B of A High Yield Broad Market Index tumbles 0.89%; 2007 return falls to 2.59%

By Paul Deckelman

New York, Nov. 13 - The Banc of America Securities High Yield Broad Market Index lost 0.89% in the week ended Friday, its second consecutive weekly retreat, following the 0.26% loss seen the previous week ended Nov. 2.

While the most recent trend has been negative, the index has still risen in nine weeks out of the 12 since it began turning upward in the week ended Aug. 23. Gains have now been seen in 28 weeks out of the 45 since the start of 2007, against 17 losses - part of a larger pattern of strength that the index has shown since late June of last year; gains have now been recorded in 54 weeks out of 72 during that stretch, according to a Prospect News analysis of the B of A data.

But while advances have been seen in most weeks this year, much of that occurred in the first half of the year, when there was steady week-to-week strength. The momentum shifted to the downside around mid-year and stayed there for some weeks, before the index started to move back up in late August, through September and into October. November, however, has so far seen a return to negativity. In the last 24 weeks, there have now been 11 positive returns and 13 negative returns.

On a year-to-date basis, the index's return declined to 2.59% versus 3.51% the previous week, well down from its 2006 finish at 11.89%.

Showing its volatile, streaky nature, the index began 2007 with two straight months of strong gains, followed by a period of choppiness seen roughly from late February through early April, but after that had again showed consistent strength for a number of weeks. The year-to-date return peaked at 4.72% in the week ended May 24, moved down subsequently and actually fell into the red, bottoming at a 0.25% cumulative loss during the week ended Aug. 16, before heading back upward in late August.

Spreads widen to new high for year

B of A analysts said that the index's average spread over Treasuries ballooned out by 43 basis points on the week to finish at a bloated 532 bps - its new wide point for the year, up from the previous 2007 high of 494 bps, seen in the week ended Aug. 16, and well up from 489 bps in the Nov. 2 week.

The index had begun the year in a spread-tightening mode, extending the trend that had been in effect throughout 2006, when spreads had begun that year at 384 bps off Treasuries and had ended it at 305 bps over. After continuing to come in for the first two months of 2007, spreads had proceeded to rise over the next few weeks before resuming their tightening trend, which brought them down to their low for the year of 263 bps seen in the week ended June 7. That was also the record tight level since B of A began compiling the index.

From that nadir, though, spreads began to climb back up, hitting their previous peak in mid-August but coming down from that zenith after that. However, there have now been three sizable spread-widenings in the last four weeks, bringing the average spread back up to its current swollen level.

The index's yield to worst, which previously had widened to 8.87% from 8.76% the week before, shot up to 9.14% in the most recent week, not too far below its peak level for 2007 so far at 9.29%, which was seen in the Aug. 16 week.

The index tracked 1,611 issues of $100 million or more, down from 1,616 issues the week before, while its overall market value fell to $624.6 billion from $633.8 billion previously. B of A sees the index as a reliable proxy for the high-yield universe, which by some estimates is around $1 trillion in value.

Middle tier finishes on top

On a credit-quality basis, the middle of the three credit tiers into which B of A divides the HY Broad Market Index - those issues rated BB-, B+ and B, making up 41.31% of the index - had the best return, relatively speaking, meaning in this case the smallest loss, at 0.54%.

The uppermost tier - those issues rated BB and BB+, comprising 22.57% of the index - lost 0.88%, while the lowest tier - those issues rated B- and below, accounting for 36.12% of the index - brought up the rear by plunging 1.27%.

It was the fourth straight week in which the middle tier finished on top and the third consecutive week in which all three tiers finished in that precise order; in the week ended Nov. 2, the middle tier lost 0.12%, the upper tier lost 0.31%, and the lower tier lagged with a 0.39% loss.

By ratings categories for the three major baskets of credits into which B of A divides the index, excluding those issues which are not rated, its analysts again said that CCC-rated paper, which largely, but not totally, comprises the bottom tier, "underperformed" the rest of the index, generating a total loss of 1.58%. That continued the trend seen the week before, when it had an index-worst loss of 0.51%. B-rated credits - similar to, but not exactly the same as the middle tier - lost 0.66%, versus their 0.20% loss the week before, while BB-rated assets (the upper tier partially, but not completely, overlaps this subset) lost 0.74% in the most recent week, versus the previous week's 0.18% deficit.

Spreads widen as governments come in

The analysts noted that while the average high-yield spread jumped by 43 bps, as noted, the yield on the benchmark 10-year Treasury note narrowed by 11 bps to 4.21% from 4.32% the week before.

In the primary market, they said, there were five deals pricing a total of $2.2 billion of new paper, versus six issues totaling about $1.9 billion the week before. The additional transactions boosted year-to-date new issuance to $162.4 billion, according to B of A's calculations, versus the record total of $179.3 billion in 2006.

Weekly reporting high-yield mutual funds, as measured by AMG Data Services, showed a $13 million outflow in the week ended last Wednesday, following the previous week's $90.8 million inflow. The year-to-date cumulative outflow total stands at about $1.3 billion, while the average weekly outflow was $28 million.

Negative sectors retain control

In the latest week, 35 of the 41 industry sectors into which B of A divides its high-yield universe were in negative territory, just three were in positive territory, and three others had flat 0.00% readings, neither a loss nor a gain, although it should be noted that those latter three groupings - credit insurance, leisure equipment and products, and water utilities - are relatively new sectors created in the sector restructuring that took place last year and even at this date still do not as yet have any issues represented in them.

That result continues and extends the trend seen in previous week, when 20 sectors were in the red, 18 were in the black and the three new empty sectors had their flat readings. While strongly positive breakdowns have been seen throughout most of the year and have predominated recently, with nine positives and just three negatives in the last 12 weeks, negative breakdowns have now been seen in three of the last four weeks. Positive and negative sector breakdowns have been about evenly split, at 11 positive versus 12 negative, in the last 23 weeks.

Life/health insurers week's best sector

The life/health insurance sector was the week's best performer, returning 1.74% to take over the top spot from the prior week's champion, property/casualty insurers, which had led all sectors in the week ended Nov. 2 with a 1.07% gain, its second finish among the Top Five best-performing sectors in three weeks.

Only two other sectors actually finished in the black this past week and they did so just barely - oil and gas (up 0.02%) and real estate (up 0.01%). Excluding the flat readings of the three new empty sectors, the latest Top Five list was filled out by two other sectors which merely had smaller losses than all of the other negatives - health care facilities (down 0.07%) and pipelines (down 0.08%).

Diversified financials week's worst

On the downside, the diversified financials sector - hard-hit by continued market anxiety about the credit sector and mortgage names - repeated as the week's worst finisher, losing 2.40%, on top of its index-worst 1.22% the previous week. Diversified financials has now been the cellar-dweller in three weeks out of the last four, including the week ended Oct. 18, when it had an index-worst loss of 1.56%, and has also now been among the Bottom Five worst performers for four straight weeks, including the Oct. 26 week, when it lost 0.18%.

Banks (down 2.33%), consumer durables/non-automotive (down 1.84%) automobiles (down 1.78%) and retail (down 1.67%) rounded out the latest week's Bottom Five list. Consumer durables/non-auto - which includes the beleaguered homebuilding industry - and retail were both spending a second straight week among the Bottom Five, after having been there in the week ended Nov. 2 with losses of 0.66% and 0.56%, respectively. Banks, on the other hand, had been among the Top Five the week before with a 0.55% gain.

Health care equipment/services tops for year

On a year-to-date basis, with 45 weeks now in the books, the health care equipment and services sector remained in the top position, although its cumulative return eased to 10.75% from 10.94% the previous week. It is still the only sector to break into positive double-digits so far this year.

Transportation moved up one notch in the standings and took over as the second-strongest industry grouping so far this year although its return went down to 7.66% from 7.88%, while the previous Number-Two, diversified telecom, slipped one notch to third, as its return declined to 7.60% from 8.13% previously.

Metals and mining hung onto fourth place with a return of 7.33%, down from 7.45%.

The life/health insurance sector, on the strength of its index-best performance for the week, jumped up to fifth-best for the year, its return zooming to 6.84% from 5.01% the week before. The previous fifth-place holder, consumer non-cyclical/other, fell out of leadership contention, as its cumulative return slid to 6.07% from 7.39% the week before.

The food and drug retail group meantime hung onto sixth place, even as its 2007 return slid to 6.69% from 7.16% the week before.

Consumer durables/non-auto year's worst

On the downside, repeat Bottom Five finisher consumer durables/non-auto - which, as noted, includes the hard-hit homebuilding industry - remained the year's worst-performing sector, as its 2007 loss worsened markedly to 10.54% from 8.86% the week before. For the moment, it remains the only sector posting a double-digit percentage loss.

Diversified financials - once again the week's single worst-performing sector and also a repeat Bottom Fiver to boot, as noted - remained second-worst on a year-to-date basis, with a 7.44% loss, considerably wider than the previous week's 5.16% deficit.

Another Bottom Five finisher, banking, slipped one notch, from fourth-worst to third-, as it fell back into the red with a 2.18% loss, versus the previous week's slight 0.15% gain for the year. The previous third-worst sector, insurance brokers, improved to only fourth-worst, even as its loss for the year grew to 1.76% from 1.12% previously.

The retail sector, yet another Bottom Fiver, remained fifth-worst and also swung to a loss year to date at 0.41%, versus its 1.28% positive return the previous week.

Excluding the three empty new sectors' flat 0.00% readings for the year, the paper and forest products sector, not among the worst laggards previously, fell to sixth-weakest in the index, as its cumulative return withered to 1.33% from 2.73% previously. The previous sixth-worst sector, other health care, managed to climb out of that trough by posting only a relatively moderate loss on the week, which took its year-to-date return down to 1.64% from 2.41% previously.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.