B of A High Yield Broad Market Index jumps 0.81% on week, 2008 return swings to gain at 0.46%

By Paul Deckelman

New York, April 28 - The Banc of America Securities High Yield Broad Market Index shot up by another 0.81% in the week ended Friday - its sixth straight gain, including the 1.04% jump seen in the previous week ended April 18.

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 six weeks have all been to the upside.

With 17 weeks now in the books, the index remains essentially evenly split between weekly gains and losses, with nine of the former and eight of the latter. On a year-to-date basis, the index's return has now moved into positive territory for the first time this year at 0.46%, versus the 0.35% cumulative loss seen the week before. That transition into the black caps an impressive comeback seen since the week ended March 14, when the index hit its low point for the year, a 4.15% loss.

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 702 basis points, having tightened substantially from 740 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 narrowed considerably the week before to 10.40% from 10.62% in the week ended April 11, continued to come in to 10.24% 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 1,548 issues of $100 million or more, up from 1,543 issues the week before, while its overall market value rose to $586.8 billion from $578.4 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 stays 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 36.66% of the index - had the best return, zooming 1.19% on the week. This was followed by the middle tier - those issues rated BB-, B+ and B, making up 45.07% of the index - which gained 0.68%. The uppermost tier - those issues rated BB and BB+, comprising 18.27% of the index - brought up the rear with a 0.41% return.

It was the second consecutive week in which the tiers finished in that specific order; in the previous week ended April 18, the lower tier jumped 1.34% with the middle tier close behind with a 1.25% advance and the upper tier lagging behind with a flat 0.00% return, neither a gain nor a loss.

The lower tier has now been on top for the third time in five 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. In contrast, the upper tier remained mired in its recent slump, which has now seen it at the bottom of the pile in four out of the past five weeks.

The latest week also marked the sixth 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, a stretch when all three tiers had consistently been showing losses.

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 - outperformed the rest of the index, rising 1.35% on the week. This was followed by the B-rated credits - similar to, but not exactly the same as the middle tier - which rose 0.80%, while the BB-rated bonds (the upper tier partially, but not completely, overlaps this subset) was up 0.55% on the week.

Junk spreads tighten

The average high-yield spread tightened by 38 bps in the most recent week, while the CDX HY index closed the week at 97.44 versus previous week close at 96.81.

The primary sphere saw three deals from domestic issuers totaling $852 million having priced by Friday, versus the previous week, which saw two deals adding up to $806 million. Month-to-date new-issuance stands at $3.3 billion.

Seventeen weeks into the year, 2008 new issuance totals about $13.7 billion - although even with the 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 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 $294.6 million in the week ended Wednesday, according to statistics compiled by AMG Data Services. That followed the $59.2 million inflow seen in the previous week ended April 16.

Positive sectors retain control

In the latest week, 34 of the 40 industry sectors into which B of A divides its high-yield universe were in positive territory, four 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. In the previous week, 33 sectors finished in the black, five in the red and the two newer sectors had flat readings - the second consecutive week for that particular numerical result.

The sixth 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 remain about evenly split, with nine positive weeks and eight negatives in the 17 weeks since the start of the year.

Insurance brokers tops for week

The insurance brokerage sector retained the top spot in the most recent week with a robust 3.64% rise - this on top of the previous week's even more impressive 4.45% climb. That eye-opening two-week winning streak moves the volatile sector further away from its previous pattern of weakness, which had seen it posting the biggest loss in the index in three out of the four weeks ended April 11 and having been among the Bottom Five worst-performing industry groups in all four of those weeks.

Other telecommunications (up 1.70%), gaming, lodging and leisure (up 1.65%), wireline telecom (up 1.56%) and technology (up 1.55%) rounded out the latest week's Top Five list of the best-performing sectors. It was the second straight week in the Top Five for other telecom, which had made it there the week before with a 1.79% gain. On the other hand, gaming, lodging and leisure had been among the big losers the week before, when it lost 0.12%, and the week before that, when it dropped 0.49%.

Diversified financials week's worst sector

On the downside, the diversified financials sector lost an index-worst 0.72%. It was a comedown for the sector, which had been among the Top Five the previous week with a 2.75% gain. The volatile industry group has recently zig-zagged back and forth between the Top Five and the Bottom Five; it was among the big losers in the April 11 week with a 0.68% deficit, but had outperformed all other sectors the week before that, ended April 4, with a 3.60% gain - its third straight week in the Top Five and second week in the three in which it led the index. The sector grabbed the unwanted honor of worst weekly performer from the previous week's cellar-dweller, life/health insurance, which had an index-worst 1.45% loss in the April 18 week. The life insurers, meantime, remained in the Bottom Five in the April 25 week with a 0.60% loss.

Property/casualty insurance (down 0.54%) and textile and apparel (down 0.33%) were the only two other sectors actually finishing in the red for the latest week. The latest Bottom Five was rounded out by the consumer durables/non-automotive sector, which rose 0.22%, the smallest positive reading in this week's index.

Banking still top 2008 sector

The banking sector remained clearly the best performer on a year-to-date basis, as its cumulative return grew to 8.97% from 7.67% the week before, while the electric utilities sector stayed at Number-Two, its cumulative gain growing to 5.67% from 4.40% in the April 18 week. Pipelines remained third-best, as its gain for the year rose to 4.59% from 4.28%.

Health care facilities held on to fourth place as its return increased to 4.12% from 3.62% previously. Health care equipment and services stayed at fifth best with a 3.59% return, up from 2.97%. Other health care, not previously among the leaders, jumped into sixth place with a 3.03% return, up from 2.41% the week before, supplanting the previous Number-Six, property/casualty insurance, whose Bottom Five-worthy loss dropped its year-to-date return to 1.97% from 2.52% the week before, knocking it out of leadership contention for now.

Consumer non-cyclical/other worst '08 sector

On the downside, the consumer non-cyclical other sector tumbled to the bottom as year-to-date returns among the sectors generally rose across the index; even that biggest loser saw its red ink lessened to a 7.21% loss from 8.04% the week before.

Advertising dependent media - which had tied with consumer non-cyclical/other the week before - was the second-worst sector in the index so far this year, although its loss narrowed to 7.07% from 8.04%. The previous week's worst finisher for the year so far, the insurance brokers, broke out of that rut to improve to "only" third worst, helped by the group's second straight weekly domination of the Top Five, which cut its loss for the year to 6.83% from 10.10% previously, and from 13.93% the week before that.

Bottom Fiver life/health insurance fell one notch to fourth worst in the index from fifth, its loss for the year growing to 5.71% from 5.19% the week before - one of the very few sectors actually deteriorating on a year-to-date basis. The previous week's fourth worst, gaming, lodging and leisure, improved slightly to just fifth worst, helped by its Top Five weekly performance. That cut its 2008 loss to 5.56% from 7.10%. The paper and forest products sector stayed sixth worst with a 3.48% loss, narrowing from 4.14%.

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