B of A High Yield Broad Market Index tumbles 1.03%; 2007 return falls to 0.54%

By Paul Deckelman

New York, Nov. 27 - The Banc of America Securities High Yield Broad Market Index lost 1.03% in the week ended Friday, its fourth consecutive weekly retreat, following the 0.98% loss seen the previous week ended Nov. 16.

Although the most recent trend has been negative, the index has still risen in nine weeks out of the 14 since it began turning upward in the week ended Aug. 23. Gains have been seen in 28 weeks out of the 47 since the start of 2007, against 19 losses - part of a larger pattern of strength that the index has shown since late June of last year; gains have been recorded in 54 weeks out of 74 during that stretch, versus 20 losses, according to a Prospect News analysis of the B of A data.

But while advances have been seen in most weeks this year, much of that occurred in the first half of the year, when there was steady week-to-week 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. November, however, has so far seen a return to negativity. In the last 26 weeks, there have now been 11 positive returns and 15 negative returns.

On a year-to-date basis, the index's return tumbled to 0.54% versus 1.59% the previous week and well down from its 2006 finish at 11.89%.

Showing its volatile, streaky nature, the index 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 for a number of weeks. The year-to-date return peaked at 4.72% in the week ended May 24, moved down subsequently and actually fell into the red, bottoming at a 0.25% cumulative loss during the week ended Aug. 16, before heading back upward in late August - only to start heading back downward in early November.

Spreads widen to new high for year

B of A analysts said that the index's average spread over Treasuries ballooned out by 53 basis points on the week to finish at a bloated 621 bps - its new wide point for the year, up from the previous 2007 high of 568 bps, seen the week before.

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 their 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, though, spreads began to climb back up, getting as wide as 494 bps in mid-August but coming down from that zenith after that. However, there have now been five sizable spread-widenings in the last six weeks, bringing the average spread back up to its currently swollen level.

The index's yield to worst, which previously had widened to 9.43% from 9.14% the week before, shot up to 9.74% in the most recent week, a new peak level for 2007 so far and eclipsing the old mark seen the week before.

The index tracked 1,596 issues of $100 million or more, down from 1,606 issues the week before, while its overall market value fell to $603.1 billion from $615.7 billion previously. 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.

Upper tier finishes on top

On a credit-quality basis, the uppermost of the three credit tiers into which B of A divides the HY Broad Market Index - those issues rated BB and BB+, comprising 21.40% of the index - had the best return, relatively speaking, meaning in this case the smallest loss, at 0.39%.

The middle tier - those issues rated BB-, B+ and B, making up 41.77% of the index - lost 0.80%, while the lowest tier - those issues rated B- and below, accounting for 36.83% of the index - brought up the rear by plunging 1.68%.

That broke a five-week stretch in which the middle tier had finished on top, including the previous week ended Nov. 16, when it lost 0.63%, the lower tier lost 1.16% and the upper tier lagged with a 1.32% nosedive.

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, its analysts again 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 1.82%. That continued the trend seen the week before, when it had an index-worst loss of 1.34%. B-rated credits - similar to, but not exactly the same as the middle tier - lost 1.11%, versus their 0.77% loss the week before, while BB-rated assets (the upper tier partially, but not completely, overlaps this subset) had the smallest loss of the three, at minus 0.48%, versus the previous week's 1.02% deficit.

Spreads widen as governments come in

The analysts noted that while the average high-yield spread jumped by 53 bps, the yield on the benchmark 10-year Treasury note tightened by 17 bps to an even 4% from 4.17% the week before.

In the primary market, they said, activity "came to a complete halt," as year-to-date new issuance remained at $164.8 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, reported a $241.2 million outflow in the week ended last Wednesday, on top of the previous week's whopping $632.2 million outflow, the biggest exodus of cash from the funds in two years. The year-to-date cumulative outflow total stands at about $2.1 billion, up from $1.8 billion previously, while the average weekly outflow grew to $44 million from $40 million the week before.

Negative sectors retain control

In the latest week, 35 of the 41 industry sectors into which B of A divides its high-yield universe were in negative territory, just three were in positive territory, and three others had flat 0.00% readings, neither a loss nor a gain, although it should be noted that those latter three groupings - credit insurance, leisure equipment and products, and water utilities - are relatively 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 latest weekly result continues and extends the trend seen in the previous week, when 36 sectors were in the red, two were in the black and the three new empty sectors had their flat readings. While strongly positive breakdowns have been seen throughout most of the year and have predominated recently, with nine positives and just five negatives in the last 14 weeks, negative breakdowns have now been seen in five of the last six weeks. Positive and negative sector breakdowns have been split, at 11 positive versus 14 negative, in the last 25 weeks.

Consumer durables/non-auto week's worst sector

The parade of negative sectors was led by the consumer durables/non-auto group - the sector that includes the hard-hit homebuilding industry - which recorded an index-worst 2.49% loss, taking over as the cellar-dweller from diversified financials, which had held that unenviable position for previous three straight weeks including the week ended Nov. 16, when it swooned to a 4.16% loss. The diversified financials sector had also been at the bottom of the pile in four weeks out of the previous five, and was among the Bottom Five worst-performing sectors for five straight weeks.

Consumer durables/non-auto, meantime, has now been on the Bottom Five list for four straight weeks, including the Nov. 16 week, when the sector lost 1.69%.

Automobiles (down an even 2%) other telecommunications (down 1.74%), technology (down 1.64%) and retail (down 1.50%) rounded out the latest week's Bottom Five list. It was the third straight week there for autos, which had lost 1.81% in the previous week.

Insurance brokers week's best sector

On the upside, the insurance brokers sector was the week's best performer, up 0.20%, taking over the top spot from life/health insurance, which had been atop the pile for the previous two weeks, including the Nov. 16 week, when it had an index-best 0.86% gain. It was a solid comeback for the insurance brokers' group, which had been among the Bottom Five the week before with a 3.19% plunge.

Only two other sectors actually finished in the black this past week, and did so just barely - the property/casualty insurers, up 0.07%, and pipelines, up 0.04%. Excluding the flat readings of the three new empty sectors, the latest week's Top Five list of best-performing sectors was filled out by two other sectors which merely had smaller losses than all of the other negatives - transportation (down 0.06%) and life/health insurance (down 0.14%), which, as noted, had been the previous week's champion.

Health care equipment/services tops for year

On a year-to-date basis, with 47 weeks now in the books, the health care equipment and services sector remained in the top position, although its cumulative return eased to 10.32% from 10.71% the previous week. It is still the only sector to break into positive double-digits, percentage-wise, so far this year.

The life/health insurers remained in second place although the sector's year-to-date return dipped to 7.61% from 7.76% previously due to its small loss for the week; that loss was small enough, as noted, for the insurers to be included in the weekly Top Five grouping.

The transportation sector - also in the Top Five with a small loss that took its 2007 return down to 7.36% from 7.43% - moved up one notch in the standings, to third-strongest from fourth previously. That in turn, displaced the previous third-place holder, diversified telecom, which moved down into fourth place with a 6.95% return for the year, down from 7.57% previously.

The food and drug retailers moved up one position, to fifth-best from sixth previously, even as its yearly return dropped to 6.29% from 6.61%. It traded places with metals and mining, which moved down to sixth-best from fifth, as its cumulative return fell to 5.79% from 7.09%.

Consumer durables/non-auto year's worst

On the downside, repeat Bottom Five finisher consumer durables/non-auto - which, as noted, was the single-biggest loser in the index for the week - also remained the year's worst-performing sector, as its 2007 loss gapped out to a yawning 14.23% from 12.05% the week before.

Diversified financials also remained a double-digit percentage loser, sliding to a cumulative loss of 12.08% from 11.29% previously.

While the insurance brokers sector had the best performance of any sector on the week, as noted, it remained third-worst on the year, although its 2007 loss narrowed to 4.70% from 4.89% before. Banking remained fourth-worst on the year with a 2.72% loss, wider than the previous week's 2.29% deficit.

Bottom Five finisher retailing was again the fifth-weakest sector year to date as its loss widened to 2.13% from 0.65%. Fellow Bottom Fiver autos continued to spin its wheels as the sixth-worst performer for the year, swinging from a narrow 0.28% gain on the year in the previous week to a 1.73% loss in the week ended Friday.

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