B of A High Yield Broad Market Index up 0.12%, year-to-date return improves to 1.50%

By Paul Deckelman

New York, Oct. 3 - The Banc of America Securities High Yield Broad Market Index rose 0.12% in the week ended Sept. 29 after four straight weeks of decline, although only the previous week's 0.97% retreat was at all noteworthy.

The index has now shown gains in 11 weeks out of the last 16 and 12 weeks out of the last 18.

On a year-to-date basis, the index's return, which in the previous week had tumbled to 1.38% from 2.37%, improved modestly to 1.50% in the week ended Thursday but still remained well off its high point for the year of 2.50%, reached in late August.

The index's spread over Treasuries, which the week before had widened out to 392 basis points from 373 bps, came back down in the most recent week, to 376 bps, while its yield to worst - which had previously jumped to 7.96% from 7.76% - came in slightly, to 7.94% in the latest week.

The more narrowly focused High Yield Large Cap Index, which generally tracks the patterns seen in the HY Broad Market Index, rose 0.14% in the week ended Thursday, after having plunged by 1.13% the week before, its fourth straight week of either negative or flat returns.

The large cap year-to-date return, which had previously plummeted to 0.95% from 2.10%, moved back up to 1.09% in the most recent week, though it too remains well below the index's high point for the year of 2.23%, reached in late August.

Its spread over Treasuries, which in the week ended Sept. 22 had increased sharply to 383 bps from 359 bps, markedly declined in the most recent week, to 362 bps, while the yield to worst decreased to 7.81% after having ballooned out to 7.88% the week before from 7.64%.

In the latest week, the more inclusive HY Broad Market Index tracked 1,721 issues of $100 million or more, down from 1,723 issues the week before, while the overall market value of the index fell to $580.1 billion from $583.9 billion the previous week.

The more narrowly focused HY Large Cap Index, measuring the most liquid portion of the high-yield world, tracked 665 issues of $300 million or more, down from 675 the week before, with the overall market value of the index declining to $375.3 billion from $379 billion the week before. B of A sees both indexes as reliable proxies for the $750 billion high-yield universe.

Middle credit tier outperforms

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, making up 39.16% of the index - had the best return, 0.21%, followed by the bottommost tier - those issues rated B- and below, accounting for 33.07% of the index - which was up 0.17%. Bringing up the rear was the topmost tier - those issues rated BB and BB+, comprising 27.77% of the index - which lost 0.08%.

It marked the second straight week, and the fourth week out of the past five, in which the middle tier has had the best return. In the week ended Sept. 22, the middle tier had the smallest loss, at 0.78%, followed by the top tier, which lost 0.87%, and then the bottom tier, which lost 1.27%.

B of A analysts, in noting how the HY Broad Market Index had edged up in the most recent week, said the market seemed to be "steadying as investors assessed the likely impact Hurricane Rita would have on the economy." They noted that the primary market had witnessed "moderate" activity levels, with five issuers having tapped the market for $1.877 billion in total proceeds by the end of trading on Thursday, although three deals were downsized and yet another deal was dropped.

With the year now three quarters finished, year-to-date new-deal supply stood at 323 issues totaling $86.9 billion of proceeds. On the demand side, high-yield mutual funds, a widely followed measure of market liquidity, showed $1.295 billion of net outflows in the week ended Sept. 28, widening out dramatically from the previous week ended Sept. 21 of $329 million outflow.

In the most recent week, 17 of the 23 industry sectors into which B of A divides its high-yield universe showed positive returns, against six sectors showing negative results. That was a turnaround from the negative trend seen over the previous two weeks, especially in the week ended Sept. 22, when all 23 sectors were in the red.

Transportation tops for week

The transportation sector, recently among the weakest industry groupings, was clearly the best performer in the latest week, returning 1.06%. It was a sharp reversal for the transportation group, which previously had been among the Bottom Five worst performers in four straight weeks, including its 1.77% loss in the week ended Sept. 22, and in seven weeks out of the previous nine. Transportation took over the top spot from finance, which in a week ended Sept. 22 when all sectors finished in the red, had managed to record the smallest loss, 0.23%.

Also showing a marked turnaround in the latest week was the paper and packaging sector, which rose 0.60%, second-best in the index. The week before, the group had plunged 2.05% - the worst showing in the index for a second consecutive week, and the fourth week out of the prior six in which it had been in the Bottom Five.

Steel (up 0.55%), technology (up 0.47%) and business services (up 0.44%) rounded out the Top Five list of best-performing sectors in the latest week. Steel has now been in the Top Five in two weeks out of the past four. Business services has been there in two weeks out of the last three, and four weeks out of the last eight.

Consumer non-cyclicals worst for week

On the downside, consumer non-cyclical companies lost 0.28% in the latest week, replacing paper and packaging as the worst finisher. In the previous week, the consumer non-cyclicals had been in the Top Five, with a smaller-than-most 0.47% loss, but the sector has now been in the Bottom Five in two weeks out of the past four.

Consumer non-durables companies (down 0.24%), industrials (down 0.22%), finance (down 0.20%) rounded out the latest week's Bottom Five list, along with utilities and non-ferrous metals and mining (both down 0.11%). It was the second straight week in the Bottom Five for consumer non-durables, which lost 0.98% in the week ended Sept. 22, and for utilities, which had plunged 1.44%. Finance, as noted, had led the Top Five that previous week with its relatively small loss.

On a year-to-date basis, the transportation sector's index-leading return cut the sector's 2005 cumulative loss to 15.44% from 16.32% previously, but it remains clearly down at the bottom as the worst-performing industry group in the index, pulled down for most of the year so far by the volatile bonds of the troubled airline industry - particularly Delta Air Lines Inc. and Northwest Airlines Corp., both now in bankruptcy.

Consumer durables' 2005 deficit meanwhile narrowed a bit, to 4.27% from 4.37% the previous week, while paper and packaging's Top Five showing cut its 2005 deficit to 2.47% from 3.06%. No other sectors were in the red on a year-to-date basis.

On the upside, PCS/cellular's index-best year-to-date return fattened to 8.97% from 8.80% the week before, while Bottom Fiver finance remained in second place, although its cumulative return eased to 6.04% from 6.24% previously. Top Five finisher business services swelled to 4.68% from 4.22% previously.

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