B of A High Yield Broad Market Index off 0.40% on week; 2007 return drops to 2.50%

By Paul Deckelman

New York, July 16 - The Banc of America Securities High Yield Broad Market Index lost 0.40% in the week ended Thursday - its seventh consecutive downturn, including the 0.09% loss in the previous week ended July 5, after eight straight weekly advances before that.

The seven straight losses 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 period of choppiness seen roughly from late February through early April, but after that had again been showing consistent strength, until the beginning of the current downturn in late May.

While gains have still been seen in 17 weeks out of the 28 since the start of 2007, against 11 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 55 during that stretch, according to a Prospect News analysis of the B of A data - the momentum, at least for now, seems to have clearly shifted to the downside.

The index's year-to-date return declined to 2.50% in the most recent week, down from 2.91% seen in the week ended July 5, 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.

The index's average spread over Treasuries, which in the prior week had widened to 312 basis points from 310 bps in the week ended June 28, ballooned out in the most recent week to 326 bps - its new high for the year, far eclipsing the previous peak level of 313 bps reached in the week ended March 13.

The index had begun the year in a spread-tightening mode, continuing the trend which had been in effect through 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 this year, spreads had proceeded to rise over the next few weeks to the previous peak level, 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, which was also the record tight level since B of A began compiling the index. From that nadir, spreads began to gradually climb back up over the next five weeks, to stand at current levels.

The index's yield to worst, which previously had risen to 8.19% from 8.13% the week before, moved even further upward, to 8.31%, in the most recent week.

The index tracked 1,645 issues of $100 million or more, down from 1,659 issues the week before, while its overall market value accordingly slid to $631.6 billion from $640.3 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 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 middle tier - those issues rated BB-, B+ and B, making up 44.23% of the index - had the smallest loss, at 0.32%, edging the uppermost tier of the three - those issues rated BB and BB+, comprising 21.34% of the index - which lost 0.33%, while the lowest tier - those issues rated B- and below, accounting for 34.43% of the index - brought up the rear with a 0.55% loss.

It was the second consecutive week in which the tiers had finished in that particular order - in the previous week, the middle tier lost 0.05%, the upper tier lost 0.09% and the bottom tier lost 0.14% - and the fourth straight week in which the bottom tier was also at the bottom of the pile.

That stretch has represented a sharp reversal of the previous pattern, which up through the week ended June 14 had seen the lower tier on top, followed by the middle tier, and then the upper tier on the bottom, in five weeks out of the previous seven, and over the longer-term, in 11 weeks out of the prior 18. Before embarking on its current losing streak, the lowest tier had been on top for six consecutive weeks, through the week ended June 14, and even including the results of the past four weeks, the bottom tier has still been dominant in 10 weeks out of the last 15 and over the longer term, in 23 weeks out of the prior 31.

Even though it has avoided finishing last for the past four weeks, the upper tier has still been at the bottom of the pile for nine weeks out of the last 17 and in 16 weeks out of the prior 27. By again finishing on top in the latest week, the middle tier deviates from its recent pattern, which up through the week ended June 28 meant that it had lived up to its name and had been sandwiched between the other two tiers for nine weeks out of the previous 13 and longer term, in 17 weeks out of the previous 24.

B of A's analysts accordingly asserted once again that the low-quality CCC-rated paper, which largely, but not totally, comprises the bottom tier, "continued to underperform," with a 0.72% loss, while the BB credits (the upper tier partially, but not completely, overlaps this subset) lost 0.30%. B-rated paper - similar to, but not exactly the same as the middle tier - was seen to have lost 0.33%.

Primary issuance "remained muted," the analysts said, with $972.5 million having come to market in the week ended Friday, although that represented a gain over the previous week - a holiday-shortened period that included an abbreviated session on July 3 and a full market shutdown the following day - during which just two deals totaling $573 million had priced. The analysts calculated that year-to-date new issuance stood at $127.2 billion at week's end. Issuance totaled a record $179.3 billion in 2006, according to B of A's calculations.

Wider credit spreads drive losses

The analysts noted that while the average spread on the index versus comparable Treasury issues widened by 15 bps, at the same time, risk-free [i.e., Treasury] rates were "almost stable," with the yield on the 10-year government benchmark issue tightening by 2 bps at the end of the week, to 5.12%.

Weekly reporting high-yield mutual funds, as measured by AMG Data Services, showed a $47.5 million outflow in the week ended last Wednesday, back to back with the previous $222.8 million cash exodus from the funds. The analysts calculated that year-to-date cumulative flows slid into negative territory, with a $33.4 million deficit for the year, versus the $14.1 million cumulative inflow seen the week before. The average weekly flow also moved into the red, to negative $1 million, from positive $1 million the week before.

Negative sectors still dominate

In the latest week, 32 of the 42 industry sectors into which B of A divides its high-yield universe were in negative territory, seven were in positive territory and there were three 0.00% readings, neither a loss nor a gain, although it should be noted those latter sectors - 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.

It was the sixth straight week that the sector breakdown has been negative, including the previous week, which saw 20 sectors in the red, 18 in the black and the three new empty sectors, plus a fourth sector, transportation, with flat 0.00% readings - the second time in three weeks in which transportation also put up zeroes.

That six-week stretch (preceded by a seventh week that saw the positive/negative sector split virtually even, with only a slight edge to the positive side) 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.

Insurance brokers week's worst sector

In the latest week, the insurance brokers sector was the single-worst performer, plunging 1.55%, to displace the previous week's cellar-dweller, retail, which had fallen 0.91% in that prior week, ended July 5. The retailers, however, remained among the Bottom Five worst-performing sectors, marking two straight weeks there, with a 1.02% deficit in the latest week.

Other telecommunications (down 1.16%), technology (down 0.89%) and consumer durables/non-auto (down 0.82%) rounded out the latest week's Bottom Five list. It was a sharp reversal for other telecom, which in the previous week had been among the Top Five best-performing sectors with a 0.48% gain; however, the volatile sector has now been in the Bottom Five in two weeks out of the last three, including its 1.12% loss in the week ended June 28. Consumer durables/non-auto has also been there for two weeks out of the past three, including its index-worst 1.39% loss in that June 28 week.

Banking week's best sector

On the upside, the banking group was the week's best-performing sector, with a 0.43% gain, and has now held that exalted position in two weeks out of the past three, including the June 28 week, when it had an index-best 0.48% gain. The banks' reign was interrupted only by the gas utilities, which had been in the top spot in the week ended July 5 with a 0.52% return.

Life/health insurance (up 0.28%), pharmaceuticals (up 0.25%), real estate and other health care (both up 0.04%) rounded out the latest week's Top Five listing.

Health care equipment tops for year

On a year-to-date basis, with 28 weeks now in the books, the health care equipment and services sector hung onto the top position, which it took over in the previous week, although its cumulative return declined to 5.92% from 6.28%.

Industrial products remained second-strongest on a cumulative basis, although its return fell to 5.61% from 5.72% the week before. Health care services remained Number Three in the most recent week, although its 2007 return fell to 4.71% from 5.25% previously. Wireless telecom, in fourth place the week before with a 4.60% return, and metals and mining, just behind it in fifth place at 4.59%, tied in the most recent week at 4.49%. Transportation, dropped from the leaderboard the week before, climbed back on, in sixth-place at 4.44%, down only slightly from the previous week's 4.46%, while food and drug retailers, the previous week's sixth-place finisher at 4.49%, fell out of leadership contention, sliding to 4.05%.

Insurance brokers year's worst

On the downside, the insurance brokers, dragged down by the group's index-worst weekly loss, clearly remained the year's worst-performing sector as well, mired deep in the dungeon at negative 2.43%, a sharp deterioration from its 0.90% cumulative loss the week before.

Fellow Bottom Five finisher other telecom remained the second-worst performer for the year, its 2007 loss widening to 1.50% from 0.35%.

Diversified financials remained the third-worst sector on a year-to-date basis, its cumulative loss increasing to 0.94% from 0.29%.

The other health care sector, previously the fourth-worst, and consumer durables/non-auto, previously only the fifth-worst, traded places in the latest week; Bottom Fiver consumer durables non/auto's 2007 return fell into the red, down 0.64%, from the prior week's 0.18% cumulative gain, while other health care, helped by its Top Five weekly showing, improved slightly to a 0.01% gain for the year from a 0.03% loss the week before. Fellow Top Fiver life/health insurers again made up the sixth-weakest sector, although the group's cumulative return rose to 1.40% from 1.13% the week before.

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