B of A High Yield Broad Market Index off 0.13%, first loss in six weeks; year-to-date return eases to 9.42%

By Paul Deckelman

New York, Dec. 6 - The Banc of America Securities High Yield Broad Market Index saw its first loss after five straight weeks of gains, losing 0.13% in the week ended Dec. 2. That retreat followed the 0.29% return reported in the week ended Nov. 24.

(B of A did not officially publish its weekly High Yield Broad Market and High Yield Large Cap indexes that previous week due to the Thanksgiving Day holiday, which saw an early market close on Nov. 24 and Nov. 26 bracketing a full closure on Nov. 25, but it did make its raw data for the week available to Prospect News. Because of the Thursday market close, B of A calculated the index for the that week on a Wednesday-to-Wednesday basis, rather than the usual Thursday-to-Thursday calculation, meaning that while the prior-week results are roughly comparable to the latest week's figures, the comparison is not exact).

For the year to date so far, the HY Broad Market Index has returned 9.42%, down from 9.57%, its 2004 peak level, seen in the week ended Nov. 24.

Even including the latest weekly result, the index has still now risen in seven weeks out of the past nine, in 15 weeks out of the last 18, and in 24 weeks out of the last 29, an overwhelmingly 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 increased slightly to 356 basis points from 355 basis points the week before, while its yield-to-worst widened to 7.19% from 7.07% week before.

Large Cap loses 0.24% for week

The more narrowly focused High Yield Large Cap Index continued to follow the same pattern as the HY Broad Market Index, posting a modest decline after five straight weeks on the upside. It lost 0.24% in the latest week, versus the 0.32% gain in the week ended Nov. 24. The year-to-date return decreased to 9.12% from the previous week's 9.37%, its 2004 peak level. Large Cap's spread over Treasuries widened out to 344 basis points from 340 basis points, while its yield to worst rose to 7.12% from 6.97% previously.

In the latest week, the more inclusive High Yield Broad Market Index tracked 1,671 issues of $100 million or more, up from 1,665 the week before, while the overall market value of the issues increased to $539.2 billion from $537.5 billion the previous week. The High Yield Large Cap Index, representing the most liquid portion of the high-yield world, meantime tracked an even 600 issues of $300 million or more, up from 597 the previous week, with total market value rising to $329.1 billion from $327.7 billion. B of A sees both as reliable proxies for the $750 billion high-yield universe.

Lowest credit 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 40.22% of the index - had the best return for a fifth straight week, gaining 0.22%, the only one of the three tiers in positive territory. The middle credit tier (those issues rated BB-, B+ and B, making up 44.24% of the index) had a 0.35% loss for the week, while the topmost credit tier - issues rated BB+ and BB, comprising 15.54% of the index - had the worst showing, losing 0.43%.

The order of finish in the previous week was the lowest tier again leading the way with a 0.50% gain, followed by the top tier, with a 0.16% return, while the middle tier returned 0.14%.

Issuance activity strong

B of A analysts, while noting the index's small loss in the latest week, also pointed out that the new-issue market remained active, with six issuers having raised $2.324 billion by the close Thursday; combined with the more than $1.6 billion that was slated for Friday, they said, the week's new-issue supply was expected to exceed the year-to-date average weekly issuance volume up to that point of $2.297 billion.

For the first time in a long time, the number of industry sectors showing a loss well exceeded the number posting gains, 16-to-7, although many of the sectors showed only small gains or losses - as little as one or two hundredths of a percentage point. The week before, all of the 23 sectors into which B of A divides its junk bond universe into had shown positive returns for a second straight week, in line with recent pattern of broad-based strength in the index, with all, or nearly all sectors finishing in the black.

Transportation tops for week

Even though the index suffered a loss for the week, the only big sector movement was on the upside, as the transportation issues shot up 1.64%, propelled skyward by the recovering airline constellation, led by beleaguered Delta Air Lines Inc.; the carriers were rising in the most recent week as world crude oil prices, considered a significant leading indicator of the airlines' huge energy costs, were continuing to fall for most of the week, and finished the week around $42-43 a barrel, nearly 25% below the peak levels of more than $55 a barrel that they had reached in mid-October. It was the third week out of the last four in which the transportation sector clearly had the best showing of any group, the only exception being the Nov. 24 week's very modest 0.11% gain - small enough to list transportation among the Bottom Five weakest finishers. In that Nov. 24 week, wireline telecommunications operators had been the best-performing sector, up 0.73%. However, including the latest week's stellar performance, transportation has now finished among the Top Five strongest sectors in six weeks out of the last eight.

Chemical companies (up 0.16%) were a distant second among this latest week's best finishers, closely followed by industrials (up 0.15%). Technology (up 0.10%) and entertainment (up 0.08%) rounded out the latest week's Top Five list. Entertainment had also been among the best finishers the week before, when it gained 0.53%, and in fact has now been in the Top Five for three straight weeks. However, chemicals returned just 0.12% the week before, a small enough gain to land them in the Bottom Five, which was composed solely that week of sectors which had below-average gains, relative to the rest of the index.

Gaming sector worst for week

On the downside, gaming was the worst performer this past week, losing 0.60%. The week before, steel had been the cellar-dweller, with just a tiny 0.03% return.

Lodging was the second-worst finisher this past week, down 0.48%, with business services (down 0.46%), paper and packaging (down 0.41%) and publishing (down 0.34%) rounding out the latest week's Bottom Five. Lodging was also in the Bottom Five the week before, when it returned just 0.07%, and has in fact now been among the Bottom Five for five consecutive weeks.

Transportation worst for year

On a year-to-date basis, the transportation sector's powerful showing this past week, pulled it well out of the red, where it had been the only sector still showing a negative 2004 return. That 0.08% deficit in the Nov. 24 week became a 1.56% cumulative gain for the year in the most recent week. In mid-August, transportation had been down more than 14% on a year-to-date basis.

Steel sector tops for year so far

Among the year-to-date leaders, steel inched up to 15.93% from 15.92% the week before. The chemicals sector's Top Five showing boosted its year-to-date return to 13.97%, second-best in the index behind the steelers, from 13.79% the week before. Non-ferrous metals and mining lost ground to the chemical names, dropping to 13.18% from 13.31% previously.

Other sectors showing double-digit year-to-date strength included consumer non-durables, although they dipped slightly to 11.73% from 11.74%; gaining ground were the industrials, a Top Fiver this week, which firmed to 11.67% from 11.51%. Consumer non-cyclicals slipped to 11.19% from 11.40%, while energy names likewise backpedaled to 11.09% from 11.31%. Healthcare, which had broken into double digits in the Nov. 24 week with a cumulative return of 10.04%, was back in the high singles in the latest week, up 9.82% for the year to date.

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