B of A High Yield Large-Cap Index off 0.32%; year-to-date gain eases to 3.32%

By Paul Deckelman

New York, Feb. 4 - The Banc of America High Yield Large Cap Index retreated 0.32% in the week ended last Thursday (Jan. 30), the second week in a row in which the market gauge was modestly on the downside. In the previous week (ended Jan. 23), the index eased 0.12%. The downturns follow five straight weeks of advances, stretching back into December.

The year-to-date return likewise declined in the latest week to 3.32% from 3.65% the week before. 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).

In the latest week, the index's spread over comparable Treasury issues widened out to 902 basis points from 897 the week before, while its yield-to-worst moved up to 12.15% from 12.05%.

B of A's somewhat broader and more representative Banc of America High Yield Broad Market Index was also slightly on the downside in the most recent week, posting a deficit of 0.20%, versus the nearly flat 0.02% loss in the week ended Jan. 23. The HY Broad Market Index's year-to-date return was 2.73%, down from 2.94% the prior week. Its spread over Treasuries was 916 basis points and its yield to worst was 12.12%, up from 911 basis points and 12.03%, respectively.

(The High Yield Large Cap Index, representing the most liquid portion of the high yield world, tracks approximately 400 issues of $300 million or more, having a total market value of about $180 billion. The High Yield Broad Market Index tracks approximately 1,400 issues of $100 million or more, having a total market value of about $340 billion. B of A sees both as reliable proxies for the approximately $600 billion high yield universe.)

B of A analysts noted that the second consecutive downturn in the two high yield indexes coincided with the posting of the first notable (nearly $649 million) weekly outflow this year in high yield mutual funds, a key measure of junk market liquidity - but they also said that the junk market "has remained resilient thus far in 2003" despite that outflow and "the considerably higher war premium being extracted from the financial markets."

They pointed out that in contrast to the relatively modest declines seen in the HY Broad Market and HY Large Cap indexes, the high yield market outperformed the major equity indexes by more than 4.5%, with the Dow Jones Industrial Average losing 5.1% on the week; the S&P 500 down 4.81%, and the Nasdaq index off 4.75% in that period. They also noted that high-grade corporate bonds outperformed stocks on a year-to-date basis, although there was some spread widening in the face of war jitters and continued profit warnings from many companies. But while the equity markets sold off, "spread weakness was met with buyers eager to snap up 'cheap' bonds, which they expect will rally once Iraq has been disarmed," the B of A report said.

Even with the latest downturn, both high yield indexes remain solidly positive for the year so far, mostly coasting on the strong returns seen in the first week of the year. By way of contrast, the HY Large Cap Index finished 2002 down 2.89%, while the HY Broad Market Index posted a 1.55% gain in 2002.

Banc of America said that the latest week's decline in the HY Broad Market Index was led by the transportation sector, laden with airline bonds, and the lodging group. The sectors continued to soften due to their weak earnings outlook.

Transportation - which was also the worst finisher in the week ended Jan. 23, when it was down 3.13% - lost another 3.00% in the week ended Thursday, and moved into negative territory on a year-to-date basis. Among the big losers in the group were Atlas Air Inc.'s 10¾% notes due 2005, which lost 7 points over the week to close at 15; Atlas' bonds "have been weakening since the company disclosed in the previous week that it has not made an aircraft lease payment and may defer others. The disclosure also led S&P to downgrade the airline's issuer credit rating from B- to CCC-," the B of A report said. Other downsiders included Delta Air Lines' 8.3% notes due 2029 dropping 4.5 points to 58.5; and Northwest Airlines' 9 7/8% notes due 2007 easing 3 points to 66.

Lodging was the second-worst performer, down 1.52% as industry giants Hilton and Starwood's lowered earnings guidance pushed the bonds of high yielders Meristar Hospitality Corp., Felcor Lodging and Host Marriott lower in sympathy.

Steel (also off 1.52% as AK Steel Corp. debt turned lower), PCS/cellular companies (down 1.11%) and entertainment (0.61% worse) rounded out the Bottom Five list of the week's worst-performing sectors.

On the upside, satellite services gained 3.40% as Sirius Satellite Radio's bonds traded up after the satellite radio broadcaster announced an offer to exchange shares of its common stock for all of its outstanding debt; Sirius' 14½% notes due 2009 and its 15% notes due 2007 advanced 18 and 13 points, respectively, to close at 53 and 50.

Technology was the second-best performer, up 1.72% on strength in Amkor Technology Inc., Nortel Networks Corp. and Lucent Technologies Inc. debt. Energy (up 0.51%), North American cable operators (0.50% better) and publishing (a 0.41% gain) rounded out the Top Five list of the best-performing sectors on the week.

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