B of A High Yield Broad Market Index up 0.62%; year-to-date return improves to 5.74%

By Paul Deckelman

New York, Sept 20 - The Banc of America Securities High Yield Broad Market Index rose another 0.62% in the week ended Thursday Sept. 16, its seventh consecutive weekly advance. This brought the index's year-to-date return to 5.74%, a new 2004 high. The week before, the index had gained 0.39%, for a cumulative return of 5.09%, the high point for the year up to that point.

Besides being the seventh consecutive weekly advance, the latest week's gain was also the fourteenth in the last 15 weeks and sixteenth in the last 18 weeks. Since late May, when it was coming off a prolonged negative stretch which had put it into the red, the index has strongly turned back into positive territory.

In the latest week, the index's spread over Treasuries actually increased slightly despite the gain, to 449 basis points from 448 bps previously, as Treasuries outperformed other fixed-income markets, although its yield-to-worst continued to tighten, to 7.65% from 7.76%.

The more narrowly focused High Yield Large Cap Index continued to largely follow the same pattern as the HY Broad Market Index, rising 0.67% in the latest week on top of the 0.46% gain the week before. Year to date, Large Cap's cumulative 2004 return rose to 5.33%, its new peak level for 2004, from 4.63% the week before, which had been the previous high point.

Large Cap's spread over Treasuries was unchanged from the week before, at 432 bps, while its yield-to-worst meantime improved to 7.54% from 7.67% previously.

In the latest week, the more inclusive High Yield Broad Market Index tracked 1,644 issues of $100 million or more, as the total market value of the issues rose to nearly $512 billion from $510.7 billion the week before. The High Yield Large Cap Index, representing the most liquid portion of the high yield world, meantime tracked 590 issues of $300 million or more; total market value increased to $309.3 billion from $308.2 billion the week before. B of A sees both as reliable proxies for the $750 billion high yield universe.

Weakest credits best again

On a credit-quality basis, the lowest of the three credit tiers into which B of A divides its index (issues rated B- and below, accounting for 40.14% of the index) had the best return for the fifth consecutive week, with a 0.66% gain. For a second straight week, the topmost credit tier - those issues rated BB+ and BB, comprising 14.98% of the index - had the next-best return, 0.61%, followed closely by the middle credit tier (consisting of those issues rated BB-, B+ and B and making up 44.88% of the index), just a step behind at 0.59%. In the previous week, the lowest tier returned 0.49%, the top tier 0.33% and the middle tier 0.32%.

B of A analysts noted that once again, the strongest performance was turned in by issues rated CCC and below, which returned 0.76%. The single-B and BB names returned 0.60% and 0.56%, respectively.

They also pointed out that while new-deal activity was limited, with four offerings having priced as of last Thursday's close, collectively worth $938 million in proceeds, "the forward calendar continues to build," increasing to 19 upcoming deals potentially totaling $5.2 billion as of the close Thursday. On the demand side, the analysts noted that the AMG high yield mutual funds- flow number was a $258 million inflow, its fourth straight influx. A total of $919 million more has come into the funds - a key barometer of overall junk market liquidity trends - than has flowed from them over the past four weeks.

With such favorable technical factors at play, the overall advance remains broad-based, with 22 of the 23 industry sectors into which B of A divides its junk bond universe having positive returns in the most recent week, following the previous week's 21-2 positive split.

Wireline top performers

For a second straight week, wireline telecommunications operators were the strongest performers, returning 1.17% on top of the previous week's index-best 0.75% gain.

Utilities were the second-best performers for a second straight week, barely missing the top spot itself with a 1.16% return, a shade behind wireline. In the previous week, the utilities had also been Number Two, with a 0.63% return.

Chemicals (up an even 1%), steelmakers (up 0.97%) and three sectors all tied at 0.70% - entertainment, non-ferrous metals and mining and advertising-dependent media - rounded out the Top Five list of the strongest performing sectors in the most recent week. The week before, chemicals (up 0.57%) and non-ferrous metals and mining (up 0.63%) had been in the Top Five; chemicals have now been there for three straight weeks. On the other hand, entertainment, with a gain of just 0.03%, had been on the Bottom Five list of the weakest finishers in the week ended Sept. 9.

Transportation sole loser

In the most recent week, only one sector in the Bottom Five actually had a loss - transportation, down 0.03%. The week before, transportation had actually managed a rare respectable gain of 0.55%, just missing Top Five status, and technology (down 0.14%) had been the weakest finisher.

All of the other names in the latest week's Bottom Five list were sectors with smaller gains than everyone else, including business services (up 0.11%), cable/DBS operators (up 0.19%), consumer durables companies (up 0.19%) and lodging companies (up 0.41%).

In the previous week, the cable/DBS sector had actually made the Top Five, with a 0.57% return, but the lodging group had been among the weakest performers, with a puny 0.06% gain.

Steel passes 10% YTD

On a year-to-date basis, their finish in the Top Five in the most recent week helped to push the steelmakers over the psychologically potent 10% return mark this past week, to 10.99%, well up from the prior week's 9.92% 2004 gain.

Non-ferrous metals and mining, in a three-way tie for the final spot in the Top Five this week, also topped 10% as they increased their second-place year-to-date return to 10.25% from 9.48% the week before.

The chemicals' sector's third straight weekly Top Five return pushed its year-to-date gain up to 9.34% from 8.28% previously.

Other groups showing notable year-to-date strength include consumer non-durables companies, which firmed to 8.47% from 7.96% the week before; industrials, (up to 8.10% from 7.44%); energy (8.02%, up from 7.34%), and consumer non-cyclicals (7.93% up from 7.28%).

On the downside, the transportation sector, weighed down as it is by the volatile bonds of the deeply troubled airline sector - remains mired in red ink year-to-date, its small loss in the most recent week slightly increasing its cumulative deficit to 12.05% from 12.03%. However, wireline telecom, helped by its second consecutive index-best return, sliced its cumulative loss to 2.20% from 3.32% previously. Those are the only two industry sectors in the red year-to-date.

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