B of A High Yield Large-Cap Index down 0.51%, year-to-date gain shaved to 20.66%

By Paul Deckelman

New York, July 1 - The Banc of America High Yield Large Cap Index turned negative in the latest week, after three straight weeks of solid gains. The market measure fell 0.51% in the week ended Thursday, reversing the recent positive trend. In the previous week, ended June 19,the index had risen 1.33%.

The index's year-to-date return eased slightly, to 20.66% in the latest week, from its peak level for the year, at 21.28%, the week before.

Despite the retreat, the index's spread over comparable actually managed to dip three basis points, to 652 bps over, while its yield-to-worst widened out to 9.02% from 8.84% the week before.

The more inclusive Banc of America High Yield Broad Market Index was saw its winning streak broken in the latest week, retreating 0.28, versus the 1.17% rise seen the week before. The index's cumulative return for the year pulled back to 17.95% from 18.28% previously.

Also in the latest week, the spread narrowed to 683 basis points over Treasuries from 690 bps the week before, although the yield fattened to 19.21% in the week ended June 26 from 19.07% the week before.

In the latest week, the High Yield Large Cap Index, representing the most liquid portion of the high yield world, tracked 494 issues of $300 million or more, having a total market value of almost $253 billion. The High Yield Broad Market Index tracked 1,563 issues of $100 million or more, having a total market value of over $443 billion. B of A sees both as reliable proxies for the approximately $700 billion high yield universe.

The latest week's retreat in both the HY Large Cap Index and the HY Broad Market Index, following several weeks of strong gains, coincided with a rare high yield mutual fund outflow ($177.184 million, according to market participants familiar with the weekly flow figures compiled by AMG Data Services). The flow of funds into and out of the junk bond market, tracked by the closely followed weekly numbers, is considered a significant barometer of overall junk market liquidity trends. The notable rise in the Banc of America indices seen since last fall has coincided with the return of liquidity to the market, which has spurred both strong new issuance and a solid secondary performance.

B of A analysts noted the downturn in liquidity in the latest week, but also pointed out in their weekly report that despite the softness seen in the two indices, high yield is still posting a very strong return for the year - just under 18% for the HY Broad Market Index and still over 20% for the Large Cap. In the Broad Market Index, declining industry sectors outnumbered advancing ones 20 to 7.

On a credit-rating basis, the topmost of the three tiers into which B of A divides its index (credits rated BB+ and BB) eked out a 0.07% gain, while the middle tier (credits rated BB-, B+ and B) and the lowest tier (issues rated B- and below) had negative returns of 0.25% and 0.46%, respectively.

In the most recent week, North American cable operators turned in the worst showing, falling 1.56%; the sector was pulled down by weakness in Charter Communications Holdings LLC, whose 8 5/8% notes due 2009 lost two-and-a-quarter points to close at 72.5, and in Cablevision Systems' CSC Holdings bonds, the latter easing on news that the Justice Department is looking into the company's accounting practices. CSC's 7 5/8% notes due 2011 lost nearly two points to end the week at 102.

Steel (which the previous week had been the best performer of all, tracked closely by the domestic cablers) was the second-worst performer, dropping 1.32% on weakness in AK Steel and U.S. Steel issues. Domestic wireline telecommunications companies (off 0.94% as Qwest Capital Funding debt retreated) , PCS/cellular (0.92% weaker) and technology (off 0.88%) rounded out the week's Bottom Five list of the worst-performing sectors.

On the upside, non-ferrous metals and mining company bonds were ahead by 1.33%, as USEC's 6 5/8% notes due 2006 jumped 11% and its 6 ¾% notes due 2009 rose five points (in the previous week, the group had been among the worst finishers).

International cable operators were 1.02% better, powered by a rise in Ono Finance bonds.

Transportation (0.81% better, as Delta Airlines bonds gained some altitude), satellite services (0.72% ahead) and industrials (a 0.29% gain) rounded out the latest week's Top Five list of best-performing sectors.

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