B of A High Yield Broad Market Index up 0.75% on week, 2008 total cut to minus 0.98%

By Paul Deckelman

New York, Feb. 5 - The Banc of America Securities High Yield Broad Market Index notched its second consecutive gain of 2008 in the week ended Friday, when it rose by 0.75%, on top of the 0.51% advance seen in the previous week ended Jan. 25.

Those back-to-back gains followed consecutive losses over the first three weeks of the year. Even so, the index has still seen four losses in the last seven weeks, dating back to mid-December.

On a year-to-date basis, the index is down 0.98%, having improved from a 1.72% loss seen the previous week and having strengthened even more from the 2.21% loss seen in the week ended Jan. 18, the low point for the year so far.

In 2007, while posting gains in 32 weeks and losses in 20, the index posted a return for the year of 1.85%, 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. The 2007 return was far smaller than the index's 2006 finish of 11.89%.

Spread tightens from wide point

B of A analysts said that the index's average spread over Treasuries was 715 basis points, having narrowed from 722 bps seen in each of the previous two weeks, the high for the year so far. Despite the modest tightening, those spreads remain well out from the 613 bps mark at which the index ended 2007, as well as its high point for 2007 of 621 bps, reached in the week ended Nov. 23.

The index's yield to worst, after having narrowed a little the week before to 10.15% from 10.25%, its high point for the year, continued to come in to 10.04% in the most recent week but remains well above the 2007 year-end figure of 9.68%.

The index tracked 1,566 issues of $100 million or more, up from 1,554 the week before, while its overall market value rose to $590.7 billion from $579.2 billion the week before. 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.

Upper tier remains on top

On a credit-quality basis, all three of the credit tiers into which B of A divides the HY Broad Market Index posted gains for a second straight week, with the uppermost tier - those issues rated BB and BB+, comprising 21.06% of the index - up an index-best 0.87%. That was followed by the lower tier - those issues rated B- and below, accounting for 38.30% of the index - which returned 0.73%. The middle tier - those issues rated BB-, B+ and B, making up 40.64% of the index - brought up the rear a 0.70% gain.

It was the second straight week in which the upper tier has been dominant, including the week ended Jan. 25, when it rose 0.97%; it has now been on top in five weeks out of the last seven. The latest week also halted a five-week losing streak for the lower tier, which had lived up to its name and sank to the bottom in each of those weeks including the Jan. 25 week, when it was up a paltry 0.26%. The middle tier had been up 0.49% in that same week.

By the ratings categories for the three major baskets of credits into which B of A divides the index, excluding those 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, with a 0.84% return. BB-rated bonds (the upper tier partially, but not completely, overlaps this subset) rose 0.75%, while the B-rated credits - similar to, but not exactly the same as the middle tier - was not far behind at 0.72%.

Junk spreads tighten, finally

While the average high-yield spread tightened by 7 bps on the week to 715 bps, as noted - the first junk spread-tightening in seven weeks - the yield on the benchmark 10-year Treasury note widened by 3 bps to 3.59% from 3.56% the week before, breaking a six-week run of falling Treasury yields.

The primary market had its biggest week of the year so far, with two transactions totaling $6.535 billion, most of it from Harrah's Entertainment Inc.'s $6 billion-plus two-tranche mega-deal. That contrasted sharply with the previous week, when no transactions priced. With five weeks in the books, year-to-date new issuance rose to $7.385 billion. In 2007, some $172.5 billion priced, according to B of A's calculations, 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 $78 million in the week ended Wednesday. That followed the previous week's outflow of $231.9 million, for a year-to-date cumulative outflow of $742.9 million.

Positive sectors keep control

In the latest week, 29 out of the 41 industry sectors into which B of A divides its high-yield universe were in positive territory, nine were in negative territory and three others had flat 0.00% readings, neither a loss nor a gain, although it should be noted that those sectors - credit insurance, leisure equipment and products, and water utilities - are relatively new sectors created in the sector restructuring that took place in 2006 and even at this relatively late date still do not as yet have any issues represented in them.

This continued a newly positive trend also seen in the previous week, when 28 sectors finished in the black, 10 in the red and the three empty "new" sectors had flat readings. The two weeks of positive breakdowns broke the prior trend of mostly negative splits seen in each of the three previous weeks of 2008.

Consumer durables/non-auto week's best sector

In the latest week, the consumer durables/non-automotive sector - which includes the hard-hit homebuilding industry - was the week's best-performing sector with a 2.69% return, apparently helped by the latest Federal Reserve interest rate cut. It grabbed the top spot away from the previous week's champion, banking, which had an index-leading 2.52% return in that week, which ended Jan. 25. It was the second consecutive week in which consumer durables/non-auto was among the Top Five best finishers, making it there in the previous week with a 1.11% gain.

Automobiles (up 2.21%), diversified financials (up 1.92%), other health care (up 1.65%) and wireless telecommunications (up 1.06%) rounded out the latest week's Top Five list.

It was the second straight week in that elite grouping for diversified financials and autos, which had each made it the week before with returns of 2.18% and 1.75%, respectively. Counting the latest week's results, diversified financials have now been among the Top Five in three weeks out of the last four and in four weeks out of the last six. Wireless telecom, meantime was rebounding solidly after having been among the Bottom Five worst-performing sectors in the Jan. 25 week with a 0.68% loss.

Entertainment week's worst sector

On the downside, entertainment was the week's worst-finishing sector with a 4.18% loss on the week, taking over that unwanted honor from the previous week's cellar-dweller, insurance brokerage, which had plunged a whopping 7.54% in that week.

Consumer products (down 0.60%), advertising-dependent media (down 0.27%), property/casualty insurance (down 0.25%) and industrial products (down 0.24%) rounded out the latest week's Bottom Five list.

Insurance brokers worst 2008 sector

On a year-to-date basis, insurance brokerage remained the worst-performing sector of 2008 so far, although its loss for the year narrowed a bit to 7.57% from an 8.26% loss the week before. The consumer non-cyclical/other sector's position deteriorated to second-worst in the index from just fourth-worst the week before, while its cumulative deficit widened to 4.20% from a deficit of 4.04% the week before. That, in turn, caused the previous week's second-worst sector - gaming, lodging and leisure - to improve, relatively speaking, to only third-worst, as its loss for the year narrowed to 3.77% from a loss of 4.29%.

Entertainment, which had actually been among the top 2008 sectors in the previous week with a 0.50% return, good enough for third-best that week, tumbled all the way down to fourth-worst in the most recent week with a 3.70% loss, dragged down by its index-worst weekly performance, as noted. Retail, previously the third-worst sector year to date, improved, relatively speaking, to just fifth-worst, as its loss for the year narrowed to 3.36% from a loss of 4.04%.

The previous week's fifth-worst sector, cable/DBS, and weekly Bottom Fiver advertising-dependent media, which was not previously among the worst laggards, finished tied for sixth-worst at minus 3.05%, versus cumulative losses of 3.35% and 2.79%, respectively, the week before.

Life/health insurance best 2008 sector

Life/health insurance remained the year's strongest performer so far, although its 2008 return only grew slightly to 1.49% from 1.46%. Autos, one of the Top Five weekly gainers, as noted, cruised into second place on a year-to-date basis at 1.41%, versus its loss the previous week of 0.79%. Also getting back into the black for 2008 was fellow Top Fiver diversified financials, now third-strongest at 1.09% versus its 0.81% cumulative loss the week before.

Another Top Five finisher, other health care - not previously among the leaders - was robust enough to be fourth-best on the year with a 0.90% return, versus its 0.74% loss the previous week. Yet another Top Five performer - weekly leader consumer durables/non-auto - moved up to fifth-best on the year so far on the strength of its big weekly advance, as noted, with a 0.77% cumulative gain versus its 1.86% cumulative loss the week before. Weekly Bottom Fiver property/casualty insurance, previously the second-strongest 2008 performer, tumbled four positions to just sixth-best, as its year-to-date return declined to 0.67% from 0.92% the week before.

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