B of A High Yield Broad Market Index up 0.40%, year-to-date return rises to 1.38%

By Paul Deckelman

New York, Dec. 5 - The Banc of America Securities High Yield Broad Market Index rose 0.40% in the week ended Thursday, Dec. 1, its second consecutive gain. The index had risen 0.33% in the week ended the previous Friday (Nov. 25), which contained an additional day due to interruptions to trading, and in B of A's tabulation of the weekly numbers, due to the Thanksgiving Day holiday break. Since about mid-September, the index has followed a pattern alternating a week or two of gains with losses. The latest week's gain is just the fifth in the last 14 weeks, although looking over a longer timeframe the index has still shown positive returns in 16 weeks out of the last 26.

The index's year-to-date return rose to 1.38% from the 1.03% cumulative return reported in the Nov. 25 week.

The index's spread over Treasuries, which the week before had increased modestly to 403 basis points from 400 bps previously, tightened significantly to 386 bps this past week, while its yield-to-worst - which had previously narrowed slightly, to 8.40% from 8.41%, continued to come in, to 8.33%.

The more narrowly focused High Yield Large Cap Index, which generally tracks the patterns seen in the HY Broad Market Index, also rose 0.40% in the week ended Friday, on top of a 0.37% gain the week before. It was just the fourth week in the last 13 in which Large Cap did not show either a negative, or at best, a flat return.

The Large Cap year-to-date return rose to 0.95% from 0.61% the week before.

Large Cap's spread over Treasuries, which in the week ended Nov. 25 had crept up to 386 basis points from 385 bps the week before, tightened to 369 bps in the latest week, while its yield-to-worst narrowed to 8.17%, after having declined in the previous week to 8.23% from 8.27%.

In the latest week, the more inclusive HY Broad Market Index tracked 1,702 issues of $100 million or more, off slightly from 1,703 the week before, although the overall market value of the index edged up to $561.7 billion from $561.5 billion the previous week.

The more narrowly focused HY Large Cap Index, measuring the most liquid portion of the high yield world, tracked 674 issues of $300 million or more, off from 675 the week before, although the overall market value of the index rose to $367.1 billion from $366.9 billion the week before. B of A sees both indexes as reliable proxies for the approximately $750 billion high yield universe.

Middle tier does best

On a credit-quality basis, the middle of the three credit tiers into which B of A divides its index - those issues rated BB-, B+ and B, making up 41.24% of the index - had the best return, gaining 0.55%, followed by the bottom tier (those issues rated B- and below, accounting for 31.78% of the index), with an 0.36% return. The topmost tier - those issues rated BB and BB+, comprising 26.98% of the index - brought up the rear, with a 0.24% return.

That broke the recent pattern - seen in three weeks out of the previous four - in which the lowest tier had the best showing. It was also the fourth straight week, and fifth out of the last six, in which the top tier has had the worst return. In the week ended Nov. 25, the bottom tier rose 0.49%, the middle tier gained 0.28%, while the top tier returned 0.19%

B of A's analysts declared that "the high yield secondary market continued to march ahead" in the latest week, adding that "although utilities and autos kept the market on edge with a steady flow of news, broad-based investor buying helped the market to maintain a positive tone."

They called new-deal issuance "tepid after the holiday weekend," with just one deal for $50 million in total proceeds having priced by the time the market closed on Thursday. The analysts said that through Thursday year-to-date new-deal issuance, by their count, stood at $102 billion in 378 deals. On the demand side, as measured by the high yield mutual fund-flow numbers compiled by AMG Data Services - a much watched barometer of overall junk market liquidity trends - weekly-reporting funds saw $225 million of net inflows through Wednesday (Nov. 30) - the first such inflow number after 11 weeks of outflows that saw approximately $3.3 billion exiting the market.

All sectors gain

In the most recent week, all 23 of the industry sectors into which B of A divides its high yield universe showed positive returns, against no negatives, a slight improvement from the previous week, when 21 sectors were in the black and two finished in the red. That two-week show of strength marked the first time in more than a month that the sector count had been so strongly positive.

Steel on top

In the latest week, steel was the strongest performer, with a 0.92% return, taking over the top spot from the previous week's best finisher, cable/DBS operators, which had gained 0.79% in the week ended Nov. 25. Traders cited steel sector consolidation talk as a factor.

Consumer non-durables (up 0.86%), business services (up 0.72%), non-ferrous metals and mining (up 0.68%) and paper and packaging (up 0.67%) rounded out the latest week's list of the Top Five best-performing sectors. It was the second straight week in the Top Five for consumer non-durables, and the second straight week as well for paper and packaging, which has now also been in the Top Five in four weeks out of the last five; both sectors rose 0.56% in the week ended Nov. 25.

Utilities in last place

There was no "downside" per se in the latest week, with all 23 sectors showing gains; the week's Bottom Five list of the worst-performing sector consists of those industry groupings merely having smaller returns than their index peers.

The smallest return was utilities' 0.04% gain, marking the second straight week the sector - which includes the volatile bonds of troubled power generator Calpine Corp. - has been the cellar dweller. It lost 0.06% in the week ended Nov. 25.

Consumer durables (up 0.05%) cable/DBS and PCS/cellular operators (both up 0.24%), and wireline telecommunications (up 0.30%) filled out the latest week's Bottom Five list. It was the second straight time that consumer durables - which includes the volatile bonds of the problem-plagued automotive industry - finished only slightly weaker than the utilities, including the 0.02% loss the previous week.

Consumer durables have now been in the Bottom Five four times in a row and in five weeks out of the last six. On the other hand, the latest week's results were a sharp reversal for cable/DBS, which, as noted had been the previous week's best performer, with an 0.79% return, and for PCS/cellular, which was second-best in that Nov. 25 week, with a 0.62% return. Cable/DBS, however, has now been in the Bottom Five in three weeks out of the last four.

PCS/cellular still YTD leader

On a year-to-date basis, PCS/cellular's Bottom Five showing did not appreciably diminish its commanding position as the index's best performer, as its return grew to 9.54% from 9.30% previously.

The wireline telecommunications sector extended its 2005 gain to 6.55% from 6.32%, continuing to hold second place. Top Fiver business services' return improved to 6.04% from 5.31%, while finance trailed at 5.40%, up from 4.99% previously.

On the downside, transportation remains solidly mired down at the bottom with the worst 2005 cumulative loss, even though this declined to 14.08% from 14.55% previously. The sector is dominated by the bonds of the troubled airline industry, particularly Delta Air Lines Inc. and Northwest Airlines Corp., both of which were beaten down deep into distressed-debt territory over a period of months earlier this year before eventually filing for bankruptcy.

Consumer durables' fourth straight finish in the Bottom Five kept it in place with the second-largest loss for the year, although this declined slightly to 5.96% from 5.97% the previous week. Repeat Top Fiver paper and packaging's year-to-date loss fell to 3.48% from 4.09% previously, aided by this past week's sizable gain.

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