B of A High Yield Broad Market Index jumps 0.69% on week; 2007 return grows to 3.26%

By Paul Deckelman

New York, Oct. 1 - The Banc of America Securities High Yield Broad Market Index rose for a sixth straight week, returning 0.69% in the week ended Thursday, on top of the 1.16% advance seen in the previous week ended Sept. 20.

Those six straight weekly gains represent a definitive break from the index's recently inconsistent pattern; after having posted steady gains for most of the first half of the year, the index had more lately been in a zig-zag pattern, alternating a week or two of upside with a week or two of retreat, including the dramatic 2.32% plunge in the week ended July 26 - easily its worst loss so far this year and one of its worst weekly deficits ever.

Advances have been seen in most weeks this year, although the momentum shifted to the downside around mid-year. Since then, there have been 10 negative returns and now eight positive returns in the last 18 weeks.

On a year-to-date basis, the index's return rose to 3.26%, versus the previous week's 2.55% reading.

Prior to the current winning streak, recent year-to-date performance had also been zig-zagging. After having dipped into the red for the first time in 2007 during the week ended Aug. 2, at 0.03%, it was back in the black the following week, ended Aug. 9, when it was up 0.59%, but then fell back into the red in the week ended Aug. 16, when it was down 0.25% for the year. That was its worst cumulative loss so far, before beginning its bounce in the Aug. 23 week - an upward move which has since continued over the next five weeks.

The index had finished 2006 with an 11.89% return. Showing its volatile, streaky nature, it began 2007 with two straight months of strong gains, followed by a period of choppiness seen roughly from late February through early April, but after that had again showed consistent strength. It peaked at 4.72% in the week ended May 24, moved down subsequently and fell into the red, but began heading back upward in late August.

Gains have now been seen in 25 weeks out of the 39 since the start of 2007, against 14 losses - part of a larger pattern of strength that the index has shown since late June of last year, with gains now having been recorded in 51 weeks out of 66 during that stretch, according to a Prospect News analysis of the B of A data. However, since hitting its high point in late May, the recent momentum had clearly shifted to the downside, before the return to the upside of the past few weeks.

The index's average spread over Treasuries, which in the prior week had narrowed markedly to 440 basis points from 476 bps the week before, edged back upward in the most recent week, to 441 bps.

The index had begun the year in a spread-tightening mode, extending the trend that had been in effect throughout 2006 when spreads had begun that year at 384 bps off Treasuries and had ended it at 305 bps over. After continuing to come in for the first two months of 2007, spreads had proceeded to rise over the next few weeks before resuming their tightening trend, which brought them down to the low for the year of 263 bps seen in the week ended June 7. That was also the record tight level since B of A began compiling the index. From that nadir, spreads began to climb back up, to stand at their current relatively bloated levels, peaking at 494 bps in the week ended Aug. 16, but then edging down somewhat since then, and coming in solidly in the Sept. 20 week.

The index's yield to worst, which previously had narrowed notably to 8.80% from 9.05% the week before, continued to tighten in the most recent week, to 8.68%. It had recently peaked at 9.29% in the Aug. 15 week.

The index tracked 1,625 issues of $100 million or more, up from 1,619 issues the week before, and its overall market value rose to $629.9 billion from $624.1 billion the previous week. 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.

Middle tier finishes on top

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 42.91% of the index - had the best return, 0.75%. The uppermost tier - those issues rated BB and BB+, comprising 22.80% of the index - returned 0.68%, while the lowest tier - those issues rated B- and below, accounting for 34.29% of the index - brought up the rear with a return of 0.63%.

That represented a break in the pattern seen in the previous three weeks, when the middle tier lived up to its name and finished sandwiched between the other two tiers. In the week ended Sept. 20, the lower tier returned 1.55%, the middle tier was up 1.04%, while the upper tier lagged behind at 0.82%. However, the latest week's order of finish also represented a return to the recent trend of lower-tier weakness, which has now been seen in two weeks out of the last three and over a broader time frame, in 10 weeks out of the last 15.

However, B of A's analysts noted that total returns by ratings categories "were roughly equal," with the three major baskets of credits into which B of A divides the index, excluding those which are not rated, finishing in a tightly spaced virtual dead heat. CCC-rated paper, which largely, but not totally, comprises the bottom tier, actually oh-so-slightly outperformed the rest with a return of 0.71%, while B-rated credits - similar to, but not exactly the same as the middle tier - followed close behind at 0.70%. BB-rated assets (the upper tier partially, but not completely, overlaps this subset) were not far off the pace, returning 0.68%.

The analysts noted that while the average spread on the index widened by 1 bp on the week, in contrast, the yield on the 10-year Treasury decreased by 3 bps to 4.59% from 4.62% a week earlier.

The primary market, they said, "was roughly at the level of the prior week," when the new-deal arena came back to life after several weeks of no issuance. Six transactions totaling $1.9 billion priced by Friday, up from the previous week's four pricings amounting to $1.8 billion. That boosted year-to-date new issuance to $136.3 million in the latest week. Issuance totaled a record $179.3 billion in 2006, according to B of A's calculations.

Weekly reporting high-yield mutual funds, as measured by AMG Data Services, showed a $465.8 million inflow in the week ended last Wednesday, which followed the previous week's $31.8 million outflow. Year-to-date cumulative outflows total about $1.6 billion, down from the prior week's $2.1 billion, for an average weekly outflow of $42 million, down from $55 million the previous week.

Positive sectors in control

In the latest week, 37 of the 42 industry sectors into which B of A divides its high-yield universe were in positive territory, two were in negative territory, and three others had flat 0.00% readings, neither a loss nor a gain, although it should be noted that the latter groupings - credit insurance, leisure equipment and products, and water utilities - were new sectors created in the sector restructuring that took place last year and do not as yet have any issues represented in them.

It was the sixth straight week of a largely positive sector breakdown, including the previous week, when 36 sectors finished in the black, three were in the red and the three empty new sectors had flat 0.00% readings.

That six-week stretch has been a departure from the trend of negative breakdowns that had predominated since around mid-year, even now still having been recorded in nine weeks out of the last 17. However, the larger trend for much of this year, and even stretching back into last year, has seen strongly positive breakdowns.

Autos tops for week

The automobile sector was the index's best performer, rising 1.72% on the week, no doubt encouraged by the quick end to the potentially costly United Auto Workers strike against General Motors Corp., a development that not only boosted GM's bonds and those of its 49% owned GMAC LLC financing arm, but also those of domestic arch-rival Ford Motor Co., Ford's finance unit and various automotive parts suppliers. The autos displaced the previous week's top-spotter, consumer durables/non-auto, which had soared an index-leading 3.14% during the week ended Sept. 20.

Property/casualty insurers (up 1.53%), other health care (up 1.26%), transportation (up 1.12%) and health care services (up 1.05%) rounded out the latest week's Top Five list of best-performing sectors.

Consumer durables/non-auto week's worst

On the downside, the consumer durables/non-auto sector - which, as noted, had been the previous week's top performer - went from first to worst in the most recent week, tumbling 1.02%, pulled down by the continued troubles of the hard-hit homebuilding business, including unexpectedly bad quarterly numbers from industry leader Lennar Corp. and bearish monthly existing-home sales data from the National Association of Realtors.

Those negatives combined to dim the fading glow from the Federal Reserve's recent unexpectedly large rate cut, which had boosted the builders and the entire non-automotive consumer durables group along with them in the previous week. The volatile sector has now been the index's worst performer in two weeks out of the last three, including the week ended Sept. 13, when it slid 2.21%. It took over as the cellar-dweller from the bank sector, which had slid an index-worst 3.75% in the Sept. 20 week.

However, banking (down 0.39%) remained among the Bottom Five worst-performing sectors in the most recent week, and was the only other sector actually finishing in the red. As had been the case the week before, excluding the flat readings of the three empty new sectors, the latest week's Bottom Five was rounded out by three sectors merely showing smaller gains than all of the other positive finishers - retail (up 0.01%), entertainment (up 0.09%) and paper and forest products (up 0.10%). It was a sharp comedown for the retailers, which had been among the Top Five the week before with a 2.08% gain.

Health care equipment tops for year

On a year-to-date basis, with 39 weeks now in the books, the health care equipment and services sector remained in the top position, its cumulative return pushing up to 7.79% from 7.14%. Diversified telecommunications was second-best at 7.09%, up from 6.62% previously. Metals and mining was third-best, at 6.84%, up from 5.75% the week before.

Top Five finisher transportation was the fourth-place finisher, at 6.63%, up from 5.44%. Industrial products remained fifth-strongest, at 6.13%, up from 5.38%. Chemicals moved up to sixth-best at 5.70%, from 4.92% before.

Consumer durables/non-auto year's worst

On the downside, the consumer durables/non-auto sector was both the week's worst-performing sector and the year's for the second time in three weeks, its 2007 loss widening to 8.22% from 7.27% the week before.

Diversified financials was second-worst with a 2.12% loss, although that was down from the previous week's 3.01% deficit, while the insurance brokers sector was third-worst with a 2.09% loss, down from the previous week's 2.91% shortfall.

Repeat Bottom Fiver banks' cumulative loss widened to 1.86% from 1.48%, bad enough for fourth-worst in the index. Excluding the three empty new sectors' flat 0.00% readings, life/health insurance was fifth-worst on the year, its 2007 return a relatively modest 1.19%, up from 0.22% the week before. Bottom Fiver paper and forest products fell to sixth place, its cumulative return only rising to 1.44% from 1.34% the week before.

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