B of A High Yield Broad Market Index down 0.17% on week; 2007 return falls into red at minus 0.03%

By Paul Deckelman

New York, Aug. 6 - The Banc of America Securities High Yield Broad Market Index posted its second straight loss - and its ninth in the last 10 weeks, easing 0.17% in the week ended Thursday. That loss followed the dramatic 2.32% plunge in the previous week ended July 26 - easily its worst loss so far this year and one of its worst weekly deficits ever.

With the latest downturn, the index now has slid into the red on a year-to-date basis for the first time this year, showing a loss of 0.03%, down from a 0.14% cumulative gain the week before, its prior low point, and well down from its peak return of 4.72% seen in the week ended May 24.

The index had finished 2006 with an 11.89% return. Showing its volatile, streaky nature, it 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, until the beginning of the current downturn after peaking in late May.

Gains have still been seen in 18 weeks out of the 31 since the start of 2007, against 13 losses - part of a larger pattern of strength that the index has shown since late June of last year, with gains recorded in 44 weeks out of 58 during that stretch, according to a Prospect News analysis of the B of A data. However, since hitting its high point in late May, the momentum has clearly shifted to the downside.

The index's average spread over Treasuries, which in the prior week had absolutely ballooned out to 424 basis points from 337 bps in the week ended July 19, continued to widen in the latest week to 435 bps, its new high for the year, eclipsing the previous peak level of 424 bps, set the week before, as noted.

The index had begun the year in a spread-tightening mode, continuing 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 the 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, spreads began to gradually climb over the next eight weeks, to stand at current bloated levels.

The index's yield to worst, which previously had zoomed upwards to 8.91% from 8.33% the week before, continued to rise, to 9.02% in the most recent week, clearly its high for the year.

The index tracked 1,633 issues of $100 million or more, down from 1,648 issues the week before, while its overall market value sank to $611 billion from $619.1 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 back on top

On a credit-quality basis, the middle of the three credit tiers into which B of A divides the HY Broad Market Index - those issues rated BB-, B+ and B, making up 43.78% of the index - was the strongest of the three, with a 0.17% return, followed by the uppermost tier - those issues rated BB and BB+, comprising 21.80% of the index - with a 0.08% rise, while the lowest tier - those issues rated B- and below, accounting for 34.42% of the index - brought up the rear with an 0.70% loss.

It was the second straight week in which the three tiers had finished in that order; in the week ended July 26, when all three had shown losses, the middle tier was the strongest, relatively speaking, showing the smallest loss of the three at minus 1.84%, followed by the upper tier's 2.02% loss and the lower tier's 3.12% plunge.

The latest week also was the third week out of the last four in which the middle tier has been on top, the third straight week in which the uppermost tier finished sandwiched between the other two. And it was a continuation of the recent established pattern of lower-tier weakness - the tier has now lived up to its name and has finished at the bottom of the pile in six weeks out of the past seven.

B of A's analysts accordingly asserted that once again, the low-quality CCC-rated paper, which largely, but not totally, comprises the bottom tier, "underperformed" the rest of the index, sliding 0.75% for the week. This was followed by the B-rated paper - similar to, but not exactly the same as the middle tier - which lost 0.16%. The BB credits (the upper tier partially, but not completely, overlaps this subset) finished with a 0.16% gain on the week.

Primary activity absent

Primary issuance "came to a complete halt, given the difficult market environment," the analysts said, with no new paper having priced in the week ended Friday, down from $2.5 billion the week before. The analysts calculated that year-to-date new issuance remained at $130.9 billion at week's end, the same as the week before. Issuance totaled a record $179.3 billion in 2006, according to B of A's calculations.

Credit spreads widen as Treasury yields fall

The analysts noted that while the average spread on the index versus comparable Treasury issues "continued to widen," rising by 11 bps on the week to 435 bps, as noted, at the same time, risk-free [i.e., Treasury] rates "declined moderately," with the yield on the 10-year government benchmark issue coming in by 2 bps at the end of the week, to 4.77%, again "counteracting the effect of rising spreads on total returns," they said.

Weekly reporting high-yield mutual funds, as measured by AMG Data Services, showed a $493.4 million outflow in the week ended Wednesday, back to back with the previous $366.1 million cash exodus from the funds. It was the eighth consecutive outflow. The analysts calculated that year-to-date cumulative outflows now stand at $1.1 billion versus the previous week's $593.6 million deficit for the year. The average weekly outflow increased to $35 million from $20 million the week before.

Negative sectors again dominate

In the latest week, 30 of the 42 industry sectors into which B of A divides its high-yield universe were in negative territory, nine were in positive territory, while there were three flat 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 a continuation, slightly moderated, of the strongly negative breakdown seen in the previous week, when 38 sectors finished in the red, just one - property/casualty insurance - was in the black, and the three empty sectors had flat readings. Although the trend for much of this year, and even stretching back into last year, had strongly positive breakdowns, momentum has shifted decidedly to the negative side lately, with negative breakdowns now having been seen in eight weeks out of the last nine.

Insurance brokers worst sector for week

In the latest week, the insurance brokers sector suffered the biggest loss, plunging 5.08%, taking over as the cellar-dweller from the consumer durables/non-auto sector, which was the week's biggest loser in the previous week, ended July 26, with a 4.51% drop, reflecting renewed problems for the homebuilding industry. However, the latter sector remained among the Bottom Five worst-performing industry groupings in the latest week, losing 1.54%.

Property/casualty insurers (down 2.92%), food and drug retailers (down 2.46%) and pharmaceuticals (down 2.13%) rounded out the latest week's Bottom Five list. It was a sharp reversal for the property/casualty insurers, which, as noted, had been the sole sector actually in the black in the previous week, and thus, the index leader, with a 0.09% return.

Other telecoms week's best sector

On the upside, the normally weak other communications sector - one of the weakest performers this year so far - stunned observers by posting a strong 2.94% return on the week, the best in the index. It displaced property/casualty insurance, which, as noted, had been in the top spot during the July 26 week. It was a strong comeback for other telecom, which had been in the Bottom Five in the previous week with a 3.89% loss.

Automobiles (up 1.05%), aerospace and defense (up 1.04%), diversified telecommunications (up 0.66%) and commercial services (up 0.63%) rounded out the latest week's Top Five list of the best-performing sectors. The auto group had also been among the Bottom Five the previous week, and also with a 3.89% loss.

Health care equipment and services tops for year

On a year-to-date basis, with 31 weeks now in the books, the health care equipment and services sector hung onto the top position, although its cumulative return fell to 4.69% from 4.85%.

Transportation, which in the previous week had moved up three notches into second place, continued to hold that Number-Two slot, although its yearly return eased to 3.45% from 4.17% earlier.

Metals and mining, not recently among the leaders, got back in the running with a 3.12% return, up from 2.57% the week before, a good enough showing for third place. That displaced the property/casualty insurers, whose, Bottom Five-worthy weekly loss dropped the group from leadership contention as its year-to-date return slid from 3.54% to 0.51%.

Industrial products remained fourth-best with a 3.04% return, though that was down from 3.29% a week before.

Chemicals, which had fallen off the leaderboard the previous week, was back in fifth place with a 2.85% return, even though this was down from 3.12% previously.

Wireless telecom, tied with the food and drug retailers for the final leadership slot the week before with a 3.28% return, took over sole possession, even as its 2007 return fell to 2.70%. The food and drug retailers, posting a big enough loss on the week to make the Bottom Five, fell from leadership contention as their year-to-date return shrank to 0.73%.

Insurance brokers year's worst

On the downside, after a one-week respite, the insurance brokers' segment - the biggest loser on the week - again became the biggest loser for the year so far as well, falling three notches into the dungeon as its index-worst 2007 loss ballooned out to 8.76% from 3.90% previously.

Fellow Bottom-Fiver consumer durables/non-auto, which includes the recently hard-hit homebuilders, remained the second-worst performer for the year so far, its loss swelling to 6.50% from 5.04% the week before.

Other health care fell two positions, to third-worst on the year from fifth-worst the week before, as its year-to-date deficit expanded to 5.12% from 3.78%.

That displaced the diversified financials, which improved, relatively speaking, to only fourth-worst from third-worst previously, as the sector's loss for the year actually declined respectably, to 4.37% from 4.96%. It moved into the slot up to which the insurance brokers had managed to claw their way the week before, only to plunge back down in the latest week.

Meanwhile, that previous week's worst-year-to-date performer, other telecom, improved in the latest week to only fifth-worst, helped by its index-leading Top Five weekly performance. Its loss for the year narrowed to 2.89% from 5.66% previously.

Wireline telecom, not previously among the worst finishers, fell to sixth-worst as its 2007 loss expanded to 2.29% from 1.30%, while the previous Number Six, technology, only retreated to a 1.54% loss from 1.87% the week before.

© 2015 Prospect News.
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