B of A High Yield Broad Market Index rises 0.36% on week, 2008 loss cut to 3.83%

By Paul Deckelman

New York, March 24 - The Banc of America Securities High Yield Broad Market Index rose by 0.36% in the holiday-shortened week ended Thursday, breaking its losing streak of two consecutive declines, including the 1.03% plunge seen in the previous week ended March 14. Even with the latest advance, though, the index has still posted losses in five of the last seven weeks.

The latest loss represented at least a temporary departure from 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. Since that time, it has been choppy and inconsistent.

With 12 weeks now in the books, the index has seen eight losses against four gains. On a year-to-date basis, the index is down 3.83%, but has come off its low point for the year so far, the 4.15% cumulative loss seen in the week ended March 14.

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 backs off wide point of year

B of A analysts said that the index's average spread over Treasuries was 860 basis points, having narrowed by 2 bps from 862 bps the week before, the wide point for 2008 so far. 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 11.16%, a new high for the year, from 10.80%, decreased slightly to 11.13% in the latest week.

The index tracked 1,561 issues of $100 million or more, up from 1,566 the week before, although its overall market value rose to $569.6 billion from $569.1 billion. 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.

Middle tier on top

On a credit-quality basis, the middle one 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 44.83% of the index - had the best return for the week, up 0.66%, followed by the uppermost tier - those issues rated BB and BB+, comprising 19.71% of the index - which rose by 0.16%. The lowest tier - those issues rated B- and below, accounting for 35.46% of the index - brought up the rear with a 0.12% gain, returning to its rut, temporarily vacated in the previous week, which has now seen the lower tier live up to its name and finish at the bottom of the pile in nine weeks out of the past 13.

The latest results broke out of the pattern seen during the previous two weeks, and five times over the prior six weeks, in which all three of the tiers had finished in the red. In the previous week, the upper tier had the best return for a second straight week, relatively speaking, by posting the smallest loss of the three, 0.36%. This was followed by the lower tier, temporarily breaking out of its slump with a 1.04% loss, while the middle tier lagged behind with a 1.30% deficit.

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, BB rated bonds (the upper tier partially, but not completely, overlaps this subset) outperformed the remainder of the index, the analysts said, with a return of 0.52%. As it has been doing over the past several weeks, CCC rated paper - which includes many, but not all, of the lower-tier credits - again underperformed the rest of the index, with just a 0.07% gain, while B rated credits - similar to, but not exactly the same as the middle tier - returned 0.39%.

Junk tightens as governments gain

The analysts noted that while the average high-yield spread came in by 2 bps in the most recent week - breaking away from 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 3.34% on Thursday, having tightened by 13 bps from 3.47% the week before. It was the second straight week in which Treasury yields had narrowed, continuing to break away from the pattern seen in five weeks out of the prior six in which Treasury yields had increased. Junk spreads and Treasury yields have now been moving in the same direction in five weeks out of the last seven.

There were no new deals priced during the holiday-abbreviated four-day week, the second consecutive week in which the market saw a complete shutout. Twelve weeks into the year, 2008 new-issuance totals continue to hover around $9.1 billion. That is 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 $140.7 million, which followed the previous week's $190.5 million outflow. The latest cash exodus swelled the year-to-date cumulative outflow to some $989 million, for an average weekly outflow of about $82.4 million.

Positive sectors regain control

In the latest week, 20 of the 40 industry sectors into which B of A divides its high-yield universe were in positive territory, 17 were in negative 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 aerospace and defense sector.

That breakdown was a departure from the negative trend which has been seen most weeks of the year so far, including the March 14 week when 30 sectors finished in the red, seven were in the black and the two empty "newer" sectors continued to show flat readings, joined by the established healthcare services sector. Negative breakdowns have now been seen in eight weeks out of the 12 since the start of the year.

Diversified financials week's best sector

The diversified financials sector returned an index-best 2.10% in the latest week, grabbing the top spot away from textile and apparel, which had led all sectors in the March 14 week with a 0.36% gain. It was a sharp turnaround for the diversified financials, which went from worst to first - in the previous week, the sector had nosedived an index-worst 4.20% to land among the Bottom Five weakest-performing sectors for a third consecutive week, and to be at the absolute bottom of the pile in two of those three weeks.

Life/health insurance (up 1.48%), food and drug retailers (up 1.21%), healthcare facilities (up 0.88%) and automobiles (up 0.86%) rounded out the latest week's Top Five list of the best-performing sectors. The life/health insurers and the autos joined diversified financials in a major turnaround, going from the Bottom Five to the Top Five; in the March 14 week, the life/health insurers lost 1.74% while autos plunged 3.75%, the latter grouping winding up in the Bottom Five for a third consecutive week.

Insurance brokers week's worst sector

On the downside, the insurance brokers sector tumbled 1.49% to take over as the cellar-dweller from diversified financials, which held that unwanted honor the week before, as noted. It was a notable deterioration for the brokers, who had made it to the Top Five the previous week with a 0.11% gain.

Real estate (down 1.45%), consumer non-cyclical/other (off 1.12%), other telecommunications (down 0.70%) and pharmaceuticals (off 0.62%) rounded out the latest week's Bottom Five rankings. It was the third straight week there for consumer non-cyclical/other, which also wound up among the worst losers in the March 14 week, with a 2.33% retreat, and in the week ended March 7, when the sector fell 1.43%. Other telecom had also been there in the March 14 week with a 1.43% loss.

Consumer non-cyclical/other still 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. Despite its loss for the week, B of A analysts said that its year-to-date loss actually narrowed to 12.97% from 14.13% in the previous week, due to a statistical quirk related to the shortening of the week due to last Friday's holiday; while the sector turned in positive performances in each of last week's four actual trading days, lowering its cumulative loss from that which had been seen at the end of the preceding week, the weekly advance or decline is always figured on a rolling five-day basis - in other words, the five most recent sessions - which in this case included a large daily loss recorded the previous Friday. The statistical quirk also affected some other sectors whose "weekly" gain or loss, based on the most recent five sessions, did not quite match up with the week-to-week changes in the year-to-date return, although none of those differences were as dramatic as the one seen in the consumer non-cyclical/other sector.

Advertising-dependent media remained second-worst on the year, its percentage loss also remaining in double-digit territory, although the size of that loss actually narrowed to 11.85% from 12.06% the week before.

Insurance brokerage, also a Bottom Fiver in the latest week, fell one position in the rankings to third worst from fourth worst previously, its loss for the year growing to 9.83% from 8.44%. The former third-worst 2008 sector, diversified financials, meanwhile clawed its way up one position to just fourth worst, helped by its index-leading weekly performance, which shrank its loss for the year to 7.92% from 8.95% previously.

The fifth- and sixth-worst performing 2008 sectors also traded places, with gaming, lodging and leisure falling to fifth worst as its cumulative loss widened to 7.44% from 7.39% previously. Meanwhile, paper and forest products improved, relatively speaking, to just sixth worst, its year-to-date loss declining to 7.04% from 7.55% the week before.

Banking remains top 2008 sector

The order of finish among the best-performing sectors of 2008 so far was unchanged from the previous week. The banking sector remained clearly the best performer on a year-to-date basis, although its return declined to 4.31% from 4.79% the previous week. The pipeline sector stayed in second place, as its 2008 return held fairly steady at 2.97%, versus 2.99% the week before.

The electric utilities sector remained third best with a 1.34% return for the year, up from 0.79%. Property/casualty insurance was still fourth best, its year-to-date gain increasing a little to 0.87% from 0.72%. Other healthcare stayed in fifth place, even as its 2008 return eased to 0.40% from 0.49% the week before.

Metals and mining stayed at sixth best for the year, its cumulative return holding steady at 0.29% despite a modestly positive return for the week, due to the statistical anomaly already noted.

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