The January Effect That Wasn't

The secondary high yield market was fairly uneventful last week, characterized by a lot of lateral moves, telecom up slightly and movie theaters down somewhat.

"Everybody's just in a bad mood," said one trader in summing up the week.

One of the biggest underlying factors is the continuing lackluster performance in the Treasury market, sources said. And at least one high yield portfolio manager said he's expecting things to only get worse in the coming months.

He said that last year high yield outperformed Treasurys nearly 10%, but there is practically no chance the market will repeat the same kind of year, comparatively. In fact, he said, it is doubtful whether high yield will outperform Treasurys at all.

But even more pressing is the fund flows, he said. The retail investors in the high yield mutual funds are unlikely to look at the funds' returns and be thankful that 2% is at least outperforming the declining Treasurys. He or she is more likely to get out all together and put it all in a higher performing asset class, such as an index fund that is returning 25%, or a high-tech fund that is returning 100%, the portfolio manager said.

"The retail investors won't see 2% to 3% and say I've beaten the benchmark.' They'll say, this stinks, why am I in this at all?'" he said.

Also looming on the horizon are expected interest rate hikes from the Federal Reserve, several investors said. With the economy rolling along, and Y2K fears a thing of the past, several institutional investors said they expected a series of rate hikes that will total nearly 1% over the next several months.

Furthermore, this all is coming in January, usually one of the better months for high yield returns, investors said.

As far as bond moves on the week, Splitrock Services and Concentric Network Corp. both saw nice gains on announcements of their respective acquisitions (see story on page 1).

Movie theater chain Loews Cineplex lost about five or six points last week to trade at 80 or 81 on its $300 million, 8.875% notes of '08 after it reported quarterly earnings on Wednesday.