B of A High Yield Broad Market Index dives 1.08%; 2004 gain slashed to 0.58%

By Paul Deckelman

New York, May 10 - The Banc of America Securities High Yield Broad Market Index tumbled 1.08% in the week ended Thursday May 6, its worst loss in 2004, exceeding the 1.06% downturn the index posted back in early February, the previous worst week. The latest loss dwarfed the 0.19% easing seen in the previous week. The index's latest downturn deeply slashed the market measure's year-to-date return to 0.58%, well down from 1.68% the week before.

The index's spread over Treasuries widened 25 basis points in the latest week, to 473 bps over from 448 bps in the April 29 week; only the accompanying deterioration in Treasuries, fueled by interest-rate hike fears, kept the spread from being far larger. However, it is still well under its high for the year, 527 bps in the week ended March 25. Meanwhile, the latest week's yield-to-worst grew to 8.19% from 7.88% the week before.

The latest week's big loss is an abrupt departure from the pattern seen in effect since early February; after having posted strong gains in the first weeks of the year, continuing a fabulous winning streak that went all the way back to mid-August of 2003, the index recorded its first downturn in many months in the week ended Jan. 29 and then showed what previously had been the largest loss this year, 1.06% the following week. Since then, the index had pretty much zig-zagged inconclusively up and down - up modestly a week or so here, down moderately a week or so there.

B of A's more narrowly focused High Yield Large Cap Index had, until this past week, followed the same recently choppy, inconclusive pattern as the HY Broad Market index, but Large Cap swooned 1.36% in the week ended Thursday, after having been off 0.32% the week before. The cumulative return for 2004 moved into the red, down 0.42%, from a 0.96% gain the week before.

Large Cap's spread over Treasuries - like that of the HY Broad Market Index - was noticeably wider in the most recent week, in line with the index's weakness, moving out to 461 basis points over from 434 bps in the week ended April 29, though still well inside the year's-high 512 bps spread in the week ended March 25. The yield-to-worst was meantime widening to 8.19% from 7.86%.

In the latest week, the more inclusive High Yield Broad Market Index tracked 1,660 issues of $100 million or more, having a total market value of not quite $506 billion, down from over $508 billion the week before, while the High Yield Large Cap Index, representing the most liquid portion of the high yield world, tracked 593 issues of $300 million or more, having a total market value of about $304.8 billion, off from over $305 billion the week before. B of A sees both as reliable proxies for the $750 billion high yield universe.

Top rated credits lose least

On a credit basis, all three of the credit tiers into which B of A divides its index posted large declines ; the highest credit tier - those credits rated BB+ and BB, comprising 14.01% of the index - had the smallest loss, 0.90%, followed by the lowest grouping (issues rated B- and below, accounting for 40.81% of the index), with 1.09%. The middle credit tier (consisting of those issues rated BB-, B+ and B and making up 45.17% of the index) had the widest loss, though just barely; it was down 1.12%.

The week before, the order of finish had been reversed, with the middle credit tier having the smallest loss, of 0.15%, the lower tier off 0.18% %, and the upper tier showing the largest loss, 0.37%.

Of the 23 industry groupings into which B of A divides its high yield universe, 22 showed negative returns, and just one - finance - didn't, and even that group could not post a gain but rather merely broke even, at 0.00%. The week before, 17 sub-sectors showed negative returns, while six were positive.

Wirelines perform worst YTD

B of A analysts said that weakness in the wireline telecommunications area - by far the worst-performing sub-sector so far this year - weighed on the market earlier in the week, and then the whole junk market followed wireline down on the sell-off in Treasuries. On the primary side, "faced with the prospect of higher financing costs, issuers continued to push their bond offerings through the latest week," with as much as $5 billion of new supply expected to have priced by the week's end. Demand, however, remained weak, with high yield mutual fund flows - a key measure of market liquidity trends - seen down $200.6 million in the latest week, according to figures from AMG Data Services.

In the latest week, the airline-heavy transportation sector, apparently roiled by sharply rising oil prices on top of the usual terrorism-linked concerns, dropped an index-worst 2.37% in the latest week, replacing wireline telecom, which had been the worst group for two consecutive weeks previously, including the prior week's 2.36% fall. In that previous week, transportation had been down 0.70%, a poor enough showing to earn a place on the Bottom Five list of the week's worst finishers.

Utilities were off 2.10% in the latest week, second-worst in the index. Cable/DBS (off 2.06%), technology (down 1.80%) and steel names (1.72%) rounded out the latest week's Bottom Five; technology had also been among the worst finishers the week before, when it had dropped 1.11%.

There was no upside; as noted the best-performing sector on the week, finance, could do no better than break even. The week before, chemicals had led the way, with a 0.46% gain.

The Top Five list of the week's best finishers was filled out by sub-sectors having the smallest losses; industrials eased 0.36%, consumer non-durables were down 0.44%; consumer non-cyclical names were down 0.56%, and energy lost 0.61%. The industrials and consumer non-durables had also been among the Top Five the previous week, with gains of 0.26% and 0.12%, respectively.

On a year-to-date basis, wireline remains the worst-performing sector, its negative return swelling to 8.34% from 7.20% the weak before, although transportation - in the aftermath of its index-worst fall this past week - is not much better, its cumulative loss growing even more sharply, to 7.50% from 5.26% the week before.

Utilities, on the basis of their Bottom Five showing this week, are now down 2.31% on the year, having widened their loss sharply from 0.21% the week before. Other sub-sectors now in negative territory year-to-date include cable/DBS (down 1.52% following a Bottom Five finish this past week), publishing (off 1.20%) and PCS/cellular (0.18% lower).

While most sectors remain in the black year-to-date, the latest week's losses pushed all of their returns down. The non-ferrous metals and mining group is still the strongest sub-sector, although its total return fell to 4.71% from 6.14%.

Consumer non-durables companies are second-best, with a 4.16% return, down from 4.61%. The group eclipsed former second-place holder steel, one of this past week's Bottom Five; the steelers' year-to-date return dipped to 3.65% from 5.46% the week before.

Finance - the only name to do as well as breaking even in the recent week - remained at a 4.09% year-to-date return.

Consumer non-cyclicals were returning 3.88%, although that was down from 4.46% the week before, while

Industrials have returned 3.44% so far this year.

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