B of A High Yield Large-Cap Index jumps 1.35% on liquidity boost; 2003 gain rises to 4.62%

By Paul Deckelman

New York, March 4 - The Banc of America High Yield Large Cap Index zoomed 1.35% in the week ended last Thursday (Feb. 27), its second consecutive week of solid gains, following the 0.64% advance seen in the previous week (ended Feb. 20). B of A analysts attributed the jump to the effect of a $1.54 billion high yield mutual fund inflow - the largest such liquidity boost since last summer.

The two weeks of gains seemed to re-establish the positive tone in the index's performance, dating back to the last quarter of last year, which had been temporarily interrupted by four weeks of losses from mid-January to mid-February.

The year-to-date return continued to improve to 4.62% - the high for the year so far - from 3.23% the previous week, after having bottomed at its low for the year at 2.57% in the week ended Feb. 13.

The index's spread over comparable Treasury issues narrowed to 909 basis points from 933, while the yield to worst correspondingly fell to 12.01% from 12.32%.

Strong performances in such industrial sectors as utilities, telecommunications and technologies, which have a relatively heavy concentration of larger, more liquid issues, helped the Large Cap Index outperform the overall speculative market, as represented by B of A's somewhat broader and more representative Banc of America High Yield Broad Market Index.

This index, too, was better in the most recent week, firming 0.99%, versus its 0.47% gain in the week ended Feb. 20. The HY Broad Market Index's year-to-date return improved to 3.91%, up from 2.89% the prior week. Its spread over Treasuries narrowed to 926 basis points from 939 the week before, with the yield-to-worst declining to 12.04% from 12.23%.

(The High Yield Large Cap Index, representing the most liquid portion of the high yield world, tracks nearly 450 issues of $300 million or more, having a total market value of almost $195 billion. The High Yield Broad Market Index tracks over 1450 issues of $100 million or more, having a total market value of about $360 billion. B of A sees both as reliable proxies for the over $600 billion high yield universe.)

B of A analysts noted that in the most recent week, the high-yield market diverged from the equity markets, which continued to mostly tread water, and solidly outperformed them, with the HY Broad Market Index's return beating the weekly returns on the Nasdaq Composite Index, the S&P 500 and the Dow Jones Industrial Average by 154 basis points, 97 bps and 137 bps, respectively. Aided by the massive inflow - the first billion-dollar-plus inflow since early January and the largest inflow since late August 2002, when $1.56 billion more came into the funds than left them - the high yield indexes also outperformed the high-grade corporate bond market, as measured by the Banc of America Billion Dollar Index, which returned 0.52% on the week and is up 1.94% year to date.

In the latest week, all but three of the 27 industrial sectors into which Banc of America divides its high-yield universe finished in positive territory.

Utilities were the best performing sector in the HY Broad Market Index, up 4.05%, as the sector traded up alongside the bonds of fallen angel pipeline company, El Paso Corp., which announced that it would sell $500 million of natural gas reserves to Chesapeake Energy Corp, the asset sale helping to improve its liquidity position. El Paso also announced that two subsidiaries (Southern Natural Gas Co. and ANR Pipeline Co.) would bring a combined $700 million of notes to the market, and that it had received new financing in the form of a $1 billion loan. El Paso's 7¾% notes due 2032 were up six points to end at 66, while on the whole, its bonds were up around seven points, on average. El Paso's strength translated into firmer levels of other power producing or pipeline companies, as Calpine Corp.'s 8½% notes due 2011 firmed five points to close at 47; AES Corp.'s 9 3/8% notes due 2010 advanced four points to close at 71; and Williams Companies' 8 1/8% notes due 2012 gained nearly nine points to end at 85.5.

The second-best performer, North American cable, was up 2.45% on the week, helped by solid fourth-quarter numbers and good results and improved 2003 guidance from high-grade cable industry bellwether Comcast Cable Communications. That helped Charter Communications Holdings LLC's 8 5/8% notes due 2009 were up two points to 47.5, and Cablevision Corp.'s CSC Holdings 7 5/8% notes due 2018 gained three points to end at 93.

PCS/cellular operators (the previous week's best performer; up 2.31% in the most recent week on earnings-driven firmness in the bonds of Rural Cellular Corp. and Nextel Communications Inc.), technology (1.91% better) and satellite services (up 1.60%) rounded out the Top Five list of the best-performing sector in the most recent week.

On the downside, the transportation group was once again the worst performer, for a second consecutive week and the fifth week in the last six. The group lost 1.07% as airline bonds continued to descend lower in the face of rising fuel costs and the threat of war with Iraq. Losers included Delta Air Lines' 8.3% notes due 2029, which fell two points to end at 50, and Continental Airlines' 8% notes due 2005 down 2½ points to close at 47.5.

Finance was the second worst performing sector, off 0.37% as Fairfax Financial's 7 3/8% notes due 2006 fell 2½ points to end at 78.5.

Consumer non-cyclical companies (0.31% lower on weakness in Fleming Cos. Inc. and Service Corp. International bonds), industrials (up a scant 0.05%) and non-ferrous metals and mining (a paltry 0.23% gain) rounded out the Bottom Five list of the weakest performing sectors in the most recent week.

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