B of A High Yield Broad Market Index up 0.44%, year-to-date return grow to 2.50%

By Paul Deckelman

New York, Aug. 29 - The Banc of America Securities High Yield Broad Market Index rose 0.44% in the week ended Thursday, Aug. 25, its second consecutive gain, on top of the 0.34% return in the previous week (ended Aug. 18). The index has now showed gains in 10 weeks out of the last 11 and 11 weeks out of the last 13. The index most recently fell in the week ended Aug. 11, when it declined 0.26%.

On a year-to-date basis, the index's return increased to 2.50%, a new high point for the year, after having rebounded the previous week to 2.05% from 1.70%. B of A analysts noted also that the new cumulative total is "significantly higher than its 2005 low of negative 4.05% that it touched on May 17, 2005."

The index's spread over Treasuries, which in the previous week had risen to 362 basis points from 355 bps over the week before, tightened a bit to 359 bps in the latest week. Its yield-to-worst - which had previously narrowed a little to 7.71% from 7.74%, continued to come in, to 7.64% 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, likewise rose for a second straight week in the week ended Thursday, by 0.53%, on top of the previous week's 0.37% gain. The year-to-date return, which had previously rebounded to 1.80% from 1.42%, jumped to its high point of the year, at 2.33%.

HY Large Cap's spread over Treasuries, which in the week ended Aug. 18 had ballooned out to 349 basis points from 338 bps previously, declined to 344 bps, while its yield-to-worst fell to 7.51%, after having inched up in the Aug. 11 week to 7.59% from 7.58% the week before.

In the latest week, the more inclusive HY Broad Market Index tracked 1,741 issues of $100 million or more, up from 1,739 the week before, and the overall market value of the index rose to $595.5 billion from $592.2 billion the previous week.

The more narrowly focused HY Large Cap Index tracked 670 issues of $300 million or more, unchanged from the week before, while their total market value rose to $382.3 billion from $381.261 billion previously. B of A sees both indexes as reliable proxies for the $750 billion high yield universe.

Weakest credits show biggest gains

On a credit-quality basis, the bottommost of the three credit tiers into which B of A divides its index - those issues rated B- and below, accounting for 33.58% of the index - had the best return, gaining 0.58%, followed by the top credit tier (those issues rated BB+ and BB, comprising 26.86% of the index), which returned 0.45%. Bringing up the rear for a second straight week was the middle credit tier - those issues rated BB-, B+ and B, making up 39.66% of the index - which gained 0.32%.

That was a reversal of the order seen in the week ended Aug. 18, when the top tier returned 0.49%, followed by the bottom tier, which returned 0.37%, while the middle tier gained 0.25%. However, it marked a return to the pattern seen in the two weeks before that and in five weeks out of the prior six, in which the bottom tier had the strongest return of the three.

Bank of America Securities analysts observed that Aug. 25 "marked the market's 12th consecutive day of upward moves," and, as noted, reached a new year-to-date high point.

The analysts also opined that the primary market was "slow, typical of August," with just two issuers having tapped the market for $525 million of proceeds by the time trading wrapped up on Thursday - down from the $803 million in five issues which had priced in the equivalent period during the week ended Aug. 18, and was "significantly lower" than the 2005 average weekly issuance of $2.28 million. The analysts also noted that the high-yield mutual funds reported a $9.5 million weekly net inflow (this after six straight weeks of net outflows) - but cautioned that "one week of inflows is not enough to indicate the reversal of the trend we have seen so far in 2005 (only eight weeks of net outflows out of 34 weeks)."

All sectors up

In the most recent week, all 23 of the industry sectors into which B of A divides its high yield universe had positive returns, for a second week in a row, holding to the pattern seen in 13 out of the last 14 weeks - all weeks in that stretch except for Aug. 11 - during which a clear majority of sectors had shown positive returns in each of those weeks (even including the one week in that time frame in which the HY Broad Market Index had a negative return). Before that index upturn, which began in the week ended May 26, all or almost all, of the sectors had shown losses in most weeks, dating back into mid-March.

Cable gains with Charter

Cable/DBS operators easily had the best weekly return, 1.52%, propelled upward by Charter Communication Inc.'s announcement of an $8.4 billion debt-for-equity exchange. In the previous week, transportation had been the best performer, gaining 0.68%, and at least temporarily breaking out of the pattern seen in most of the previous weeks, when transportation was either the single worst-performing sector, or was among the worst found in the Index's Bottom Five weakest finishers for the week.

But in the most recent week, transportation continued to show unaccustomed strength, returning 1.32%, second only to the cablers, as the market took Northwest Airlines Corp.'s bonds higher as the Number-Four U.S. airline carrier managed to keep its planes in the air and running a sort of normal schedule, despite a strike by the company's mechanics.

Business services and wireline telecommunications (each up 0.53%) and publishing (up 0.49%) rounded out the latest week's Top Five list of the strongest-performing industry sectors. In the previous week, business services and publishing tied for the fifth and final spot among the Bottom Five, each with a relatively weak 0.19% return. But business services has now been among the Top Five in two weeks out of the last three.

As had been the case in the week ended Aug. 18, with all 23 industry sectors finishing in the black, there was no downside per se in the week ended Thursday; the week's Bottom Five merely consisted of sectors which had smaller returns than all of the others.

Advertising dependent media was the weakest of the week, gaining just 0.08%; it replaced the previous week's cellar dweller, steel, which had been up only 10% in that Aug. 18 week. The steelers remained among the weakest, though, in the most recent week, managing only a 0.12% return. Steel's two straight weeks among the Bottom Five represent a reversal of the sector's recent trend, which prior to the Aug. 18 week, saw the grouping among the Top Five for five consecutive weeks.

Paper and packaging (up 0.14%) non-ferrous metals and mining (up 0.17%) and utilities (up 0.23% rounded out the latest week's Bottom Five collection. Paper and packaging had been in the Bottom Five the week before, with a paltry 0.15% return. However, both non-ferrous metals and utilities had finished in the Top Five the week before, with returns of 0.52% and 0.64%, respectively.

Transportation still the loser YTD

On a year-to-date basis, the transportation sector's second straight Top Five finish for the week lowered its cumulative loss for 2005 to an even 12% from 13.14% previously, but it remains by far the biggest loser.

Consumer durables' 2005 deficit meanwhile fell to 1.58% from 2.05% the previous week, while repeat Bottom Fiver paper and packaging's loss declined slightly, to 0.25% from 0.39%. Steel, also among the Bottom Five for a second straight week, still saw its cumulative loss narrow to 0.03% from 0.16% previously. No other sectors are in the red on a year-to-date basis.

PCS/Cellular year's winner

On the upside, PCS/cellular's index-best year-to-date return pushed up to 8.50% from 8.01% previously, while finance, still in second place, improved to 6.27% from 5.83% previously. Top Fiver publishing's total return increased to 4.75% from 4.24%, while fellow Top Fiver business services' return rose to 4.68% from 4.12%. Top Five finisher wireline's 2005 return rose to 4.12% from 3.57%.

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