WorldCom keeps junk index yields down, Bear Stearns says

New York, June 3 - The addition of WorldCom, Inc.'s bonds to the Bear Stearns High Yield Index helped keep overall yields down in the last weeks of the month, Bear Stearns said Monday.

Without the inclusion of WorldCom's bonds, average yields would have risen nine basis points. In fact, they were basically flat, rising just three basis points in the last week of the month after a one basis point gain the week before.

"The initial technical pressure created by many investment-grade sellers following the downgrade contributed to the opportunity for price appreciation over the last two weeks," Bear Stearns' analysts noted. The investment bank added $25 billion face amount of WorldCom bonds to its high yield index during May after they were downgraded to junk.

But Bear Stearns also noted that the impact of WorldCom highlights the "potential frustration that managers may encounter while investing in the debt."

WorldCom currently accounts for 4.02% of the index, up from 3.75% just two weeks ago.

But Bear Stearns analysts said they believe it would be difficult to justify taking a 4% weighting in a single issuer.

"Therefore, even if an investor believed that Worldcom's bonds offered the potential for price appreciation in the future, outperformance would be challenging," the analysts added.

With Moody's downgrade of Qwest, $14 billion of debt enters the Bear Stearns high yield index and will be included in the June figures.

After touching a low of 7% on April 30, 2002, Bear Stearns believes telecom will end the year at 13% to 15% of the high yield index. The company's analyst noted there is $125 billion of 6B and 5B debt on watch for downgrade, including AT&T.

Overall, the Bear Stearns index recorded a gain of 0.08% in May for a year-to-date total return of 2.87%. Without telecom, the year-to-date total return is 5.59%.

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