B of A High Yield Broad Market Index up 0.40% on week; 2007 return grows to 1.19%

By Paul Deckelman

New York, Jan. 29 - The Banc of America Securities High Yield Broad Market Index rose 0.40% in the week ended Thursday - the sixth straight weekly gain seen for the index, including the 0.36% advance seen in the previous week ended Jan. 18.

The index's recent pattern of strength continues, with gains now having been seen in 30 weeks out of the last 31, dating back to late June last year - all except the week ended Dec. 14, during which it declined a paltry 0.09%. That was part of a larger pattern of positive returns throughout most of last year, according to a Prospect News analysis of the B of A data.

The index's year-to-date return firmed to 1.19% from 0.79% the previous week. The index finished 2006 with an 11.89% return - nearly six times 2005's total 2.10% return.

The index's average spread over Treasuries, which in the previous week had narrowed to 293 basis points from 298 bps previously, tightened substantially in the most recent week, to 277 bps, in a continuation of the spread-tightening trend seen throughout last year, when spreads started at 384 bps off Treasuries and ended at 305 bps over.

Its yield to worst, which previously narrowed to 7.72% from 7.76% the week before, continued to come in, to 7.67% in the most recent week.

The index tracked 1,679 issues of $100 million or more, up from 1,671 issues the week before, while its overall market value rose to $641.9 billion from $637.3 billion the previous week. B of A sees the index as a reliable proxy for the high-yield universe, which by some estimates is nearly $1 trillion in value.

Lower tier continues to lead

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 34.42% of the index - showed the strongest performance, returning 0.62% on the week. That was followed by the middle tier - those issues rated BB-, B+ and B, making up 43.44% of the index - which gained 0.34%, while the uppermost tier - those issues rated BB and BB+, comprising 22.13% of the index - brought up the rear with a 0.19% rise.

It was the eighth consecutive week in which the lowest tier was on the top. It was also the third week in a row and the sixth week out of the last seven in which the three tiers had finished in that order. In the previous week, ended Jan. 18, the lower tier returned 0.66%, the middle tier rose 0.25%, while the upper tier rose 0.14%.

B of A's analysts again said that CCC-rated paper, which largely, but not totally, comprises the bottom tier, "outperformed" in the latest week with a 0.75% return, while B-rated paper - similar to, but not exactly the same, as the middle tier - had a total return of 0.41%. The BB-rated credits (the upper tier partially, but not completely, overlaps this subset) were up 0.20%.

About $4.5 billion of new bonds priced in the most recent week, on top of about $4.3 billion the week before. New-deal issuance so far this year stands at $13.2 billion, while issuance totaled a record $179.3 billion in 2006, according to B of A's calculations.

The analysts said that weekly reporting high-yield mutual funds, as measured by AMG Data Services, showed a net inflow of $73 million in the week ended Jan. 24, following the $181 million inflow seen in the previous week. Net inflows to date total $543 million, for an average weekly $136 million inflow.

Spreads keep tightening

The analysts further stated that "as in the prior week, the [index's] strong performance was driven by compressing spreads," while risk-free (i.e., Treasury) rates ballooned out, in contrast to the previous week when government bond yields held steady. While the average spread on the index tightened by 15 bps in the most recent week, to 277 bps, as noted, the 10-year Treasury's yield jumped to 4.87% on Jan. 25, up 13 bps from 4.74% the week before.

In the latest week, 35 of the 42 sectors into which B of A divides its high-yield universe were in positive territory, with just one - property/casualty insurers - showing a loss, and six showing flat 0.00% readings, neither a loss or a gain, although it should be noted that five of these 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 other telecommunications sector also actually traded to a flat reading, for a third consecutive week.

In the Jan. 18 week, 32 sectors were in the black, against four in the red, and six sectors - the five new sectors, plus other telecom - at 0.00%. Solidly positive sector breakdowns have now been seen over the past 31 weeks, and on a longer-term basis, in 52 weeks out of the past 61, encompassing virtually all of last year and extending back to late 2005. Such strongly positive breakdowns pretty much dominated last year, except for the several weeks of choppy returns in May and June.

Consumer non-cyclical tops for week

In the latest week, the consumer non-cyclical/other sector had the week's best return, at 1.12%, passing up the automobiles sector, which had led the pack the previous week with a 0.92% return. It was the second consecutive week among the Top Five best-performing sectors for the consumer non-cyclicals, which made it the previous week with a 0.47% return.

The autos, meantime, were also among the Top Five for a second straight week (up 0.87%). Health care equipment and services (up 0.86%), health care facilities (up 0.84%) and retail (up 0.78%) rounded out the Top Five in the latest week.

Property-casualty worst for week

On the downside, the property-casualty insurers group, as noted, was the only sector actually showing a loss in the latest week, declining 0.24%. In the previous week, life-health insurers had been the worst-performer, down 0.30%.

For a third consecutive week, as noted, the other telecom sector recorded a flat, 0.00% return, neither a loss nor a gain.

The remainder of the Bottom Five list of the worst-performing sectors was filled out in the most recent week by sectors which merely had smaller returns than all of the others that finished in the black. These were the gas utilities (up 0.03%), pipelines (up 0.08%) and banks (up 0.10%) sectors. It was the second straight week among the Bottom Five for gas utilities and pipelines, which had declined 0.13% and 0.02%, respectively, in the week ended Jan. 18. It was also the second straight week in the Bottom Five for other telecom.

Consumer non-cyclical tops for year

On a year-to-date basis, after four weeks, the consumer non-cyclicals/other sector, on the strength of its repeat Top Five showing and index-best return this week, strengthened its position as the strongest 2007 performer so far, with a 2.80% return, up from 1.66% the previous week.

Automobiles, also on the strength of parking in the Top Five for a second straight week, moved into second place at 2.32%, up from 1.44% the week before, displacing the previous Number-Two, the paper and forest products sector, whose 1.99% return, up from 1.61% previously, failed to keep pace. Also pushing ahead of the paper and lumber companies were the retailers, a Top Fiver, at 2.17%, up from 1.38% previously.

On the downside, no sectors are now in the red on a cumulative basis; even the four which were showing losses in the previous week - oil and gas, life/health insurers, other health care and aerospace and defense - are now slightly in the black.

The weakest performer, year to date, among the sectors actually trading bonds, is other telecom, with a flat 0.00% reading. Omitting the other five sectors with flat year-to-date readings, because they are new sectors with no bonds trading in them as yet, the weakest 2007 returns so far are life/health insurers (up 0.08%), oil and gas (up 0.17%), real estate (up 0.19%), aerospace and defense (up 0.24%) and other health care (up 0.27%).

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.