B of A High Yield Broad Market Index tumbles 0.98%; 2007 return falls to 1.59%

By Paul Deckelman

New York, Nov. 20 - The Banc of America Securities High Yield Broad Market Index lost 0.98% in the week ended Friday, its third consecutive weekly retreat, following the 0.89% loss seen the previous week ended Nov. 9.

Although the most recent trend has been negative, the index has still risen in nine weeks out of the 13 since it began turning upward in the week ended Aug. 23. Gains have now been seen in 28 weeks out of the 46 since the start of 2007, against 18 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 73 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 25 weeks, there have now been 11 positive returns and 14 negative returns.

On a year-to-date basis, the index's return tumbled to 1.59% versus 2.59% the previous week and 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 - only to start heading back downward in early November.

Spreads widen to new high for year

B of A analysts said that the index's average spread over Treasuries ballooned out by 36 basis points on the week to finish at a bloated 568 bps - its new wide point for the year, up from the previous 2007 high of 532 bps, seen the week before.

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, getting as wide as 494 bps in mid-August but coming down from that zenith after that. However, there have now been four sizable spread-widenings in the last five weeks, bringing the average spread back up to its currently swollen level.

The index's yield to worst, which previously had widened to 9.14% from 8.87% the week before, shot up to 9.43% in the most recent week, a new peak level for 2007 so far and eclipsing the old mark of 9.29%, which was seen in the Aug. 16 week.

The index tracked 1,606 issues of $100 million or more, down from 1,611 issues the week before, while its overall market value fell to $615.7 billion from $624.6 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 41.27% of the index - had the best return, relatively speaking, meaning in this case the smallest loss, at 0.63%.

The lowest tier - those issues rated B- and below, accounting for 36.54% of the index - lost 1.16%, while the uppermost tier - those issues rated BB and BB+, comprising 22.20% of the index - brought up the rear by plunging 1.32%.

It was the fifth straight week in which the middle tier finished on top; in the week ended Nov. 9, the middle tier lost 0.54%, the upper tier lost 0.88%, and the lower tier lagged with a 1.27% nosedive, the third consecutive week in which the tiers had finished in that precise order.

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 1.34%. That continued the trend seen the week before, when it had an index-worst loss of 1.58%. B-rated credits - similar to, but not exactly the same as the middle tier - lost 0.77%, versus their 0.66% loss the week before, while BB-rated assets (the upper tier partially, but not completely, overlaps this subset) lost 1.02% in the most recent week, versus the previous week's 0.74% deficit.

Spreads widen as governments come in

The analysts noted that while the average high-yield spread jumped by 36 bps, as noted, the yield on the benchmark 10-year Treasury note narrowed by 4 bps to 4.17% from 4.21% the week before.

In the primary market, they said, there were six deals pricing a total of $2.5 billion of new paper, versus five issues totaling about $2.2 billion the week before. The additional transactions boosted year-to-date new issuance to $164.8 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 whopping $632.2 million outflow in the week ended last Wednesday - the biggest exodus of cash from the funds in two years - following the previous week's $13 million outflow. The year-to-date cumulative outflow total stands at about $1.831 billion, while the average weekly outflow was $40 million.

Negative sectors retain control

In the latest week, 36 of the 41 industry sectors into which B of A divides its high-yield universe were in negative territory, just two 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 latest weekly result continues and extends the trend seen in previous week, when 35 sectors were in the red, three 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 four negatives in the last 13 weeks, negative breakdowns have now been seen in four of the last five weeks. Positive and negative sector breakdowns have been about evenly split, at 11 positive versus 13 negative, in the last 24 weeks.

Life/health insurers week's best sector

The life/health insurance sector was the week's best performer for a second straight week, returning 0.86% to retain the top spot, on top of its index-best 1.74% return the week before.

Only one other sector actually finished in the black this past week and did so just barely - consumer non-cyclical/other, up 0.02%. Excluding the flat readings of the three new empty sectors, the latest Top Five list of best-performing sectors was filled out by three other sectors which merely had smaller losses than all of the other negatives - diversified telecommunications (down 0.02%), health care equipment and services (down 0.03%) and wireless telecom (down 0.05%).

Diversified financials week's worst sector

On the downside, the diversified financials sector - hard-hit by continued market anxiety about the credit environment and mortgage names - again repeated as the week's worst finisher, its third straight week in that unenviable position. Its yawning 4.16% loss in the latest week came on top of index-worst losses of 2.40% in the week ended Nov. 9 and 1.22% in the week ended Nov. 2. Diversified financials has also now been the cellar-dweller in four weeks out of the last five, including the week ended Oct. 18, when it had an index-worst loss of 1.56%, and additionally has now been among the Bottom Five worst performers for five straight weeks, including the Oct. 26 week, when it lost 0.18%.

Insurance brokers (down 3.19%), cable/DBS operators (down 2.46%), automobiles (down 1.81%) and consumer durables/non-automotive (down 1.69%) rounded out the latest week's Bottom Five list. Consumer durables/non-auto - which includes the beleaguered homebuilding industry - was among the Bottom Five for a third straight week, on top its loss of 1.84% the previous week and 0.66% the week before that. It was the second straight week among the big losers for the autos, which had also been there the previous week with a 1.78% loss.

Health care equipment/services tops for year

On a year-to-date basis, with 46 weeks now in the books, the health care equipment and services sector remained in the top position, although its cumulative return eased slightly to 10.71% from 10.75% the previous week due to its small loss - although that loss was small enough to include the sector in the latest week's Top Five. It is still the only sector to break into positive double-digits, percentage-wise, so far this year.

The life/health insurers - the week's top-performing sector and the only Top Five finisher to actually post a sizable positive return for the week - jumped three whole positions in the standings, moving up to second place from fifth place previously, as its 2007 return improved markedly to 7.76% from 6.84%.

Fellow Top Fiver diversified telecom, which had only a marginal loss, hung onto enough of its gains, at 7.57% versus 7.60% the week before, to also hang on as third-strongest.

Transportation, previously the second-strongest sector year to date, fell to fourth place, as its cumulative return declined to 7.43% from 7.66% previously. It in turn displaced the previous Number-Four finisher, metals and mining, which moved down one notch to occupy the now-vacant fifth slot, as its return for the year fell to 7.09% from 7.33%. Food and drug retailers remained in sixth place, as the sector's cumulative return eased to 6.61% from 6.69%.

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 12.05% from 10.54% the week before.

However, it is no longer the only sector posting a double-digit percentage loss. Diversified financials, continuing the sector's recent run of index-worst weekly performances, has now slid down to a cumulative loss of 11.29% from 7.44% previously and remains the second-worst 2007 performer.

Fellow Bottom Fiver insurance brokers tumbled to third-worst in the index on a year-to-date basis from "only" fourth-worst previously, its loss widening to 4.89% from 1.76% before. That moved banks up one notch, from third-worst to fourth-, with a 2.29% loss, versus 2.18% the week before.

Retailing remained the fifth-weakest industry grouping with a loss for the year of 0.65%, versus a 0.41% deficit previously.

Excluding the flat cumulative readings of the three empty sectors, Bottom Fiver automobiles - not previously among the worst laggards - tumbled to sixth-weakest in the index year to date, as its big weekly loss sliced its gain for the year to just 0.28% from 2.13% the week before. The previous sixth-worst sector, paper and forest products, managed to separate itself from the biggest losers as its return for the year fell only moderately, to 1.10% from 1.33% previously.

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