B of A High Yield Large-Cap Index jumps 1.19%, again on liquidity boost; up 5.86% year to date

By Paul Deckelman

New York, March 11- For a second consecutive week, a junk bond mutual fund inflow of more than a billion dollars helped to push the Banc of America High Yield Large Cap Index up strongly, as the market measure zoomed 1.19% in the week ended Thursday (March 6), on top of the 1.35% gain seen the previous week (ended Feb. 27). All told, it was the third consecutive week in which solid gains were seen in the index.

As had been the case in the week ended Feb. 27, when the $1.54 billion inflow seen that week - the largest one-week increase since last summer-was credited with pushing the secondary market higher, the $1.328 billion inflow reported for the week ended March 5 was thought to be a crucial factor in the index's latest advance. The latest week's mega-inflow marked the first time since March, 2002 that over a billion dollars more had come into the junk funds in each of two consecutive weeks than had left them. The weekly fund flow numbers are regarded 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 three-week winning streak seems to have re-established and strengthened the positive tone in the index's performance, dating back to the last quarter of last year, which had been temporarily interrupted by four weeks of losses from mid-January to mid-February.

The year-to-date return continued to improve to 5.86% - the high for the year so far - from 4.62% the previous week, after having bottomed at its low for the year at 2.57% in the week ended Feb. 13.

The index's spread over comparable Treasury issues in the latest week narrowed to 898 basis points from 909 previously, while the yield-to-worst correspondingly fell to 11.76% from 12.01%.

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 1.01%, an almost identical advance to its 0.99% rise in the week ended Feb. 27. The HY Broad Market Index's year-to-date return improved to 4.95%, up from 3.91% 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 918 basis points from 926 the week before, with the yield-to-worst declining to 11.82% from 12.04%.

(The High Yield Large Cap Index, representing the most liquid portion of the high yield world, tracks nearly 450 issues of $300 million or more, having a total market value of around $200 billion. The High Yield Broad Market Index tracks about 1475 issues of $100 million or more, having a total market value of about $365 billion. B of A sees both as reliable proxies for the over $600 billion high yield universe.)

B of A analysts noted that in the most recent week, liquidity, as measured by the junk mutual fund flow numbers, was once again king, "thereby creating a very strong technical environment."

Even as investors "searched for security this week" by turning to the credit markets in the face of geopolitical uncertainty and negative unemployment numbers, the analysts said - this pushed the yield on the 10-year Treasury issue down to 3.66% by Thursday - within the junk sphere, they showed more tolerance for risk, as the lowest of the three credit tiers into which B of A divides its HY Broad Market Index (issues rated B- and below) gained 1.36% on the week, followed by the middle tier (BB-, B+ and B, up 0.80%) and then by the high tier (BB and BB+, up 0.77%).

Of the 27 industry sectors into which B of A divides its index, 26 showed gains, with only transportation on the downside.

Satellite services was the best-performing sector, jumping 3.84% on the week as six of the nine issues in the relatively small sector advanced. Panamsat Corp.'s bonds led the way, its 8½% notes due 2012 firmed four points to close at 99, while Loral Cyberstar Inc.'s 10% notes due 2006 gained two points to end at 41.

Lodging checked in with a 2.31% advance for the week, as Host Marriott Corp.'s 7 7/8% notes due 2008 rose nearly three points to end at 95 after Moody's affirmed Host Marriott's Ba3 senior unsecured debt rating, citing the company's good liquidity position, the performance of its upscale hotel portfolio and its success in renegotiating management contracts, offsetting its high leverage. Moody's also helped Felcor Lodging LP's 9½% notes due 2008 gain 2½ points to close at 94.5 after the agency affirmed FelCor's Ba3 senior unsecured rating. Meristar Hospitality's bonds advanced four points on average, with its 9 1/8% notes due 2011 firming 3½ points to end at 82.5.

PCS/cellular operators (up 2.18% on the strength of American Tower Corp. and Alamosa Holdings Inc. bonds), domestic wireline telecom companies (up 2.14%) and finance issues (1.76% better) rounded out the Top Five list of the best-performing sectors for the week.

On the downside, as noted, the airline-heavy transportation sector was the only grouping actually in the red; it was off 2.10%, as Delta Air Lines' bonds lost an average of five points on the week after the carrier reported that capacity fell 3.8% and traffic declined 1.1% in February. It was the third consecutive week at the bottom of the barrel for the transportations, including the previous week's 1.07% loss, and the sixth week out of the past seven during which the sector was the worst of the worst.

With most of the other 26 sectors showing strong gains of a full percentage point or better, the Bottom Five list of the weakest performing groups was filled out by those sectors with the smallest gains. International cable operators were the second-worst sector, on a relative basis, posting just an 0.44% gain on the week, as Telewest Communications plc's bonds pulled the sector down; its zero-coupon/9¼% notes due 2009 lost half a point to close at 16.

Consumer non-durables (0.49% better, undermined by weakness in Dillard's Inc. debt), healthcare (up 0.51%) and North American cable (up 0.62% rounded out the Bottom Five list for the latest week.

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