B of A High Yield Broad Market Index up 0.52%; year-to-date return 9.39%

By Paul Deckelman

New York, Nov. 22 - The Banc of America Securities High Yield Broad Market Index gained for a fourth consecutive week, returning 0.52% in the week ended Thursday Nov. 18, up from 0.22% the week before (ended Wednesday, Nov. 10, due to the market having been closed the following day for the Veterans' Day holiday).

The latest week's gain boosted the index's year-to-date return to 9.39%, a new peak level for 2004. That was up from the prior week's 8.83% return and from the old year-to-date mark of 8.88%, seen in the week ended Nov. 4 (B of A explained that the Nov. 10 week's cumulative 2004 return lagged the previous week's even though the index had a modest advance due to a statistical quirk arising from its use of a different method of calculation in the Nov. 10 week because of the holiday market closure).

Including the latest weekly result, the index has now risen in six weeks out of the past seven, 14 weeks out of the last 16, and 23 weeks out of the last 27, 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.

The index's spread over Treasuries narrowed to 371 basis points, unchanged from the week before, while its yield-to-worst narrowed slightly to 7.10% from 7.16% week before.

The more narrowly focused High Yield Large Cap Index continued to follow the same pattern as the HY Broad Market Index, posting a fourth straight weekly gain, rising 0.59% on top of the previous week's more modest 0.12% advance. The year-to-date return increased to a new 2004 peak level of 9.19% from 8.55%, and up as well from the previous high-water mark of 8.75% in the Nov. 4 week (the Nov. 4 Large Cap HY results were affected by the same statistical anomaly as the HY Broad Market index). Large Cap's spread over Treasuries widened slightly, to 354 basis points over Treasuries from 351 bps, although its yield to worst actually declined to 6.99% from 7.03% previously.

In the latest week, the more inclusive High Yield Broad Market Index tracked 1,657 issues of $100 million or more, down from 1,664 the week before, while the overall market value of the issues declined to $534 billion from $536 billion the previous week. The High Yield Large Cap Index, representing the most liquid portion of the high yield world, meantime tracked 592 issues of $300 million or more, off slightly from 595 the previous week, with total market value dipping to just under $324 billion from $325.5 billion. B of A sees both as reliable proxies for the $750 billion high yield universe.

Weakest credits show best returns

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 40.47% of the index - had the best return for a third straight week, gaining 0.82%. However, the topmost credit tier (issues rated BB+ and BB, comprising 15.77% of the index) finished a respectable second with a 0.54% return. The middle credit tier - those issues rated BB-, B+ and B, making up 43.77% of the index) was last with a 0.23% return. In the previous week, the lowest tier led the way with a 0.47% gain, followed by the middle tier with a 0.12% return, while the top tier lost 0.13%, the same order of finish it had the week before (ended Nov. 4).

B of A analysts noted that while the index posted a gain in the latest week, "it did so on below-average volume, as the market's focus was on new issuance. They noted that as of the close Thursday, $4.3 billion had been raised in 20 deals, "as issuers rush in before the upcoming Thanksgiving holiday." The primary sector, with over $3 billion more expected to price Friday, was on track to become the busiest week of the year in terms of new-issue volume, eclipsing the $7.1 billion mark set back in March.

On the demand side, the analysts observed that a relatively small $73.5 million inflow to high-yield mutual funds was seen in the week ended Wednesday - much less than the $601 million seen in the prior week. Still, they said, it was the fourth straight week in which more money came into the finds than left them, according to AMG Data Services, whose statistics are considered a reliable barometer of overall junk market liquidity trends.

All sectors gain, transportation top

All 23 of the industry sectors into which B of A divides its junk bond universe had positive returns in the latest week, compared with 20 out of the 23, with three negatives, in the week ended Nov. 10. Both weeks' results are 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.

In the most recent week, the transportation sector made it two big, index-leading gains in a row, returning 2.48% on top of the previous week's 2.28% showing. The group has now been among the Top Five best finishers in five weeks out of the last six, dating back to Oct. 14, and has led all comers in four of those weeks, including the latest. Transportation's gains have been driven by the volatile airline component, which has strongly rebounded now that troubled Delta Air Lines Inc. has gotten its pilots to agree to $1 billion in pay cuts and seems to be making progress in its efforts to get some of its debtholders to agree to an exchange offer that would do away with at least a portion of its $20 billion debt load.

Wireline telecommunications operators (up 1.16%) were the second-best finishers, followed by cable/DBS operators (up 0.96%), entertainment (up 0.74%) and utilities (up 0.66%). In the previous week, utilities had been the second-strongest sector with a 0.64% rise; the group has now been in the Top Five for three straight weeks. The cable/DBS names on the other hand, had been the single worst performer in the Nov. 10 week, losing 0.68%.

Paper and packaging shows smallest rise

On the downside, with all 23 sectors finishing in the black this past week, the Bottom Five list of the weakest finishers merely holds those whose gains were much smaller than the other groupings.

Chief among these was paper and packaging, which gained just 0.09%, to take over from cable/DBS as the week's worst performer. Energy (up 0.10%), finance (up 0.18%), business services (up 0.21%) and lodging (up 0.22%) rounded out the latest Bottom Five. The week before, finance had made the Top Five for a third consecutive week, with a 0.59% gain. Lodging, though, had been among the worst performers, with a 0.09% loss, and the sector has now been in the Bottom Five for three consecutive weeks.

Steel first year to date

For the year to date, the steel sector continues to have the best return, 15.83%, up from 15.12% the week before.

The chemical sector remained in second place, with a return of 13.77%, up from 13.19%, followed by non-ferrous metals and mining, which increased its cumulative return to 13.15% from 12.82%.

Other sectors showing double-digit year-to-date strength included consumer non-durables, rising to 11.45% from 11.04% the week before; consumer non-cyclicals, up to 11.40% from 10.96% the week before; industrials, which firmed to 11.35% from 11.02%, and finally, energy names, whose Bottom Five finish kept its total return from growing to more than 11.13% from 11.02% the week before.

The transportation sector's continued recent strong showing - exemplified by its second-straight index-topping performance this past week and its string of recent Top Five finishes - has finally lifted its year-to-date return back into positive territory, at 0.02% from its 2.40% loss the week before. As recently as the week ended Sept. 30, the transportation group had a yawning cumulative loss of as much as 12.29% for the year.

With transportation back in the black, no industry sector shows a loss for the year-to-date.

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