B of A High Yield Broad Market Index down 0.33%, year-to-date return falls to 0.53%

By Paul Deckelman

New York, Nov. 22 - The Banc of America Securities High Yield Broad Market Index retreated 0.33% in the week ended Thursday, its second consecutive loss, following the 0.16% decline in the week ended Nov. 10. That represents a slight deviation from the index's recent pattern, since about mid-September, of alternating back and forth most weeks between gains and losses.

The latest week's loss was also the ninth in the last 12 weeks, although looking over a longer time frame, the index has still shown positive returns in 14 weeks out of the last 24.

The loss pulled the index's year-to-date return down to 0.53%, following the previous week's decline to 0.86% from 1.03% before that. The index's year-to-date return thus retreats still further below 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 to 377 basis points from 365 bps previously, ballooned out to 400 bps this past week, while its yield to worst - which had previously increased to 8.27% from 8.20% - continued to widen, to 8.41%.

The more narrowly focused High Yield Large Cap Index, which generally tracks the patterns seen in the HY Broad Market Index, fell 0.46% in the week ended Thursday, on top of the 0.33% deficit seen the week before. The latest week's loss marked the ninth week in the last 11 in which the index had shown either negative, or at best, flat returns.

The Large Cap year-to-date return, which had previously fallen to 0.45% from the 0.78% seen in the week ended Nov. 3, continued to decline in the latest week, narrowly moving back into negative territory with a 0.01% cumulative loss - far from the index's high point for the year of 2.23%, reached in late August.

Its spread over Treasuries, which in the week ended Nov. 10 had widened out to 361 bps from 346 bps the week before, continued to increase, to 385 bps in the latest week, while its yield to worst fattened to 8.27%, after having increased in the previous week to 8.12% from 8.03%.

In the latest week, the more inclusive HY Broad Market Index tracked 1,704 issues of $100 million or more, up from 1,691 issues the week before, while the overall market value of the index rose to $566.7 billion from $563 billion the previous week.

The more narrowly focused HY Large Cap Index, measuring the most liquid portion of the high-yield world, tracked 675 issues of $300 million or more, up from 664 the week before. The overall market value of the index rose to $372.2 billion from recent valuations in the $365 billion area. B of A sees both indexes as reliable proxies for the approximately $750 billion high-yield universe.

Middle credit tier outperforms

On a credit-quality basis, the middle of the three credit tiers into which B of A divides its index - those issues rated BB-, B+ and B, making up 41% of the index - had the smallest loss, 0.20%. This was followed by the bottom tier - those issues rated B- and below, accounting for 31.16% of the index - which lost 0.29%, while the topmost credit tier - those issues rated BB and BB+, comprising 27.85% of the index - brought up the rear, with a 0.59% loss.

That broke the pattern seen over the previous two weeks, when the lowest tier had the best showing, but represents a reversion to the pattern which had been seen in five weeks out of the six before that, in which the middle tier had the best return.

In the week ended Nov. 10, the bottom tier had the smallest loss, 0.08%, followed by the middle tier, which lost 0.17%, and then the top tier, which had a 0.26% loss.

B of A analysts noted that the latest week's overall loss was paced by large losses in the consumer durables sector - which includes the troubled automotive names - and in paper and packaging, both of which declined by more than a full percentage point.

'Moderate' primary activity

The analysts characterized primary market issuance as "moderate," with nine issuers having tapped the market for a total of $1.467 billion in total proceeds through the close of business on Thursday, bringing year-to-date new supply to $97.8 billion in 365 deals. One of the week's deals was upsized and two were downsized.

On the demand side, they noted that about $162 million more left the high-yield mutual funds - a measure of overall market liquidity trends - than came into them in the week ended Nov. 16, according to AMG Data Services. That followed the previous week's $138 million funds outflow, bringing total outflows in the last 10 weeks above $3 billion.

In the most recent week, 12 of the 23 industry sectors into which B of A divides its high-yield universe showed negative returns, against 11 industry groupings showing gains, the sixth week in the last nine in which negative sector-count results have dominated. That followed the unusual breakdown the previous week, when just nine of the 23 sectors finished in the red, against 14 sectors in the black, even though the overall index moved lower - the apparent disparity caused by that week's biggest loser, the consumer durables sector, having had a massive 1.77% deficit that pulled the whole index down markedly.

Consumer durables worst for week

And consumer durables was for a second consecutive week by far the worst performer, sliding 1.85% in the week ended Thursday on the continued retreat of General Motors Corp. bonds and those of former GM unit Delphi Corp. The junk market was roiled by renewed fears of a possible coming GM bankruptcy, as such speculation made the rounds of the credit default swaps market, where the cost of buying protection against a debt default by the beleaguered automotive giant widened considerably. CDS market technical considerations also hammered down the price of Delphi bonds, causing them to tumble into the low 50s as a previous short squeeze that had propped those bonds up evaporated.

The weakness in GM and Delphi dragged other automotive names lower as well. Besides having the worst loss of any sector for two weeks running, consumer durables has now been among the Bottom Five worst-performing sectors in three weeks out of the last four.

Also helping pull the overall index down for the week, was paper and packaging, which plummeted 1.08% - a sharp comedown from the previous week, when the sector had led all sectors in the index with a 0.88% gain and had made the Top Five list of the week's best performers for a second straight week.

Cable/DBS operators (down 0.56%), publishing (off 0.38%) and consumer non-durables (down 0.32%) rounded out the latest week's Bottom Five list. It was the second straight week in the Bottom Five for cable/DBS, which had also made it the previous week with a 0.90% loss. The latest week's loss was a reversal for publishing, which had been in the Top Five the week before with a 0.44% gain, although the sector has now been in the Bottom Five in two weeks out of the last four, as has the consumer non-durables group.

Health care sector tops for week

On the upside, health care returned 0.41% to take over the top spot from the paper and packaging sector, the previous week's leader as noted. It was a notable rebound for health care, which had been among the Bottom Five the previous week with a 0.13% loss, although the group has now been among the Top Five in two weeks out of the last three.

Finance (up 0.38%), transportation (up 0.29%) lodging (up 0.26%) and gaming (up 0.20%) rounded out the latest week's Top Five list. It was the second straight week in that select circle for lodging, which made it the week before with a 0.55% return. Finance has now been among the Top Five for two weeks out of the last four, and transportation for three weeks out of the last six.

Transportation worst for year

On a year-to-date basis, however, transportation remains solidly mired down at the bottom with the worst 2005 cumulative loss, even though this declined slightly to 14.67% from 14.92% previously on the strength of its Top Five performance this past week. The sector is dominated by the bonds of the troubled airline industry, particularly Delta Air Lines Inc. and Northwest Airlines Corp., both of which were beaten down deep into distressed-debt territory before eventually filing for bankruptcy.

Consumer durables' second straight index-worst weekly loss widened its year-to-date deficit to a yawning 6.81% from 5.05% the week before, while Bottom Fiver paper and packaging - which in the week ended Nov. 10 had gone sharply in the opposite direction and improved to a 3.70% cumulative loss from 4.54% the week before - gave back all of those gains and then some in the most recent week, and has now lost 4.74% on the year. Another Bottom Five name, cable/DBS, has widened out to a 2005 loss of 1.51% from 0.95% previously.

PCS/cellular tops for year

On the upside, PCS/cellular's year-to-date return increased a bit, to 8.41% from 8.24% the week before, and the sector clearly remains the dominant finisher so far. Wireline telecommunications extended its 2005 gain to 5.67% from 5.62%, continuing to hold onto second place. Business services' return improved to 4.76% from 4.60%, followed closely by Top Fiver finance, which firmed to 4.74% from 4.34% previously.

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