Banc of America High Yield Broad Market Index down 0.08%, year-to-date return at 2.37%

By Paul Deckelman

New York, Sept. 12 - The Banc of America Securities High Yield Broad Market Index eased 0.08% in the week ended Sept. 8, on top of a 0.05% dip the previous week.

Even so, the index has shown gains in 10 weeks out of the last 13.

On a year-to-date basis, the index's return declined slightly to 2.37%, after having fallen back the previous week to 2.45% from 2.50%, its high point for the year so far.

The index's spread over Treasuries, which in the previous week had ballooned out to 384 basis points from 359 bps mostly due to strength in the Treasuries market, fell back to 376 bps despite the junk market's continued lackluster performance, as Treasuries gave up their earlier gains. Its yield to worst, previously up to 7.69% from 7.64%, rose to 7.74% in the latest week.

The more narrowly focused High Yield Large Cap Index, which generally tracks the patterns seen in the High Yield Broad Market Index, likewise retreated 0.10% in the week, after having eased 0.12% the previous week. The year-to-date return, which had previously fallen to 2.21% from 2.33% - its high point of the year - dropped to 2.11%.

The spread over Treasuries, which in the week ended Sept. 1 had widened drastically to 371 bps from 344 bps, declined to 362 bps. Its yield to worst rose to 7.61%, after having risen the week before to 7.57% from 7.51%.

In the latest week, the more inclusive High Yield Broad Market Index tracked 1,730 issues of $100 million or more, down from 1,739 the week before, while the overall market value of the index fell to $591.7 billion from $593.3 billion the previous week.

The High Yield Large Cap Index, measuring the most liquid portion of the high-yield world, tracked 672 issues of $300 million or more, unchanged from the week before, although the overall market value of the index rose slightly to $381.7 billion, up from the previous week's $381.4 billion. Banc of America sees both indexes as reliable proxies for the $750 billion high-yield universe.

Middle tier prevails

On a credit-quality basis, the middle of the three credit tiers into which Banc of America divides its index -issues rated BB-, B+ and B, 39.67% of the index - had the best return at 0.12%, followed by the bottommost tier - B- and below, 33.44% of the index - which lost 0.12%. Bringing up the rear was the topmost tier - BB and BB+, 26.89% of the index - which lost 0.31%.

It was the second consecutive week the tiers had finished in that order: In the week ended Sept. 1, the middle tier was up 0.02%, bottom tier down 0.09% and the top tier down 0.17%.

Banc of America analysts, noting the second straight modest loss, said, "High oil prices and concerns about their impact on the economy continued to affect market sentiment this week."

They also pointed out that back from its late summer hiatus, the primary sphere "was buzzing with activity after the Labor Day holiday, with five issuers having tapped the market for a total of $2.55 billion of proceeds, while the highlight of the week in the new-deal arena was one offering upsized to $350 million."

On the demand side, high-yield mutual funds, a measure of overall junk market liquidity trends measured by AMG Data Services, showed an $84.5 million net inflow in the week ended Sept. 7 versus a $101.5 million outflow the week before.

12 sectors in the black

In the most recent week, 12 of the 23 industry sectors into which Banc of America divides its high-yield universe had positive returns, versus 10 groups finishing in the red and one - industrials - finishing unchanged.

In the previous week, 14 groups had positive returns and nine finished on the downside. The most recent two weeks represent an erosion from the previous two weeks, when all 23 sectors were in the black, but still fit generally into the pattern now seen in 15 weeks out of the last 16 as the majority of sectors had gains.

Steel had the best performance in the most recent week, returning 0.47%. The week before, finance and entertainment were tied for the top spot, each returning 0.31%.

The return represents a rebound for the steelers, who had been among the Bottom Five worst performing sectors in two weeks out of the previous three.

Gaming (up 0.28%), energy (up 0.20%), utilities (up 0.19%) and lodging (up 0.14%) rounded out the latest week's Top Five list of the best-performing sectors. It was the second consecutive week that energy has been in the Top Five, on top of the previous week's 0.28% gain, while the utilities have now been there in two weeks out of the last four.

Gaming, on the other hand, had been among the Bottom Five the week before with a 0.29% loss, in the immediate aftermath of Hurricane Katrina, which damaged or forced closures at a number of casino operations in southern Louisiana and the Mississippi Gulf Coast. Several companies that suffered damage issued statements during the week indicating that they were insured for their losses and intend to rebuild and reopen.

Airlines cause worry

On the downside, the transportation sector posted its second consecutive index-worst big loss, 1.88%, on top of the 0.82% retreat seen the week before, pulled down by energy worries, particularly for strikebound Northwest Airlines Corp. and for Delta Air Lines Inc., both of which are flirting with bankruptcy. News that Northwest and its mechanics had resumed talks proved to be of not much help to the bonds, as short-lived gains evaporated when it became apparent that Northwest would ask for even larger labor-cost concessions from the still-recalcitrant union.

In the two weeks before that, the sector had showed uncharacteristic strength, landing in the Top Five in each of those weeks - finishing on top in the week ended Aug.18 - amid investor hopes that the Northwest mechanics would not strike, or if they did, the airline would be able to weather the work stoppage with its replacement workers.

But as the strike has dragged on amid union claims of impaired efficiency and unsafe maintenance as well as reports the FAA will investigate how well the contingency plan is working, transportation has reverted to its more familiar role as either the worst-performing sector or, at best, among the Bottom Five.

Consumer non-cyclical companies (down 0.42%), entertainment (down 0.35%), consumer durables (down 0.33%) and health care (down 0.25%) rounded out the latest week's Bottom Five list.

It was the second straight week there for consumer durables, which had lost 0.70% the previous week. However, consumer non-cyclicals had been among the Top Five the week before, with a 0.23% gain, as had entertainment, which tied for first place that week with an 0.31% gain.

Transportation still sinking

On a year-to-date basis, the transportation sector's second big index-worst weekly loss widened its 2005 cumulative loss to 14.36% from 12.72% previously, solidifying its unenviable distinction as the biggest loser.

Fellow Bottom Five finisher consumer durables' 2005 deficit rose to 2.59% from 2.28% the previous week, while paper and packaging's loss doubled to 0.40% from 0.20%. No other sectors were in the red on a year-to-date basis.

On the upside, PCS/cellular's index-best year-to-date return pushed up to 8.74% from 8.61% previously, while finance was a solid second place, despite a drop in its cumulative return to 6.46% from 6.60% previously.

Business services rose to 4.79% from 4.66%, while publishing rebounded to 4.67% from 4.62%. Wireline telecommunications' 2005 return slipped to 4.14% from 4.27%.

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