B of A High Yield Large-Cap Index up 0.64%; year-to-date gain rises to 3.23%

By Paul Deckelman

New York, Feb. 25 - The Banc of America High Yield Large Cap Index advanced 0.64% in the week ended last Thursday (Feb. 20), breaking a four-week long losing streak that included the 0.51% loss seen in the previous week (ended Feb. 13). The four weeks of downturns, including that week, had partially unraveled the gains of five straight weeks of advances, stretching back into December.

The year-to-date return - which in the Feb. 13 week had fallen to its low for the year, 2.57% - fattened up in the most recent week to 3.23%. The cumulative return had been given a big boost by the 3.43% gain seen in the first full trading week of the year (ended Jan. 9), but had been steadily eroding in recent weeks, before the latest upturn.

Even with the index's solidly better performance in the most recent week, its spread over comparable Treasury issues actually widened slightly to 933 basis points from 932 the week before, as the gains were offset by the Treasury market's war-jittery firmness, although the index's yield-to-worst narrowed to a bit to 12.32% from 12.37%.

B of A's somewhat broader and more representative Banc of America High Yield Broad Market Index was also better in the most recent week, firming 0.47%, versus its 0.24% loss in the week ended Feb. 13. The HY Broad Market Index's year-to-date return improved to 2.89%, up from 2.40% the prior week. Its spread over Treasuries rose slightly to 939 basis points from 937 the week before, again on the stronger Treasuries market, and its yield-to-worst was 12.23, a slight narrowing from the 12.25% seen the week before.

(The High Yield Large Cap Index, representing the most liquid portion of the high yield world, tracks more than 400 issues of $300 million or more, having a total market value of about $185 billion. The High Yield Broad Market Index tracks over 1400 issues of $100 million or more, having a total market value of about $345 billion. B of A sees both as reliable proxies for the approximately $600 billion high yield universe.)

B of A analysts noted that in the most recent week, the credit markets "stepped to the beat of a different drummer again . . . as investor demand and solid two-way trading flows continued even after poor equity performance at mid-week pushed the equity market (DJIA) below 8000 for Thursday's close."

The analysts said that investor demand "provides a compelling argument refuting the existence of a war risk premium in the credit markets; however, the decrease in Treasury yields that has been linked to the potential for war has fueled corporate market total returns."

They said that the high yield market, specifically, broke out of its previous slump, as 21 of the 27 sectors into which B of A divides its HY Broad Market Index posted gains, against only six decliners. They noted that strength in the PCS/cellular, domestic wireline telecommunications and utility sectors, where there are heavy concentrations of larger, more liquid issues, enabled the HY Large Cap Index to outperform its Broad Market counterpart.

But even so, the Broad Market Index's performance was still helped by those three sectors, which were the three best performers in the most recent week. PCS/cellular led the way with a 1.80% gain, as Nextel Communications Inc.'s bonds moved up on good fourth-quarter earnings results, as Nextel posted a net profit of $1.46 billion, versus a net loss of $1.8 billion in the year-ago period. Revenue was up 24% year-over- year to $1.88 billion, and the Reston, Va.-based wireless provider added 503,000 customers during the quarter. Nextel's benchmark 9 3/8% notes due 2009 firmed nearly three points to end at 98.5.

Utilities were the second-best finisher, up 1.52% - a sharp turnaround from the week before, when it had been among the weakest sectors. In the week ended Thursday, AES Corp.'s bonds gained up to seven points - its 9 3/8% notes due 2010 gained six points to close at 67 - while CMS Energy Corp.'s bonds rose about five points, including its 7½% notes due 2009, which gained five points to end at 78.

Domestic wireline issues (up 1.42%, mainly on strength in Qwest Communications International Inc. and Level 3 Communications Inc. bonds), lodging (1.16% better) and finance (an 0.73% gain) rounded out the Top Five list of the best-performing sectors for the week. Lodging, it should be noted, had been the absolute worst performer the week before.

On the downside, transportation resumed that role with a 1.25% loss, making it four weeks out of the last five that the sector was being dragged down more than any other by faltering airline company bonds. Losers included Northwest Airlines Inc., whose 8.52% notes due 2004 closed at 66 after dropping eight points, and Delta Air Lines Inc., whose 7.7% notes due 2005 lost five points to end at 67.

Nobody was applauding for the entertainment sector, down 0.57% as Six Flags Inc.'s bonds weakened, its zero-coupon/10% discount notes due 2008 down 2½ points to close at 92, while AMC Entertainment Inc.'s 9½% notes due 2011dropped nearly a point to end at 96.5.

International cable operators (off 0.54% as Telewest Communications plc and British Sky Broadcasting Group plc's bonds eased), satellite services (down 0.46%) and healthcare (0.09% lower) rounded out the Bottom Five list of the week's worst-performing sectors.

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