Banc of America High Yield Broad Market Index jumps 0.78%; year-to-date return rises to 7.71%

By Paul Deckelman

New York, Nov. 1 - The Banc of America Securities High Yield Broad Market Index resumed its winning ways in a definitive manner in the week ended Thursday, rising 0.78%, to bring its year-to-date return to 7.71%, its peak level for 2004 so far.

That represented a sharp improvement from the 0.03% decline, and the 6.88% cumulative return, recorded the previous week ended Oct. 21.

The previous high point on a year-to-date basis had been 6.69%, seen in the week ended Oct. 14.

The index has now risen in three weeks out of the past four, 11 weeks out of the last 13, and 20 weeks out of the last 24, a mostly positive stretch that dates back to late May, when the index began to bounce strongly back from a prolonged negative streak which had put it into the red during much of the first part of the year.

In the latest week, the index's spread over Treasuries narrowed considerably, to 413 basis points, from 442 basis points the week before, while its yield to worst declined to 7.36% from 7.59%.

Large Caps up 0.90% for week

The more narrowly focused High Yield Large Cap Index continued to follow the same pattern as the HY Broad Market Index, also posting a sharp gain in the most recent week, to more than make up for the small loss the week before. It jumped 0.90%, versus the 0.05% loss in the week ended Oct. 21. The year-to-date return likewise zoomed to 7.41%, a new 2004 peak, from 6.45% the week before. The prior peak level for 2004 had been 6.50% in the week ended Oct. 14.

Like the HY Broad Market Index, Large Cap's spread over Treasuries came in sharply, declining 33 basis points to 394 basis points from 427 basis points the week before. Its yield to worst likewise narrowed to 7.23% from 7.50% previously.

In the latest week, the more inclusive High Yield Broad Market Index tracked 1,662 issues of $100 million or more, well up from 1,642 the week before, as the market value of the issues soared to nearly $530.6 billion from just under $515.9 billion the previous week. The High Yield Large Cap Index, representing the most liquid portion of the high-yield world, meantime tracked 595 issues of $300 million or more, up from 589, as total market value rose to $322.2 billion from $311.6 billion the week before. B of A sees both as reliable proxies for the $750 billion high-yield universe.

Lowest tier outperforms

On a credit-quality basis, the lowest of the three credit tiers into which B of A divides its index - those issues rated B- and below, accounting for 40.01% of the index - had the best return, gaining 0.96%. The topmost credit tier (issues rated BB+ and BB, comprising 15.78% of the index) and the middle credit tier - those issues rated BB-, B+ and B, making up 44.21% of the index - both returned 0.66% on the week. The week before, the middle tier led with a 0.05% return, while the lowest tier lost 0.07% and the top tier fell 0.14%.

B of A analysts, analyzing the rally, said that the index's "strong performance" was "powered by positive earnings reports and a runup in Delta [Air Lines Inc.'s] bonds on the back of the company's successful negotiations with its [pilots'] union." While the supply of new bonds that priced during the week since release of the previous index increased to $1.78 billion from $1.1 billion the week before, new-issue volume, they said, "remains modest."

On the demand side, they noted the "small" net inflow of $56.5 million in the week ended last Oct. 27, as reported by AMG Data Services, but said that while the size of the inflow was "minuscule" compared with the overall assets of the funds, the fund-flow trend has been positive over recent weeks, "underscoring the growth in demand."

All 23 of the industry sectors into which B of A divides its junk bond universe had positive returns in the latest week, in line with the trend lately of broad-based strength in the index, which has seen either all of the sectors or almost all of them in the black over most of the recent weeks. It did mark, however, a considerable improvement over the previous week's unusual deviation from that norm, which saw 13 of the 23 sectors positive, eight sectors having negative returns and two others finishing absolutely flat, neither up nor down.

The volatile transportation sector continues to be a roller-coaster, rising and falling with the performance of the airline bonds in general and, in this case, Delta in particular. The transportation bonds - which had been propelled skyward in the week ended Oct. 14 by a whopping index-best 3.12% return, only to plummet back to earth in the week ended Oct. 21 with an index-worst 2.03% loss after Delta and the other major carriers reported losing money by the planeload in the industry's historically profitable third quarter - were once again rocketing upward by an eye-opening 5.94% in the week ended Oct. 28. The bonds were again given lift by Delta's labor agreement news. In the previous week, gaming had been the best finisher, with a 0.48% return.

Transportation strongest for week

The transportation sector's gain was more than three times the size of the next largest advance, steel's 1.79% increase. Cable/DBS (up 1.21%), finance (up 1.03%) and consumer durables (up 0.98%) rounded out the latest week's Top Five list of best-performing sectors. That was a big turnaround from the week before, when, in addition to transportation, the consumer durables, finance and steel sectors had all been among the Bottom Five worst finishers - consumer durables and steel for a second consecutive week - with losses of 1.06%, 0.89% and 0.46%, respectively.

On the downside, as has been the case several times in the past few months of mostly advances, there was no downside in the strictest sense in the latest week, with no sectors actually finishing in the red.

Utilities weakest for week

Utilities had the smallest return in the index, 0.39%, followed by healthcare and energy (both up 0.45%), industrials (up 0.48%) and non-ferrous metals and mining (up 0.49%) to round out the latest week's Bottom Five. Industrials had actually been among the Top Five the week before with a smaller return (0.36%) than they had this past week.

On a year-to-date basis, the steel sector's solid second-place finish in the Top Five boosted its cumulative return to 14.25% from 12.24% the week before, opening a yawning gap over non-ferrous metals and mining companies, still in second place but with their weak Bottom Five showing only pushing them up to 12.46% from 11.91%, leaving them far behind the resurgent steelers.

Also showing some notable year-to-date strength was the chemical sector, at 12.11%, up from 11.04% the week before. Consumer non-durables, energy and industrials all pushed into double-digit returns, with Top Fiver consumer non-durables rising to 10.42%, up from 9.84% previously; energy at 10.42%, up from 9.90%; and industrials at 10.22%, up from 9.69%, even though the latter two sectors were among the Bottom Five weakest finishers this week. Consumer non-cyclicals rose to 9.91% from 9.35%, while lodging was up to 9.08% from 8.40%.

On the downside, the transportation sector's stunning Top Five best gain slashed its year-to-date deficit nearly in half, to just 5.96% - the lowest its been in months - from an 11.23% 2004 loss the week before. No other industry sector shows a loss for the year to date.

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