B of A High Yield Broad Market Index jumps 1.24% on week; 2007 return bounces back to 1.79%

By Paul Deckelman

New York, Dec. 4 - The Banc of America Securities High Yield Broad Market Index shot up by 1.24% in the week ended Friday, ending four consecutive weeks of decline, including the 1.03% loss seen the previous week ended Nov. 23.

Although the most recent trend has been negative, the index has still risen in 10 weeks out of the 15 since it began turning upward in the week ended Aug. 23 following a lengthy summer slide. Gains have now been seen in 29 weeks out of the 48 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 55 weeks out of 75 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, saw a return to negativity, which was blunted in the most recent week. In the last 27 weeks, there have now been 12 positive returns and 15 negative returns.

On a year-to-date basis, the index's return more than tripled to 1.79% versus 0.54% the previous week, but remains 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. It started heading back upward in late August and subsequent months - only to move back downward through most of November, but then closing out the month with a robust gain.

Spread tightens from year's wide point

B of A analysts said that the index's average spread over Treasuries narrowed by 25 basis points on the week to finish at 596 bps, in from the bloated 621 bps, its wide point for the year, 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 were five sizable spread-widenings over a six-week period in October and November, bringing the average spread back up to its new high, before the most recent week's tightening.

The index's yield to worst, which previously had widened to a new high for the year at 9.74% from 9.43% the week before, came back in to 9.48% in the most recent week.

The index tracked 1,594 issues of $100 million or more, down from 1,596 issues the week before, although its overall market value rose to $609.1 billion from $603.1 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 remains 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 21.54% of the index - had the best return, zooming 2.04% on the week.

The lowest tier - those issues rated B- and below, accounting for 37.34% of the index - gained 1.30%, while the middle tier - those issues rated BB-, B+ and B, making up 41.12% of the index - brought up the rear with a 0.75% gain.

It was the second straight week in which the upper tier had been the best performer; in the previous week, when all three credit tiers were in the red, it had the smallest loss, at 0.39% while the middle tier lost 0.80% and the lower tier lagged badly with a 1.68% nosedive. That result broke a five-week stretch during which the middle tier had finished on top.

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 said that CCC-rated paper "outperformed" the rest of the index with a 1.51% total return, breaking the trend seen over the previous six weeks during which that basket had chronically underperformed the other two, including the prior week ended Nov. 23, when it generated a total loss of 1.82%. B-rated credits - similar to, but not exactly the same as the middle tier - were yielding 0.96%, versus their 1.11% loss the week before, while BB-rated assets (the upper tier partially, but not completely, overlaps this subset) returned 1.44%, versus their index-best 0.48% loss the week before.

Spreads tighten as governments come in

The analysts noted that while the average high-yield spread tightened significantly to 596 bps, the yield on the benchmark 10-year Treasury note was also coming in by 6 bps to 3.94% from an even 4% the week before.

In the primary market, they said, activity "accelerated" from the levels seen the prior week, when the new-deal market "came to a complete halt." Some $5.7 billion of bonds priced, as year-to-date new issuance grew to $170.5 billion, up from $164.8 billion, according to B of A's calculations, though not yet matching the record total of $179.3 billion that the bank reported last year.

Weekly reporting high-yield mutual funds, as measured by AMG Data Services, suffered a $471.7 million outflow in the week ended last Wednesday, on top of the previous week's $241.2 million outflow. The year-to-date cumulative outflow total stands at about $2.5 billion, up from $2.1 billion previously, while the average weekly outflow grew to $53 million from $44 million the week before.

Positive sectors regain control

In the latest week, 34 of the 41 industry sectors into which B of A divides its high-yield universe were in positive territory, just four were in negative 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.

The breakdown was a sharp reversal of what had been seen in the previous week, when 35 sectors were in the red, just three 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 also predominated over the past few months, with 10 positives against just five negatives in the last 15 weeks, negative breakdowns had dominated most recently, with more sectors in the red than in the black in five of the last seven weeks. Positive and negative sector breakdowns have been roughly split since about mid-year, at 12 positive versus 14 negative in the last 26 weeks.

Diversified financials week's best sector

The diversified financials sector, which includes the recently embattled mortgage providers, jumped an eye-popping 4.70% on speculation that a plan to stop the wave of residential foreclosures - which has sapped the ability of mortgage companies to raise fresh capital by securitizing loans - might be in the works.

The big gain represents a dramatic turnaround for the sector, which has chronically been among the worst performers in the index over the past few months, mostly on the turmoil wracking the mortgage lenders. While the previous week ended Nov. 23 was also not too bad for the sector - it was neither among the best nor the worst performers, finishing somewhere in the middle of the pack with a relatively modest 0.95% loss - the five weeks before that were a nightmare for sector investors, with the diversified financials finishing among the Bottom Five worst-performing sectors in all five of those weeks. But in the latest week, it took over the top spot from the previous week's champion, insurance brokers, which had risen 0.20% in the week ended Nov. 23.

Automobiles (up 2.72%), technology (up 1.77%), health care facilities (up 1.61%), and paper and forest products (up 1.49%) rounded out the latest week's Top Five list of best-performing sectors. It was a solid comeback for the autos, which had been among the Bottom Five in the previous week with a 2.00% loss, the sector's third consecutive week in that unenviable position, and for the tech issues as well, which had also been in the previous week's Bottom Five with a 1.64% loss.

Insurance brokers week's worst

On the downside, the insurance brokers went from first to worst, tumbling an index-worst 3.23% in the latest week after having been the best performer the week before, as noted, with a 0.20% gain. It was the second Bottom Five finish in the last three weeks for the brokers sector, which took over as the cellar-dweller from consumer durables/non-auto. That latter sector, which includes the hard-hit homebuilding industry, also hurt by the mortgage industry meltdown, had absorbed a 2.49% beating in that prior week, its fourth consecutive time among the Bottom Five.

Food, beverage and tobacco companies (down 0.20%), textile and apparel (down 0.09%) and transportation (down 0.05%) were the only other sectors to actually finish in the red in the most recent week. It was a comedown for transportation, whose 0.06% loss the previous week had been small enough for the sector to make it into the Top Five that week. With all other sectors finishing in the black in the latest week, other than the three new empty sectors and their flat 0.00% readings, the Bottom Five was filled out by health care services and pharmaceuticals, each up 0.02%, a far smaller gain than any of the other sectors finishing in the black.

Health care equipment/services tops for year

On a year-to-date basis, with 48 weeks now in the books, the health care equipment and services sector remained in the top position, with its cumulative return firming to 10.70% from 10.32% 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 group remained in second place, its year-to-date return improving to 8.31% from 7.61% previously. The transportation sector - despite being in the Bottom Five with a small loss that took its 2007 return down to 7.31% from 7.36% - retained its hold on third place in the standings, although fourth-place holder diversified telecom remained not too far behind with a 7.03% return for the year, up from 6.95% previously.

The food and drug retailers were again fifth-best with a yearly return of 6.84%, up from 6.29% the week before. Metals and mining meantime continued to hold the sixth and last spot on the leaderboard, with a cumulative return of 6.79%, well up from the previous week's 5.79%.

Consumer durables/non-auto year's worst

On the downside, consumer durables/non-auto remained the year's worst-performing sector, although its 2007 loss narrowed a little to a still-yawning 13.76% from an even worse 14.23% the week before.

Diversified financials remained the second-worst sector year to date despite its solid weekly victory as the index's best performer, as noted, but its cumulative loss did narrow considerably to 7.94% from 12.08% the week before.

That was not much worse than the insurance brokers, which remained the third-weakest sector for the year, but the sector's index-worst performance on the week, as noted, caused its loss for the year to worsen measurably to 7.77% from 4.70% the week before. Banking remained fourth-worst on the year with a 2.17% loss, narrower than the previous week's 2.72% deficit.

Retailing was again the fifth-weakest sector year to date, although its loss narrowed to 1.03% from 2.13%. Omitting the flat 0.00% 2007 readings of the three empty sectors, other health care, not previously among the worst laggards, fell to sixth-worst on the year, although its cumulative return actually improved a little on the week to 0.73% from 0.13%. The previous sixth-worst sector, autos, pulled itself out of that ditch with a Top Five weekly showing that lifted its year-to-date performance to a 0.95% gain from a 1.73% loss the week before.

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