B of A High Yield Broad Market Index off 0.22%; down 0.70% year to date

By Paul Deckelman

New York, Jan. 24 - The Banc of America Securities High Yield Broad Market Index fell further into negative territory in the week ended Jan. 20, retreating 0.22%. It was the third straight week of decline for the index, which has been falling steadily since the start of the new year, including the 0.37% loss seen the week before.

The negative start for the year is a clear reversal of the largely positive trend that dominated most of 2004 all the way back to late May and which included the last four weeks of the year.

For 2005 so far, the index is off 0.70%, having widened out from the previous week's 0.49% year-to-date loss. The index's spread over Treasuries increased to 363 basis points from 357 basis points the week before, while its yield to worst rose to 7.24% from 7.14% the week before.

In that previous week, Banc of America Securities did not officially publish its index, due to the abbreviated session on Jan. 14 ahead of the full market closure on Jan. 17 for the Martin Luther King Day holiday, but it did make its raw data available to Prospect News.

Large Cap Index down 0.30%

The more narrowly focused High Yield Large Cap Index continued to follow the same pattern as the HY Broad Market Index, down for a third straight week with a 0.30% loss, on top of the 0.53% retreat the week before.

Like the HY Broad Market Index, Large Cap had shown gains in most weeks in the latter part of 2004, including the last four weeks of the year. The total loss for 2005 so far widened to 1.02% from 0.73% the week before. Large Cap's spread over Treasuries rose to 353 basis points from 346 basis points, while its yield to worst also increased to 7.17% from 7.07% previously.

In the latest week, the more inclusive High Yield Broad Market Index tracked 1,687 issues of $100 million or more, up from 1,685 the week before, although the overall market value of the issues continued to decrease to $542.5 billion from $543.9 billion the previous week. The High Yield Large Cap Index, representing the most liquid portion of the high-yield world, meantime, tracked 611 issues of $300 million or more, unchanged from the week before, while total market value declined to $333.1 billion from $334.2 billion. B of A sees both as reliable proxies for the $750 billion high-yield universe.

Top tier credits outperform

On a credit-quality basis, the topmost of the three credit tiers into which B of A divides its index - those issues rated BB+ and BB, comprising 17.35% of the index - was the only one showing a positive return on the week, up 0.04%. This was followed by the middle credit tier - those issues rated BB-, B+ and B, making up 44.32% of the index - which was off 0.19%, with the lowest tier - those issues rated B- and below, accounting for 38.34% of the index - lagging behind with a 0.36% loss.

It was the second consecutive week the three tiers finished in that order. The week before, the top tier had the smallest loss (down 0.02%), followed by the middle tier (down 0.26%) and then the lower tier (down 0.64%). The recent emergence of the top tier and the weak showings by the bottom tier breaks the previous pattern, which saw the lowest tier as the best performer for four weeks in a row, five weeks out of the previous six and nine weeks out of the prior 10.

B of A analysts, noting the continued softness of the indexes, pointed out that in the most recent week, high-yield mutual funds saw outflows of $446 million, with a year-to-date loss from the funds of $572 million. The funds are considered a generally reliable barometer of overall junk market liquidity trends. They also observed that primary activity during the week was relatively light, with five deals totaling $775 million having priced through Thursday. However, the analysts predicted that this week would be busy, with $5.5 billion on the forward calendar.

Most sectors in the red

Sixteen out of the 23 industry sectors into which B of A divides its high-yield universe had negative returns in the latest week, versus seven in positive territory. This was something of an improvement from the previous week, when just one sector was in the black and the 22 showed losses. The negative trend seen in the positive /negative sector split since the start of the year represents a substantial reversal of the pattern that had been in effect for most of the previous weeks, when all or nearly all of the industry sectors had shown positive returns.

Transportation worst for week

For a third straight week, the transportation sector was clearly the worst performer, losing an even 2%, on top of the 1.77% loss seen in the week ended Jan. 13 and the 0.83% downturn in the week ended Jan. 6. It was also the fourth week in the last five in which the group, heavy with volatile airline bonds, had posted the largest loss. This was quite a contrast to the surprising strength the sector had shown through much of the last quarter of 2004, when it was consistently the most robust sector, bounding back from large losses suffered earlier in the year.

Utilities (down 0.52%) was the second-worst performer in the latest week. It was the third straight week in which the sector was on the Bottom Five list of worst-performing groups, having lost 0.80% in the week ended Jan. 13 and 0.72% in the week ended Jan. 6.

Cable/DBS operators (down 0.45%), consumer durables companies (off 0.38%) and technology (down 0.30%) rounded out the Bottom Five list in the latest week. Cable/DBS had also been among the biggest losers the previous week, when the sector was down 1.17%. Technology had actually been among the Top Five best performers the week before, when it lost 0.04% - a considerably smaller loss than most other sectors - but it has now been in the Bottom Five for two weeks out of the last three, including its 0.56% loss in the Jan. 6 week.

Steel sector tops for week

On the upside, steel was the best performer of a weak lot, posting a 0.12% gain. The week before, chemicals, with a 0.06% return, had been the sole industry sector finishing in the black.

Entertainment (up 0.09%), consumer non-durables companies (up 0.08%), lodging (up 0.07%) and finance (up 0.06%) rounded out the latest week's Top Five list. Consumer non-durables had also been among the Top Five the week before, when its 0.04% loss was among the smallest in the index. Finance has now been in the Top Five for two weeks out of the last three.

Transportation top loser of year

On a year-to-date basis, transportation deepened its loss to 4.51% so far this year from 2.56% the week before, as the sector has seemingly returned to the unenviable position that it held for most of 2004 when it posted a sizable cumulative loss for most of the year. Even its strong rebound in the last quarter of the year still left the sector with the smallest return of any sector in 2004, at 4.74%.

Utilities, hurt by three straight weeks among the Bottom Five, extended its year-to-date loss to 2.06% from 1.55% the week before. Cable/DBS names are down 1.61% on the year, widening out from 1.16% the week before, and wireline telecommunications' 2005 showing worsened to 1.16% from 0.99% the previous week.

PCS/Cellular strongest for year

On the upside, the PCS/cellular sector remains the strongest so far this year, although its 0.73% cumulative return came in slightly from 0.75% the week before. Advertising-dependent media declined to 0.19% from 0.24%. Finance, which rose slightly to 0.07% from 0.01%, is the only other sector in positive territory so far this year.

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