High yield turning in best performance since 1997, says Deutsche Bank Securities

By Paul A. Harris

St. Louis, March 28 - The high-yield market is already up by more than any year since 1997 - with less than three months completed, according to a report Friday by Deutsche Bank Securities Inc. co-heads of high yield research David Bitterman and Andrew W. Van Houten, along with Hunkar Ozyasar.

From March 20-27, the Deutsche Bank Global High Yield Index gained 1.05%, marking the sixth consecutive week of positive returns and bringing year-to-date junk returns to 7.27%.

"To put this result in perspective, the high yield market has not returned this much in an entire year since 1997," the report noted, adding that although returns were distributed "rather uniformly among sectors" during the week lower rated issues had a slight edge with CCC rated bonds returning 1.48% versus 0.97% for B rated issues and 0.98% for BB's.

"Telecom, which is advancing in pretty much the same fashion as it went down last year, i.e. out of control, beat the composite index once again, returning 1.42% for the week," the report continued. "The telecom sector has returned 16.2% thus far in 2003, meaning that roughly half of the losses of 2002 (down 33.7%) have been recovered.

"Utilities, on the other hand, have bested telecoms by both measures. Not only has the sector returned more (up 20.2% year to date), but it has also recovered almost the entire loss of 2002 (down 21.46%). Utilities were also the best sector over the last week, gaining 4.5% in just seven days."

Bitterman, Van Houten and Ozyasar noted that in spite of the positive news the primary market had one of the slowest weeks since the beginning of the year with only four issues and $881 million in new deals. The forward calendar, they added, has also "dried up dramatically" with only $1.4 billion of new deals scheduled for the weeks ahead.

"Given the uncertainty in the financial markets this is of course to be expected and it wouldn't worry us at all if it hadn't been for the immense mismatch it creates between supply and demand. Despite relatively low new issuance funds continue to flow into the high yield market like never before and, in our opinion, disturb the historical balance between returns.

"In medicine 'tolerance' refers to the reduction of the body's responsiveness to a substance with repeated use or exposure. In simpler terms you know you have developed tolerance when anything less than six Tylenol pills does nothing to relieve your headache.

"With each passing week more evidence builds up that the high yield market is developing serious tolerance to fund flows. Near-record weekly inflows, which in the past would send the market to the stratosphere, are having a relatively small impact on returns.

"The last three weeks have been particularly disappointing where inflows of $639 million, $882 million and $1 billion lifted the high yield composite index by less than 1.5%. Although 7.3% for the year is an impressive return performance, the traditional link between inflows and returns is clearly weakening. While record flows would almost certainly lead to record returns in the past, they are only lifting the market by a one or two percentage points now."

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