B of A High Yield Broad Market Index up 0.20% on week; 2007 return grows to 4.04%, another new high

By Paul Deckelman

New York, May 7 - The Banc of America Securities High Yield Broad Market Index returned 0.20% in the week ended Thursday, on top of a 0.42% gain in the previous week ended April 26. It was the fifth consecutive weekly advance for the index, as it moves away from its recent pattern of choppiness, seen roughly from late February through early April, and returns to the more consistent strength that it showed for a number of weeks at the start of the year.

Including the latest week's results, gains have now been seen in 14 weeks out of the 18 since the start of 2007 - part of a larger pattern of strength that the index has shown since late June of last year, with gains in 40 weeks out of 45 during that stretch. That, in turn, was part of a still-larger trend of positive returns in evidence throughout most of last year and now extending into the beginning of 2007, according to a Prospect News analysis of the B of A data.

The index's year-to-date return increased to 4.04% in the most recent week, a new high for the year so far, up from the previous peak level of 3.83% seen the week before. The index finished 2006 with an 11.89% return - nearly six times 2005's total 2.10% return.

The index's average spread over Treasuries, which in the prior week had narrowed to 289 basis points from 298 bps previously, edged downward to 288 bps, as the index continued its return to the spread-tightening trend that had been seen throughout last year, when high-yield spreads started at 384 bps off Treasuries and ended at 305 bps over.

That trend had pretty much continued into the first two months of the new year, until the recent period of turbulence, which included one week - ended March 1 - in which spreads ballooned out by an astonishing 34 bps. Though below their peak 2007 level of 313 bps seen in the week ended March 15, spreads still remain above their mid-February low for the year of 269 bps, having surrendered and not yet recovered some of the spread-tightening gains that were achieved in the first weeks of the year.

The index's yield to worst, which previously declined to 7.55% from 7.62% the week before, also tightened slightly, to 7.54% in the most recent week.

The index tracked 1,652 issues of $100 million or more, down marginally from 1,653 issues the week before, although its overall market value rose to $648.4 billion from $646.2 billion the previous week. 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.

Credit tiers closely spaced

On a credit-quality basis, the three credit tiers into which B of A divides the HY Broad Market Index all finished with virtually identical returns, with the uppermost tier - those issues rated BB and BB+, comprising 21.51% of the index - having gained 0.21% on the week, while the two other tiers - the lowest tier - those issues rated B- and below, accounting for 34.39% of the index - and the middle tier - those issues rated BB-, B+ and B, making up 44.20% of the index - both just a shade behind, at 0.20%.

This represented at least a temporary interruption in the patterns of strength and weakness that the individual tiers had been demonstrating up through the previous week ended April 26, when the lowest tier had returned 0.55%, the middle tier 0.38% and the upper tier 0.30% - the third time in the prior four weeks, the fifth time in the previous eight, and the seventh time in the prior 11 weeks that the tiers had finished in that particular order.

Up through that previous week, the lowest tier had been on top in four straight weeks, in six weeks out of the prior eight and in 17 weeks out of the previous 20. The middle tier had, up to that point, lived up to its name and had been sandwiched between the other two tiers in three weeks out of the prior four, in five weeks out of the previous eight and in 11 weeks out of the prior 15, while the upper tier had been at the bottom of the pile for five weeks out of the prior six and in 12 weeks out of the previous 16.

While the B of A's analysts had recently characterized lower-quality paper as having "outperformed" the rest of the index over a period of some weeks, they now said that in the most recent week, "performance was homogenous across the credit quality buckets," with CCC-rated paper, which largely but not totally comprises the bottom tier, and the higher-rated BB credits (the upper tier partially, but not completely, overlaps this subset), having returned 0.20%, while B-rated paper - similar to, but not exactly the same as the middle tier - yielded 0.21%.

Primary issuance "remained at elevated levels" in the latest week, the analysts said, with $8.1 billion of new bonds having priced, up from $6.1 billion in the previous week. The analysts calculate year-to-date new issuance at $74.8 billion, up from $66.7 billion previously. Issuance totaled a record $179.3 billion in 2006, according to B of A's calculations.

Declining Treasuries, steady spreads

The analysts further observed that "the week's performance was driven by moderately declining risk-free [i.e., Treasury] rates," as the yield on the 10-year government issue fell by 3 bps to 4.67% while the average high-yield spread remained close to unchanged, tightening 1 bp to 288 bps, as noted.

Weekly reporting high-yield mutual funds, as measured by AMG Data Services, showed an inflow of $209 million in the week ended Wednesday, versus the minimal $200,000 net inflow seen the week before. Year-to-date cumulative inflows now stand at $1.2 billion, up from $1 billion previously, with the average weekly flow at $68 million, up from $60 million previously, the analysts said.

In the latest week, 37 of the 42 industry sectors into which B of A divides its high-yield universe were in positive territory, with two sectors in negative territory, and three flat 0.00% readings, neither a loss nor a gain, although it should be noted that these were new sectors created in the sector restructuring that took place last year and do not as yet have any issues represented in them.

In the two previous weeks, the positive sectors had scored a clean sweep of the groupings showing actual returns, with 38 in the black each week versus none in the red, in addition to four sectors showing flat returns (that latter group has since been reduced by one, with one issue having now begun trading in the previously empty insurance brokers sector). The results over the latest week continue the pattern of solidly positive sector breakdowns that has now been seen in 42 out of the past 45 weeks, going back to last June, and on an even longer-term basis, in 63 weeks out of the past 75, encompassing virtually all of this year so far and last year and extending all the way back to late 2005.

Property/casualty insurers week's best

In the week ended Thursday, the property/casualty insurance sector had the best return, up 0.66%, to take the top spot away from the previous week's champion, consumer durables/non-auto, which had returned an index-leading 0.77% in that prior week ended April 26. The latter group, though, did remain among the Top Five best-performing sectors in the May 3 week with a 0.48% return - now its fourth straight week in that select circle, following five previous weeks, dating back to mid-February, in which it had been among the Bottom Five worst-performing sectors in the index, reflecting the extreme distress at that time among homebuilders, a key component.

Health care equipment and services (up 0.63%), health care services (up 0.44%) and the diversified telecommunications and automobile sectors (each up 0.42%) rounded out the latest week's Top Five list. It was the third straight week there for health care services, which had made it the week before with a 0.62% return and an 0.89% return the week before that ended April 19. It was the second straight week in the Top Five for health care equipment and services and autos, which were there in the April 26 week with returns of 0.70% and 0.65%, respectively. Diversified telecom has now been among the Top Five in two weeks out of the last three.

Pharmaceuticals week's worst

On the downside, pharmaceuticals had the week's worst return, losing 0.51% to eclipse the previous week's cellar-dwellers, diversified financials and wireless telecom, which had each returned a meager 0.23% in the week ended April 26, when no sectors had shown actual losses.

The only other sector actually in the red for the most recent week was technology, down 0.02%. Omitting the empty sectors showing flat readings, the latest week's Bottom Five list was rounded out by sectors merely showing smaller gains than all of the other positive sectors - retail (up 0.01%), paper and forest products (up 0.03%) and gaming, lodging and leisure (up 0.05%).

Health care equipment/services tops for year

On a year-to-date basis, with 18 weeks now in the books, the health care equipment and services sector pushed upward on the strength of its Top Five weekly performance to take over first place with a 2007 return of 6.26%, up from its previous third-place tie with health care services at 5.60%. The latter sector, meantime, also a weekly Top Five finisher, moved into second place, at 6.07%.

The previous year-to-date leader, consumer non-cyclical/other, tumbled to third place at 5.97%, although its return was up from an index-best 5.73% previously. Industrial products remained fourth-best at 5.83%, up from 5.58%. Retail, the previous week's second-place holder at 5.71%, fell into fifth place, its tiny Bottom Five-worthy gain only moving its cumulative return up to 5.72%. Metals and mining, previously in fifth place with a 5.39% return for the year, was pushed down to sixth place, at 5.61%.

Diversified financials year's worst

On the downside, again omitting the three empty sectors, diversified financials remained the index's worst year-to-date laggard, returning just 1.12%, although that was up from 0.98% previously.

Banks remained the second-worst sector at 1.81%, up from 1.75%. The other health care sector, previously only the fourth-worst sector, declined to third-worst at 2.26%, although that was up from 2.06%. It traded places in the rankings with Top Fiver consumer durables/non-auto, which improved to just fourth-worst from third with a 2.40% return, up from 1.90% the week before.

Other telecom remained the fifth-worst cumulative finisher at 2.47%, up from 2.07% previously, and real estate was still sixth-weakest at 3.08%, up from 2.92%.

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