B of A High Yield Broad Market Index down 0.56% in first week of 2008, off 0.60% on year so far

By Paul Deckelman

New York, Jan. 7 - The Banc of America Securities High Yield Broad Market Index started the new year off on the wrong foot, losing 0.56% in the week ended Friday, its second loss in the last three weeks. That stood in contrast to its 0.11% gain in the previous week ended Dec. 28, the last full reporting week of 2007. Since it began turning upward in the week ended Aug. 23, following a lengthy summer slide, the index has now risen in 12 weeks and has posted declines in eight weeks.

On a year-to-date basis, the index is down 0.60% (the year-to-date figure and the first weekly total of 2008 do not match due to a statistical quirk; since B of A calculates its index on a Monday-to-Friday basis, the weekly figure in this case includes Monday, Dec. 31 - the last trading day of 2007 - when the index rose marginally in an abbreviated holiday session, while that session is not included in the 2008 cumulative return).

In 2007, even while posting gains in 32 weeks and losses in just 20, the index only posted a return for the year of 1.85%, having see-sawed between its peak level of 4.72%, reached in the week ended May 24, and its low-point of a 0.25% loss seen in the week ended Aug. 16. The 2007 return was far smaller than the index's 2006 finish of 11.89%.

Spread widens past last year's high

B of A analysts said that the index's average spread over Treasuries ballooned out to a bloated 652 basis points in the most recent week - a 45-bps widening from the 607 bps where it stood at the end of the previous week, and a 39-bps widening from the 613 bps mark at which it ended 2007. The spread also far overshot its high point for 2007 of 621 bps, reached in the week ended Nov. 23.

The index's yield to worst, which previously had risen to 9.68% from 9.65% the week before, and which ended the year anchored at 9.68%, jumped out to 9.83% in the most recent week.

The index tracked 1,559 issues of $100 million or more, down from 1,570 the week before and from 1,568 at the end of 2007. Its overall market value fell to $598.5 billion from $595.5 billion on Dec. 28 and from $595.3 billion at the end of the year. 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, all three of the credit tiers into which B of A divides the HY Broad Market Index posted losses, with the middle tier - those issues rated BB-, B+ and B, making up 41.34% of the index - having the smallest deficit, off 0.19%. The uppermost tier - those issues rated BB and BB+, comprising 21.12% of the index - was next with a 0.38% loss, while the lower tier - those issues rated B- and below, accounting for 37.54% of the index - lagged behind with the worst showing, losing 1.06%.

It was the second straight week in which the lower tier lived up to its name and sank to the bottom - in the week ended Dec. 28, it was up just 0.01%, while the upper tier was up 0.27% - the second week in the previous three and the fourth week in the prior six in which the upper tier was on top - and the middle tier gained 0.12%. But counting the latest week's results, the middle tier has now been on top in two weeks out of the last three.

By the ratings categories for the three major baskets of credits into which B of A divides the index, excluding those issues which are not rated, CCC paper - which includes many, but not all, of the lower-tier credits - "underperformed," the analysts said, noting its 1.34% loss for the week, while the B-rated credits - similar to, but not exactly the same as the middle tier - lost 0.43%. The BB-rated assets (the upper tier partially, but not completely, overlaps this subset) had the smallest loss, of 0.24%.

Spreads widen, governments tighten

The analysts pointed out that while the average high-yield spread rose by 45 bps on the week, as noted, the yield on the benchmark 10-year Treasury note tightened by 16 bps to 3.87% from 4.03% the week before, a fifth straight week of movement in opposite directions and the third straight week in which the junk spread widened while the Treasury yield fell.

In the primary market, they said, there was no activity seen in the most recent week, so the year-to-date new issuance stands at zero. In 2007, some $172.5 billion priced, according to B of A's calculations, somewhat short of the record total of $179.3 billion that the bank reported in 2006.

Weekly reporting high-yield mutual funds, as measured by AMG Data Services, saw an outflow of $2.9 million in the week ended Wednesday. That followed the previous week's outflow of $150.5 million.

Negative sectors regain control

In the latest week, 23 of the 41 industry sectors into which B of A divides its high-yield universe were in negative territory, 15 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 sectors - credit insurance, leisure equipment and products, and water utilities - are relatively new sectors created in the sector restructuring that took place in 2006 and even at this relatively late date still do not as yet have any issues represented in them.

That was the opposite of the trend seen in the previous week, when 29 sectors were in the black, nine were in the red and the three empty "new" sectors had flat readings. That continued the somewhat inconsistent trend seen in the market for much of last year, from about early June onward; in the 31 weeks since then, positive and negative sector breakdowns have been almost evenly split, at 15 positives versus 16 negatives.

Retail week's worst sector

In the latest week, retailing was the worst-performing sector in the index with a 2.18% loss, taking that dubious honor away from industrial products, which had been the cellar-dweller in the previous week, ended Dec. 28, with a 0.79% loss. It was a sharp reversal for retail, which in the previous week had been among the Top Five best-performing sectors in the index with an 0.31% return; however, it marked a reversion to a more familiar pattern for the sector, with retail having now been among the Bottom Five worst-performing sectors in three weeks out of the last four.

Cable/DBS operators (down 1.77% on the week), diversified financials (down 1.71%) and the technology and automobile sectors, which each lost 1.32%, filled out the latest week's Bottom Five list. It was a decided comedown for technology and for the diversified financials, which each had been in the Top Five in the previous week with gains of 0.51% and 0.37%, respectively. But diversified financials have now been in the Bottom Five in two weeks out of the last three, as have automobiles.

Life/health insurance tops for week

On the upside, life/health insurance had the best return on the week, up 1.45%, to take over the top spot from the previous weekly champion, other telecommunications, which had posted an index-best 0.92% return in the Dec. 28 week.

Property/casualty insurance (up 0.70%), banks (up 0.64%), consumer non-cyclical/other (up 0.58%) and pipelines (up 0.36%) rounded out the Top Five list in the latest week. It was the second straight week in that select circle for the property/casualty insurers, which had made it there the week before with a 0.41% gain. Pipelines had meantime spent the week before among the Bottom Five with a 0.28% loss. Banks have now been in the Top Five in two weeks out of the last three.

Retail worst 2008 sector

On a year-to-date basis, the sector rankings for best and worst generally followed the weekly order of finish - but not exactly, given the discrepancy between the weekly and the year-to-date stats, as noted.

On the downside, retailing, the week's worst performer, was also the worst year-to-date so far with a 2008 loss of 2.07%. It was followed by cable/DBS and diversified financials, each down 1.74% on the year, autos (down 1.42%) and technology (down 1.30%), all of which are in the weekly Bottom Five. Also showing a notable year-to-date loss was the insurance brokerage sector, down 1.02% on the year.

The new year-to-date standings mark a continuation of the negative trends seen last year for diversified financials, insurance brokers, retail and autos, all of which finished among the worst-performing sectors in 2007, posting final losses of 8.82%, 7.78%, 2.52% and 0.29%, respectively.

Life/health insurance tops in '08 so far

On the upside, life/health insurance was not only the week's strongest sector, but the strongest so far this year with a 1.03% gain. It was followed by weekly Top Fivers property/casualty insurers (up 0.58%), consumer non-cyclical/other (up 0.56%) and banks (up 0.56%). Top Five finisher pipelines is not among the year-to-date leaders so far and in fact shows a small loss (0.06%) on the year. Other sectors doing better so far in 2008 which did not make the weekly rankings include transportation (up 0.14%) and the oil and gas and health care equipment and services sectors, each up 0.13%.

The new 2008 standings mark a continuation of the positive trends for health care equipment and services - the single best-performing sector in the index last year with a gain of 11.36% - as well as transportation and life/health insurance, which were among the strongest sectors of 2007 with cumulative gains of 7.24% and 6.86% respectively.

Banking, meantime, may be trying to break out of its 2007 rut, which saw the banks among the biggest losers on the year, down 3.33%.

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