B of A High Yield Broad Market Index up 0.33%, year-to-date return grows to 1.94%

By Paul Deckelman

New York, Aug. 1 - The Banc of America Securities High Yield Broad Market Index rose 0.33% in the week ended July 28, the index's seventh straight week of gains and ninth week out of the last 10, including the 0.07% advance in the previous week ended July 21.

On a year-to-date basis, the index's return rose to 1.94% after having edged up to 1.61% the week before, strengthening the recovery from the prolonged downturn that dominated most of the first half of the year, which, at its worst, had pushed the year-to-date loss all the way to 3.31%, in mid-May.

The index's spread over Treasuries, which in the previous week had narrowed to 355 basis points from 362 bps in the week ended July 14, was unchanged in the most recent week, holding steady at 355 bps, while its yield to worst - which had previously inched up to 7.64% from 7.61% - came back in, to 7.60%.

The more narrowly focused High Yield Large Cap Index, which essentially mirrors the patterns seen in the HY Broad Market Index, gained 0.37% after having broken even in the July 21 week at 0.00%, which broke a string of five straight weeks of advances. The year-to-date return, which had accordingly held steady at 1.47% in that previous week, firmed to 1.84% in the week ended Thursday.

HY Large Cap's spread over Treasuries, which in the week ended July 21 had narrowed to 333 bps over from 339 bps previously, edged up to 334 bps in the most recent week, while its yield to worst, which had previously widened to 7.44% from 7.39%, declined in the most recent week to 7.40%.

In the latest week, the more inclusive HY Broad Market Index tracked 1,704 issues of $100 million or more, up from 1,698 issues the week before, and the overall value of the issues rose to $553.9 billion from $550.4 billion the previous week.

The more narrowly focused HY Large Cap Index tracked 636 issues of $300 million or more, up from 634 the week before, and their total market value rose to $346.9 billion from $344.6 billion previously. B of A sees both indexes as reliable proxies for the $750 billion high-yield universe.

Top credit tier outperforms

On a credit-quality basis, the topmost credit tier of the three credit tiers into which B of A divides its index - those issues rated BB+ and BB, comprising 23.30% of the index - had the best return, 0.55%, followed by the bottommost tier - those issues rated B- and below, accounting for 31.30% of the index - which returned 0.50%. Bringing up the rear was the middle tier - those issues rated BB-, B+ and B, making up 45.40% of the index - which returned 0.20%.

That was a reversal of the previous week, which saw the bottom tier up 0.28%, the middle tier up 0.04%, and the top tier losing 0.20%, and it broke a three-week streak in which the three tiers had finished in that order. It represented, however, a reversion to the pattern seen in the two weeks before that, when the top tier had the best return.

Banc of America Securities analysts observed that the "strength for the week was the result of investor demand in the high-yield secondary market and a buoyant equity market." They noted that the junk bond primary sector "witnessed heavy activity," with $4.2 billion in total proceeds from three issuers by the time the market closed Thursday, with one issuer (SunGard Data Systems Inc.) accounting for $3 billion after having upsized one of its offerings, and another issuer also upsizing its offering. That was up from the previous week's "lackluster activity" of $550 million of new debt from three issuers in the comparable period.

The analysts also pointed out that high-yield mutual fund flows - a barometer of overall market liquidity trends - reported $104.8 million of net outflows in the most recent week, the third straight week of outflows including the previous week's $53 million.

In the most recent week, 20 of the 23 industry sectors into which B of A divides its high-yield universe had positive returns, versus three negative sectors, an improvement from the previous week, when the positive split was 16 in the black, seven in the red, for the second week out of three. Over the past 10 weeks, a clear majority of sectors have shown positive returns in each of those weeks - even including the one week in the past 10 in which the HY Broad Market Index had a negative return (ended June 9) - and including three weeks in which all sectors were positive, one week where the split was 21-to-2, and another two, including the most recent week, in which it was 20-to-3. Before the index upturn that began in the week ended May 26, all or almost all, of the sectors were showing losses in most weeks, dating back into mid-March.

Steel sector tops for week

For a second consecutive week, the best-performing sector was steel, which had jumped 1.17% in the week ended July 21 and which added another 0.86% in the week ended this past Thursday. It was the third straight week among the Top Five best-performing sectors for the steelers, which had also returned a robust 1.41% in the week ended July 14.

Cable/DBS operators (up 0.83%), wireline telecommunications (up 0.62%), consumer durables companies (up 0.52%) and business services (up 0.44%) rounded out the latest week's Top Five list.

It was the fourth straight week consumer durables companies have been among the best performers, including the 0.45% return in the week ended July 21. The group includes automotive parts and components makers, which have recently rebounded in line with the upturn in the major carmakers. However, the latest week represented a rebound for cable/DBS and wireline, which had been among the Bottom Five worst performing sectors in the July 21 week, with losses of 0.24% for the cablers and 0.41% for wireline - the worst in the index. The cable group has now been in the Top Five in two weeks out of the last three, while business services has been there in two weeks out of the past four.

Transportation worst in week

On the downside, transportation was the worst-performing sector, with a 0.62% loss, having taken over from the previous week's cellar-dweller, wireline, which, as noted, had lost 0.41% in the week ended July 21. Transportation - dominated by the volatile bonds of the troubled airline industry - has now been in the Bottom Five in two weeks out of the last four and four weeks out of the last seven.

Technology (down 0.21%) and non-ferrous metals and mining (off 0.15%) were the only other sectors posting losses this past week. The Bottom Five was filled out by sectors merely posting considerably smaller returns than the rest of their peers - paper and packaging (up 0.12%) and entertainment (up 0.13%).

It was the second straight week among the Bottom Five for technology, which was down 0.11% in the week ended July 21, but represented a turnaround for entertainment, which was in the Top Five the previous week - for the second time in three weeks - with a 0.59% return. Paper and packaging has now been in the Bottom Five in two weeks out of the last four.

Transportation worst for year

On a year-to-date basis, the transportation sector's index-worst performance for the week pushed its cumulative loss for 2005 out to 10.34% from 9.78% the previous week, clearly the biggest loser so far.

Repeat Top Fiver consumer durables' deficit narrowed considerably for yet another week, to 1.96% from 2.47% the previous week and from 2.90% the week before that, while steel, the week's best finisher overall for a second straight week, cut its loss for the year so far even more sharply, to 0.84%, from 1.69% the previous week, and from 2.82% the week before that. Bottom Fiver paper and packaging, despite its small gain for the week, is the only other sector still in the red for the year at this point, down 0.45%, although that's an improvement from the previous week's 0.57% deficit.

PCS/cellular on top for year

On the upside, PCS/cellular expanded its cumulative return to 7.16% from 6.93% the week before and clearly remains the best showing in the index. Finance remains second-best year to date, as its return improved to 5.09% from 4.66%.

Also showing notable strength were publishing, which rose to 3.86% from 3.68%, just barely ahead of Top Fiver business services, which advanced to 3.83% from 3.37%, while another Top Five finisher, wireline telecom, rose to 3.34% from 2.71% previously. Bottom Fiver non-ferrous metals and mining retreated to 3.28% from 3.44%.

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