B of A High Yield Broad Market Index up 0.59% in week, 2004 gain increases to 1.93%

By Paul Deckelman

New York, Jan. 20 - The Banc of America High Yield Broad Market Index returned 0.59% in the week ended Thursday Jan. 15 - its 22nd consecutive weekly gain, and second in as many weeks since the start of the new year, following the 1.33% jump which the index took in the previous week, ended Jan. 8.

The index's year-to-date return fattened to 1.93% from 1.33% the week before. The index had gained a stunning 28.88% in 2003 and its upward momentum seems to be continuing unabated.

However, the recent trend of narrowing spreads over Treasuries was temporarily halted, as yields on the government issues fell sharply in response to unexpectedly weak December non-farm payrolls news. In the latest week, despite its overall gain, the High Yield Broad Market Index's spread widened out to 471 basis points from 459 bps the previous week, the 2004 low so far. But the index's yield-to-worst continued to narrow, to 7.35% from 7.47% the week before

B of A's High Yield Large Cap Index showed a similar pattern of strong movement, even as the spread over Treasuries widened out. In the week ended Thursday, it returned 0.48%, its 12th consecutive weekly gain and second for 2004, following the prior week's 1.63% bulge. The cumulative return for 2004 meanwhile pushed up to 2.12% from 1.63%. The index posted a stellar 32.62% cumulative return in 2003.

Large Cap's spread over Treasuries - like that of the High Yield Broad Market Index - widened out a bit in the latest week, to 439 basis points, up from 421 bps the week before, but the yield-to-worst narrowed to 7.15% from 7.22%.

In the latest week, the more inclusive High Yield Broad Market Index tracked 1,632 issues of $100 million or more having a total market value of over $507 billion, while the High Yield Large Cap Index, representing the most liquid portion of the high yield world, tracked 563 issues of $300 million or more having a total market value of over $305 billion. B of A sees both as reliable proxies for the $750 billion high yield universe.

Banc of America Securities analysts noted that the high yield market continues to show a "firm tone," while the pace of the primary segment picked up, with some $3.4 billion in 15 deals priced in the week ended Thursday - the busiest week since the week of Dec. 8, when close to $5 billion of new bonds appeared. They also acknowledged demand for high yield paper "remained strong as well," with high yield mutual funds reporting an inflow of $396 million in the week ended last Wednesday, as measured by AMG Data Services, whose weekly fund-flow statistics are seen by market participants as a key barometer of overall junk market liquidity trends.

On a credit basis, highest of the three credit tiers into which B of A divides its index - those credits rated BB and BB+ and comprising 15.65% of the index - showed an index-best 0.81% gain, followed by the lowest credit tier (issues rated B- and below, accounting for 37.86% of the index), which returned 0.61%. Bringing up the rear was the middle credit tier, consisting of those issues rated BB-, B+ and B and making up 46.49% of the index, which returned 0.49%. In the previous week, the lower tier led the way with a 2.00% gain, followed by the middle tier (1.03%) and the top tier (0.69%).

The overall index advance remains broad-based, with 22 out of the 23 industry groups into which B of A divides its high yield universe posting gains for the week and only one - cable/DBS operators - finishing in the red (and even then, just barely, with a 0.05% decline). The previous week had seen a clean sweep, with all 23 subsectors in the black.

The cable/DBS's weak performance was a sharp turnaround from the week before, when it had been the strongest of all subsectors, with a 2.52% return. In the latest week, that index-best position was waken over by non-ferrous metals and mining, up 1.89%, a far better return than any other grouping. In the week ended Jan. 8, the non-ferrous metals and mining group was on the Bottom Five list of the week's weakest finishers, with a relatively restrained 0.44% gain.

Transportation (up 1.03%), consumer non-cyclical companies (up 0.99%), energy (up 0.85%) and PCS/cellular operators (up 0.82%) rounded out the latest week's Top Five list of the best performers. In the previous week, PCS/cellular has been a Top Five name, gaining 1.99%, while energy had been among the laggards, up only a relatively sedate 0.75%

On the downside, apart from the negative return posted by cable/DBS as it went from first to worst, as noted, the other names among the Bottom Five merely turned in weaker-than-average gains. Business services (up 0.22%), finance (up 0.30%), technology (0.35% better) and advertising-dependent media (0.37% ahead) rounded out the list of the week's weakest areas. The tech names had been among the top finishers the week before, with a 2.38% return.

On a year-to-date basis, PCS/cellular, on the strength of two straight weeks in the Top Five, has taken over as the leader, with a cumulative return of 2.82%, dethroning first-week leader cable/DBS, whose small, but index-worst, loss this past week dropped it back to a 2.47% return. That also puts it behind wireline operators, which have returned 2.56% so far.

Steel, despite a respectable 0.81% gain in the week, remains the weakest cumulative name so far, at 0.94%, chiefly because its performance in the first week, just 0.14% lagged the rest of the index so badly. Steel was also the weakest finisher of 2003, its 11.35% final return - due to a very strong December - the smallest of any grouping.

Business services, on the Bottom Five list in the most recent week, remains only slightly ahead of the steelers, with an anemic 1.17% year-to-date return so far.

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