B of A High Yield Broad Market Index jumps 1.16% on week; 2007 return grows to 2.55%

By Paul Deckelman

New York, Sept. 24 - The Banc of America Securities High Yield Broad Market Index rose for a fifth straight week, soaring 1.16% in the week ended Thursday, on top of the 0.23% advance seen in the previous week ended Sept. 13.

Those five straight weekly gains represent a definitive break from the index's recently inconsistent pattern; after having posted steady gains for most of the first half of the year, the index had more lately 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.

Advances have been seen in most weeks this year, although the momentum decidedly shifted to the downside around mid-year. Since then, there have been 10 negative returns and now seven positive returns in the last 17 weeks.

On a year-to-date basis, the index's return jumped to 2.55%, nearly double the previous week's 1.37% reading.

Year-to-date performance had also recently 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 beginning its bounce in the Aug. 23 week, an upward move which has since continued over the next four weeks.

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. It peaked at 4.72% in the week ended May 24, moved down subsequently and fell into the red, but began heading back upward in late August.

Gains have now been seen in 24 weeks out of the 38 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 now having been recorded in 50 weeks out of 65 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 had clearly shifted to the downside, before the nascent return to the upside of the past few weeks.

The index's average spread over Treasuries, which in the prior week had narrowed to 476 basis points from 478 bps the week before, continued tightening markedly in the most recent week, down to 440 bps.

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, peaking at 494 bps in the week ended Aug. 16, but then edging down somewhat since then, and coming in solidly in the most recent week.

The index's yield to worst, which previously had narrowed to 9.05% from 9.07% the week before, also came in notably in the most recent week, tightening 20 bps to finish at 8.80%. It had recently peaked at 9.29% in the Aug. 15 week.

The index tracked 1,619 issues of $100 million or more, down from 1,620 issues the week before, although its overall market value rose to $624.1 billion from $617.9 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.

Lower tier finishes on top

On a credit-quality basis, the lowest of the three credit tiers into which B of A divides the HY Broad Market Index -those issues rated B- and below, accounting for 34.62% of the index - had the best return, 1.55%. The middle tier - those issues rated BB-, B+ and B, making up 42.68% of the index - returned 1.04%, while the uppermost tier - those issues rated BB and BB+, comprising 22.70% of the index - brought up the rear with a return of 0.82%.

The lower tier's solid rise represented a break with its recent trend of weakness, which through the previous week ended Sept. 13 had been seen in nine weeks out of the prior 13, and also represented a reversal of the recent pattern of upper-tier strength, which had been seen in the prior two weeks, and in three weeks out of the prior four. The middle tier, however, has now lived up to its name and finished sandwiched between the other two tiers, for a third consecutive week. In that previous week ended Sept 13, the upper tier returned 0.43%, the middle tier rose 0.23% and the lower tier was up 0.11%.

B of A analysts said that "low-quality paper outperformed," with CCC-rated paper, which largely, but not totally, comprises the bottom tier, turning in a 1.93% return, B-rated credits - similar to, but not exactly the same as the middle tier - returning 1.04%, and BB-rated assets (the upper tier partially, but not completely, overlaps this subset), returning 0.91%.

The analysts noted that while the average spread on the index decreased by 35 bps on the week, "in contrast," the yield on the 10-year Treasury rose to 4.70% by the end of the week, 24 bps wider than 4.46% a week earlier.

The primary market, they said, "came back to life, following several weeks of no issuance." Four transactions totaling $1.8 billion priced by Friday, boosting year-to-date new issuance to $134.3 million from $132.5 million the previous week. 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 a $31.8 million outflow in the week ended last Wednesday, which followed the previous week's $153.6 million outflow. Year-to-date cumulative outflows total about $2.1 billion, for an average weekly outflow of $55 million.

Positive sectors in control

In the latest week, 36 of the 42 industry sectors into which B of A divides its high-yield universe were in positive territory, three were in negative territory, and three others had flat 0.00% readings, neither a loss nor a gain, although it should be noted that the latter groupings - 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.

It was the fifth straight week of a largely positive sector breakdown, including the previous week, when 31 sectors finished in the black, seven were in the red and there were four flat 0.00% readings - the empty new sectors plus the established consumer products sector.

That five-week stretch has been a departure from the trend of negative breakdowns that had predominated recently, even now still having been recorded in nine weeks out of the last 16. However, the larger trend for much of this year, and even stretching back into last year, has seen strongly positive breakdowns.

Consumer durables/non-auto tops for week

The consumer durables non-auto sector was the index's best performer, zooming 3.14% to replace diversified financials, which held the top spot the previous week with a 0.89% return. Consumer durables/non-auto, which includes the hard-hit homebuilding sector, in fact went from worst to first - it had been the single worst performer the previous week, when it lost 2.21% - given a big boost by the Federal Reserve's rate cut, which stirred optimism that easier interest rates might boost home buying and, in turn, spur additional home construction.

Insurance brokers (up 2.59%), retail (up 2.08%), diversified financials (up 2.01%) and health care facilities (up 1.93%) rounded out the latest week's Top Five best-performing sectors. It was the third straight week there, and fourth week out of the most recent five for diversified financials, which, as noted, had been the leading finisher the previous week, as well as the week before that. The volatile sector has also been among the Bottom Five worst-performing sectors in two weeks out of the past six. The insurance brokers have also been volatile - the sector was in the Bottom Five the previous week, with a 0.62% loss, but has now been in the Top Five in two weeks out of the last three.

Banks worst sector for week

On the downside, the banking sector was the worst single performer on the week, losing a whopping 3.75% to take over as the cellar-dweller from consumer durables/non-auto, which, as noted, had been the previous week's worst performer with a 2.21% loss.

Life/health insurance (down 2.13%) and gas utilities (down 0.22%) were the only two other sectors actually showing losses on the week. Excluding the flat readings of the three empty new sectors, the latest week's Bottom Five was rounded out by two other sectors merely showing smaller gains than all of the other positive finishers - real estate (up 0.41%) and food and drug retail (up 0.49%).

Health care equipment tops for year

On a year-to-date basis, with 38 weeks now in the books, the health care equipment and services sector remained in the top position, its cumulative return pushing up to 7.14% from 6.04%. Diversified telecommunications was second-best at 6.62%, up from 4.69% previously. Metals and mining was third-best, at 5.75%, up from 4.98% the week before.

Transportation was the fourth-place finisher, at 5.44%, up from 4.87%. Industrial products was fifth-strongest, at 5.38%, up from 4.58%. Consumer non-cyclical/other moved up to sixth-best at 5.34%, up from 3.56% before.

Consumer durables/non-auto year's worst

On the downside, the consumer durables/non-auto sector remained worst performer on a year-to-date basis, although its 2007 loss fell to 7.27% from 10.09% previously, on the strength of its index-best performance on the week.

Fellow Top Fiver diversified financials was second-worst with a 3.01% loss, although that was down from the previous week's 4.92% deficit, while insurance brokers, yet another Top Five finisher, was third-worst with a 2.91% loss, down from the previous 5.36% loss.

Banks - the week's single worst-performing sector, as noted - fell to fourth-worst on the year, with a 1.48% loss, a sharp deterioration from the previous week's 2.36% cumulative gain. Excluding the three empty new sectors' flat 0.00% readings, Bottom Fiver life/health insurance fell to fifth-worst on the year, its 2007 return slashed to 0.22% from 2.40% previously. Other health care was sixth-worst with a year-to-date gain of 0.35%, an improvement from its 0.34% cumulative loss the week before.

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