B of A High Yield Broad Market Index off 0.09% on week, first loss since June; year-to-date return eases to 11.29%

By Paul Deckelman

New York, Dec. 18 - For the first time since late June, the Banc of America Securities High Yield Broad Market Index recorded a loss, albeit a small one, as it declined 0.09% in the week ended Thursday. That breaks a spectacular streak of 24 straight weeks, dating back to the first week of summer, during which the index had shown gains, including the 0.69% advance seen in the previous week, ended Dec. 7.

Even with the small setback in the most recent week, the index has still mostly been on the upside this year, except for a period of some weeks of choppiness from mid-May into late June. It has shown positive results in 32 weeks out of the last 40 and, over the longer term, in 45 weeks out of the last 56, dating back to mid-November last year, according to a Prospect News analysis of the B of A data.

The index's year-to-date return eased to 11.29% in the most recent week, off slightly from 11.39% the week before, its high point for the year so far. The index has still more than quintupled 2005's total 2.10% return.

The index's spread over Treasuries, which in the previous week had narrowed to 328 basis points from 341 bps previously, continued to tighten in the latest week, to 320 bps. Its yield to worst, which had previously come in markedly, to 7.79% from 7.92% the week before, widened to 7.84% in the most recent week.

The index tracked 1,689 issues of $100 million or more, up from 1,677 issues the week before, and its overall market value grew to $632 billion from $624.6 billion the previous week. B of A sees the index as a reliable proxy for the roughly $800 billion high-yield universe.

Lower credit tier outperforms

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 34.18% of the index - showed the strongest performance, returning 0.05% on the week - the only one of the three in positive territory, and even that just barely. That was followed by the middle tier - those issues rated BB-, B+ and B, making up 43.95% of the index - which lost 0.09%, while the upper tier - those issues rated BB and BB+, comprising 21.87% of the index - brought up the rear with a 0.29% loss.

It was the second straight week in which the lowest tier was on top. In the week ended Dec. 7, the lower tier returned 0.86%, the upper tier 0.69% and the middle tier 0.57%.

Accordingly, B of A's analysts again said that CCC-rated paper, which largely, but not totally, comprises the bottom tier, "outperformed" versus the other ratings categories and the index itself, returning 0.09%. By comparison, B paper - similar to, but not exactly the same, as the middle tier - was down 0.11%, while the BB-rated credits - the upper tier partially, but not completely, overlaps this subset - lost 0.15%.

The analysts said that the market's "weak performance was driven by increasing risk-free rates," as the average spread on high-yield issues dropped by seven bps, to 320 bps, while in contrast, the 10-year Treasury note stood at 4.60% on Dec. 14, up 12 bps from 4.48% on Dec. 7.

They said that primary market activity "accelerated from the levels of the prior week," with a total of $10.4 billion having priced in the week ended Dec. 15, well up from $2.7 the week before. Year-to-date issuance was $175.9 billion in the week, up from $165.5 the preceding week, according to B of A's calculations.

And the analysts related that weekly reporting high-yield mutual funds showed an outflow of $47 million in the week ended Dec. 13, according to AMG Data Services. That followed an inflow of $267 million in the previous week, ended Dec. 6. The year-to-date net outflow rose to $3 billion from $2.9 billion previously, while the average weekly outflow rose to $60 million from $59 million the week before.

In the latest week, 23 of the 42 sectors into which B of A divides its high-yield universe were in positive territory, with nine showing losses and five sectors showing flat 0.00% readings, neither a loss or a gain, although it should be noted that those five sectors showing flat readings were new sectors created in the sector restructuring that took place at the end of March and do not as yet have any issues represented in them. The number of sectors was enlarged by one, as B of A began separately breaking out pipeline operators, who heretofore had been counted among the oil and gas credits. In the previous week, with 41 sectors reporting, 36 were in the black, none were in the red and the five new sectors showed neutral readings.

Strong positive sector breakdowns - or at least, mostly positive - have now been seen over the past 24 weeks, and on a longer-term basis, in 46 weeks out of the past 55. Strongly positive breakdowns have pretty much dominated the year, except for the several weeks of choppy returns in May and June.

Entertainment tops for week

In the latest week, the entertainment sector led all groupings, with a 1.21% return, taking the top spot occupied the previous week by cable/DBS operators, which had a 1.46% return that week.

The latest week's Top Five list of best-performing sectors was rounded out by other health care (up 1.02%), banks (up 0.52%), metals and mining (up 0.26%) and diversified telecommunications (up 0.24%). It was an improvement for the banks, which in the week ended Dec. 7 had been on the Bottom Five list of the week's worst finishers with a modest 0.29% return in a week in which most other sectors had far stronger advances.

Autos worst for week

On the downside, the automobiles sector had an index-worst 1.04% loss, supplanting the previous week's cellar-dweller, the life and health insurers, which had a paltry 0.05% return in the Dec. 7 week. The autos have now been among the Bottom Five in two weeks out of the last four.

The life/health insurers (down 0.91%), technology (down 0.50%), food and drug retailers (down 0.30%) and aerospace and defense (down 0.29%) rounded out the latest week's Bottom Five. As noted, the life/health insurers had been in that group the week before. The tech names have now also been there in two weeks out of the last four.

Autos still tops on the year

Even with its index-worst performance in the latest week, the automotive sector remains the strongest performer year to date, although its cumulative lead dropped to 21.84% from 23.11% the week before.

Cable/DBS operators remained a solid, if still-somewhat distant, second place, as the group's 2006 return firmed slightly to 16.57% from 16.425% previously.

On the downside, excluding the flat year-to-date readings on paper of the five sectors in which no bonds yet trade, health care facilities remained clearly the worst performer so far this year, although the group boosted its year-to-date performance to 2.43% from 2.29%.

Gaming, lodging and leisure's cumulative return eased to 6.47% from 6.50%, as it remained the second-weakest sector in the index.

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