B of A High Yield Broad Market Index up 0.69%, year-to-date return swings into the black at 0.20%

By Paul Deckelman

New York, Feb. 7 - The Banc of America Securities High Yield Broad Market Index recorded its second consecutive weekly gain in the week ended Feb. 3 and showed a positive year-to-date return for the first time this year.

The index returned 0.69% in the latest week, on top of the 0.20% gain seen in the previous week ended Jan. 27. The cumulative return swung into positive territory, at 0.20%, versus the previous week's 0.50% 2005 loss.

The two weekly upturns back to back break a string of three consecutive weeks of losses dating back to the start of the year and seem to be a reversion to the largely positive trend that had dominated most of 2004, all the way back to late May, and which had included the last four weeks of the year. The index had ended 2004 up 11.01%.

The index's spread over Treasuries tightened to 337 basis points in the most recent week from 354 basis points the week before, while its yield to worst decreased to 7.05% from 7.21% the week before.

Large caps up 0.85% for week

The more narrowly focused High Yield Large Cap Index continued to follow the same pattern as the HY Broad Market Index, finally showing a second consecutive gain and moving into positive territory for the year. It jumped 0.85% in the week ended Feb. 3, on top of the 0.25% return in the week ended Jan. 27, ending a streak of three straight negative weeks going back to the beginning of the year. On a cumulative basis, Large Cap was back in the black in the latest week, up 0.08%, a turnaround from the 0.77% cumulative loss seen the previous week. The Large Cap Index had gained 10.93% in 2004.

Large Cap's spread over Treasuries in the most recent week declined to 322 basis points from 343 basis points, while its yield to worst also was down a bit, to 6.93% from 7.15% previously.

In the latest week, the more inclusive High Yield Broad Market Index tracked 1,693 issues of $100 million or more, down slightly from 1,694 the week before, and the overall market value of the issues rose to $548.7 billion from $545.2 billion the previous week. The High Yield Large Cap Index, representing the most liquid portion of the high-yield world, meantime tracked 614 issues of $300 million or more, down from 617 the week before, while total market value increased to $338.1 billion from $336.3 billion. B of A sees both as reliable proxies for the $750 billion high-yield universe.

Top, bottom tiers outperform

On a credit-quality basis, the topmost of the three credit tiers into which B of A divides its index - those issues rated BB+ and BB, comprising 17.67% of the index - and the lowest tier (those issues rated B- and below, accounting for 37.88% of the index) both returned 0.77%, followed by the middle credit tier - those issues rated BB-, B+ and B, making up 44.45% of the index - which returned 0.61%. It was the fourth straight week in which the top tier had the best return, although it was tied with the lowest tier this time around. The top tier had also had the best return in the week ended Jan. 27, up 0.38%, followed by the lower tier (up 0.18%) and then the middle tier (up 0.16%), the second consecutive week that the tiers had finished in that order.

The recent emergence of the top tier and the relatively weak showings lately by the bottom tier - up until this past week - has represented a change from the previous pattern, which throughout November, December and into early January had seen the lowest tier as the best performer for four weeks in a row, five weeks out of the previous six and nine weeks out of the prior 10.

B of A analysts noted that merger and acquisition headlines in the wireline telecommunications sector "gave the market a boost, as did strength in Airline and Utility names." In the primary sphere, they said. "We saw another active week on the heels of [the week ended Jan. 27's] heavy new issuance," with $4.6 billion of new paper having priced by the close on Thursday. The analysts also pointed out that "demand as measured by high-yield mutual fund flows reversed trend," as junk bond funds reporting on a weekly basis saw a $118 million inflow on the week, after three consecutive weeks of outflows. The fund flows are seen as in indicator of apparent market liquidity trends.

All 23 of the industry sectors into which B of A divides its high-yield universe had positive returns in the latest week, an improvement on the previous week's breakdown, which saw 15 of the 23 groups positive, versus seven negatives and one - industrials - absolutely flat, with neither a loss nor a gain. The clean sweep is a throwback to the pattern seen during the index's surge in the latter part of 2004, when either all or almost all of the industry sectors had positive returns most weeks.

Wireline top sector for week

As the Banc of America Securities analysts had noted, wireline telecom showed particular strength, up 1.77%, paced by news that - as the market had theorized and expected - SBC Communications Inc. agreed to acquire its former corporate parent, AT&T Corp. - and the latter's long-distance rival, MCI Inc., had received an acquisition bid from Qwest Communications International Inc., and was reported to have held talks with another regional provider of local phone service, Verizon Comminications Inc. It was the second straight week at the top for wireline, which had also risen an index-best 0.80% in the week ended Jan. 27 on the strength of the M&A speculation.

Transportation was the second-strongest sector, jumping 1.75% on a perceived improvement in the bonds of the volatile airline industry, which rose as oil prices headed the other way. The group's strong showing represents a turnaround from the slide the transportation names had recently been suffering. Before this past week, the group had been the worst-performing sector for four straight weeks and five out of the prior six, including the week ended Jan. 27, when they fell 1.17% - quite a contrast to the surprising strength the sector had shown through much of the last quarter of 2004, when it was consistently the most robust sector, bouncing back from large losses suffered earlier in the year.

Utilities (up 1.25%), business services (up 0.86%) and paper and packaging (up 0.82%) rounded out the latest week's Top Five list of best-performing groupings. It was the second straight week utilities were among the Top Five, including the Jan. 27 week, when they had been up 0.49%. Before that, the sector had been among the Bottom Five worst performers for three straight weeks. Business services had been in the Bottom Five the week before, with a 0.11% weekly loss.

Lodging sector weakest

On the downside, there was no "downside" in the literal sense, with all 23 industry groupings finishing the black. Lodging had the weakest showing, up 0.25%. In the previous week, as noted, transportation had been the worst-performing sector.

Industrials (up 0.26%), consumer non-durables companies (up 0.29%), consumer durables companies (up 0.32%) and technology (up 0.38%) rounded out the latest week's Bottom Five list of the weakest-performing sectors. It was the second week in the last three in which consumer durables and technology were in the Bottom Five.

On a year-to-date basis, transportation's strong showing in the latest week cut its cumulative loss to 3.97% from 5.63% the week before, although the grouping still remains clearly the worst performer of 2005 so far. Two other sectors which had also been posting notable year-to-date losses managed to trim those losses sharply - utilities, whose second straight Top Five showing cut the sector's 2005 loss to 0.36% from 1.58% the week before, and cable/DBS, whose cumulative loss was trimmed to 0.48% from 1.14% the previous week.

On the upside, the PCS/cellular solidified its position as the strongest performer so far this year, its cumulative return growing to 1.91% from 1.31% the week before. Wireline telecom, on the strength of a second consecutive week as the index's best performer, swung to 1.40% year-to-date return from the 0.37% cumulative loss seen the week before. Finance firmed to a 1.20% year-to-date gain from 0.21% the week before.

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