B of A High Yield Broad Market Index climbs 1.04% on week, 2008 loss tumbles to 0.35%

By Paul Deckelman

New York, April 22 - The Banc of America Securities High Yield Broad Market Index jumped by 1.04% in the week ended Friday - its fifth straight advance including the 0.28% rise seen in the previous week ended April 11.

That winning streak represents a continued departure from the pattern of mostly weakness that had been 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. After that, it alternated stretches of weakness and strength. But following two weeks in which losses were recorded, the last five weeks have all been to the upside.

With 16 weeks now in the books, the index is now evenly split between weekly gains and losses, with eight of each. On a year-to-date basis, the index's loss has been slashed to 0.35%, down from the 1.37% cumulative loss seen in the April 11 week and a considerable improvement from 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, yield to worst decline

B of A analysts said that the index's average spread over Treasuries was 740 basis points, having tightened substantially from 796 bps the week before and having come in further still from the 862 bps level seen in the March 14 week, the wide point for 2008 so far. Even so, spreads so far this year remain 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 edged up the week before to 10.62% from 10.61% in the week ended April 4, narrowed considerably to 10.40% in the latest week and has tightened still further from its high point for the year, 11.16%, seen in the March 14 week.

The index tracked 1,543 issues of $100 million or more, down from 1,548 issues the week before, although its overall market value rose to $578.4 billion from $574.9 billion previously. 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.

Lower tier back 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 35.96% of the index - had the best return, zooming 1.34% on the week. This was followed by the middle tier - those issues rated BB-, B+ and B, making up 45.96% of the index - which gained 1.25%. The uppermost tier - those issues rated BB and BB+, comprising 18.08% of the index - brought up the rear with a flat 0.00% return, neither a gain nor a loss.

It was the fifth straight week in which all three credit tiers finished in the black, continuing to reverse the pattern that had been seen in five of the previous six weeks through March 14, when all three tiers had consistently been showing losses.

The upper tier fell into its slump, which has now seen it at the bottom of the pile in three out of the past four weeks, while the lower tier was on top for the second time in four weeks, continuing to move away from its earlier pattern of weakness, which through the week ended March 20 had seen it on the bottom in nine weeks out of the previous 13. During the previous week, ended April 11, the upper tier had led the way, rising 0.69%, followed by the lower tier, which had gained 0.20%. Though not too far off that pace, the middle tier had lagged at 0.18%.

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, the B-rated credits - similar to, but not exactly the same as the middle tier - "produced the best performance of the week," the B of A analysts said, up 1.51%, while their spreads tightened by 73 bps to an average of 742 bps. The group posted a total return for the month and the quarter of 3.57%.

They said that CCC-rated paper - which includes many, but not all, of the lower-tier credits - was up 1.36% on the week, with a 3.32% total return for the quarter, while the BB-rated bonds (the upper tier partially, but not completely, overlaps this subset) was up 0.18% on the week and trailed the others with a 1.44% quarterly total return.

Junk spreads tighten

The average high-yield spread widened by an eye-popping 57 bps in the most recent week, while the analysts noted that the widely followed CDX HY index closed the week at 96.81 versus the previous week's close at 93.84.

The activity level in the primary sphere was quieter in the latest week, with two deals from domestic issuers totaling $806 million, down from the previous week when five deals collectively worth $1.189 billion came to market. Sixteen weeks into the year, 2008 new issuance totals about $12.9 billion - although even with pickup seen over the past several weeks, it's still well under the brisk pace seen in 2007, when a near-record total of $172.5 billion priced, according to B of A's calculations. A key B of A syndicate official projected last month that that the junk market is likely to see about $60 billion to $80 billion of new issuance in 2008.

The analysts noted that weekly reporting high-yield mutual funds saw an inflow of $59.2 million in the week ended Wednesday, according to statistics compiled by AMG Data Services. That followed the $716 million inflow seen in the previous week ended April 9.

Positive sectors retain control

In the latest week - for a second straight time - 33 of the 40 industry sectors into which B of A divides its high-yield universe were in positive territory, five were in negative territory and two sectors had flat 0.00% readings, neither a loss nor a gain. However, it should be noted that 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 have any issues represented in them.

That fifth straight - and very dominating - win by the positive sectors represented a continued departure from the negative trend that had been seen for most of the year until recently. Positive and negative breakdowns are now evenly split, each seen in eight weeks out of the 16 since the start of the year.

Insurance brokers go from worst to first

The insurance brokerage sector jumped 4.45% in the most recent week - an all-the-more stunning achievement because it had been the previous week's single worst-performing sector, with a 1.42% loss. That loss in the week ended April 11 was also the sector's second straight index-worst loss and third in four weeks, as well as its fourth consecutive week among the Bottom Five worst-performing sectors. The insurance brokers grabbed the top spot away from the banks, which had been the previous week's champion with a 3.57% gain.

Automobiles (up 2.76%) and hugging their rear bumper, diversified financials (up 2.75%), other telecommunications (up 1.79%) and cable/DBS operators (up 1.59%) rounded out the latest week's list of the Top Five best-performing sectors.

The autos and diversified financials remained especially volatile; in the week ended April 11, both had been among the Bottom Five with losses of 0.58% and 0.68%, respectively - but in the week before that, ended April 4, diversified financials had topped all sectors with a 3.60% return, its second such big win in three weeks and its third consecutive week among the Top Five, while the autos sector had made it into the Top Five for a second straight week with a 2.92% advance.

Life/health insurance week's worst sector

On the downside, the life/health insurance sector's 1.45% loss was the worst in the index last week, supplanting the previous cellar-dweller, which was insurance brokerage, as already noted. Health care services (down 1.05%), transportation (down 0.26%), banking (down 0.17%) and gaming, lodging and leisure (down 0.12%), rounded out the latest week's Bottom Five list.

It was the second straight week there for the gamers, who had the bad luck of having been there the week before, when the sector lost 0.49%. On the other hand, the latest results were a comedown for health care services and the banks, which had been in the Top Five the week before with respective returns of 1.19% and, as already noted, 3.57%.

Insurance brokerage worst 2008 sector

Despite its index-leading weekly showing, the insurance brokers sector remained the worst-performing sector on a year-to-date basis, although its 2008 loss came in to 10.10% from 13.93% previously. Advertising-dependent media remained the second-worst finisher for the year, although its cumulative loss narrowed to 8.04% from 9.01% previously; it shared that position with the previous week's third-worst 2008 sector, consumer non-cyclical/other, whose loss also narrowed to 8.04% from 8.49%.

They were followed by Bottom Five finisher gaming, lodging and leisure, which remained fourth-worst on a year-to-date basis with a 7.10% loss, versus the previous week's 6.98% deficit. The life-health insurers, though not among the worst year-to-date laggards previously, tumbled to fifth-worst in total returns with a 5.19% loss, widening from 3.80% the previous week, dragged down by the group's index-worst weekly finish.

The paper and forest products sector, previously fifth-worst on the year, thus managed to improve, relatively speaking, to just sixth-worst with a 4.14% loss, narrowing from 4.80%. That let wireline telecom, previously the sixth-worst 2008 sector with a 4.20% loss, put a little distance between itself and the big losers, as its cumulative loss narrowed to 3.31%.

Banking top 2008 sector

On the upside, the banking sector remained clearly the best performer on a year-to-date basis, even though it landed among the Bottom Five on a weekly basis. That cut its cumulative return to 7.67% from 7.86% the week before, while the electric utilities sector stayed at Number-Two, its cumulative gain growing to 4.40% from 3.79% in the April 11 week. Pipelines remained third-best, as its gain for the year rose to 4.28% from 3.55%.

Health care facilities moved up a notch in the standings to fourth place from fifth, as its return increased to 3.62% from 2.18% previously. It changed positions with health care equipment and services, which fell to fifth-best with a 2.97% return, up from 2.59%. Property/casualty insurance, not previously among the leaders, jumped to sixth-best with a 2.52% return, up from 1.42% previously, pushing the previous sixth-place holder, metals and mining, out of leadership contention, at least for the moment. The latter's year-to-date return rose to 2.41% from 2.16% the week before.

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