B of A High Yield Broad Market Index up 1.75%, year-to-date gain increases to 16.53%

By Paul Deckelman

New York, Aug. 26 - The Banc of America High Yield Broad Market Index broke a four-week losing streak and shot up 1.75% in the most recent week, pushing its year-to-date return up to 16.53%. In the previous week, ended Aug. 14, the index had lost 0.49%, pushing the year-to-date return down to 14.52%.

In the week ended last Thursday, the index also showed a narrowing of its spread over Treasuries to 625 basis points from 671 bps the week before, while its yield to worst likewise narrowed to 9.66% from 10.16% in the Aug. 14 week.

B of A's High Yield Large Cap Index, which tracks the most liquid portion of the high yield spectrum, showed an even more notable improvement in the latest week, up 2.45%, versus the previous week's 0.61% decline. The Large Cap Index's year-to-date return swelled to 18.69% from 15.86% the week before, while the spread over Treasuries and the yield to worst narrowed to 593 basis points and 9.47%, respectively, from 654 bps and 10.16% the previous week.

In the latest week, the more inclusive High Yield Broad Market Index tracked 1,5767 issues of $100 million or more, having a total market value of nearly $445 billion, while the High Yield Large Cap Index, representing the most liquid portion of the high yield world, tracked 518 issues of $300 million or more, having a total market value of nearly $260 billion. The B of A sees both as reliable proxies for the approximately $700 billion high yield universe.

B of A analysts noted that the gain in the High Yield Broad Market Index was the first seen after four straight weeks of losses. They noted that "the slowdown of speculative grade paper supply ahead of the Labor Day holiday helped ease the negative short-term technicals that have plagued the secondary market since mid-July," while "dynamics on the demand side also improved, as the torrid outflow from high yield mutual funds slowed."

In the latest week, AMG Data Services reported relatively modest net outflows from the high yield funds (a key barometer of junk market liquidity) of $83.8 million, versus three straight weeks previously in which outflows had topped $1 billion.

The B of A analysts further said that the 1.75% gain recovered "almost all of the losses it suffered earlier in the month." The comeback, they said "was reminiscent of the recent credit rally of 2002-2003, with high beta sectors such as Cable and Utilities leading the market performance."

On a credit basis, the lowest of the three credit tiers into which B of A divides its index - representing credits rated B- and below, making up 35.82% of the index - had the best return in the most recent week, rising 2.13%. It was followed by the middle credit tier (issues rated BB-, B+ and B, making up 48.09% of the index), which returned 1.74%. Bringing up the rear was the top credit tier, of issues rated BB+ and BB (16.09%), which returned 0.96%.

In the latest week, all 27 of the industry sectors into which B of A divides its index had positive returns, with the top performer, utilities, up 3.08% as Calpine Corp. bonds gained an average of 4½ points and its 8½% notes due 2011 up six points to close at 71, while AES Corp.'s 9 % notes due 2015 were up more than four points to 100.25.

Steel issues were the second-best performers, up 2.88% as AK Steel Corp.'s up five points on the week on news that it had closed the acquisition of Central Tubing Facility. United States Steel LLC notes rose 1½ to 2½ points.

North American cable operators (up 2.86% on strength in Charter Communications Holdings and Cablevision Corp.), technology companies up 2.76% and chemical firms (2.75% better) rounded out the Top Five list of the best-performing sectors in the latest week.

With all 27 industry sectors in the black, "weakest performers" is a relative term. International cable operators had the smallest return, 0.30%, followed by energy (0.31%) and finance (0.39%). Non-ferrous metals and mining (0.44%) and transportation (0.63%) rounded out the week's Bottom Five list of the weakest-performing sectors.

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