Banc of America High Yield Broad Market Index climbs 0.85% in week, up 1.53% for year

By Paul Deckelman

New York, July 18 - The Banc of America Securities High Yield Broad Market Index rose 0.85% in the week ended July 14, its fifth straight week of gains and seventh of the last eight weeks, including the slight 0.09% firming the week ended July 7.

On a year-to-date basis, the index's return more than doubled to 1.53% from 0.68% the week before, strengthening the recovery from the prolonged downturn that dominated most of the first half of the year - 3.31% at its worst in mid-May.

The index's spread over Treasuries, which in the previous week had moved downward to 392 basis points from 401 bps, picked up nearly 30 bps in narrowing sharply to 362 bps in the latest week. Its yield to worst - previously inched up to 7.77% from 7.76% - declined to 7.61%.

Large Caps climb

The more narrowly focused High Yield Large Cap Index, which mirrors the patterns seen in the HY Broad Market Index, also notched a healthy gain - also its fifth straight advance - jumping 0.94%, on top of the weak 0.05% gain the prior week.

Its year-to-date return almost tripled to 1.47% from 0.53% previously. HY Large Cap's spread over Treasuries, which in the July 7 week declined to 370 bps from 379 bps, shrank markedly to 339 bps in the latest week, while its yield to worst came in at 7.39% from 7.57%.

In the latest week, the more inclusive HY Broad Market Index tracked 1,699 issues of $100 million or more, down from 1,705 the week before, but the overall value of the issues still managed to rise slightly to $549.7 million from $549.2 billion the previous week.

The more narrowly focused HY Large Cap Index tracked 631 issues of $300 million or more, down from 633 the week before, but their total market value rose to $343.1 billion from $342.4 billion previously. Banc of America sees both indexes as reliable proxies for the $750 billion high-yield universe.

Bottom tier gains 1.16%

On a credit-quality basis, the bottommost of the three credit tiers into which Banc of America divides its index - those issues rated B- and below, 34.63% of the index - had the best return at 1.16%. This was followed by the middle tier - those issues rated BB-, B+ and B making up 44.45% of the index - which returned 0.80%. The topmost credit tier - those issues rated BB+ and BB, 20.92% of the index - brought up the rear with a 0.43% return.

It was the second consecutive week in which the three tiers had that same order of finish; in the week ended July 7, the bottom tier had the best return, gaining 0.17%, followed closely by the middle tier at 0.13%, while the top tier showed a 0.12% loss.

Banc of America Securities analysts said that the strong advance seen in the most recent week was due to "the positive momentum in the equity markets, declining oil prices and a lack of significant negative credit news." The sharp decline in the spread was "bolstered in large part by a decline in Treasuries."

The analysts noted that the junk bond primary market "witnessed moderate activity" during the week, with $2.3 billion total proceeds having priced from 10 issuers by the close Thursday, including over $1.7 billion from six issuers, including four upsized offerings, on Thursday alone.

That contrasts with the previous week's total - just one new deal, yielding proceeds of $157 million. The analysts pointed out that high-yield mutual fund flows - a barometer of overall market liquidity trends - reported $12 million of net outflows in the most recent week versus the previous week's $81 million. "The inflows and outflows have alternated over the past six weeks, indicating that investors are seeking direction," the Banc of America analysts opined.

All sectors rise

All 23 sectors had positive returns in the most recent week, strengthening from the previous week's 16 to 7 positive split. Over the past eight weeks, a majority of sectors have been in the black in each of those weeks -including the June 9 week in which the HY Broad Market Index had a negative return.

Before the index upturn that began the week ended May 26, all or almost all of the sectors were showing losses in most weeks, dating into mid-March.

Cable/DBS outperforms

The best-performing sector was cable/DBS, which soared 1.60%, barely beating out transportation (up 1.59%) and PCS/cellular (up 1.56%). The cablers took over the top spot from business services, which had posted an index-best 0.41% return in the week ended July 7.

Steel (up 1.41%) and consumer durables (up 1.28%) rounded out the latest week's Top Five list of the best-performing sectors.

It was the second straight week in the Top Five for consumer durables, which gained 0.24% the week before, and represented a reversal for transportation, which lost a yawning 1.59% the week before, the worst showing in the index for a second consecutive week.

However, the transportation grouping, dominated by the volatile bonds of the troubled airline industry, has been among the Top Five in five weeks out of the past nine, demonstrating the fickleness of investor sentiment, and has led all sectors in four of those five weeks. The latest week's showing also represented a turnaround for the PCS/cellular operators, which were on the Bottom Five list of the worst performing industry sectors the previous week with a 0.11% loss.

Finance worst for week

There was no "downside" per se in the latest week, with all 23 sectors finishing in the black, and the new Bottom Five merely consisted of those sectors with considerably smaller returns than their peers. Finance had the smallest return at 0.26%, taking over the unwanted distinction of worst in the index from transportation.

Lodging and industrials (each up 0.40%), utilities (up 0.50%) and chemicals (up 0.53%) rounded out the latest week's Bottom Five collection.

It was the second consecutive week in the Bottom Five for finance, which lost 0.03% in the week ended July 7, and represents a reversal for chemicals, which was among the Top Five that week with a 0.28% return, and for utilities, which tied with consumer durables for the final spot in the July 7 Top Five with an 0.24% return.

Industrials has now been among the Bottom Five in two weeks out of the past three.

Transportation worst for year

On a year-to-date basis, the transportation sector's strong showing for the week - just 0.01% away from being the best in the index - cut its cumulative loss markedly to 9.89% from 11.31% the week before, but it remains mired solidly in the cellar as the year's worst performer so far.

Top Fiver consumer durables' deficit also narrowed considerably to 2.90% from 4.13% previously, but fell into second place among the weakest grouping as previous second-worst player steel - also in the Top Five this week - slashed its year-to-date loss to 2.82% from 4.17% previously.

Paper and packaging - whose loss fell to 0.56% from 1.45% previously - is the only other sector still showing a cumulative 2005 loss at this point.

On the upside, PCS/cellular's Top Five performance this week solidified its year-to-date status as index leader, as its return ballooned to 6.98% from 5.34% previously. Finance, despite being among the Bottom Five for a second straight week, remains second best year to date, as its return improved to 4.49% from 4.22%.

Publishing rose a full point to 3.64% from 2.64%, business services improved to 3.33% from 2.57%, while wireline telecommunications' return grew to 3.13% from 2.30%, and non-ferrous metals and mining firmed up to 3.09% from 2.21% previously.

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