B of A High Yield Large-Cap Index off up 0.22%; year-to-date gain rises to 3.77%

By Paul Deckelman

New York, Jan. 21- The Banc of America High Yield Large Cap Index firmed in the week ended last Thursday (Jan. 16), rising 0.22%, to push its year-to-date gain up to 3.77%. That builds on the hefty advance seen in the first week of the year, when the index posted a 3.43% return.

In the latest week, the index's spread over comparable Treasury issues widened out slightly, however, to 877 basis points, from 865 in the week ended Jan. 9, while its yield to worst also rose, to 11.93%, from 11.90%, reflecting a stronger Treasury market.

Banc of America analysts noted that the latest week marked the fifth consecutive week in which the high-yield market showed some improvement - and that in turn was a continuation of the broad surge in junk bond secondary trading seen through most of the last quarter of the year.

After having touched bottom in early October, the speculative-grade market came roaring back from its deep late summer/early fall doldrums, a comeback fueled in large measure by plentiful liquidity, as measured by junk bond mutual fund inflows.

It ended 2002 only slightly negative, as measured by the Large Cap Index, which gauges the most liquid portion of the high-yield world by tracking about 400 bonds of $300 million or over, having a total market value of approximately $175 billion. In 2002, the Large Cap Index - which had shown a cumulative loss of nearly 16% by early October - closed out the year down a relatively modest 2.89%, with a spread against Treasuries of 956 basis points, and a yield-to-worst of 12.51%.

Another B of A market measure - its High Yield Broad Market Index - did even better, coming on strong in the last three months of 2002 to actually end on a positive note, with a final year-to-date return of 1.55%, with a spread of 963 basis points over Treasuries and a yield-to-worst of 12.43%.

The HY Broad Market Index - which tracks over 1400 high yield issues of $100 million or more having a total market value of almost $350 billion - has also been up solidly the first two weeks of the new year.

In the week ended last Thursday, it gained 0.45%, for a cumulative 2.96% return, increasing from the 2.46% gain it posted in the week ended Jan. 9. As was also the case with the High Yield Large Cap Index, the spread over Treasuries in the most recent week widened slightly to 891 basis points from 886, reflecting the Treasury market's strength, although the yield-to-worst improved to 11.92% from 11.97% the week before.

The bank's analysts noted that the credit markets in general "were unable to maintain [the previous] week's spread-tightening momentum and positive market tone," notching considerably smaller gains than those seen in the first week of the year. They cited a number of overhanging negatives, including escalating geopolitical risks, combined with disappointing profit announcements and the upward pressure on oil prices resulting from the worsening situation with Iraq, labor unrest in Venezuela's energy industry and cold weather in the U.S.

But helping to partially offset these negatives in the high-yield market and keep the returns positive were such technical factors as the junk investor inflow numbers. "Strong demand for the asset class, as evidenced by the $928 million of high yield fund net inflows, helped lift the market despite lackluster data releases and the softness in equities," the B of A report said.

Of the 27 industry sectors into which Banc of America divides its High Yield Broad Market Index, 21 advanced on the week and six declined.

But B of A noted that "the tone in the market was noticeably cooler during the latter part of the week, as weakness in Charter Communications, one of the largest issuers in the high yield market, dampened the market's momentum."

Domestic cable operators, in fact, were the weakest performers of the week, retreating 1.98%, largely dragged down by Charter's problems.

Consumer non-cyclical companies (down 0.78%), lodging (down 0.46%), utilities (down 0.36%) and paper and packaging (down 0.17%) rounded out the Bottom Five list of the worst performing sectors for the week.

On the upside, the strength had a decided international flavor, as international wireless operators zoomed 10.68% on the week; international wireline telecommunications companies jumped 4.42%; and international cable companies - in sharp contrast to their North American cousins - rose 2.73%.

Transportation names (up 2.59%) and PCS/cellular operators (up 2.57%) rounded out the Top Five list of best-performing sectors for the most recent week.

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