B of A High Yield Broad Market Index falls 0.45% on week; 2007 return drops to 4.24%

By Paul Deckelman

New York, June 11 - The Banc of America Securities High Yield Broad Market Index lost 0.45% in the week ended Thursday - its second consecutive downturn following the 0.01% loss in the previous week ended May 31 after eight straight weekly advances before that.

The back-to-back losses represent an interruption in the trend which the index had recently shown of moving away from the pattern of choppiness seen roughly from late February through early April and solidifying its return to the more consistent strength that it showed for the first two months at the start of the year.

Including the latest week's retreat, gains have still been seen in 17 weeks out of the 23 since the start of 2007, against just six losses - part of a larger pattern of strength that the index has shown since late June of last year, with gains recorded in 43 weeks out of 50 during that stretch. That, in turn, was part of a still-larger trend of positive returns in evidence throughout most of last year and now extending into the first half of 2007, according to a Prospect News analysis of the B of A data.

The index's year-to-date return declined to 4.24% in the most recent week, down from 4.71% seen in the week ended May 24, and off from the index's 2007 peak level so far of 4.72% seen the week ended May 17. 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 prior week had tightened to 267 basis points from 268 bps previously, continued to narrow in the latest week, to 263 bps, yet another new low for the year and a new record low as well - as the index continued the spread-tightening trend that had been seen throughout last year when high-yield spreads started at 384 bps off Treasuries and ended at 305 bps over, and which carried over into 2007 as well.

That trend had pretty much continued into the first two months of the new year but came to a screeching halt during the recent February-April period of turbulence, which included one week, ended March 1, in which spreads ballooned out by an astonishing 34 bps, ultimately rising to a 2007 peak level of 313 bps in the week ended March 15. They gradually came back down from that zenith and have now moved below the initial lows seen in mid-February.

The index's yield to worst, which previously had risen to 7.56% from 7.52% the week before, moved even further upward, to 7.69%, in the most recent week.

The index tracked 1,663 issues of $100 million or more, up from 1,657 issues the week before, while its overall market value rose to $651.8 billion from $651.6 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.

Lowest credit tier still on top

On a credit-quality basis, with all three of the credit tiers into which B of A divides the HY Broad Market Index showing losses this past week, the lowest tier of the three - those issues rated B- and below, accounting for 34.31% of the index - had the best performance, relatively speaking, with the smallest loss, 0.29%. This was followed by the middle tier - those issues rated BB-, B+ and B, making up 43.75% of the index - which lost 0.43%, with the uppermost tier - those issues rated BB and BB+, comprising 21.94% of the index - which plunged 0.76%.

Although all three tiers had negative returns, their order of finish marks a reversion to the substantial patterns of strength and weakness which the index has been seeing for quite some time now, which was interrupted in the week ended May 31, when the lower tier returned 0.05%, but the upper tier lost 0.02% and the middle tier lost 0.04%.

The order in which the tiers finished in the latest week has now been seen in four weeks out of the last six, and over the longer term, in 10 weeks out of the last 17. The lowest tier continues its long-standing relative dominance, having now been on top for five consecutive weeks, in nine weeks out of the last 10 and over the longer term, in 22 weeks out of the last 26. The middle tier had now lived up to its name and has been sandwiched between the other two tiers in six weeks out of the last 10 and longer term, in 14 weeks out of the prior 21, while the upper tier has now been at the bottom of the pile for eight weeks out of the previous 12 and in 15 weeks out of the prior 22.

Even with the lower tier seeing a smaller loss on the week than the middle tier, B of A's analysts declared that B-rated paper - similar to, but not exactly the same as the middle tier - "outperformed" the rest of the index, showing a 0.37% loss, while CCC-rated paper, which largely, but not totally, comprises the bottom tier, fell 0.40%. The higher-rated BB credits (the upper tier partially, but not completely, overlaps this subset) had the worst showing, with a 0.61% deficit.

Primary issuance increased from the levels seen in the prior week, which, it should be noted, was holiday-shortened, with an abbreviated session on May 25 and a full market close for Memorial Day on May 28. In the latest week, $6.1 billion of new paper priced, versus $3 billion the week before. The analysts calculate year-to-date new issuance at $104.4 billion, up from $98.3 billion the week before. Issuance totaled a record $179.3 billion in 2006, according to B of A's calculations.

Treasury rate rise moves junk market

The analysts further observed that for yet another week, the junk market's loss was being driven by the continued rise in risk-free [i.e., Treasury] rates. However, as had been the case the week before, while the yield on the benchmark 10-year government issue rose - it jumped another 24 bps on the week to finish at a swollen 5.13% - high-yield spreads continued to tighten, with the average spread coming in by 4 bps during the week to 263 bps, as noted.

Weekly reporting high-yield mutual funds, as measured by AMG Data Services, showed an inflow of $167.4 million in the week ended last Wednesday, on top of the $41 million inflow seen the week before. Year-to-date cumulative inflows now stand at $1.6 billion, with the average weekly flow up to $71 million, the analysts said, versus $67 million the week before.

In the latest week, 36 of the 42 industry sectors into which B of A divides its high-yield universe were in negative territory, with just three sectors in positive territory and three flat 0.00% readings, neither a loss nor a gain, although it should be noted that these - 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.

That overwhelmingly negative sector breakdown represents a sharp deterioration from the previous week's almost equal split (20 sectors in the black, 19 in the red and the three flat readings from the empty sectors). Taken together, they represent an interruption of the pattern of solidly positive sector breakdowns that up through the week ended May 24 had been seen in 45 out of the previous 48 weeks, going back to last June, and on an even longer-term basis, in 66 weeks out of the prior 78, encompassing virtually all of this year so far as well as last year, and in fact extending all the way back to late 2005.

Life/health insurance week's worst

In the latest week, life/health insurers had the biggest loss of any sector, plummeting 1.11%, displacing the previous week's twin cellar-dwellers, the gas utilities and paper and forest products sectors, which each lost 0.36% that week. It was the third time in the last four weeks that the insurers had the worst showing of any sector, and the fourth time in the last five weeks that the group was among the Bottom Five worst-performing sectors.

Other telecommunications (down 0.98%), diversified financials (down 0.86%), consumer non-cyclical/other (down 0.81%) and pipelines (down 0.80%) rounded out the latest week's Bottom Five list. It was a sharp reversal for consumer non-cyclical/other, which had been among the Top Five best-performing sectors the week before, with a 0.25% return.

Health care equipment/services on top

On the upside, the health care equipment and services sector was the best performer of a weak lot, up 0.18% - though that was an improvement over the previous week, when the sector was in the Bottom Five with a 0.19% loss. The sector displaced the previous week's champs, property/casualty insurance and the food and drug retailers, which had finished in a first-place tie in that May 31 week with a 0.30% gain.

Only two other sectors actually posted positive returns in the latest week, and they just barely made it - gas utilities (up 0.02%) and textile and apparel (up 0.01%). Gas utilities, as noted, had been tied for the biggest loss of the prior week, at 0.36%.

The remainder of the latest week's Top Five consisted of a pair of sectors having smaller losses than the others did. These included paper and forest products (down 0.06%) and industrial products (down 0.09%). As noted, paper and forest products had been tied with gas utilities the previous week for the biggest loss in the index.

Health care services tops for year

On a year-to-date basis, with 23 weeks now in the books, the health care services sector remains the best performer, although its 2007 return declined in the latest week to 7.30% from 7.61% previously.

On the strength of its index-leading weekly performance, health care equipment and services remained second-best with a 7.24% cumulative return, up from 7.04% the week before. Fellow Top Fiver industrial products suffered only a relatively small loss versus other sectors, its return for the year declining to 6.84% from 6.93%, but still allowing the group to rise one notch in the rankings, to third-strongest from fourth previously. In turn, the prior week's fifth-strongest sector, metals and mining, moved up to Number Four, at 6.10%, although that was down from 6.43% before. Bottom Five finisher consumer non-cyclical/other, however, tumbled two positions, to only fifth-strongest from Number Three the week before, at 6.08%, well down from the prior week's 6.94%.

Continuing a back-and-forth battle for the last spot on the leaderboard that has gone on for several weeks now, commercial services, not previously among the leaders at 6.06%, fell to 5.83%, but still managed to grab sixth place away from entertainment, which fell out of contention as its return for the year slid to 5.79% from 6.10%.

Insurance brokers year's worst

On the downside, omitting the three empty sectors, the new insurance brokers sector, which only began trading one issue last month, racking up small weekly gains, continued to have the smallest cumulative return of any sector, at 0.64%, down from 0.82% previously.

Among the more established sectors, the life/health insurers, their 2007 return dragged all the way down to 0.92% from 2.05% previously by their index-worst-weekly showing, fell to second-worst from only third-worst previously, as the sector traded positions with fellow Bottom Fiver diversified financials. The latter grouping went from second-worst to just third-worst, as its cumulative return declined to 1.12% from an even 2% the week before.

Bottom Fiver other telecom remained the fourth-weakest sector in the index on the year, its return sliding a full point to 1.34% from 2.34% previously. Other health care and banks, which had tied for fifth-worst the week before at 2.81% apiece, diverged this past week, with other health care's cumulative return falling to 2.14%, keeping that sector as fifth-weakest, while the banks moved up a notch to only sixth-worse, as their return only declined moderately to 2.62%.

© 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.