Advantage Data: Real estate, auto services led junk rebound last week

By Paul Deckelman

New York, July 5 - The high-yield market came roaring back last week with a solidly positive performance, breaking a string of three previous weeks on the downside, according to weekly industrial-sector bond-performance statistics supplied to Prospect News by Advantage Data Inc.

As the first half of the year came to a close - although junk had been off in four weeks out of the last six - only six weekly downturns had been recorded year-to-date, against 20 weeks when high yield ended on the upside.

The latest week's stronger tone represented a sharp break with the previous three weeks and a definitive return to the pattern of strength which has been seen in the sector breakdowns for most of this year; after advances were recorded in each of the first nine weeks of 2011 - part of a 14-week winning streak that dated all the way back to last Dec. 3 - that streak was snapped by negative results over two weeks in mid-March. The sectors rebounded later that month and went on a nine-week tear. However, things have been choppy since then, with a fall in the May 27 week, a rebound in the week ended June 3 and declines in each of the previous three weeks, followed by the latest week's rebound.

Some 63 of the 76 broad-industry sectors into which Boston-based Advantage Data currently divides its entire high-yield universe finished in the black in the latest week, with just seven closing in the red and another six sectors showing not enough statistically meaningful activity to produce any kind of results.

That was a strong reversal of the bearish trend seen over the prior three weeks, including the previous week ended June 24, when 42 sectors posted negative returns, 27 sectors ended with positive results, one sector indicated neither a gain nor a loss and six others showed no results.

Reflecting that return to the usual pattern, 28 out of the 30 most significantly-sized sectors - as measured by the number of bond issuers, the collective number of issues tracked and their total face amount - ended in the black this week, with only two finishing in the red. The week before, 16 of those major sectors had showed negative returns, against 13 with positive returns and one - transportation equipment manufacturing - unchanged with a flat 0.00% reading.

Among specific major sectors, bonds of real estate operators and automotive services providers showed the strongest gains, while on the downside, precision instrument makers and electric and gas utilities showed losses. Interestingly, that was a sharp reversal of the results from the previous week for all four of those sectors.

Among statistical indicators, the junk market's total year-to-date return, as measured by the widely followed Merrill Lynch High Yield Master II index, rose on a Friday-to-Friday basis versus the previous week's cumulative return for the first time in six weeks.

Real estate leads the rally

Among specific significantly-sized sectors, real estate showed the strongest gain, returning 1.71%. That was a solid comeback from the losses seen over the prior three weeks, including two weeks in which real estate was the worst performer of all major sectors. The sector had a 0.40% loss the previous week. However, even with the latest upturn, it has still been among the worst finishers in four weeks out of the last six.

Other significant gainers in the latest week included automotive services (up 1.60%), coal mining (up 1.25%), lodging (up 1.02%), petroleum refining (up 0.96%) and amusement (up 0.95%). Coal mining has now been among the best-performing sectors in two weeks out of the last three. On the other hand, auto services - chiefly vehicle-rental companies - was the single worst-finishing major sector in the June 24 week, when it posted a 0.47% loss, and even with the latest week's gain has still been among the worst performers in five weeks out of the last seven.

On the downside, bonds of precision instrument manufacturers - chiefly medical device makers - had the biggest loss among the major sectors this past week, falling 0.56% in going from first to worst; the week before, its 0.36% gain was the best major sector showing and its fifth consecutive week in that elite group.

Electric & gas services was down 0.28%, also a reversal of the strength seen the prior week, when it had risen by 0.19%, which marked the fifth time in six weeks and the seventh time in the previous nine that the utility operators had been among the big winners.

Those two sectors were the only sizable sectors actually finishing in the red in the latest week; the list of underachievers was rounded out with sectors merely posting much smaller gains than most, including paper manufacturing (up 0.16%), the building construction and non-depository financial institutions sectors (each up 0.18%) and insurance carriers (up 0.20%). The latter group has now been among the worst laggards in three weeks out of the last four.

Food stores first for year

On a year-to-date basis 26 weeks into 2011, bonds of the major-sized sectors have been strong, with 26 out of 30 showing cumulative returns of at least three full percentage points, up from 25 the previous week, including one above 8% year-to-date and six above 6%, nine more above 5% and eight others topping 4%.

Bonds of food store operators held their cumulative lead with a year-to-date return of 8.06%, followed by petroleum refiners (up 6.79%) and precision instrument manufacturers (up 6.50%).

Bringing up the rear, publishing had a relatively modest 2.57% year-to-date return, followed by real estate (up 2.70%) and metals mining (up 2.72%).

Merrill index strong

Looking at the overall domestic high-yield market, junk bonds, as measured by the Merrill Lynch High Yield Master II Index, had a one-week gain as of Friday of 0.726%, their biggest weekly upturn since early January and their first week-over-week advance since the week ended May 20, with five straight weekly losses in between, including a 0.15% deficit in the week ended June 24. Those five losses had followed nine straight weeks of gains going back to late March. The latest upturn lifted the index's year-to-date return to 5.082%, up from 4.324% the previous Friday, though still well down from the 6.071% cumulative gain posted at the end of the week ended May 20, the 2011 peak level so far.

As of Friday, the index showed an average price of 102.290, a yield to worst of 7.29% and a spread to worst of 549 basis points over comparable Treasuries, versus a price of 101.774, a yield of 7.40% and a spread of 592 bps at the end of the previous week.

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