B of A High Yield Broad Market Index down 0.38%, first loss in nine weeks; 2007 return falls to 4.22%

By Paul Deckelman

New York, Oct. 22 - The Banc of America Securities High Yield Broad Market Index fell by 0.38% in the week ended Thursday - its first downturn after eight straight weekly gains starting in late August, including the 0.65% advance seen in the previous week, ended Oct. 11.

Gains have now been seen in 27 weeks out of the 42 since the start of 2007, against 15 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 53 weeks out of 69 during that stretch, according to a Prospect News analysis of the B of A data.

But while gains have been seen in most weeks this year, much of that occurred in the first half of the year, when there was steady strength. The momentum shifted to the downside around mid-year and stayed there for some weeks, before the index started to move back up in late August, through September and into October. In the last 21weeks, there have now been 10 positive returns and 11 negative returns.

On a year-to-date basis, the index's return fell to 4.22%, versus the previous week's 4.37% reading.

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, bottoming at a 0.25% cumulative loss during the week ended Aug. 16, before heading back upward in late August.

Spreads widen during week

The index's average spread over Treasuries, which in the prior week had tightened markedly to 412 basis points from 437 bps the week before, ballooned back out to 446 bps during the most recent week.

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, peaking at a bloated 494 bps in the week ended Aug. 16, but coming down from that zenith since then to stand at current levels.

The index's yield to worst, which previously had narrowed to 8.51% from 8.64% the week before, widened back out to 8.68% in the most recent week. It had recently peaked at 9.29% in the Aug. 15 week.

The index tracked 1,604 issues of $100 million or more, down from 1,608 issues the week before, while its overall market value fell to $629.2 billion from $632.5 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 42.44% of the index - had the best return, i.e., the smallest loss, at minus 0.16%. The lowest tier - those issues rated B- and below, accounting for 35.48% of the index - was next, with a 0.52% deficit, while the uppermost tier - those issues rated BB and BB+, comprising 22.08% of the index - brought up the rear with a 0.59% loss.

That broke the pattern seen during the two prior weeks, when the lower tier had the best return; in the previous week, ended Oct. 11, the lower tier rose 0.96%, the upper tier 0.49%, and the middle tier just a shade less at 0.48%.

By ratings categories for the three major baskets of credits into which B of A divides the index, excluding those issues which are not rated, B of A analysts said that CCC-rated paper, which largely, but not totally, comprises the bottom tier, "underperformed" the rest of the index, generating a total loss of 0.71%, versus the previous week's total return of 1.11%. BB-rated assets (the upper tier partially, but not completely, overlaps this subset) lost 0.40%, versus their 0.45% return a week before, while B-rated credits - similar to, but not exactly the same as the middle tier - had the smallest loss, 0.22%, versus their 0.59% gain the week before.

The analysts noted that while the average high-yield spread jumped out by 34 bps in the latest week to 446 bps, as noted, the yield on the benchmark 10-year Treasury note was tightening by 15 bps, to 4.49%.

In the primary market, they again said, "activity increased from the level of the prior week," with a total of six deals totaling $4.1 billion having priced in the week ended Friday, versus four transactions collectively worth $3.5 billion in the previous week. The additional transactions boosted year-to-date new issuance to $149.6 billion, according to B of A's calculations, versus the record total of $179.3 billion in 2006.

Weekly reporting high-yield mutual funds, as measured by AMG Data Services, showed a $139.6 million inflow in the week ended last Wednesday, following the previous week's $26 million cash infusion. The year-to-date cumulative outflow total declined to about $1.2 billion from around $1.4 billion the week before, while the average weekly outflow also declined to $30 million from $34 million in the prior week.

Negative sectors regain control

In the latest week, 21 of the 42 industry sectors into which B of A divides its high-yield universe were in negative territory, 18 were in positive 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 even at this date still do not as yet have any issues represented in them. That broke an eight-week run of predominantly positive sector breakdowns, including the Oct. 11 week, when 38 sectors were in the black, just one was in the red, and the three empty new sectors had flat readings.

Strongly positive weekly breakdowns have been seen for much of this year, and even stretching back into last year, although the trend turned decidedly negative around mid-year. However, since then the trend has turned back to positive, chiefly due to that recent eight-week stretch of sectors finishing mostly in the black, with 10 positive weeks and 10 negative weeks now having been recorded in last 20 weeks.

Life/health insurers top sector for week

The life/health insurance sector was the index's best performer in the most recent week, rising 0.97% to claim the top spot away from the previous week's champion, gas utilities, which had jumped 2.85%. The life/health insurers thus went from worst to first in the latest week - reversing the journey which the volatile sector took the week before. In the week ended Oct. 11, the sector had gone from first to worst, posting an index-worst 0.72% loss; in fact, it was the only sector actually in the red that week. However, the grouping has now been the top-finishing sector in two weeks out of the past three, including the week ended Oct. 4, when it had posted an index-best 2.71% gain.

Meanwhile, the gas utilities sector - the Oct. 11 week's best performer, as noted - remained among the Top Five best-performing sectors for a second straight week, with a gain of 0.61%.

The health care services sector (up 0.74%), insurance brokers (up 0.63%) and property/casualty insurers (up 0.55%) rounded out the latest week's Top Five list. It was the second straight week in that elite group for the insurance brokers, which had made it the previous week with a 1.56% gain. Health care services notched a solid comeback, after having landed among the Bottom Five worst-performing sectors the week before with a paltry 0.18% gain.

Diversified financials week's worst sector

On the downside, diversified financials lost 1.56%, taking over as the cellar-dweller from the life/health insurers, which lost 0.72% in the previous week, as noted.

The latest week's Bottom Five list was rounded out by consumer durables/non-automotive (down 1.36%), retail (down 1.20%), other telecommunications (down 0.75%) and technology (down 0.72%).

Health care equipment/services tops for year

On a year-to-date basis, with 42 weeks now in the books, the health care equipment and services sector remained in the top position, its cumulative return pushing up to 10.33% from 10.16%, and still the only sector to break into positive double-digits so far this year. Diversified telecom remained second-best on the year at 8.21%, up from 7.98% previously.

Transportation moved up one position, to third-best, as its return for the year swelled to 7.92% from 7.53%, while metals and mining, which previously was third-best, fell a notch to fourth-place at 7.40%, down from 7.65% the week before.

Also trading places on the leaderboard were the consumer non-cyclical and industrial products sectors. The latter moved up one notch, to fifth-best from sixth, as its 2007 return increased slightly, to 6.93% from 6.86% before, while the consumer non-cyclicals group lost one position and moved down to sixth place, its cumulative return easing to 6.78% from 7.50% .

Consumer durables/non-auto year's worst

On the downside, Bottom Fiver consumer durables/non-auto, which includes the hard-hit homebuilding industry, remained the year's worst-performing sector, as its 2007 loss widened to 7.68% from 6.41% the week before.

Diversified financials - the week's single worst-performing sector, as noted - tumbled one position to second-worst on a year-to-date basis, with a 2.54% loss, wider than the previous week's 0.99% deficit. The insurance brokers sector, the previous second-worst grouping, improved, relatively speaking, to only third-worst, on the strength of its Top Five weekly performance, which sliced its loss for the year to 0.54% from 1.16% previously.

Banking remained the fourth-weakest year-to-date sector, although its loss so far narrowed to 0.51% from 0.98%. Excluding the three empty new sectors' flat 0.00% readings for the year, the paper and forest products sector was fifth-weakest, a one-notch deterioration in its position, as its cumulative return declined to 2.23% from 2.91%. Retail, not previously among the worst 2007 laggards, fell to sixth-worst, at 2.32%, its year-to-date return dragged down from 3.51% the week before by its Bottom-Five weekly showing - off 1.20%, as noted.

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