B of A High Yield Broad Market Index up 0.29%, year-to-date return rises to 1.74%

By Paul Deckelman

New York, Dec. 19 - The Banc of America Securities High Yield Broad Market Index rose 0.29% in the week ended Thursday, Dec. 15, its fourth consecutive advance, including the 0.06% return the previous week (ended Dec. 8). The latest week's gain is also the seventh in the last 16 weeks, and the 18th out of the last 28, and would seem to be confirming a recent strengthening trend - in opposition to the pattern previously seen in the index since mid-September of alternating a week or two of gains with losses.

The index's year-to-date return rose to 1.74% from the 1.44% cumulative return reported in the Dec. 8 week.

The index's spread over Treasuries, which the week before had widened out to 399 basis points from 386 bps previously, came in to 393 bps, while its yield-to-worst - which had previously risen to 8.38% from 8.33% - declined modestly to 8.34%.

The more narrowly focused High Yield Large Cap Index, which generally tracks the patterns seen in the HY Broad Market Index, rose 0.33% in the week ended Thursday, after having slipped 0.02% the previous week, but even with the latest week's gain, the Large Cap Index has still been either negative or at best, flat, in 10 weeks out of the most recent 15.

The Large Cap's year-to-date return firmed back up to 1.26% from 0.93% the week before. Its spread over Treasuries, which in the week ended Dec. 8 had ballooned out to 384 basis points from 369 bps the week before, declined to 377 bps in the latest week, while its yield to worst fell to 8.18%, after having risen in the previous week to 8.24% from 8.17%.

In the latest week, the more inclusive HY Broad Market Index tracked 1,708 issues of $100 million or more, up from 1,706 the week before, while the overall market value of the index rose to $561.5 billion from $560.1 billion the previous week.

The more narrowly focused HY Large Cap Index, measuring the most liquid portion of the high yield world, tracked 680 issues of $300 million or more, up from 677 the week before, while the overall market value of the index grew to $366.7 billion from $365.1 billion the week before. B of A sees both indexes as reliable proxies for the approximately $750 billion high yield universe.

Top tier shows top return

On a credit-quality basis, the uppermost of the three credit tiers into which B of A divides its index - those issues rated BB and BB+, comprising 27.08% of the index - had the best return, gaining 0.50%. This was followed by the middle tier (those issues rated BB-, B+ and B, making up 40.77% of the index), which gained 0.24%. Bringing up the rear was the bottom tier - those issues rated B- and below, accounting for 32.15% of the index - with a 0.17% return.

The sudden domination of the index by the top credit tier represented a sharp break with recent history, which had seen the middle tier on top in each of the previous two weeks, and which had also seen the top tier having the worst return over the previous five straight weeks, and in six weeks out of the previous seven. In the week ended Dec. 8, the middle tier gained 0.12%, followed by the bottom tier, with a 0.10% return, while the top tier lagged with a 0.07% loss.

B of A's analysts declared that the latest week's advance had been paced by gains in the utility, consumer durables and wireline telecommunications sectors. They saw new-deal issuance explode to $6.553 billion for 13 issuers in the week by Thursday's close, including $4.36 billion from six issuers on Thursday alone, making that the single biggest issuance day in six years (although Cablevision Systems Corp. subsequently cancelled its billion-dollar Thursday issue due to technical covenant violation problems). In the previous week, $765 million had priced for six issuers in the equivalent time period. B of A analysts estimate that as of Thursday's close, 409 deals generating total proceeds of some $112 billion had priced year-to-date.

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 $319 million of net outflows in the week ended Wednesday (Dec. 14), partly reversing the $586 million of inflows over the previous two weeks, including the $361 million infusion in the week ended the previous Wednesday (Dec. 7).

In the most recent week, 18 of the 23 industry sectors into which B of A divides its high yield universe showed positive returns, against five negatives, the same breakdown seen the week before. Over the last four weeks, the sector count has been strongly positive, after more than a month previously in which it was largely inconsequential or even predominantly negative.

Utilities #1 on Calpine

The best performer in the latest week was the utilities sector, which rose 0.66% as Calpine Corp.'s bonds "moved up . . . as concerns about its immediate bankruptcy dissipated," the B of A analysts opined. The utilities displaced transportation, which had occupied the top spot in the week ended Dec. 8, when that group had returned 0.79%. The utilities actually went from worst to first, having had an index-worst 0.40% loss in the previous week on investor angst about Calpine's fate - which was also its third consecutive week as the index's worst finisher.

Consumer durables was the second-best finisher in the most recent week, rising 0.60%, as General Motors Corp.'s "efforts at selling its GMAC [General Motors Acceptance Corp.] unit continued to generate news that contributed to the volatility in the market," the B of A analysts said, even though, they added, the giant automaker "stole the limelight with the downgrades from [Standard & Poor's] on concerns that its mounting North American losses would be challenging to curtail." As was the case with the utilities sector, the latest week represented a sharp reversal of recent fortunes for the consumer durables group, which up until the week ended Dec. 8 had turned in the second-worst showing in the index for three straight weeks - including its 0.30% loss that week - and had made the Bottom Five list of worst performing sectors five times in a row and in six weeks out of the previous seven.

The wireline telecom and the entertainment sectors (each up 0.47%), and finance (up 0.46%) rounded out the Top Five list of the index's best-performing sectors in the most recent week.

Cable bottom

On the downside, the cable/DBS operators (down 0.19%) had the weakest showing, taking over, as noted, from the utilities group, which had been the cellar dweller for the previous three consecutive weeks. The cablers have, however, now been among the Bottom Five biggest losers for three straight weeks - including the 0.16% loss in the Dec. 8 week - and they have now been among the worst finishers in five weeks out of the previous six - the only exception being the week ended Nov. 25, when cable/DBS had been the best performer in the index, with an 0.79% gain.

Non-ferrous metals and mining (down 0.10%), paper and packaging (down 0.07%), PCS/cellular operators (down 0.05%) and steel (down 0.04%) rounded out the latest week's Bottom Five list. It was the second straight week in the Bottom Five for paper and packaging, including the previous week's 0.15% loss, and the group has now been among the losers in three weeks out of the last five. However, both steel and non-ferrous metals and mining had been among the previous week's Top Five - the second straight week there for both - with gains of 0.45% and 0.33%, respectively. PCS/cellular has now been among the Bottom Five in two weeks out of the past three.

Transportation last YTD

On a year-to-date basis, transportation remains solidly mired down at the bottom with the worst 2005 cumulative loss, although its deficit fell to 13.07% from 13.40% previously.

Consumer durables' Top Five finish this past week cut its cumulative loss to 5.68% from 6.24% the week before, although it continues to have the second-largest loss for the year. Repeat Bottom Fiver paper and packaging's year-to-date loss increased to 3.70% from 3.63% previously.

On the upside, PCS/cellular maintained its commanding position as the index's best performer so far this year, although its Bottom Five finish trimmed its year-to-date return slightly to 9.62% from 9.67% previously.

Top Five finisher wireline telecom extended its 2005 gain to 7.26% from 6.76%, continuing to hold second place. Business services' return for the year grew to 6.20% from 5.93%, while Top Fiver finance was not far behind at 6.09%, up from 5.60% previously.

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