B of A High Yield Broad Market Index up 0.20%; year-to-date return improves to 2.88%

By Paul Deckelman

New York, Aug. 9 - The Banc of America Securities High Yield Broad Market Index gained 0.20% in the week ended Thursday Aug. 5, getting back on the winning track after a one-week interruption to its recent positive trend; the index had fallen 0.42%in the week ended July 29, which broke a seven-week winning streak that had stretched back to early June.

The market measure has now been up in 10 of the last 12 weeks - and the other down week in that stretch saw just a tiny 0.04% loss in the June 3 week - as the index has continued its slow but steady recovery from the pronounced downturn it had suffered in late April and early May.

The gain in the latest week brought the index's year-to-date return up to 2.88% from to 2.67% in the previous week, although it still remains below the recent peak of 3.11%, seen two weeks earlier.

In the latest week, the index's spread over Treasuries widened to 469 basis points from 456 bps the week before. Despite the better performance of high-yield bonds, Treasuries cut yields and posted firm gains on weak economic data reported last week. The index's yield to worst tightened to 8.16% from 8.18%.

The more narrowly focused High Yield Large Cap Index continued to follow pretty much the same pattern as the High Yield Broad Market Index, also posting a 0.20% gain in the latest week, against a 0.53% loss the week before - which had also broken a seven-week upward spiral. On a year-to-date basis, Large Cap's cumulative 2004 return rose to 2.07% from 1.87% the week before.

Large Cap's spread over Treasuries widened out to 460 bps from 447 bps the week before, the gain in Treasuries overshadowing the modest gain in the junk index's measure. Its yield to worst meantime was 8.15%, little changed from 8.14% previously.

In the latest week, the more inclusive High Yield Broad Market Index tracked 1,652 issues of $100 million or more as the total market value of the issues grew to $505.6 billion from $504.8 billion the week before, while the High Yield Large Cap Index, representing the most liquid portion of the high yield world, tracked 590 issues of $300 million or more. Its total market value grew to $304.3 billion from $302.8 billion the week before. B of A sees both as reliable proxies for the $750 billion high yield universe.

Middle credits perform best

On a credit basis, the middle tier of the three credit tiers into which B of A divides its index (consisting of those issues rated BB-, B+ and B and making up 45.30% of the index) had the best performance, returning 0.44%. This was followed by the topmost tier - those issues rated BB+ and BB, comprising 14.61% of the index - which was up 0.34%. Bringing up the rear for a second straight week was the lowest tier (issues rated B- and below, accounting for 40.09% of the index), which lost 0.12%. In the previous week, when all of them had been in the red, the top tier had a 0.30% loss, followed by the middle tier, with a 0.42% loss, and then the lower tier, which lost 0.47%.

B of A analysts noted that as the index got back in the black in the latest week the new-issue market "revved up," with 11 issuers raising $3.4 billion in the week through Thursday, well up from the prior week's $1.3 billion, making this past week about the busiest since early May. The analysts also noted that the widely followed AMG high yield mutual fund-flow statistics eased for a second straight week, although the $29 million outflow was quite small compared with the previous week's outflow in the market liquidity measure of $358 million.

Nineteen of the 23 industry sectors into which B of A divides its junk bond universe were in the black in the most recent week, a decided reversal of the week before, when all 23 industry groupings were in negative territory.

Transportation, wirelines drop

Most of the gains and losses were moderate, except for the two worst performers - transportation, which plummeted 2.78% and wireline telecommunications, which swooned 1.08%.

The transportation sector, which continued to be dragged down by the troubled airline industry's volatile bonds, was the biggest loser for a second consecutive week, following the previous week's 1.92% nosedive. The transportation group - which had actually turned in several sporadic weekly gains in June and July when it appeared that the airlines' troubles might be moderating - is thus now firmly established in its more usual position at or near the bottom.

Wireline telecom had also been in the Bottom Five group of worst performing sectors the week before, when it lost 0.65%.

Healthcare (down 0.21%), entertainment (down 0.10%) and cable/DBS (up 0.05%, the smallest gain of any sector finishing in the black) rounded out the latest week's Bottom Five. The week before, cable/DBS had been in what passed for a Top Five grouping of the least-weak finishers, with a 0.28% loss, one of the smaller deficits recorded that week.

Utilities perform best

On the upside, utilities generated the most power of any sector, firming 0.65%. Publishing, with a 0.11% loss, smallest in the index, had "led" the sectors the previous week.

Steel had the second-best finish this past week, 0.60%, returning to the sector's recent pattern of strong returns (on the Top Five list of best performers now in five of the last seven weeks, and the strongest finisher in two of those weeks) and proving that the previous week's showing, when it was the second-worst performer of all sectors, with a 1.81% loss, must have been a fluke.

Energy (up 0.53%), chemicals (up 0.51%) and consumer durables companies (up 0.49%) rounded out the most recent week's Top Five.

Steel #1 year to date

On a year-to-date basis, the steelmakers, helped by their second-best showing in this week's Top Five, continue to show the best return, fattening their cumulative gain to 7.66% from 7.02% the week before. That widened the steelers' lead over the non-ferrous metals and mining group, whose return improved more moderately, to 7.13% from 6.91% the week before.

Other groups showing year-to-date strength include consumer non-durables companies, although their return merely inched up to 6.83% from 6.77%; Top Five finisher chemicals (now up to 5.77% from 5.23%); consumer non-cyclicals (up 5.74% from 5.47%); industrials (up to 5.64% from 5.27%); and Top Fiver energy (jumping to 5.29% from 4.74%).

On the downside, transportation's second consecutive horrendous index-worst performance this past week solidifies its status as the worst performer year to date, with its cumulative loss ballooning to 12.98% from 10.49% the week before. Wireline telecom remains a distant second-worst on a year-to-date basis, its second straight Bottom Five showing pushing its loss for the year up to 5.67% from the previous week's 4.64%. Cable/DBS operators also remain in the red for the year, although their slight gain - small enough to keep them in the Bottom Five - did shave their deficit marginally to 0.72% from 0.77%.

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