B of A High Yield Large-Cap Index up 3.34% in fourth straight gain

By Paul Deckelman

New York, Nov. 12 - The Banc of America High Yield Large Cap Index posted its fourth consecutive gain in the week ended Thursday Nov. 7, zooming 3.34%. That gain followed the 1.91% advance in the previous week, ended Oct. 31.

The High Yield Large Cap Index's year-to-date loss narrowed markedly for a second straight week to 8.96% in the most recent week from 11.90% the week before. While still large in objective terms, the year-to-date loss has sharply receded from the biggest weekly cumulative loss for the year, the 15.68% drop which had been recorded in the week ended Oct. 10.

The index's spread over Treasuries and yield-to-worst both narrowed in the most recent week to 1,080 basis points and 13.93% versus 1,157 basis points over and 14.68% in the previous week.

However, even with the sizable bounce seen over the past four weeks, the index's cumulative performance still remains well below the relatively modest loss level at which it ended 2001, when the B of A market measure suffered an approximate 3% loss for the full year. The spread at the end of 2001 was somewhat over 900 basis points off Treasuries and its year-end yield to worst was above 13.50%.

In the week ended Thursday, the index tracked 379 issues with a total market value of $153.333 billion, versus 380 issues worth $148.506 billion the week before. Banc of America sees the index, which tracks issues of $300 million and over, as a reliable barometer of trends in the overall high yield market of over $500 billion.

The bank's broader high yield index, which includes issues of $100 million or more, meantime tracked 1,366 issues having a collective market value of $303.352 billion in the most recent week, versus 1,368 issues worth $296.405 billion the week before.

The High Yield Broad Market Index jumped 2.48% on the week, and had a spread of 1,087 basis points and a 13.82% yield to worst in the most recent week, versus the previous week's gain of 1.08%, its 1,148 basis points spread and 14.43% yield-to-worst. The HY Broad Market Index's year-to-date loss narrowed to 3.71% from 6.03% the week before. The latest week's advance was broad-based, with 25 of the 27 industry sectors into which B of A divides its HY Broad Market Index posting gains.

Of the three credit tiers into which B of A divides the index, the big middle credit tier (issues rated BB-, B+ and B, comprising 50.23% of the index) had the best showing, gaining 2.86%. The bottom tier - bonds rated B- and below, making up 34.09% of the index, including many of the rebounding telecom and cable issues - was not far behind, with a 2.71% return on the week, while the top credit tier (issues rated BB+ and BB, making up 15.68% of the index) was up 0.81%. It was the third straight week in which those tiers finished in the same order.

B of A analysts noted that both the high yield and the high-grade bond markets were helped by the 50-basis point cut in the targeted federal funds rate that came out of last week's much-anticipated meeting of the Federal Open Market Committee. The "surprising" rate cut, plus "the Fed's optimism about the state of economy were well received by both the equity and credit markets," the analysts' report said.

They further stated that "sectors that had come under severe pressure in early October (e.g., transportation, telecom, cable, utilities and technology) posted the largest gains, as they continued to move higher on the improving outlook for positive liquidity events (e.g. asset sales and refinancings)."

Finally, B of A said that last week's $1.1 billion of net inflow into high yield mutual funds - the fourth consecutive week of net inflows - "further enhanced the technical landscape in high yield."

The best-performing industry sector in the high yield universe in the most recent week was transportation, which soared 11.08% as air carriers - helped by positive news from United Airlines - firmed smartly. UAL's bonds advanced 13 points or more, with its 10.67% notes due 2004 gaining 21 points to close at 43 after the airline reached an agreement with one of its lenders to refinance $500 million of debt, giving the company more time to delay filing for bankruptcy. Other airline bonds firmed as well, with Delta Air Lines' bonds gaining anywhere from six to 17 points and its 8.3% notes due 2029 up 11 points to end at 58. Northwest Airlines' 9 7/8% notes due 2007 firmed 15 points to close at 58.

The transportations had been on the Top Five list of the best-performing sectors the week before, when they had notched a 2.36% gain, while domestic wireline telecommunications issues had lead all groups that week, with a 7.31% advance.

In the week ended Thursday, the domestic wirelines were again among the strongest performers - their fourth straight week in the Top Five - returning 6.28% as Time Warner Telecom's 10 1/8% notes due 2011 and its 9¾% notes due 2008 advanced four and five points respectively, both closing at around 50. Level 3 Communications Inc.'s issues also strengthened by between one and 2½ points, with its 9 1/8% notes due 2008 rising 2.5 to close at 59.

North American cable operators (up 5.49%, largely on gains in Cablevision bonds on a large asset sale and news of an equity investment), utilities (up 5.23%) and technology names (3.74% better) rounded out the latest week's Top Five; the techs had also been there the week before, with a 4.49% gain.

On the downside, only two sectors actually had negative results in the latest week.

International cable operators repeated as the worst performer, although its 0.71% dip was far less than the previous week's 5.46% slide. United Pan-Europe Communications NV's notes were down a point in the latest week.

Steel issues also ended in the red, with an 0.15% dip, as issues of AK Steel retreated half a point, with the company's 9% notes due 2007 and its 7¾% notes due 2012 closing around 101 and 98, respectively.

Three sectors which posted smaller returns than the rest of the groups in the index rounded out the Bottom Five list of the worst-performing sectors in the latest week; consumer non-durables (up 0.39% on rises in retailers Saks and The Gap); consumer durables (up 0.81%); and finance (up 0.83%).

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