B of A High Yield Broad Market Index up 0.07% on week; 2007 return grows to 0.65%

By Paul Deckelman

New York, Sept. 4 - The Banc of America Securities High Yield Broad Market Index rose for a second straight week, adding 0.07% in the week ended Thursday, on top of the 0.84% advance seen in the previous week ended Aug. 23.

After posting steady gains for most of the first half of the year, the index has recently been in a zig-zag pattern, alternating a week or two of upside with a week or two of retreat, including the dramatic 2.32% plunge in the week ended July 26 - easily its worst loss so far this year and one of its worst weekly deficits ever. While advances have been seen in most weeks this year, the momentum has decidedly been to the downside of late, with 10 negative returns and just four positive returns in the last 14 weeks.

On a year-to date basis, the index's return has grown to 0.65%, up from 0.59% the week before.

Year-to-date performance has also been zig-zagging; after having dipped into the red for the first time in 2007 during the week ended Aug. 2, at 0.03%, it was back in the black the following week ended Aug. 9, when it was up 0.59%, but then fell back into the red in the week ended Aug. 16, when it was down 0.25% for the year. That was its worst cumulative loss so far, before bouncing in the Aug, 23 week, an upward move continued in the week ended Thursday. The index had its peak 2007 return of 4.72% in the week ended May 24.

The index had finished 2006 with an 11.89% return. Showing its volatile, streaky nature, it 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, until the beginning of the most recent downturn, after it peaked in late May.

Gains have now been seen in 21 weeks out of the 35 since the start of 2007, against 14 losses - part of a larger pattern of strength that the index has shown since late June of last year, with gains recorded in 47 weeks out of 62 during that stretch, according to a Prospect News analysis of the B of A data. However, since hitting its high point in late May, the recent momentum has clearly shifted to the downside.

The index's average spread over Treasuries, which in the prior week had tightened to 467 basis points from 494 bps the week before - its high point for the year - widened to 483 bps in the latest 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 the 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, spreads began to climb back up, to stand at their current relatively bloated levels.

The index's yield to worst, which previously had declined to 9.09% from 9.29% the week before - its peak for the year so far - rose to 9.14% in the most recent week.

The index tracked 1,629 issues of $100 million or more, down from 1,636 issues the week before, while its overall market value fell to $619.9 billion from $623.2 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.

Middle tier back 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 42.99% of the index - was up 0.11%. This was followed closely by the lowest tier - those issues rated B- and below, accounting for 34.36% of the index - with an 0.08% return. Lagging behind was the uppermost tier - those issues rated BB and BB+, comprising 22.64% of the index - which lost 0.05%.

The order of finish in the most recent week represented a return to the pattern of middle-tier strength that has now been seen in six weeks out of the last eight, although it was interrupted in the Aug. 23 week, when the upper tier had the best return, up 1.11%, followed by the middle tier, which returned 0.85%, while the lower tier brought up the rear at 0.67%. The latest week's results also represent a departure from the recent pattern of weakness in the lower tier; even so, that tier has still lived up to its name and finished at the bottom of the pile in seven weeks out of the last 11.

B of A's analysts asserted that "spreads widened uniformly across the ratings spectrum," with BB-rated credits (the upper tier partially, but not completely, overlaps this subset) having widened 17 bps to average 380 bps, while the B-rated credits - similar to, but not exactly the same as the middle tier - widened 15 bps to average 458 bps, and CCC-rated paper, which largely, but not totally, comprises the bottom tier, widened 13 bps to average 710 bps.

Primary issuance was muted in the week ended Friday, with no transactions having taken place. In the previous week, there was one transaction - the $1.5 billion mega-deal for Sabic Innovative Plastics. Year-to-date new issuance was unchanged at $132.5 billion. Issuance totaled a record $179.3 billion in 2006, according to B of A's calculations.

Weekly reporting high-yield mutual funds, as measured by AMG Data Services, showed an $83 million inflow in the week ended last Wednesday, versus the previous week's $379.7 million cash exodus from the funds. It was first inflow after 11 consecutive weekly outflows. Year-to-date cumulative outflows remain about $2.2 billion.

Positive sectors in control

In the latest week, 29 of the 42 industry sectors into which B of A divides its high-yield universe were in positive territory, 10 were in negative territory and three others had flat 0.00% readings, neither a loss nor a gain, although it should be noted that those latter three sectors - credit insurance, leisure equipment and products, and water utilities - were new sectors created in the sector restructuring that took place last year and do not as yet have any issues represented in them.

The breakdown represents a slightly moderated continuation of the trend seen in the previous week, when 36 sectors were in the black, just three were in the red, and there were the three flat 0.00% readings.

That's a departure from the trend of negative breakdowns which has predominated recently, having now been recorded in nine weeks out of the last 13. However, the larger trend for much of this year, and even stretching back into last year, has had strongly positive breakdowns.

Food and drug retail week's best sector

The food and drug retail sector was the week's best performer, posting a 0.96% return to take over the top spot from consumer non-cyclical/other, which was the previous week's champion with a 2.76% weekly gain.

Retail (up 0.78%), health care services and life/health insurance (each up 0.57%) and consumer products (up 0.50%) rounded out the latest week's Top Five list of the best-performing sectors. It was a solid turnaround for retail and for life/health insurance, each of which had been among the previous week's Bottom Five worst-performing sectors, retail with a 0.23% loss and the insurers with just a minuscule 0.06% gain. However, the life/health insurers have now been among the Top Five in two weeks out of the last three.

Property/casualty insurers week's worst

On the downside, the property/casualty insurers group was the worst-performing sector of the week, down 0.75%, supplanting banking, the previous week's worst performer with a 0.31% loss, as the cellar-dweller.

Diversified financials (down 0.74%), automobiles (down 0.44%), aerospace and defense (down 0.26%) and consumer durables/non-auto (down 0.12%) rounded out the latest week's Bottom Five list. It was a comedown for the diversified financials, which had been among the Top Five performers the previous week, with a 1.77% gain. However, the group has now been in the Bottom Five in two weeks out of the last three.

Health care equipment and services tops for year

On a year-to-date basis, with 35 weeks now in the books, the health care equipment and services sector remained in the top position, its cumulative return edging up to 5.64% from 5.62%.

Transportation hung onto the second-place slot, its return rising to 4.51% from 4.42% the week before.

Industrial products remained third-strongest with a 4.23% return, up from 4.05% the week before. Meanwhile, the metals and mining sector was still fourth-best with a 4.16% return, up from 3.85%.

Consumer non-cyclical/other held onto the fifth-place slot into which it had moved the week before, its return rising to 3.94% from 3.82%. Chemicals, which had been booted off the leaderboard the preceding week, got back into sixth place as its 2007 return rose to 3.77% from 3.39% previously, while commercial services lost that slot and fell from leadership contention, as its year-to-date return eased to 3.51% from 3.57%.

Consumer durables/non-auto year's worst

On the downside, the consumer durables/non-auto sector remained the worst performer on a year-to-date basis, its cumulative loss widening somewhat to 8.27% from 8.16% the week before, pulled down by its Bottom Five weekly showing.

Fellow Bottom Fiver diversified financials remained second-worst for the year, its cumulative loss widening to 7.02% from 6.32% the week before. The insurance brokers sector remained third-worst, its loss for the year growing to 5.59% from 5.24%.

Retail, which had fallen in among the worst performers year to date in the previous week, was still the fourth-worst group, although its Top Five weekly performance cut its loss to 1.20% from 1.97%.

Other health care, which had improved to only fifth-worst in the index in the previous week, stayed there in the most recent week, although its loss declined to 1.34% from 1.60%. Other telecommunications stayed in the sixth-worst position to which it had moved the week before, while its loss for the year declined to 0.51% from 0.80%.

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