B of A High Yield Broad Market Index up 0.44% on week, year-to-date return grows to new high at 5.28%

By Paul Deckelman

New York, Aug. 21 - The Banc of America Securities High Yield Broad Market Index rose 0.44% in the week ended Thursday.

It was the eighth consecutive week in which the index has advanced, including the 0.31% gain seen in the previous week ended Aug. 10. That extends a recent strengthening trend that started in late June. The index has mostly been on the upside this year, except for a period of some weeks of choppiness which ran from mid-May into late June.

With its upward momentum continuing to grow, the index has now shown positive results in 16 weeks out of the last 23 and, over the longer term, in 29 weeks out of the last 39, 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 5.28% - a new high for the year - up from 4.83% the week before, the previous 2006 high, and it remains well above 2005's total 2.10% return.

The index's spread over Treasuries, which in the previous week had widened a bit to 363 basis points from 361 bps, was unchanged in the most recent week. Its yield to worst, which had tightened to 8.53% from 8.56% the week before, continued to narrow, to 8.49% in the most recent week.

The index tracked 1,685 issues of $100 million or more, up from 1,682 issues the week before, while its overall market value rose to about $583.3 billion from $578.9 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 42.77% of the index - had the best return, 0.49%., followed by the lowest of the three tiers - those issues rated B- and below, accounting for 33.32% of the index - which returned 0.45%, with the uppermost tier - those issues rated BB and BB+, comprising 23.91% of the index - bringing up the rear as it rose 0.32%. It was the second straight week in which the middle tier was on top; in the week ended Aug. 10, the middle tier returned 0.37%, the upper tier rose 0.32%, and the lower tier - on the bottom for a second consecutive week - gained 0.25%.

B of A analysts noted that B-rated paper - which partly, but not fully, overlaps the middle tier - outperformed both the higher-quality BB-rated paper and the lower-quality CCC-rated paper, in generating 16 bps in excess return and a total return of 0.52%, while the BB segment of the index, which is similar to the upper credit tier though not exactly the same, returned 3 bps in excess return and 0.38% in total return, and the CCC credits, which include most, but not all, of the lowest tier, remained flat in the way of excess return and generated 0.33% in total returns.

In contrast, the week before, BB paper had outperformed the other segments for a second straight week, generating 0.36% in total return and 8 bps in excess return, while the total return and excess return on B paper were only 0.30% and minus 1 bp, respectively, and CCC bonds showed a weekly total return of 0.23% and a weekly excess return of minus 13 bps.

The analysts said that overall, the HY Broad Market Index again "finished the week on a strong note," generating 8 bps on excess return as the average spread on the index remained unchanged, while the 0.44% total return for the week "significantly surpassed the excess return, as risk-free rates declined in response to weakening growth expectations and retreating inflation fears."

Primary activity slows

Primary market activity, they said, "slowed down substantially from the prior week," with $1.1 billion of new paper having priced in the week ended Friday, well down from the $5 billion that priced the week before. Year-to-date issuance rose to $99.1 billion from $98.1 billion, according to B of A's calculations.

And the analysts related that weekly reporting high-yield mutual funds showed an outflow of $74 million in the week ended Wednesday, according to AMG Data Services. That followed the previous week's inflow of $129 million. The latest outflow brought the year-to-date net outflow to $3.1 billion from $3 billion previously.

While both the automotive and the non-automotive components of the index were up, the automobile issues, representing 14.26% of the index - the single largest sector - convincingly outperformed with a 0.97% return in the most recent week, while the non-autos, comprising the remaining 85.74% of the index, were up 0.35%, continuing the pattern seen in the previous two weeks.

In the latest week, 33 of the 42 industrial sectors into which B of A divides its high-yield universe were in positive territory, with just three showing losses and six sectors showing neither gains nor losses, but rather, a flat 0.00% reading. It should be noted that these six were brand-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.

In the previous week, 31 sectors were in the black, against five in the red and the other six showing a flat reading.

The strongly positive trend over the past seven 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 29 weeks out of the past 38.

Life, health insurers tops for week

In the most recent week, life/health insurers had the strongest return of any sector, up 1.23%, displacing diversified telecommunications, which had been the top-spotter for two straight weeks, including the previous week's 1.01% gain.

Autos (up 0.97%, as noted), entertainment (up 0.89%), health care equipment and services (up 0.75%) and technology (up 0.68%) rounded out the latest week's Top Five list of best-performing sectors. It was the second straight week in the select circle for the automotive names, which made it in the week ended Aug. 10 with a 0.63% return and which have now been there in three weeks out of the last four. On the other hand, it was a strong rebound for the entertainment group, which had an index-worst 1.43% loss in the Aug. 10 week.

Property casualty insurers worst for week

On the downside, property casualty insurers lost 0.58% in the week ended Thursday to take over as the cellar-dweller from the entertainment sector, which, as noted, was the previous week's biggest loser. It marks the second time in three weeks that the property/casualty insurers have had the biggest loss of any sector, and the group's third straight week - and its fourth week in the last five - as part of the Bottom Five list of the week's worst-performing sectors, including the 0.06% loss seen in the Aug. 10 week.

Gas utilities (down 0.35%) and transportation (down 0.07%) were the only two other sectors actually showing negative total returns for the most recent week. The Bottom Five was rounded out by two sectors which merely had much smaller returns than any of the others in positive territory - gaming, lodging and leisure (up just 0.06%), and chemicals (up a paltry 0.09%). The chemicals sector has now been among the Bottom Five in two weeks out of the last three.

Autos tops for year so far

On a year-to-date basis, the automobiles sector's repeat Top Five showing this past week stretched its 2006 cumulative return to 15.22% from 14.11% the week before, as it remained clearly the strongest performer on the year so far.

The cable/DBS sector - which in the previous week had grabbed second place away from entertainment, which had slumped badly that week - held on at number two, as its 2006 return increased to 7.71% from 7.04% previously. Entertainment, however, propelled by its Top Five finish in the latest week, battled back into third place, as its total return jumped to7.45% from 6.50% the week before. That dumped industrial products into fourth place, as its cumulative return only increased to 7.22% from 6.98% the week before. Top Fiver health care equipment and services moved to within striking distance, its 2006 return pushing up to 7.06% in the latest week from 6.28%.

Health facilities worst for year

On the downside, the health care facilities sector cut its 2006 loss to 4.27% from 4.79% the week before, continued to wallow around at the bottom as the worst cumulative performer so far. It also now is the only sector in the red on a year-to-date basis, as the life/health insurers - given a boost by their index-best weekly performance - got back in the black on a cumulative basis, at 0.89%, up from a 0.34% 2006 deficit the week before. Excluding the flat year-to-date readings on paper of the six sectors in which no bonds yet trade, the life/health insurers are still the second-weakest sector in the index on a year-to-date basis.

The property-casualty insurers - their year-to-date return pulled down by their recent rash of Bottom Five weekly performances, including, as noted, their index-worst return this past week - are a distant third, with a 1.55% year-to-date return. Among other sectors way underperforming the overall market so far this year, the oil and gas sector has returned 1.94%, and health care services 1.98%.

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