B of A High Yield Broad Market Index up 0.47% on week; 2007 return grows to 1.13%

By Paul Deckelman

New York, Sept. 10 - The Banc of America Securities High Yield Broad Market Index rose for a third straight week, adding 0.47% in the week ended Thursday, on top of the 0.07% advance seen in the previous week ended Aug. 30.

Those gains, as well as the 0.84% return seen the week before that, ended Aug. 23, would seem to represent an attempt to break out of the index's recently inconsistent pattern; after having posted steady gains for most of the first half of the year, the index had more lately been in a zig-zag pattern, alternating a week or two of upside with a week or two of retreat, including the dramatic 2.32% plunge in the week ended July 26 - easily its worst loss so far this year and one of its worst weekly deficits ever.

While advances have been seen in most weeks this year, the momentum has decidedly been to the downside of late, with 10 negative returns and now just five positive returns in the last 15 weeks.

On a year-to date basis, the index's return has grown to 1.13%, up from 0.65% the week before.

Year-to-date performance had also been zig-zagging. After having dipped into the red for the first time in 2007 during the week ended Aug. 2, at 0.03%, it was back in the black the following week, ended Aug. 9, when it was up 0.59%, but then fell back into the red in the week ended Aug. 16, when it was down 0.25% for the year. That was its worst cumulative loss so far, before beginning its bounce in the Aug. 23 week, an upward move that continued over the next two weeks. The index had its peak 2007 return of 4.72% 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 most recent downturn, after it peaked in late May.

Gains have now been seen in 22 weeks out of the 36 since the start of 2007, against 14 losses - part of a larger pattern of strength that the index has shown since late June of last year, with gains recorded in 48 weeks out of 63 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 recent momentum had clearly shifted to the downside, before the nascent upward move of the past few weeks.

The index's average spread over Treasuries, which in the prior week had widened to 483 basis points from 467 bps the week before, tightened to 478 bps in the latest week.

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 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 climb back up, to stand at their current relatively bloated levels, peaking at 494 bps in the week ended Aug. 16.

The index's yield to worst, which previously had risen to 9.14% from 9.09% the week before, narrowed to 9.07% in the most recent week. It had recently peaked at 9.29% in the Aug. 15 week.

The index tracked 1,623 issues of $100 million or more, down from 1,629 issues the week before, while its overall market value fell to $619 billion from $619.9 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.

Upper tier back 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 22.78% of the index - had the best return, 0.62%. The other two tiers - the middle tier (those issues rated BB-, B+ and B, making up 42.86% of the index) and the lowermost tier ( those issues rated B- and below, accounting for 34.36% of the index) - each returned 0.43%.

It was the second week in the last three in which the upper tier lived up to its name and rose to the top, moving away from the recent pattern of middle-tier strength that had been seen in six weeks out of the previous eight, including the week ended Aug. 30, when the middle tier returned 0.11%, the lower tier 0.08% and the upper tier lost 0.05%. However, it represented a return to the recent pattern of weakness in the lower tier, which has now lived up to its name and finished at the bottom of the pile in eight weeks out of the last 12.

As had been in the case in the previous week, performance was fairly uniform across the ratings spectrum, with CCC-rated paper, which largely, but not totally, comprises the bottom tier, returning 0.49% on the week, while the B-rated credits - similar to, but not exactly the same as the middle tier, returned 0.48% and the BB-rated credits (the upper tier partially, but not completely, overlaps this subset) returned 0.45%. On a spread-tightening basis, the BB group outperformed, tightening by 7 bps, followed by the B group, which tightened by 6 bps, and then the CCC group, which narrowed by 1 bp.

No primary issuance was seen in the holiday-abbreviated week ended Friday, as had been the case the previous week as well. Year-to-date new issuance was unchanged at $132.5 billion. Issuance totaled a record $179.3 billion in 2006, according to B of A's calculations.

Weekly reporting high-yield mutual funds, as measured by AMG Data Services, showed a $197 million inflow in the week ended last Wednesday, which followed the previous week's $83 million cash infusion in the funds, which had been the first inflow after 11 consecutive weekly outflows. Year-to-date cumulative outflows total about $2 billion.

Positive sectors in control

In the latest week, 36 of the 42 industry sectors into which B of A divides its high-yield universe were in positive territory, just three 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 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 third straight week of a largely positive sector breakdown, including the previous week, when 29 sectors finished in the black, 10 were in the red and there were the three flat 0.00% readings.

That's a departure from the trend of negative breakdowns that had predominated recently, even now still having been recorded in nine weeks out of the last 14. However, the larger trend for much of this year, and even stretching back into last year, has had strongly positive breakdowns.

Diversified financials week's best sector

The diversified financials sector was the week's best performer, posting a 1.35% return to take over the top spot from food and drug retailing, which was the previous week's champion with at 0.96% return. However, that latter group remained among the Top Five best-performing sectors for a second straight week, with a 0.76% advance.

Diversified financials meanwhile remained volatile - the group had been among the Bottom Five worst-performing sectors in the previous week, with a 0.74% loss, and while it has now been in the Top Five in two weeks out of the last three, including the week ended Aug. 23, when it scored a 1.77% gain, it has also been in the Bottom Five in two weeks out of the past four.

Pharmaceuticals (up 0.88%), insurance brokers (up 0.87%) and other telecommunications (up 0.74%) rounded out the latest week's Top Five list.

Property/casualty insurers week's worst sector

On the downside, the property/casualty insurance sector was the week's worst performer for a second straight week, losing 0.44%, to remain as the cellar-dweller, on top of the prior week's index-worst 0.75% loss.

Real estate (down 0.18%) and diversified telecommunications (also down 0.18%) were the only two other sectors actually posting losses in the latest week. The Bottom Five list was filled out by sectors merely having smaller gains than all of the other positive sectors - health care services (up 0.08%) and pipelines (up 0.10%).

Health care equipment tops for year

On a year-to-date basis, with 36 weeks now in the books, the health care equipment and services sector remained in the top position, its cumulative return pushing up to 5.89% from 5.64%.

Transportation hung onto the second-place slot, its return rising to 4.62% from 4.51% the week before.

Industrial products remained third-strongest with a 4.46% return, up from 4.23% the week before. Meanwhile, the metals and mining sector was still fourth-best with a 4.42% return, up from 4.16%.

Consumer non-cyclical/other held onto the fifth-place slot, its return rising to 4.20% from 3.94%.

Food and drug retail, not previously among the leaders, muscled its way into that select group on the strength of its repeat weekly Top Five performance, its return climbing to 4.16% from 3.35% previously, good enough to move into the sixth-best slot, displacing chemicals, whose return only increased to 4.12% from 3.77% the week before, as it fell out of leadership contention.

Consumer durables/non-auto year's worst

On the downside, the consumer durables/non-auto sector remained the worst performer on a year-to-date basis, although its cumulative loss narrowed somewhat to 8.06% from 8.27% the week before.

Diversified financials remained second-worst for the year, although its cumulative loss narrowed considerably, to 5.76% from 7.02%, on the strength of its index-best Top Five weekly performance.

Fellow Top Fiver insurance brokers remained third-worst, although its loss for the year shrank to 4.77% from 5.59%.

Other health care remained fourth-worst, although its loss for the year fell to 0.78% from 1.34% previously.

Retail remained fifth-worst, as its cumulative loss declined to 0.48% from 1.20% the week before.

And automobiles stayed in the sixth-worst position, even as the group's loss declined to 0.10% from 0.65% previously.

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