B of A High Yield Broad Market Index tumbles 1.03% on week, 2008 loss swells to 4.15%

By Paul Deckelman

New York, March 17 - The Banc of America Securities High Yield Broad Market Index plunged by 1.03% in the week ended Friday, its second consecutive loss, on top of the 0.61% retreat seen in the previous week ended March 7. It was also the index's fifth loss in the last six weeks - a losing streak broken only by the 0.22% gain seen in the week ended Feb. 29.

The latest loss represented a continuation of the pattern of mostly weakness seen since the start of the year; the index fell for the first three weeks of 2008, blipped back upward for two weeks, then headed back downward for three more weeks, before that solitary recent gain and the losses seen over the past two weeks.

With 11 weeks now in the books, the index has seen eight losses against three gains. On a year-to-date basis, the index is down 4.15%, its new low point for 2008, widening from the prior week's 3.15% loss for the year, the previous low for the year.

In 2007, the index posted a return for the year of 1.85% on 32 weekly gains and 20 losses, 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. That 2007 return was far smaller than the index's 2006 finish of 11.89%.

Spread hits new wide point of year

The index's average spread over Treasuries was 862 basis points - a new wide point for the year so far - having jumped by 47 bps from 815 bps the week before, the previous 2008 wide point. Spreads so far this year are notably wider than the 613 bps mark at which the index ended 2007, as well as its high point for 2007 of 621 bps.

The index's yield to worst, after having widened the week before to 10.80% from 10.63%, continued to increase to 11.16% in the latest week - also a new high for the year, supplanting the previous high set the week before.

The index tracked 1,566 issues of $100 million or more, up from 1,561 issues the week before, although its overall market value fell to $569.1 million from $574.2 million. It had ended 2007 tracking 1,568 issues having a collective value of $595.3 billion. 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 stays on top

On a credit-quality basis, all three of the credit tiers into which B of A divides the HY Broad Market Index again finished in the red this past week, for the second straight week and for the fifth time in the last six weeks.

The uppermost tier of the three - those issues rated BB and BB+, comprising 18.52% of the index - had the best return, relatively speaking, losing 0.36%, the second straight week in which the upper tier lived up to its name and finished on top. That was followed by the lowest tier - those issues rated B- and below, accounting for 37.88% of the index - which lost 1.04%, breaking out of its recent rut that as of the week ended March 7 had seen that tier finish at the bottom in eight weeks out of the previous 11. The middle tier - those issues rated BB-, B+ and B, making up 43.60% of the index - brought up the rear with a 1.30% loss. In the March 7 week, the upper tier had lost 0.42%, the middle tier declined 0.51% and the lower tier lagged behind with a 0.86% loss.

By the ratings categories for the three major baskets of credits into which B of A divides the index, excluding the relatively small group of issues which are not rated, CCC-rated paper - which includes many, but not all, of the lower-tier credits - again underperformed the rest of the index, with a 1.48% loss. BB-rated bonds (the upper tier partially, but not completely, overlaps this subset) lost an even 1%, while B-rated credits - similar to, but not exactly the same as the middle tier - had the best showing, relatively speaking, losing just 0.86%.

Junk spread wider, governments tighten

While the average high-yield spread gapped out by 47 bps in the most recent week, as noted, extending the spread-widening pattern that it has shown for pretty much most of the year so far, the yield on the benchmark 10-year Treasury note stood at 3.47% on Friday, having tightened by 6 bps from 3.54% the week before.

That broke a pattern which before last week had been seen in five weeks out of the previous six in which Treasury yields had increased, as well as another trend which before last week had seen both junk spreads and Treasury yields moving in the same direction in four weeks out of the previous five.

There was one new deal with a face value of $520 million that priced during the week, in contrast to the previous week, when no deals priced. Eleven weeks into the year, 2008 new-issuance totals were hovering around $9.1 billion. That's well under the brisk pace seen in 2007, when a total of $172.5 billion priced, according to B of A's calculations, although that itself was 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 $190.5 million in the week ended Wednesday, which followed an inflow of $76.8 million the week before, the second straight inflow the market had seen. The cash exodus swelled the year-to-date cumulative outflow to $848.3 million, for an average weekly outflow of about $77.1 million.

Negative sectors retain control

In the latest week, 30 of the 40 industry sectors into which B of A divides its high-yield universe were in negative territory, seven were in positive territory and three sectors had flat 0.00% readings, neither a loss nor a gain, although it should be noted that two of these sectors - credit insurance and leisure equipment and products - are relatively new sectors created in the sector restructuring that took place in 2006. However, even at this relatively late date they still do not as yet have any issues represented in them. They were joined in the latest week by the established health care services sector.

That breakdown was a continuation of the negative trend that has been seen most weeks of the year so far, including the March 7 week when 28 sectors finished in the red, 10 were in the black and the two empty "newer" sectors continued to show flat readings. Negative breakdowns have been seen in eight weeks out of the 11 since the start of the year.

Diversified financials week's worst sector

The diversified financials sector nosedived 4.20% - the single worst showing in the index - to take over that unwanted honor from real estate, the previous cellar-dweller with a 1.99% loss in the week ended March 7. It was the third straight week that diversified financials ended up among the Bottom Five worst-performing sectors and the second time in those three weeks that the sector was the absolute worst finisher. The sector lost 1.53% in the March 7 week and fell an index-worst 1.94% in the week ended Feb. 29.

Automobiles (down 3.75%), consumer non-cyclical/other (down 2.33%), life/health insurers (down 1.74%) and other telecommunications (down 1.43%) rounded out the latest week's Bottom Five list. It was the third straight week in which the auto sector found itself parked among the worst finishers, having also been there in the March 7 week with a 1.60% loss and in the Feb. 29 week with a 0.72% loss. Consumer non-cyclical/other was also a repeat Bottom Five visitor, having wound up there in the March 7 week with a 1.43% loss.

Textile/apparel week's best sector

On the upside, the textile and apparel sector returned an index-best 0.36% on the week, taking over the top spot from the previous champion, health care equipment and services, which had led all sectors in the week ended March 7 with a 0.35% gain.

Chemicals (up 0.34%), metals and mining (up 0.13%) and the pipeline and insurance brokerage sectors (each up 0.11%) rounded out the latest week's Top Five list of the best-performing sectors.

Consumer non-cyclical/other worst 2008 sector

On a year-to-date basis, the consumer non-cyclical/other sector, a repeat weekly Bottom Five finisher, remained the worst performer, its cumulative loss growing to 14.13% from 12.08% the week before.

Advertising-dependent media remained second-worst on the year, its percentage loss also remaining in double-digit territory, widening to 12.06% from 11.29%. Diversified financials - not previously among the worst 2008 laggards - fell to third-worst on the year, dragged down by its index-worst weekly showing. Its cumulative loss deepened to 8.95% from 4.96% the week before.

That let the previous week's third-worst finisher, insurance brokerage, improve by one position in the standings, relatively speaking, to just fourth-worst, its Top Five-worthy weekly performance actually cutting its year-to-date loss a little to 8.44% from 8.54%. Paper and forest products remained fifth-worst for the year, the sector's loss widening to 7.55% from 6.37% the previous week. But gaming, lodging and leisure improved two notches, relatively speaking, to just sixth-worst from fourth-worst previously, although its loss for the year worsened to 7.39% from 6.68% before.

Banking top 2008 sector

The banking sector remained clearly the best performer on a year-to-date basis, its return firming to 4.79% from the previous week's 4.70%. The pipeline sector, a weekly Top Five finisher, stayed in second place, as its 2008 return improved a bit to 2.99% from 2.88% the week before.

The electric utilities and property/casualty insurance sectors swapped positions in the rankings, with the utilities moving up one notch to third-best from fourth previously, even though their return for the year eased to 0.79% from 0.95%, because the property/casualty insurers' 2008 gain dwindled even more, down to 0.72% from 1.20% the week before, pushing that sector down to fourth-best from third previously.

Other health care stayed in fifth place, even though its return for the year was almost halved, to 0.49% from 0.94% the week before. Top Five metals and mining - not among the previous leaders - moved up to sixth-best for the year, as its cumulative return about doubled, to 0.29% from 0.15% in the prior week.

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