B of A High Yield Broad Market Index down 0.97%, year-to-date return falls to 1.38%

By Paul Deckelman

New York, Sept. 26 - The Banc of America Securities High Yield Broad Market Index fell 0.97% in the week ended Sept. 22, its fourth straight week on the downside, although it was the first sizable drop coming after three straight weeks of negligibly small declines, including the 0.01% retreat in the week ended the previous Thursday.

Even with the latest solidly negative performance, the index has still shown gains in 10 weeks out of the last 15 and 11 weeks out of the last 17.

On a year-to-date basis, the index's return, which in the previous week had held steady at 2.37%, tumbled to 1.38%, well off its high point for the year of 2.50% reached in late August.

The index's spread over Treasuries, which in the previous week had narrowed to 373 basis points from 376 bps the week before that, widened out to 392 bps in the most recent week, while its yield to worst - which had previously risen slightly, to 7.76% from 7.74% - jumped to 7.96% in the latest week.

The more narrowly focused High Yield Large Cap Index, which generally tracks the patterns seen in the HY Broad Market Index, plunged 1.13% in the most recent week - here again, the first definitive nosedive after three weeks of minor weakness, including the flat 0.00% return in the week ended Sept. 15.

The Large Cap year-to-date return, which had previously inched downward to 2.10% from 2.11% despite the flat reading, due to a statistical anomaly, plummeted to 0.95% in the most recent week, well below the index's high point for the year of 2.23%, reached in late August.

Its spread over Treasuries, which in the week ended Sept. 15 had declined to 359 bps from 362 bps, increased sharply, to 383 bps in the most recent week, while the yield to worst ballooned out to 7.88% after having risen the week before to 7.64% from 7.61%.

In the latest week, the more inclusive HY Broad Market Index tracked 1,723 issues of $100 million or more, down from 1,736 issues the week before, while the overall market value of the index fell to $583.9 billion from $592.3 billion the previous week.

The more narrowly focused HY Large Cap Index, measuring the most liquid portion of the high-yield world, tracked 675 issues of $300 million or more, down from 678 issues the week before, with the overall market value of the index declining to $379 billion from $383.2 billion the week before. B of A sees both indexes as reliable proxies for the $750 billion high-yield universe.

On a credit-quality basis, the middle one of the three credit tiers into which B of A divides its index - those issues rated BB-, B+ and B, making up 39.78% of the index - had the smallest loss, at 0.78%. This was followed by the topmost tier - those issues rated BB and BB+, comprising 27.17% of the index - which lost 0.87%. Bringing up the rear was the bottommost of the three tiers - those issues rated B- and below, accounting for 33.06% of the index - which lost 1.27%. It marked the third week out of the past four in which the middle tier has had the best return - though in this case, that means the smallest loss - and the second straight week in which the top tier has come in second. In the week ended Sept. 15, the bottom tier rose 0.04%, the top tier broke even with a 0.00% return, and the middle tier lost 0.06%.

In the most recent week, all 23 of the industry sectors into which B of A divides its high-yield universe had negative returns, a definite deterioration from the week before, when 10 sectors had shown gains on the week, versus 11 groups finishing in the red and two - chemicals and utilities - with a breakeven return of 0.00%.

Paper/packaging worst for week

Paper and packaging companies were clearly the worst performers for a second straight week, plunging 2.05%, on top of the index-worst 0.63% loss the previous week. Paper and packaging has also now been among the Bottom Five worst-performing sectors in four weeks out of the last six. The sector continued to be dragged down by weakness in Tembec Inc.'s bonds, after Standard & Poor's recently downgraded its ratings on the Canadian forest products company and warned that the company remains operationally very weak. Also contributing to the slide was the fall in Tekni-Plex Inc.'s notes after the Somerville, N.J.-based packaging company disclosed accounting problems which will require some results to be restated and will probably delay its 2005 10-K filing.

Consumer durables (down 1.91%), transportation (down 1.77%) utilities (down 1.44%) and consumer non-durables companies (off 0.98%) rounded out the latest week's Bottom Five.

The consumer durables have now been in the Bottom Five in three weeks out of the last four, a slide which has been led by the bonds of automotive component suppliers, notably Delphi Corp., rumored to be headed toward bankruptcy, and the recently junked Dana Corp.

Transportation has now been in the Bottom Five for four straight weeks, including its 0.53% loss in the week ended Sept. 15, and in seven weeks out of the past nine, with the volatile bonds of the troubled airline industry - particularly Delta Air Lines Inc. and Northwest Airlines Corp., both now bankrupt - leading the way downward. The utilities group was pulled down by Calpine Corp., whose bonds rapidly lost power amid a dispute with bondholders over use of proceeds from a natural gas asset sale, as well as talk the San Jose, Calif., generation company was facing a cash squeeze as a big preferred offering was reported to have been shelved.

With all 23 sectors showing negative returns, there was no upside per se this past week; the Top Five list of the best-performing sectors consisted of industry groupings which merely had smaller losses than all of the others.

Cable/DBS tops for week

Chief among them was finance, which lost a relatively modest 0.23% to take over the top spot from the cable/DBS operators, who had gained an index-best 0.63% in the previous week, ended Sept. 15. Finance has been the top finisher in two weeks out of the last four.

PCS/cellular operators (down 0.25%), energy (down 0.31%), wireline telecommunications (down 0.33%) and consumer non-cyclical companies (down 0.47%) rounded out the latest week's Top Five. It was the second straight week among the elite group for the PCS/cellular sector, which had made it the previous week with a 0.31% return. Energy has been in the Top Five in three weeks out of the last four. Wireline had a big rebound, after landing among the Bottom Five in the Sept. 15 week, when it lost 0.28%. Consumer non-cyclicals have now been in the Top Five in two weeks out of the last four.

Transportation worst for year

On a year-to-date basis, the transportation sector's fourth straight weekly appearance among the Bottom Five helped widen the sector's 2005 cumulative loss to 16.32% from 14.82% previously, keeping it clearly down at the bottom as the worst-performing industry group in the index.

Bottom Five member consumer durables' 2005 deficit meanwhile widened to 4.37% from 2.50% the previous week, while paper and packaging's second consecutive index-worst weekly loss nearly tripled its 2005 deficit to 3.06% from 1.04%. Steel - which had recently climbed back into the black over a number of weeks from what had grown to a sizable cumulative loss, was back in the red, its 0.53% year-to-date gain from the week before turning into a 0.25% loss. However, no other sectors were in the red on a year-to-date basis.

On the upside, PCS/cellular's second straight Top Five placement kept it on top year to date, although its return was cut to 8.80% from 9.08% previously, while this week's index leader, finance, remained a solid second place, although its cumulative return eased to 6.24% from 6.49% previously. Business services has returned 4.22% so far, though it was down this week from 5.08% previously.

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