B of A High Yield Broad Market Index up 0.49%, year-to-date gain increases to 21.54%

By Paul Deckelman

New York, Oct. 6 - The Banc of America High Yield Broad Market Index rose 0.49% in the week ended Thursday Oct. 2, its seventh straight weekly gain, bringing its cumulative 2003 return to its highest point for the year so far, at 21.54%.

In the previous week, ended Sept. 25, the index had risen 0.26%, for a year-to-date return of 20.95%.

In the latest week, the spread over Treasuries widened slightly to 603 basis points, up from 600 bps the previous week, although the index's yield-to-worst dropped to its lowest level of the year, 8.76%, versus the previous week's 8.86%.

B of A's High Yield Large Cap Index also continued to push upward in the latest week, with a return of 0.46%, virtually identical to the HY Broad Market Index gain, versus the previous week's 0.20%. The year-to-date return fattened in the latest week to its peak level for the year, 24.13%, from 23.56% the previous week. In the latest week, the spread over Treasuries was 569 basis points, widening slightly from 564 bps previously, but the yield-to-worst was a year's low 8.54%, versus the previous week's 8.62%.

In the latest week, the more inclusive High Yield Broad Market Index tracked 1,591 issues of $100 million or more, having a total market value of over $473 billion, while the High Yield Large Cap Index, representing the most liquid portion of the high yield world, tracked 546 issues of $300 million or more, having a total market value of more than $285 billion. B of A sees both as reliable proxies for the approximately $700 billion high yield universe.

B of A analysts noted that the secondary market "continued its upward trend," even as the overall junk bond market remains focused on primary-side activity, although the analysts pointed out that new-deal activity had moderated somewhat from the heavy pace seen in mid-September, when over $4.7 billion in new bonds were priced during the week ended Sept. 18 alone. Still, they said primary activity during the latest week was on pace to exceed the average weekly volume over the last twelve months of $2.27 billion.

The bank's analysts also took note of the "modest" $79.7 million net inflow seen by high yield mutual funds in the week ended this past Wednesday (fund flows are considered a reliable indicator of overall junk market liquidity trends, a key market technical factor). It was the second straight week in which more money came into the funds than left them, on top of the previous week's $152.9 million inflow.

On a credit basis, the highest of the three credit tiers into which B of A divides its index - representing credits rated BB and BB+ and comprising 15.54% of the index - had the best return for a fourth consecutive week, rising 0.65%. It was followed for a third consecutive week by the bottom credit tier (issues rated B- and below, accounting for 35.66% of the index), which returned 0.54%, with the middle credit tier (those issues rated BB-, B+ and B, making up 48.80% of the index) again lagging behind and slightly underperforming the index at 0.39%.

Continuing a recent trend of broad-based strength, 20 of the 27 industry sectors into which Banc of America Securities divides its high yield universe were in positive territory in the latest week, although for the first time in weeks, there were as many as five or more sectors in the red.

The best- performing sector in the latest week was the non-ferrous metals and mining sector, which returned 1.22% on the strength of coal companies such as Peabody Energy Corp., whose 6 7/8% notes due 2013 rose two-and-a-quarter points to close at 104.75, while Arch Western Resources LLC, whose 6¾% notes due 2013 gained two points to close at around 103.5. The non-ferrous metals and mining sector had also turned in a strong performance the previous week (ended Sept. 25), returning 0.64%, second-best in the index that week, during which domestic wireline telecommunications issues had been the best performers with a 1.40% gain.

Utilities was the second-best performing sector in the latest week, gaining 1.18%, pushed up by strength in long maturity notes from Williams Cos. Inc.; its 8¾% notes due 2032 were quoting at around 100.5 at the end of the week, up two-and-a-half points on the week. AES Corp.'s 9½% notes due 2009 rose more than a point to close at 103.25.

Consumer non-cyclical issues (up an even 1% on strength in the bonds of consumer product makers Chattem Inc. and Jarden Corp. as well as food and beverage processors Dole Foods Inc. and Dean Foods Co.), international cable operators (up 0.92%) and energy (0.88% better) rounded out the Top Five list of the week's best-performing sectors.

On the downside, steel companies were the cellar dwellers for a third consecutive week, losing 2.63% as AK Steel Corp. bonds continued to skid, following the Ohio steelmaker's announcement that it expects to report a third-quarter net per share loss of 82 to 86 cents - far wider than consensus guidance of around 62 cents per share of red ink. AK's 7¾% notes due 2012 fell a point on Wednesday and then dropped five points on Thursday to close at around 63, while its 7 7/8% notes due 2009 lost eight points over the week to close at around 65. (The latest week's index, which only covers activity through this past Thursday, does not include the sizable gains posted by AK Steel bonds this past Friday on the strength of news that it has renewed efforts to make peace with its labor unions, gains which are likely to show up in this coming week's index).

The steel group had also lost 2.81% in the week ended Sept. 25 and 0.44% in the week ended Sept. 18 - both index-worsts - after the announcement of the abrupt resignations of chairman and CEO Richard Wardrop and President John Hritz.

Chemical companies lost 0.59% in the latest week, second-worst in the index, weighed down largely by Lyondell Chemical Co., whose 9 7/8% notes due 2007 dropped two points to 95.25, and Equistar Chemicals LP, whose 10 1/8% notes due 2008 lost nearly two points to end at 98.75.

Transportation (off 0.32% as weakness in Delta Air Lines Inc. bonds pushed the airline sub-sector lower), North American cable companies (down 0.17%) and technology (0.08% lower) rounded out the Bottom Five list of the week's worst-performing sectors; in the previous week, the domestic cablers had also been among the weakest finishers, losing 0.15%.

On a year-to-date basis, international wireline telecom's cumulative gain fattened to 68.42% from 67.36% the week before, extending its lead over second-place international wireless telecom, which eased to 63.54% from 64.37% previously.

Steelmakers (as noted, the worst-performing individual sector for each of the past three weeks) remained the only industry sector in the red for the year-to-date, its cumulative loss widening to 4.28% from the previous week's 1.69%.

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