B of A High Yield Broad Market Index up 0.11% on week; 2007 return grows to 1.80%

By Paul Deckelman

New York, Dec. 31 - The Banc of America Securities High Yield Broad Market Index rose 0.11% in the week ended Friday, its fourth gain in the last five weeks, though most of those have been relatively small advances. The upturn follows its 0.24% loss in the previous week ended Dec. 21.

The index has now risen in 12 weeks out of the 19 since it began turning upward in the week ended Aug. 23 following a lengthy summer slide. Gains have now been seen in 32 weeks out of the 52 since the start of 2007, against 20 losses - part of a larger pattern of strength that the index has shown since late June of 2006; gains have been recorded in 58 weeks out of 79 during that stretch, versus 21 losses, according to a Prospect News analysis of the B of A data.

But while advances have been seen in most weeks this past year, much of that progress occurred in the first half of the year, when there was generally 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, saw a pronounced return to negativity, although that was blunted late in the month and into December. In the last 31 weeks, there have now been 15 positive returns and 16 negative returns.

On a year-to-date basis, the index's return rose to 1.80% from 1.69% the previous week, ending the year well below its 2006 finish of 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 then actually fell into the red, bottoming at a 0.25% cumulative loss during the week ended Aug. 16. It started heading back upward in late August and subsequent months - only to move back downward through most of November. But then it closed out the month with a robust gain and moved into December with a modest advance.

Spread widens back out

B of A analysts said that the index's average spread over Treasuries widened out to finish at 607 bps, versus 597 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 were five sizable spread-widenings over a six-week period in October and November, bringing the average spread back up to its high for the year at a bloated 621 bps in the week ended Nov. 23. It subsequently came down from that peak, although the recent tightening has since been at least partially reversed.

The index's yield to worst, which previously had ballooned out to 9.65% from 9.51% the week before, rose to 9.68% in the most recent week.

The index tracked 1,570 issues of $100 million or more, down from 1,575 the week before, and its overall market value fell to $595.5 billion from $598.6 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.

Upper tier back on top

On a credit-quality basis, the uppermost of the three credit tiers into which B of A divides the HY Broad Market Index - those issues rated BB and BB+, comprising 21.07% of the index - had the best return, up 0.27%, followed by the middle tier - those issues rated BB-, B+ and B, making up 41.12% of the index - which gained 0.12%. The lowest tier - those issues rated B- and below, accounting for 37.81% of the index - brought up the rear with just a 0.01% gain on the week. It was the second week in the last three and the fourth week in the last six in which the upper tier was on top.

That stood in contrast to the week before, when all three tiers showed losses; the middle tier had the smallest loss at 0.10%, followed by the lower tier, with a 0.15% loss, and the upper tier lagged badly with a 0.68% deficit.

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, the BB-rated assets (the upper tier partially, but not completely, overlaps this subset) "outperformed," the analysts said, with a 0.22% gain, followed by the B-rated credits - similar to, but not exactly the same as the middle tier - which rose 0.09%. The CCC paper - which includes many, but not all, of the lower-tier credits - lost 0.02%.

Spreads widen as governments tighten

The analysts pointed out that while the average high-yield spread rose by 10 bps to 607 bps, as noted, the yield on the benchmark 10-year Treasury note tightened by 9 bps to 4.08% versus 4.17% the week before, a fourth straight week of movement in opposite directions and second 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, with year-to-date new issuance remaining at $172.5 billion, 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 $150.5 million in the week ended Wednesday, versus the $204.1 million outflow the previous week. The year-to-date cumulative outflow total rose to about $2.7 billion from $2.6 billion previously, while the average weekly outflow increased to $53 million from $51 million the week before.

Positive sectors regain control

In the latest week, 29 of the 41 industry sectors into which B of A divides its high-yield universe were in positive territory, nine 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 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 exact opposite of the trend the previous week, when 20 sectors ended in the red, 16 were in the black and there were five with flat readings - the three empty new sectors, as noted, plus the established industrial production and food, beverage and tobacco sectors. While moderately to strongly positive breakdowns have been seen throughout most of the year and have also predominated over the past few months, with 13 positives against just six negatives in the last 19 weeks, the negative breakdowns have dominated more recently, with more sectors in the red than in the black in six of the last 11 weeks. Positive and negative sector breakdowns have been evenly split since about mid-year, at 15 positives versus 15 negatives in the last 30 weeks.

Other telecommunications week's best sector

The other telecommunications sector posted an index-best 0.92% return in the week ended Friday, taking over the top spot from the banks, which had been the previous week's best performer with a 0.74% gain that week.

Technology (up 0.51%), property/casualty insurance (up 0.41%), diversified financials (up 0.37%) and retail (up 0.31%) rounded out the latest week's Top Five list of best-performing sectors. It was a solid comeback for both the diversified financials sector and retail, each of which had been among the Bottom Five worst sectors in the preceding week, with diversified financials posting an index-worst 2.19% loss that week and retail remaining a member of that sorry circle for a second straight week with a 1.12% loss, on top of its 0.86% Bottom Five loss the week before, ended Dec. 14.

Industrial products week's worst sector

On the downside, the industrial products sector posted an index-worst 0.79% loss in the most recent week, taking over from the previous week's cellar-dweller, diversified financials, as noted. Chemicals (down 0.68%), pipelines (down 0.28%), commercial services (down 0.24%) and consumer products (down 0.19%) rounded out the latest week's Bottom Five list.

Health care equipment/services tops for year

On a year-to-date basis, with 52 weeks now in the books, the health care equipment and services sector finished 2007 in the top position, its cumulative return growing slightly to 11.34% from 11.22% the previous week. It was the only sector to break into positive double digits, percentage-wise, in 2007.

Metals and mining moved up a notch in the final week of the year, to second-strongest with a 7.52% cumulative return, up from 7.30% and a third-place slot previously. It traded places with the previous week's number two, transportation, which fell one position to third-best as its year-to-date return eased to 7.26% from 7.33%.

Diversified telecom held onto fourth best, as its 2007 return firmed to 7.18% from 6.99% before.

Aerospace and defense remained in the number-five position, its cumulative return growing to 6.84% from 6.73% previously. And health care facilities hung onto sixth place as its 2007 return expanded slightly to 6.66% from 6.59% before.

Consumer durables/non-auto year's worst

On the downside, consumer durables/non-auto, which includes the hard-hit homebuilding industry, finished as the year's worst-performing sector, its 2007 loss widening a little to 13.34% from 13.31% the week before.

Top Five finisher diversified financials remained second worst in the index despite its strong weekly showing, although its cumulative loss did fall to 8.85% from 9.18% previously. The insurance brokers sector remained third worst, as its loss for the year declined to 7.81% from 7.93%. Banks stayed on as the fourth-worst sector, even as the group's loss for the year narrowed to 3.43% from 3.70%.

Despite its Top Five-worthy weekly performance, retail continued to languish at fifth-worst sector for 2007, although its loss for the year narrowed to 2.40% from 2.70% previously. Automobiles continued to spin their wheels as the sixth-weakest sector on the year, the group's collective loss at 0.39%, though that was down from 0.65% the week before.

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