B of A High Yield Broad Market Index up 0.07% on week, year-to-date return firms to 3.55%

By Paul Deckelman

New York, June 5 - The Banc of America Securities High Yield Broad Market Index rose 0.07% in the week ended Thursday, getting back in the black after two consecutive weeks of losses, including the 0.06% retreat the previous week ended May 25.

The index's year-to-date return edged up to 3.55% versus 3.48% the previous week and remains well above 2005's total 2.10% return.

The gain marked a return to a pattern that had been temporarily interrupted the previous two weeks. It was the eighth advance in the past 12 weeks, the 11th in the past 16 weeks, the 21st gain in the past 28 weeks, dating back to mid-November, and over the longer term, the 35th rise in the past 52 weeks, according to a Prospect News analysis of the B of A data.

The index's spread over Treasuries, which in the previous week had increased to 337 basis points from 332 bps, tightened to 333 bps in the most recent week. Its yield to worst, which had previously widened to 8.38% from 8.32%, actually continued to expand, slightly, to 8.39% in the most recent week.

The index tracked 1,693 issues of $100 million or more, down from 1,698 the week before, and its overall market value went down to about $579.4 billion from $581.5 billion the previous week. B of A sees the index as a reliable proxy for the nearly $800 billion high-yield universe.

Lowest credit tier outperforms

On a credit-quality basis, the lowest of the three credit tiers into which B of A divides the HY Broad Market Index - those issues rated B- and below, accounting for 34.10% of the index - had the best return, up 0.19%, followed by the uppermost tier - those issues rated BB and BB+, comprising 23.58% of the index - which was up 0.01%, followed closely by the middle tier - those issues rated BB-, B+ and B, making up 42.32% of the index - which showed a flat 0.00% return, with neither a gain nor a loss.

In the week ended May 25, the upper tier had lost 0.01%, the middle tier lost 0.05% and the lower tier lost 0.09% - the second consecutive week in which the tiers had all shown losses and ended in that exact order.

The latest week's finish represented a reversion to the pattern seen before the prior two weeks, during which time the lower tier had dominated for eight straight weeks, and over the longer term, in 11 weeks out of the previous 12. And it temporarily broke the pattern, seen in 13 of the previous 16 weeks, in which the middle tier lived up to its name and has ended sandwiched between the other two. It was also the third straight week in which the upper tier had not paradoxically finished at the bottom of the pile, something it had done in 18 weeks out of the previous 31, ending May 11.

B of A analysts said that the week's modest return followed "a week of mixed daily performances." They noted that while spreads on the junk index were tightening by 3 bps, Treasuries were widening by about the same amount.

The analysts noted that the automobile sector "led performance for the week, with a 0.55% return and a 70 bps gain in excess return." By way of contrast, the non-automotive portion of the index, representing the remaining 85.97% of the High Yield Broad Market Index, retreated 0.01% on the week.

They said that lower-quality paper "outperformed" the rest of the market, as the CCC-rated issues - which largely, but not completely, overlap the lower of the index's three credit tiers - had a 0.12% total weekly return, while its B-rated paper (mostly, but not totally contiguous with the middle credit tier) gained 0.08%, and the BB credits (similar to, but not exactly the same, as the upper credit tier) inched up 0.03%.

Issuance 'muted'

They also observed that new issuance was "muted," as only two deals worth $725 million had priced by Friday's close, although that was up from the $300 million which had priced the week before.

And the analysts related that $244 million more left high-yield mutual funds than came into them in the week ended May 31, according to AMG Data Services, versus a $346 million outflow the week before. The year-to-date net outflow among weekly reporting funds increased to about $2.5 billion from around $2.2 billion the week before, while the average weekly outflow rose to $113 million from $107 million previously. The fund flow numbers are an indicator of overall market liquidity trends.

In the latest week, 23 of the 42 industrial sectors into which B of A divides its high-yield universe were in positive territory, against 13 negatives and six sectors showing neither gains nor losses, but rather, a flat 0.00% reading (although it should be noted that those six were brand-new sectors created in the sector restructuring that took place at the end of March, and they do not as yet have any actual issues represented in them).

That represents a rebound from the negative sector breakdown seen in the past two weeks, including the week ended May 25, when there were just 10 sectors in the black, 25 in the red and seven having flat returns. It also represents a return to the pattern of strongly positive sector breakdowns, which before those two weeks had been seen in 22 of the previous 25 weeks through May 11.

Autos tops for week

Autos, as noted, had the best return of any sector, up 0.55%, on continued strength of issues such as General Motors Corp., GM's bankrupt former subsidiary Delphi Corp. and another bankrupt components supplier, Dana Corp. It was the second straight week at the top for the sector, which was also the champion in the May 25 week with a 0.36% return. Autos have now been among the Top Five best-finishing sectors in three weeks out of the past four.

Pharmaceuticals (up 0.43%). entertainment (up 0.39%), technology (up 0.38%) and wireline telecommunications (up 0.37%) rounded out the latest week's Top Five. It was wireline's second consecutive week there, including the previous week, when it returned 0.08%. Entertainment has now been there in six weeks out of the last eight.

Banks worst for week

On the downside, banks lost an index-worst 0.42% in the latest week to displace the previous week's cellar-dweller, cable/DBS, which dropped 0.49% in the week ended March 25.

Other health care (down 0.35%), oil and gas (also down 0.35%), consumer non-cyclical/other (off 0.30%) and food and drug retailers (down 0.29%) rounded out the Bottom Five list of worst-performing sectors in the most recent week. It was the second consecutive week in the Bottom Five for oil and gas, which lost 0.29% the previous week, and for consumer non-cyclical/other, which previously lost 0.31%, and which has now been in the Bottom Five in three weeks out of the last five. On the other hand, it was a reversal for other health care, which had made the Top Five in the March 25 week with a 0.10% gain. However, the sector has now been among the Bottom Five in two weeks out of the last four. It was also a comedown from the food and drug retailers, who were in the prior week's Top Five with a 0.26% gain.

Autos tops for year

On a year-to-date basis, the automobiles sector's second straight index-best finish boosted its 2006 cumulative return to 8.68% from 8.08% previously, leaving it to cruise along as the clear 2006 leader so far. Top Fiver entertainment remained a solid second place, rising to 6.76% from 6.34%. Industrial products stayed in third place, as its yearly return inched up to 5.91% from 5.88% previously.

Life, health insurers worst for year

On the downside, the life and health insurers' 2006 loss narrowed to 1.68% from 1.94%, but the sector decisively remains the worst-performing grouping. Health care facilities' cumulative loss also narrowed, to 0.08% from the previous week's 0.23%, but it remains the only other sector in the red so far this year. Leaving out the sectors with flat paper returns for the year because no bonds trade in them yet, repeat Bottom Fiver oil and gas fell to a 0.41% cumulative return from 0.76% previously.

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