B of A High Yield Broad Market Index falls 0.09% on week; 2007 return eases to 3.55%

By Paul Deckelman

New York, June 25 - The Banc of America Securities High Yield Broad Market Index lost 0.09% in the week ended Thursday - its fourth consecutive downturn, including the 0.59% loss in the previous week ended June 14, after eight straight weekly advances before that.

The four straight losses - including two sizable back-to-back setbacks, in the June 14 week and the 0.45% fall the week earlier - represent a definitive halt to that previous pattern of strength; after having begun the year with two months of strong gains, the index fell into a pattern of choppiness seen roughly from late February through early April, but after that had been again showing consistent strength, until the beginning of the current downturn at the very end of May.

Although the last several weeks have been on the downside, gains have still been seen in 17 weeks out of the 25 since the start of 2007, against just eight 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 52 during that stretch. That, in turn, was part of a still-larger trend of positive returns in evidence throughout most of last year and then 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 3.55% in the most recent week, down from 3.64% in the week ended June 14, and well below the index's 2007 peak level of 4.72% seen the week ended May 24. 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 widened to 272 basis points from 263 bps in the week ended June 7 - which was both the low for the year and the record tight level since B of A began compiling the index - continued to widen in the most recent week, to 288 bps. This represents a reversal of 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 had carried over into 2007 as well and which has been seen in most weeks, except for the aforementioned period of turbulence. However, even with the modest widening in the latest week, the spread remains well inside its 2007 peak level of 313 bps, reached in the week ended March 15.

The index's yield to worst, which previously had risen to 7.88% from 7.69% the week before, moved even further upward, to 7.95%, in the most recent week.

The index tracked 1,639 issues of $100 million or more, down from 1,646 issues the week before, while its overall market value accordingly dropped to $636.9 billion from $639.2 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.

Highest credit tier outperforms

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 for yet another week, the uppermost tier of the three - those issues rated BB and BB+, comprising 21.22% of the index - had the smallest loss, almost breaking even with a 0.01% loss. This was followed by the middle tier - those issues rated BB-, B+ and B, making up 44.31% of the index - which lost 0.07%, while the lowest tier - those issues rated B- and below, accounting for 34.47% of the index - brought up the rear with a 0.16% loss.

It was a sharp reversal of the order seen in the week ended June 14, when the lower tier lost 0.44%, the smallest loss of the three, the middle tier declined 0.65% and the upper tier dropped 0.72% - the second straight week in which the tiers had finished in that particular order, as well as the fifth week out of the previous seven, and over the longer-term, the 11th week out of the prior 18.

The latest results also pretty much represented a deviation from the recent patterns of strength and weakness shown by the individual tiers. Even counting in the latest week's index-worst loss, the lowest tier continues its long-standing relative dominance, having been on top for the previous six consecutive weeks, in 10 weeks now out of the last 12 and over the longer term, in 23 weeks now out of the last 28. Even with the rare victory this past week, the upper tier has still now been at the bottom of the pile for nine weeks out of the last 14 and in 16 weeks out of the prior 24. However, the middle tier has once again lived up to its name and has now been sandwiched between the other two tiers in eight weeks out of the last 12 and longer term, in 16 weeks out of the last 23.

B of A's analysts accordingly declared that the CCC-rated paper, which largely, but not totally, comprises the bottom tier, "underperformed," with a 0.20% loss, while the BB credits (the upper tier partially, but not completely, overlaps this subset) lost just 0.02%. B-rated paper - similar to, but not exactly the same as the middle tier - was seen to have lost 0.09%.

Primary issuance "accelerated" from the levels seen in the prior week. In the latest week, $5.9 billion of new paper priced versus $4.2 million the week before, with the analysts calculating that year-to-date new issuance stood at $114.6 billion at week's end, up from $108.7 billion previously. Issuance totaled a record $179.3 billion in 2006, according to B of A's calculations.

Wider spreads move junk market

The analysts further observed that the junk market was primarily driven by widening credit spreads versus comparable Treasury issues, as average spreads on the index widened by another 16 bps, to 288 bps, as noted. At the same time, risk-free [i.e., Treasury] rates "retreated modestly," with the yield on the 10-year government benchmark issue coming in by 3 bps at the end of the week, to 5.19%.

Weekly reporting high-yield mutual funds, as measured by AMG Data Services, showed a yawning $502.5 million outflow in the week ended last Wednesday, back-to-back with the previous $399.6 million cash exodus from the funds. The analysts calculated that year-to-date cumulative inflows fell to about $676 million, with the average weekly inflow sliding to $27 million from $51 million the week before.

In the latest week, 25 of the 42 industry sectors into which B of A divides its high-yield universe were in negative territory, 13 sectors were in positive territory and there were four flat 0.00% readings, neither a loss nor a gain, although it should be noted that three of 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. The fourth sector, which actually traded to a flat reading, was transportation.

It was the third straight week that the sector breakdown has been overwhelmingly negative, on top of the previous week's clean sweep, which saw all 39 sectors having bonds trading in the red, none in the black, and the three flat readings from the empty sectors.

That three-week stretch (preceded by a fourth week which saw the positive/negative sector split virtually even) represents a sharp deterioration from the previous 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 up to that May 24 point, as well as last year, and in fact extending all the way back to late 2005.

Health care facilities, technology week's worst

In the latest week, the health care facilities sector and the technology sector were tied for the unenviable distinction of being the week's worst-performing industrial grouping, as both of them lost 0.37%. That displaced other health care, which had been the previous week's cellar-dweller with a whopping 1.94% nosedive.

The diversified financials and consumer durables/non-auto sectors, both down 0.33%, and insurance brokers (down 0.31%) rounded out the latest week's Bottom Five list of the worst-performing sectors.

It was the second straight week on that list for the consumer durables/non-auto and insurance brokers groups, which were also there the week before with losses of 1.18% and 1.64%, respectively. Diversified financials, on the other hand, had been the best-performing sector the previous week, when it had a 0.14% loss, the smallest of any sector. However, the diversified financials have now been among the Bottom Five in two weeks out of the last three.

Property/casualty insurance tops for week

On the upside, property/casualty insurance returned an index-best 0.69%, taking the top spot away from the previous week's champion, diversified financials, as noted. It was a solid turnaround for the property insurers' group, which had been among the Bottom Five the week before with a 1.10% loss.

Gas utilities (up 0.51%), life and health insurance (up 0.36%), food and drug retailers (up 0.31%) and other health care (up 0.29%) rounded out the latest week's Top Five list of best-performing sectors. Other health care, as noted, had been the previous week's single worst-performing sector with a 1.94% loss.

Health care services tops for year

On a year-to-date basis, with 25 weeks now in the books, the health care services sector remains the best performer, although its 2007 return declined in the latest week to 6.30% from 6.50% previously.

The sector stayed barely ahead of industrial products, which took over as the second-strongest sector, up one notch from third the previous week, even as its cumulative return inched downward to 6.28% from 6.29% the week before. That, in turn, pushed the previous week's runner-up, health care equipment and services, down a notch into third place, as its return for the year so far eased to 6.24% from 6.46%.

The consumer non-cyclical/other sector remained a distant fourth at 5.62%, although that was up from 5.49% the previous week. Metals and mining and entertainment also held onto their previous week's rankings, at fifth and sixth, respectively. The metals group's return declined slightly to 5.46% from 5.48% before, while entertainment's cumulative total nosed downward to 5.21% from 5.27%.

Insurance brokers year's worst

On the downside, the year's worst-performing sector, insurance brokers - a repeat member of the latest week's Bottom Five - slid further into the red on a cumulative basis, to a 1.32% loss from a 1.01% deficit the week before. However, it also remained the only sector in negative territory.

Omitting the three empty sectors, the other telecommunications sector fell one position, to second-weakest in the index, with an 0.30% return, down from third-weakest at 0.38% the week before, while the previous week's second-worst finisher, other health care, actually improved a notch, trading places with other telecom to take over third-worst on the strength of its weekly Top Five performance, which boosted its 2007 return to 0.46% from 0.16% before.

Also swapping places were the previous week's fourth- and fifth-worst sectors so far this year, the life/health insurers and diversified financial. Buoyed by its weekly Top Five performance, the insurers improved a notch to only fifth-worst, as the group's 2007 return grew to 0.76% from 0.40%. The financials, meantime, which was among the Bottom Five for the week, fell to fourth-worst from fifth, as its return for the year declined to 0.64% from 0.98%.

Repeat Bottom Fiver consumer-durables/non-autos, not previously among the index's worst laggards, fell to sixth-worst, as its year-to-date return was shaved to 1.74% from 2.08% previously. The previous sixth-worst performer, real estate, improved to 2.04% from 1.91% the week before.

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