the U.S. stock market.

2 Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index. As of the latest reconstitution, the average market capitalization was approximately $664.9 million; the median market capitalization was approximately $539.5 million. The largest company in the index had an approximate market capitalization of $1.8 billion.

3 Russell Midcap® Index measures the performance of the 800 smallest companies in the Russell 1000 Index, which represent approximately 25% of the total market capitalization of the Russell 1000 Index. As of the latest reconstitution, the average market capitalization was approximately $4.7 billion; the median market capitalization was approximately $3.6 billion. The largest company in the index had an approximate market capitalization of $13.7 billion.

4 Russell 1000® Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values. The Russell 1000® Index measures the performance of the 1,000 largest companies in the Russell 3000 Index, which represents approximately 92% of the total market capitalization of the Russell 3000 Index.

5 Russell 1000® Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. The Russell 1000® Index measures the performance of the 1,000 largest companies in the Russell 3000 Index, which represents approximately 92% of the total market capitalization of the Russell 3000 Index.

6 The CSFB High Yield Index is an unmanaged index of high yield debt securities.

7 The Merrill Lynch All U.S. Convertibles Index (VXA0) is comprised of approximately 500 issues of convertible bonds and preferred stock of all qualities.

8 The Merrill Lynch All Investment Grade Convertible Index (VXA1) is comprised of approximately 200 issues of only investment-grade convertible bonds and preferreds.

9 The Merrill Lynch All Speculative Grade Convertible Index (VXA2) is comprised of approximately 300 issues of only speculative-grade convertible bonds and preferreds.

Index returns assume reinvestment of dividends and, unlike Fund returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

Performance data quoted represents past performance which is no guarantee of future results. Current performance may be lower or higher than the performance quoted.

The views and opinions expressed by John P. Calamos and Nick P. Calamos are as of the date of the article, and are subject to change at any time based upon market or other conditions. The material contained herein is for informational purposes only and should not be considered investment advice.

For more information:
Calamos Advisors LLC is a federally registered investment advisor. Part II of Form ADV, which provides background information about the firm and its business practices, is available upon written request to:

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