B of A High Yield Broad Market Index up 0.45% on week, year-to-date return grows to new high at 6.83%

By Paul Deckelman

New York, Sept. 18 - The Banc of America Securities High Yield Broad Market Index rose 0.45% in the week ended Sept. 14, the 12th consecutive week in which the index has advanced. It showed a 0.41% gain in the previous week, ended Sept. 7. The past week further 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 choppiness from mid-May into late June.

With its upward momentum continuing to grow, the index has now shown positive results in 20 weeks out of the last 27 and, over the longer term, in 33 weeks out of the last 43, 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 6.83%, a new high for the year, up from the previous 2006 high of 6.35% the week before. It remains well above 2005's total 2.10% return.

The index's spread over Treasuries continued to narrow, to 350 basis points in the most recent week. In the previous week, it had contracted to 358 bps from 368 bps the week before. Its yield to worst, which had tightened to 8.37% from 8.42% the week before, continued to head downward, to 8.29% in the most recent week.

The index tracked 1,669 issues of $100 million or more, down from 1,674 the week before, although its overall market value grew to $590.5 billion from the previous week's $589.3 billion. B of A sees the index as a reliable proxy for the nearly $800 billion high-yield universe.

Lowest 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 32.99% of the index - had the best return, 0.61%. This was followed by the uppermost tier - those issues rated BB and BB+, comprising 24.20% of the index - which was up 0.48%, and the middle tier - those issues rated BB-, B+ and B, making up 42.81% of the index - which returned 0.31% on the week.

It was the second consecutive week in which the lower tier led all segments, with the upper tier next. In the week ended Sept. 7, the lower tier returned 0.48%, while the upper tier and the middle tier each rose 0.37%.

As they had the previous week, B of A analysts declared that overall, the HY Broad Market Index, "had another strong week" in posting its 0.45% total return. They noted that the weekly excess return amounted to 36 bps "as risk-free rates were almost unchanged: the yield on the 10-year Treasury held steady at 4.79%."

Primary market activity, they said, "ramped up from the seasonally slow late summer period" as $6 billion of new issuance priced in the week ended Friday. That was leaps and bounds ahead of the previous week, when just one issue of $160 million priced in the immediate post-Labor Day sessions. Year-to-date issuance rose to $105.5 billion from the prior week's level of $99.5 billion, according to B of A's calculations.

The analysts also said that weekly reporting high-yield mutual funds showed an outflow of $20 million in the week ended Sept. 13, according to AMG Data Services. That followed the previous week's inflow of $107 million. The relatively small flow kept the year-to-date net outflow at $3 billion, while the average weekly outflow actually declined to $81 million from $83 million the week before.

For a second straight week, 35 of the 42 industrial sectors into which B of A divides its high-yield universe were in positive territory, with just one showing a loss - automobiles in the recent week, the life/health insurers the week before. Six 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 strongly positive trend over the past 11 weeks in the sector breakdown represents a return to the pattern of broad-based strength seen in effect for most of this year, except for the choppy weeks in May and June. Solidly positive breakdowns have now been seen in 33 weeks out of the past 42.

Property/casualty insurers tops for week

Property/casualty insurers were the best-performing sector for the second consecutive week, up 1.53%, on top of the index-best 1.50% return in the prior week, ended Sept. 7. It was the third straight finish among the Top Five best-performing sectors for the insurers. This represented a clear reversal of its earlier trend - the property/casualty names had been among the Bottom Five worst-performing sectors in four consecutive weeks, and in five weeks out of six in the period through the week ended Aug. 24.

Health care facilities (up 1.19%), life/health insurance (up 0.91%), cable/DBS operators (up 0.90%) and health care equipment and services (up 0.85%) rounded out the Top Five list in the most recent week. It was a solid rebound for the life/health insurers, which had been in the Bottom Five the week before with a 0.08% loss, the only sector actually finishing in the red that week. The group has now been among the Top Five three times in the past five weeks. Health care facilities and cable/DBS have now both been in the Top Five in two weeks out of the last three.

Autos worst for week

On the downside, the automotive sector was the only sector posting an actual loss in the most recent week, supplanting the life/health insurance sector as cellar dweller.

"As in the prior week, the auto sector stood out," the B of A analysts said, "this time however at the bottom of the performance spectrum." They noted that while the auto sector - which represents 14.34% of the index, the largest single sector - lost 0.08% in total return and 19 bps in excess return, the remaining non-automotive 85.66% of the index generated 0.54% in total return and 45 bps in excess return.

It was the second week in the past four in which the automotive segment wound up among the Bottom Five - a rare departure from the sector's recent strength. Even with the Bottom Five finish in the latest week, autos have been among the Top Five in five weeks out of the last eight. On a year-to-date basis, the autos still have returned an astounding 17.49%, while the rest of the index has only returned 5.33%.

In the latest week, the auto group was towed lower by market reaction to renewed bankruptcy speculation about Dura Automotive Systems Inc. The steep fall in Dura's bonds pushed other names in the automotive supplier sector lower this past week.

The Rochester Hills, Mich.-based automotive parts maker's bonds fell after a Lehman Brothers report predicted that it will likely file for Chapter 11 protection in the next few months and may first skip a bond coupon payment to conserve cash. Traders also mentioned market rumors that the company was having difficulty lining up debtor-in-possession financing at reasonable terms in advance of a filing.

At the same time, a federal judge refused to order one of Dura's suppliers to continue providing the company with components - a request Dura had made after the flow of parts was stopped due to alleged non-payment. Traders said such a development does not bode well for Dura's dealings with other vendors, although none of the others have yet taken action.

Apart from the autos, the other members of the latest week's Bottom Five were merely sectors with small gains. These included aerospace and defense (up 0.15%), banks (0.16%), real estate (up 0.21%) and other health care (up 0.24%). It was the second straight week in the Bottom Five for the banks, which were also there in the Sept. 7 week with a 0.02% gain. On the other hand, it represented a comedown for the other healthcare sector, which was in the Top Five the previous week with a 0.75% gain. Other health care has now been in the Bottom Five in two weeks out of the last three.

Autos still tops for year

Despite landing in the Bottom Five this week with its small loss, the automobiles sector clearly remains the 2006 cumulative returns champion, although its return declined slightly to 17.49%, as noted, from 17.58% previously.

Cable/DBS strengthened its hold on second place, as its Top Five finish in the latest week increased its year-to-date return to 9.83% from 8.85% previously, while entertainment stayed in third place at 9.24%, up from 8.37% the week before. Top Fiver health care equipment and services fattened its cumulative return to 9.12% from 8.19%, while industrial products rose to 8.36% from 8.06%.

Health facilities worst for year

On the downside, the health care facilities sector, helped by an impressive Top Five-worthy showing, trimmed its 2006 loss to 1.92% from 3.07% the week before, but it was still by far the worst cumulative performer so far, and the only sector in the red on a year-to-date basis.

Fellow Top Fiver life/health insurance expanded its 2006 return to 2.80% from 1.88%, but, excluding the sectors in which no bonds yet trade, the sector was still the second-weakest in the index on a year-to-date basis, even with the large weekly gain.

Consumer durables/non-auto remained third-weakest in the index, even as its yearly return grew to 3.05% from 2.44% previously, while health care services' return for the year so-far grew to 3.13% from 2.58%, and oil and gas firmed to 3.30% from 2.80% before.

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