B of A High Yield Broad Market Index up 0.35% on week, year-to-date return grows to 4.03%

By Paul Deckelman

New York, July 31 - The Banc of America Securities High Yield Broad Market Index rose 0.35% in the week ended Thursday. It was the fifth consecutive week in which the index has advanced, including the 0.12% return seen in the previous week ended July 20.

That confirmed and extended a recent strengthening trend that started in late June. Before that, there had been a period of some weeks of choppiness staring in mid-May. Up until that point in mid-May, the index, after having started the year strongly, had been moving steadily upward most weeks.

With its upward momentum re-established, the index has now shown positive results in 13 weeks out of the last 20 and, over the longer term, in 26 weeks out of the last 36, dating back to mid-November, according to a Prospect News analysis of the B of A data.

The index's year-to-date return grew in the most recent week to 4.03%, up from 3.66% the week before. It thus remains well above 2005's total 2.10% return, and just shy of its previous peak so far for 2006, 4.08%, reached during the week ended May 11.

The index's spread over Treasuries, which in the previous week had widened out to 366 basis points from 359 bps, tightened back down to 359 bps in the most recent week. Its yield to worst, which had previously edged upward to 8.67% from 8.66% the week before, narrowed to 8.62% in the most recent week.

The index tracked 1,682 issues of $100 million or more, up from 1,665 the week before, while its overall market value rose to about $575.6 billion from $570.1 billion the previous week. B of A sees the index as a reliable proxy for the nearly $800 billion high-yield universe.

Middle credit tier outperforms

On a credit-quality basis, the middle of the three credit tiers into which B of A divides the HY Broad Market Index - those issues rated BB-, B+ and B, making up 42.50% of the index - had the best return, 0.51%, followed by the lowest tier - those issues rated B- and below, accounting for 33.20% of the index - which returned 0.34%, and then the uppermost tier - those issues rated BB and BB+, comprising 24.30% of the index - which firmed 0.09%.

It was the second consecutive week the credit tiers finished in that same order. In the previous week, the returns of the three tiers had been tightly spaced, all separated by just five-hundredths of a percentage point, with the middle tier up 0.14%, followed by the lower tier at 0.10%, just a shade better than the upper tier, which firmed at 0.09%.

B of A analysts noted that "low-quality paper outperformed," with the CCC credits - which include most, but not all, of the lowest of the three credit tiers - generating a total return of 0.44% and the B credits (which partly, but not fully, overlap the middle tier) up 0.35%, while the BB rated bonds, which are similar to, but not exactly the same as the upper tier, yielded only 0.30%.

Spreads tighten

They said that the average spread on the index tightened 6 bps in the most recent week "as volatility in the financial markets retreated," with the yield on the 10-year Treasury creeping up 1 bp over the same time period. While the junk market thus generated a 0.35% total return on the week, as noted, it also posted a 30 bps excess return, they said.

Primary market activity, they noted, "rebounded from the prior week, with $1.9 billion of new bonds marketed to investors in the week ended Friday, up from $1.1 billion the week before. Month-to-date volume rose to $5.1 billion from $3.2 billion the week before, and year-to-date issuance rose to $86.9 billion from $85 billion, according to B of A's calculations.

And the analysts related that weekly reporting high-yield mutual funds showed an inflow [$56.1 million] in the week ended Wednesday, according to AMG Data Services, in contrast to the $72 million outflow the week before, ended July 19. With only a minor inflow, the net outflow still accumulates to about $3.5 billion, with an average weekly outflow of $116 million.

Unlike the week before, there was a substantial difference between the behavior of the automotive and the non-automotive components of the index. The automobile issues, representing 14.22% of the index - the single largest sector - jumped 1.43% in the most recent week, while the non-autos, comprising the remaining 85.78% of the index, gained just 0.17%.

In the latest week, 30 of the 42 industrial sectors into which B of A divides its high-yield universe were in positive territory, with six showing losses and six sectors showing neither gains nor losses, but rather, a flat 0.00% reading (although it should be noted that five of the six were brand-new sectors created in the sector restructuring that took place at the end of March, do not as yet have any issues represented in them; bonds actually traded in the sixth sector that formerly fell into that category, other telecommunications, but as was the case the week before, those returns remained flat).

The week before, 26 sectors finished in the black, against 10 in the red and six with a flat reading - other telecom, and the five new sectors which don't actually have any bonds slotted into them yet.

The strongly positive trend over the past four weeks in the sector breakdown represents a return to the pattern of broad-based strength seen in effect for most of this year, up until the several choppy weeks, in May and June. Solidly positive breakdowns have now been seen in 27 weeks out of the past 36 weeks.

Autos tops for week

Automobiles, as noted, were rolling along in high gear in the most recent week, up an index-best 1.43%, paced by General Motors Corp.'s better-than-expected quarterly earnings, the analysts noted. Autos roared past the previous week's champion, diversified telecommunications, which had returned an index-leading 0.90% in the week ended July 20. They have now been among the Top Five best-performing sectors in three weeks out of the last five.

Cable/DBS operators (up 0.89%), property/casualty insurers and paper/forest products (each up 0.69%) and wireline telecommunications companies (up 0.66%) rounded out the latest week's Top Five list. It was the second straight week in that select circle for both cable/DBS and wireline telecom, which also made it the week before with returns of 0.41% and 0.46%, respectively, while the property/casualty insurers, on the other hand, were among the Bottom Five worst-performing sectors in the July 20 week, with a 0.59% loss. Cable/DBS has now been in the Top Five for three weeks out of the last six, while the property/casualty insurers have been there twice in the last four weeks.

Health care facilities worst for week

On the downside, the analysts noted that health care facilities underperformed all other industry groupings, plunging an eye-opening 3.75% on the announcement that HCA Corp. will be acquired in a huge leveraged buyout deal. It was the second straight week facilities has been the cellar-dweller; the group also earned that unwanted distinction the week before with a 1.18% slide on negative investor response to the first news reports that a big debt-funded LBO for the company was in the making. The health care facilities sector has now been among the Bottom Five in three weeks out of the last six.

Banks (down 0.86%), health care services (down 0.76%), consumer durables/non-auto (down 0.34%) and consumer products (down 0.08%) rounded out the latest week's Bottom Five list. Consumer durables/non-auto and consumer products have both now been among the Bottom Five for three straight weeks, including the week ended July 20, when they lost 0.52% and 0.21%, respectively. Banks have been in the Bottom Five in two weeks out of the last four, and health care services in three weeks out of the last five.

Autos tops for year

On a year-to-date basis, the automobiles sector's index-leading performance caused its 2006 cumulative return to zoom to 12.65% from an even 11% the week before, as it remained by far and away the strongest performer on the year so far.

Entertainment remains a distant, though solid second, as its year-to-date return rose to 7.65% from 7.14% previously. However, cable/DBS, given a boost by its repeat Top Five finish, took over third place as its total return rose to 6.39% from 5.45%, bumping industrial products down to fourth, as its year-to-date total rose more modestly, to 6.12% from 5.83%.

Health care facilities worst for year

On the downside, the health care facilities sector's second straight index-worst loss for the week mired it deeper in the dungeon occupied by the worst cumulative performer so far, as its 2006 deficit ballooned to 5.33% from 1.64% in the previous week.

The life/health insurers - which had wallowed around at the very bottom for most of the year before recently being overtaken by facilities - was the only other sector in the red for 2006 so far, although it trimmed its loss to 1.07% from 1.51% previously.

Other telecommunications, where bonds actually began trading during the previous week to an initial flat weekly performance, was unchanged in the most recent week, with a similarly flat year-to-date return of 0.00% - neither a gain nor a loss. Bottom Fiver health care services' yearly return fell to 0.73% - the smallest of any sector not in negative or neutral territory - from 1.51% the week before, while oil and gas firmed to 0.80% from 0.43%.

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