Banc of America High Yield Broad Market Index down 0.03%; year-to-date return eases to 6.88%

By Paul Deckelman

New York, Oct. 25 - The Banc of America Securities High Yield Broad Market Index retreated in the week ended Oct. 21, after having turned in positive returns over the two previous weeks.

The index lost 0.03%, a turnaround from the 0.39% gain in the week ended Oct. 14. Even with the latest week's decline, though, the index has now risen in 10 out of the last 12 weeks and 19 weeks out of the last 23, a mostly positive stretch that dates back to late May, when the index began to strong bounce back from a prolonged negative streak which had put it into the red.

Year to date, the index has returned 6.88%, a slight decline from the 6.91% cumulative return seen the previous week, the high for the year so far.

In the latest week, the index's spread over Treasuries widened ever so slightly to 442 basis points from 441 basis points the previous week, while its yield to worst increased to 7.59% from 7.55%.

Large Cap down 0.05% for week

The more narrowly focused High Yield Large Cap Index continued to follow the same pattern as the HY Broad Market Index, also posting a small loss in the most recent week after two straight weeks of upside. It lost 0.05%, versus the 0.38% gain the week before. The year-to-date return likewise declined slightly to 6.45%, off from 6.50% in the week ended Oct. 14, the peak level for the year so far.

Like the HY Broad Market Index, Large Cap's spread over Treasuries inched up one basis point to 427 basis points from 426 basis points the week before. Its yield to worst rose a bit to 7.50% from 7.47% previously.

In the latest week, the more inclusive High Yield Broad Market Index tracked 1,642 issues of $100 million or more, having a total market value of nearly $515.9 billion, up from $515.4 billion the week before. The High Yield Large Cap Index, representing the most liquid portion of the high-yield world, meantime tracked 589 issues of $300 million or more, as total market value rose slightly to $311.6 billion from $310.6 billion the week before. B of A sees both as reliable proxies for the $750 billion high-yield universe.

Middle tier credits outperform

On a credit-quality basis, the middle one of the three credit tiers into which B of A divides its index - those issues rated BB-, B+ and B and making up 44.86% of the index - was the only division to finish in the black, up 0.05%. The lowest of the three tiers (those issues rated B- and below, accounting for 40.80% of the index), was next, with a 0.07% loss, while the topmost credit tier - issues rated BB+ and BB, comprising 14.34% of the index - lagged behind, with a 0.14% loss on the week.

Though technically a negative finish, B of A analysts characterized the latest week's small loss as "relatively flat." They noted that on the new-issue side, "supply volume continues to lag demand," with $1.1 billion in proceeds having priced during the week since release of the previous index as of the close Thursday, versus the average weekly supply volume so far this year of $2.9 billion.

The small loss in the index also coincided with an outflow of $898,000 in high-yield mutual funds, as reported by AMG Data Services - a key barometer of junk market liquidity trends - after eight straight weeks on the upside. Like the downturn in the HY Broad Market Index, the funds-flow downturn was so small in relative terms as to be essentially flat, in the view of the analysts.

Thirteen of the 23 industry sectors into which B of A divides its junk bond universe had positive returns in the latest week, with eight sectors having negative returns and two others finishing absolutely flat, neither up nor down. That contrasts with 20 sectors in the black and three in the red the week before, which was keeping in line with the recent trend of broad-based strength in the index.

Transportation worst for week

The volatile transportation sector - which had been propelled skyward in the week ended Oct. 14 by a whopping index-best 3.12% return on strength in airline bonds - was seen plummeting back to earth in the latest week after the major carriers reported losing money by the planeload in the industry's historically profitable third quarter; transportation lost 2.03%, by far and away the worst showing in the index.

Consumer durables lost 1.06% in the most recent week, second-worst in the index, while the Bottom Five list of the week's worst finishers was rounded out by finance (down 0.89%), steel (down 0.46%) and business services (off 0.21%). Business services had been the worst performer in the index the week before, when it lost 0.34%; steel was also in the Bottom Five for a second straight week, including the previous week's 0.11% loss, while consumer durables had also made the Bottom Five the week before, with a relatively weak 0.11% gain.

Gaming best sector for week

On the upside, gaming was the best-performing sector in the most recent week, with a 0.48% return (as noted, transportation had been the leader the week before).

Lodging was the second-strongest finisher in this past week's index, at 0.42%, with industrials (up 0.36%), technology (up 0.31%) and PCS/cellular operators (up 0.29%) rounding out the Top Five list of the best-performing sectors in the latest week. PCS/cellular and technology had also made the Top Five the week before, with returns of 0.61% and 0.55%, respectively.

On a year-to-date basis, the steel sector's second consecutive Bottom Five showing cut its cumulative return to 12.24% from 12.76% the week before, but the steelers remain the 2004 leaders. Non-ferrous metals and mining, through, isn't too far behind, as the group moved up to 11.91% from 11.86% the week before.

Also showing some notable year-to-date strength was the chemical sector, at 11.04%, up slightly from exactly 11% the week before; energy, at 9.90%, down slightly from 9.92%; consumer non-durables companies, at 9.84%, down from 9.89%; industrials, whose Top Five finish this week pushed them up to 9.69% from 9.30%; and consumer non-cyclicals, at 9.35%, up from 9.19%.

On the downside, the transportation sector's big loss this week caused its year-to-date deficit to balloon back out into double-digits at 11.23%, after having fallen to under 10% for the first time in several months the week before, when its 2004 loss came in at 9.40%. No other industry sector shows a loss for the year to date.

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