B of A High Yield Large-Cap Index off inches up 0.15%, year-to-date gain 16.58%

By Paul Deckelman

New York, June 3 - The Banc of America High Yield Large Cap Index was cautiously firmer in the week ended Thursday (May 29), returning 0.15%, with its year-to-date return standing at 16.58%.

As of the previous Thursday, May 22, the Large Cap Index had shown a 0.35% dip for the week - a second straight weekly loss - and its year-to-date return had declined to 16.41% (while Banc of America compiled the statistics, it did not officially publish its regular Index Weekly the previous week, due to the Memorial Day holiday).

Despite the better return seen in the latest week, the index's spread over Treasuries widened out a bit to 735 basis points from 729 basis points in the week ended May 22, chiefly due to Treasury market improvement, while its yield-to-worst also increased a tad to 9.78% from 9.76% the week before.

The slight gain in the latest HY Large Cap Index - B of A's proxy for the most liquid portion of the junk bond universe - was seen despite a second consecutive week in which high-yield mutual funds showed a net outflow, with about $619.7 million more flowing out of the funds than coming into them, actually a larger loss than the week before. The funds are considered by most market players to be a key barometer of overall junk bond market liquidity trends, and since the beginning of the year, the HY Large Cap Index, and B of A's more inclusive High Yield Broad Market Index, have essentially moved up in tandem with week after week of large junk fund inflows, which finally came to an end in late May.

The High Yield Broad Market Index meanwhile also managed to eke out a 0.08% gain in the latest week, versus a 0.22% decline in the May 22 week. Its year-to-date return firmed slightly to 14.36% from 14.27%, while both its spread and yield to worst widened slightly to 764 basis points and 9.94% respectively versus 755 bps and 9.90% the week before.

(The High Yield Large Cap Index, representing the most liquid portion of the high yield world, tracks some 475 issues of $300 million or more, having a total market value of around $236 billion. The High Yield Broad Market Index tracks about 1535 issues of $100 million or more, having a total market value of about $421 billion. B of A sees both as reliable proxies for the approximately $700 billion high yield universe.)

B of A analysts noted that even though "the spotlight remained focused on the primary side" of the overall corporate bond market, "a favorable tone remains in secondary trading, with outperformance coming from higher yield and higher beta names."

They said that "despite some softness earlier in the week, the tone in the high yield market improved on Thursday, helped by positive news in the media, telecommunications and utilities sectors." However, they added, the industrial sectors "faded over the week," contributing to the mediocre performance of the indexes.

The bank's analysts also pointed out that in the latest week, the lowest-rated bonds outperformed the rest of high yield, with the bottom of the three tiers into which B of A divides its index (issues rated B- and below) returning 0.38%. The middle tier (issues rated B, B+ and BB-) lost 0.11%, while the top tier (issues rated BB and B+) retreated 0.14%.

In the latest week, domestic wireline telecommunications companies turned in the best showing, with the sector up 1.00% on strength in Qwest Communications International after it posted generally favorable first quarter results and obtained a commitment for a $1 billion loan to refinance debt at its Qwest Corp. subsidiary. Qwest Capital Funding's 7¾% notes due 2006 firmed three points to close at 90.5, and Qwest Services Corp.'s 13½% notes due 2010 gained nearly two points to end at 113.75.

North American cable operators did nearly as well, up 0.97% on the week, as Charter Communications announced it had agreed to sell its Port Orchard, Wash. system for $91 million, pushing its 8 5/8% notes due 2009 up nearly two points to 71.375.

Utilities (up 0.93%, largely on Calpine Corp. getting an extension from its lenders on two existing working capital facilities while it negotiates a new $1 billion facility), technology names (0.78% better) and PCS/cellular companies (a 0.31% gain) rounded out the Top Five list of the best performing sectors in the most recent week.

On the downside, steel was the worst-performing sector, dropping 3.31% as AK Steel Corp.'s notes continued to weaken; AK's 7¾% notes due 2012 fell six points to end at 78.5, and its 7 7/8% notes due 2009 lost seven points to close at 80.5.

Lodging was the second-worst performing sector, with a 0.88% retreat as names weakened across the board, with Host Marriott's 7 7/8% notes due 2008 losing 1¾ points to end at 98.75 and Prime Hospitality' s 8 7/8% notes due 2012 down more than five points to 89.

Paper and packaging (off 0.80%, chiefly on weakness in Tembec Industries paper), entertainment (0.75% lower) and consumer durable goods companies (down 0.58%) rounded out the Bottom Five list of the worst-performing sectors in the latest week.

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