B of A High Yield Large-Cap Index up jumps 2.14% as liquidity surge continues

By Paul Deckelman

New York, April 29- The Banc of America High Yield Large Cap Index continued to rise for a tenth consecutive week, as the market measure gained 2.14% in the week ended Thursday April 24, fattening its year-to-date return to 14.99%.

Banc of America did not formally publish index results for the previous week, which was abbreviated by the Good Friday/Easter holiday but it said that as of Wednesday April 16, the last full trading session that week, the Large Cap Index had risen 1.49% for the week, and 12.40% for the year up to that point.

As has been the case since the beginning of the year, the advance has been fueled by the ample liquidity which the junk bond market has enjoyed, with AMG Data Services having reported that another nearly $952 million more came into high yield mutual funds than left them in the latest week.

The weekly fund flow numbers are seen by market participants as a key barometer in overall high yield liquidity trends, and their surge since mid-October has been considered a major factor in a corresponding strong performance turned in by the Banc of America high yield indexes during that time.

The index's spread over comparable Treasury issues in the latest week narrowed to 703 basis points, a 34 basis point tightening from the week before, while the yield-to-worst correspondingly dipped under 10% for the first time this year, to 9.93%, from 10.44% as of April 16.

B of A's somewhat broader and more representative Banc of America High Yield Broad Market Index was meanwhile also much improved in the week ended Thursday, up 1.71%, versus its advance of 1.15% in the week ended April 16. The HY Broad Market Index's year-to-date return improved to 12.40%, up from 10.32% the prior week, and as was the case with the HY Large Cap Index, this was a new high point for the year so far.

The HY Broad market Index's spread over Treasuries narrowed to 745 basis points from 781 as of April 16, with the yield-to-worst declining to 10.22% from 10.65%.

(The High Yield Large Cap Index, representing the most liquid portion of the high yield world, tracks nearly 460 issues of $300 million or more, having a total market value of around $225 billion. The High Yield Broad Market Index tracks about 1475 issues of $100 million or more, having a total market value of about $398 billion. B of A sees both as reliable proxies for the nearly $700 billion high yield universe.)

B of A analysts noted that the advance was extremely broad-based in the latest week - so much so that all 27 of industry sectors into which it divides its high yield universe advanced, with no decliners. The middle of the three credit tiers into which it divides its high yield world outperformed the other two tiers, with a 46.15% return for the week; the lowest of the three tiers was next with a 38.50% gain, with the highest tier bringing up the rear with just a 15.35% advance.

The analysts noted that the Large Cap Index continued to outperform the Broad Market Index, due to its higher concentration in utility names and telecommunications companies, "which have been some of the best-performing sectors in the latest credit rally."

That "Great Credit Rally of '03," as the analysts waggishly christened it, has seen spread-tightening among investment-grade credits as well as a strong advance in the high yield names. It has been largely fueled by several key factors, including moderating supply of new-deal paper, against a backdrop of investors' quest for yield.

B of A noted that the high yield market "continues to rally on positive momentum fueled by the seemingly relentless demand for this asset class." The addition of nearly $1 billion into the junk bond mutual funds in the most recent week, the analysts said, was "adding buying pressure to an already cash-plenty marketplace."

In the most recent week, steel was the top-performing sector, with a 3.37% gain, as bonds of United States Steel and AK Steel Corp. traded up after US Steel won a bid to purchase assets from the bankrupt National Steel Corp. for $1.05 billion in cash and assumed debt, causing the company's 10¾% notes due 2008 to gain three points over the week to end at 104. Although US Steel beat out AK Steel's bid for those same assets, AK Steel's bonds still ended the week up five points, with its 7¾% notes due 2012 closing at 96.

Technology (up 3.25%) was the second-best performer on the week, as bonds advanced across the board after Lucent Technologies Inc. reported better-than-expected fiscal second quarter numbers, with its net loss narrowing year-over-year to $351 million. Lucent's bonds gained an average of six points over the week as its 6.45% notes due 2029 rose to end at 71. Rival telecom equipment maker Nortel Networks Corp.'s bonds were strong as well, reflecting an improved first quarter, boosting its 6 1/8% notes due 2006 5¼ points to close at 97.25.

Utilities were up 3.03%, driven by the news that key sector player Mirant Corp.'s banks had accepted new loan terms that will prevent possible defaults, while Williams Cos. sold its 55% stake in Williams Energy Partners for over $1 billion in cash and assumed debt. Domestic wireline telecommunications companies (2.63% better) and finance names (up 2.61%) rounded out the Top Five list of best-performing sectors for the most recent week.

On the downside - the news is that there really wasn't much in the way of downside. The "weakest" performing sectors in the Bottom Five list were weak only in relative terms, merely posting smaller gains than the other 22 sectors in the High Yield Broad Market Index; even the lowest performer - the energy names - showed a stil-respectable 0.66% return, followed by consumer non-cyclical companies (a 0.74% gain) and healthcare (up 0/78%). International cable operators (up 0.82%) and non-ferrous metals mining (0.88%) rounded out the Bottom Five list in the latest week.

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