B of A High Yield Broad Market Index inches up 0.02%, year-to-date gain increases to 23.24%

By Paul Deckelman

New York, Oct.27 - The Banc of America High Yield Broad Market Index crept up 0.02% in the week ended Thursday Oct. 23. While the performance was essentially flat, technically speaking, it was the 10th consecutive weekly gain, although the cumulative 2003 return only edged up slightly to 23.24% - still, its highest point for the year so far.

In the previous week, ended Oct. 16, the index had risen 0.75%, for a year-to-date return of 23.22%.

In the latest week, the index's spread over Treasuries widened considerably to 557 basis points from 537 bps the previous week, its low for the year so far, as Treasuries firmed while junk merely spun its wheels. The index's yield-to-worst meanwhile also rose, to 8.57%, from a year's low 8.50% the week before.

B of A's High Yield Large Cap Index showed its first loss in weeks, losing 0.14% in the latest week, versus the 0.87% gain the week before. Large Cap's year-to-date return eased in the latest week to a still-impressive 26.05% from 26.22% - its peak level for the year - in the week ended Oct. 16. In the latest week, the spread over Treasuries - which had fallen below the psychologically significant 500-basis point mark to a new low for the year at 498 bps in the Oct. 16 week - widened out to 521 bps in the most recent week, while the yield-to-worst increased to 8.33%, up from the previous week's 8.22%, the year's-low 8.22%.

In the latest week, the more inclusive High Yield Broad Market Index tracked 1,595 issues of $100 million or more, having a total market value of nearly $480 billion, while the High Yield Large Cap Index, representing the most liquid portion of the high yield world, tracked 553 issues of $300 million or more having an aggregate market value of over $290 billion. B of A sees both as reliable proxies for the more than $700 billion high yield universe.

Banc of America Securities analysts noted that the "relatively flat" showing in the junk market came about when "gains from the early part of the week were wiped out by negative returns in the latter half," with the high yield market weighed down toward the end of the week by a weaker equity market and negative earnings results and warnings from some issuers.

Helping prop the market up to some degree was the fact that investors continued to inject cash, illustrated by the fifth straight rise in the weekly high yield mutual fund flow numbers compiled by AMG Data Services, as $212.3 million more came into the junk funds - a key gauge of overall market liquidity trends - than left them in the week ended this past Wednesday (Oct. 22). At the same time, the analysts noted, new-issue supply "slowed down a bit," with about $1.3 billion of new total proceeds having priced by Thursday, versus the previous week's $2.3 billion.

On a credit basis, the highest of the three credit tiers into which B of A divides its index - representing credits rated BB and BB+ and comprising 15.25% of the index - had the best return on the week and the only one that outperformed the market, with a 0.54% gain. This was followed by the middle credit tier (those issues rated BB-, B+ and B, making up 49.13% of the index), which eased by 0.01%. The lowest tier (issues rated B- and below, accounting for 35.62% of the index), had the weakest return, down 0.17% for the week. The order of finish - highest, middle, lowest - reversed the pattern which had been seen in the previous two weeks.

Advancing sectors continued to outnumber decliners, although the 17-10 split in the latest week represented a sharp pullback from the across-the-board strength seen the previous week, when advancing issues made a clean sweep of all 27 industry sectors into which Banc of America Securities divides its high yield universe.

The best performing sector on the week was technology, which returned 1.09% as Lucent Technologies Inc. bonds firmed after the telecommunications equipment maker reported a $99 million profit in its fiscal fourth quarter - the first profit in three years and a sharp turnaround from the year-ago loss of $2.81 billion. Lucent's bonds were up three to five points on average on the news, with its benchmark 7¼% notes due 2006 up three points on the week to par bid. In the previous week, transportation names (particularly the airlines) had led all sectors, with a 3.14% gain.

Paper and packaging credits gained 0.61% in the latest week, second-best in the index, as Georgia-Pacific Corp. bonds rose an average of nearly two-and-a-quarter points on the Number-2 U.S. paper maker's $189 million third-quarter profit, nearly triple its year-earlier results. Georgia-Pacific's 8 7/8% notes due 2010 were two-and-a-half points higher, ending at 112.

International cable operators (up 0.55% on firmness in British Sky Broadcasting), entertainment (up 0.54%) and lodging (0.46% better) rounded out the Top Five list of best performing sectors in the most recent week; the week before, when all 27 industry sectors showed positive returns, international cable had the smallest, at 0.15%.

On the downside in the most recent week, PCS/cellular names were the worst performers, off 0.69% as junk wireless names - particularly affiliates of the investment-grade industry leaders - softened in the wake of weak subscriber addition and churn numbers reported by the likes of Sprint and by AT & T Wireless. Triton PCS Inc. bonds lost nearly three points on the week, its 8½% notes due 2013 down two-and-three-quarter points at 105.75. As already noted, the international cable operators had been the weakest performer the week before - when PCS cellular names had meantime been among the best finishers, with a 1.07% gain).

North American cable operators were down 0.56% in the latest week, as Insight Communications Co.'s zero-coupon/12¼% notes due 2011 lost four points after Moody's Investors Service cut its senior unsecured ratings to Caa2 from Caa1 previously and lowered the Midwestern cable company's speculative grade liquidity rating to SGL-3 from SGL-2.

Utilities (down 0.41%, weighed down by declines in Reliant Resources Inc., Calpine Corp. and Dynegy Inc.), consumer durables (down 0.37%) and chemicals (down 0.34%) rounded out the Bottom Five list of the week's worst performing sectors. In the previous week, chemicals had made the Top Five, with a 1.19% return.

On a year-to-date basis, international wireline telecom's cumulative gain of 70.44% was essentially unchanged from the week before, while second-place international wireless telecom eased slightly to a 65.43% total return, down from 65.49% previously.

The steelmakers remained the only one of the 27 industry sectors in the red for the year-to-date, its cumulative loss narrowing ever so slightly to 2.10% from 2.13% the previous week.

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