Advantage Data: Lodging leads as high-yield major-sector rally ends year on high note

By Paul Deckelman

New York, Jan. 3 - The high-yield market moved up for a fifth consecutive week, closing out 2011 firing on all cylinders as a large majority of industry groupings showed gains last week, according to sector-tabulated bond-performance statistics supplied to Prospect News by Advantage Data Inc.

Of the 73 broad-industry sectors into which Boston-based Advantage Data currently divides its entire high-yield universe, 62 finished in the black last week, eight sectors were in the red and three others did not show enough statistically meaningful activity to produce any kind of results.

That continued and improved upon the bullish trend seen the week before, ended Dec. 23, when 57 sectors posted gains, 12 had negative results and four others produced no results.

Having made a positive clean sweep of December, last week - the year's finale - was the 35th time this year that a majority of sectors showed weekly gains, against 17 weeks of losses. While most of that lopsided better-than 2-to-1 positive breakdown reflects the tremendous strength seen earlier in the year, when there was week-after-unbroken week of improvements, it was a strong finish nonetheless, reversing a negative trend seen over three weeks in mid-to-late November.

Showing the streaky and cyclical nature of the junk market over the latter part of 2011, those three November weeks on the downside had stood in stark contrast to four straight weeks of gains before that, which dated back to the week ended Oct. 14. That surge, in turn, had followed five straight weeks in negative territory, a losing streak that stretched back to the week ended Sept. 9.

In the latest week, 29 of the 30 most significantly sized sectors - as measured by the number of bond issuers, the collective number of issues tracked and their total face amount - ended in the black, with only one closing in the red - again, a continuation and a strengthening of the trend from the prior week, when 26 of those sectors had shown positive results, against just four negatives.

Among specific major sectors in the latest week, bonds of lodging operators topped the list, while metals mining companies and wholesale durable goods distributors were also among the biggest gainers.

On the downside, only petroleum refiners actually posted a loss on the week, while non-depository financial institutions and metals processing companies showed only very small gains.

Looking at statistical indicators of overall market performance, junk's total year-to-date return, as measured by the widely followed Merrill Lynch High Yield Master II index, ended the week on Friday higher for a second straight week.

Key measure turns back up

Junk bonds, as measured by the Merrill Lynch index, had a one-week gain of 0.506%, its second straight weekly gain. The week before had seen a 0.577% return, in contrast to the 0.038% loss the week before that, ended Dec. 16.

With the latest week's gain, the index remained split evenly at five weeks out of the last 10 up and five weeks down, as the junk market attempted to rebuild the strong momentum which high yield had generated during the first half of the year, but which had been only sporadically present for much of the second half. However, building a base for a possible strong advance in 2012, the index ended the year up in four weeks out of the last five.

This past week's upturn raised the index's total return to 4.381% from 3.855% a week earlier. It was the highest reading for the index since the 5.03% return seen on Aug. 4, although the index ended the year below its 2011 peak level of 6.362%, set on July 26. But the levels over the last few weeks of the year were well up from the index's 2011 low point, the 3.998% cumulative deficit recorded on Oct. 4.

Other components of the Merrill Lynch index also mostly firmed on the week. As of Friday, the index showed an average price of 97.381, a yield to worst of 8.36% and a spread to worst of 743 basis points over comparable Treasuries, versus a price of 97.035, a yield of 8.45% and a spread of 741 bps at the end of the previous week.

That compared with the index's high average price for the year of 104.563, set on May 11, 2011, and its low price of 91.189, on Oct. 4; its lowest yield for the year of 6.644% on May 16, 2011 and highest yield of 10.117% on Oct. 4; and its tightest spread for the year of 481 bps, set on April 11, 2011, versus its wide spread for 2011 of 901 bps on Oct. 4.

Lodging is the leader

Back on a sector basis, Advantage Data meanwhile showed bonds of lodging operators having the best showing of any significantly sized sector last week, when they were up by 1.06%. It was the second straight week that the hoteliers were among the elite finishers, having also made it in the week ended Dec. 23, when the group checked in with a gain of 0.76%.

Other top performers this past week were metals mining companies (up 0.81%), wholesale durable goods distributors (up 0.70%), electronics manufacturers (up 0.64%) and telecommunications operators (up 0.62%). It was the second straight week in that select circle for telecom.

On the downside, petroleum refiners were the only significantly sized sector actually showing a loss, ending the week 0.64% in the red.

Several other major sectors showed only weak gains in an otherwise robust market, including non-depository financial institutions (up 0.02%), metals processors (up 0.11%), financial brokers and exchanges (up 0.16%) and real estate companies (up 0.17%). It was the second straight week among the underachievers for the non-depository financials.

Food stores the year's leader

For the full year, bonds of food store operators turned in the best performance among the significantly sized sectors with a final return of 11.20%. They were followed by miscellaneous retailers (up 9.34%), electric and gas utilities (up 9.08%), oil and gas exploration and production companies (up 8.85%), amusements (up 8.43%) and food manufacturers (up 8.39%).

Bringing up the rear, no major-sized sectors ended in the red for the year. Sectors posting only relatively small cumulative gains in 2011 were depository financials (up 1.74%), insurance carriers (up 1.90%), building construction (up 2.32%), publishing (up 2.96%) and real estate (up 2.98%).

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