B of A High Yield Broad Market Index down 0.92% on week, off 1.52% on year so far

By Paul Deckelman

New York, Jan. 15 - The Banc of America Securities High Yield Broad Market Index continued the new year on the same wrong foot on which it started, losing 0.92% in the week ended Friday. It was its second consecutive loss, including the 0.56% retreat in the previous week ended Jan. 4, as well as the second loss this year against no advances and its third loss in the last four weeks.

Since it began turning upward in the week ended last Aug. 23, following a lengthy summer slide, the index has now risen in 12 weeks and has posted declines in nine weeks.

On a year-to-date basis, the index is down 1.52%, versus the 0.60% cumulative loss posted the previous week (that old year-to-date figure and the first weekly loss of 2008 did not match due to a statistical quirk; since B of A calculates its index on a Monday-to Friday basis, the figure for the week ended Jan. 4 included Monday, Dec. 31 - technically the last trading day of 2007 - when the index rose marginally in an abbreviated pre-holiday session, while that session is not included in the 2008 cumulative return).

In 2007, even while posting gains in 32 weeks and losses in just 20, the index only posted a return for the year of 1.85%, having see-sawed between its peak level of 4.72% reached in the week ended May 24 and its low-point of an 0.25% loss seen in the week ended Aug. 16. The 2007 return was far smaller than the index's 2006 finish of 11.89%.

Spread widens to new high for year

B of A analysts said that the index's average spread over Treasuries ballooned out to a bloated 685 basis points in the most recent week - a new high for the year so far and a 33 bps widening out from the previous week's 652 bps, the index's initial 2008 high point. Both spread figures were well up from the 613 bps mark at which the index ended 2007, as well as its high point for 2007 of 621 bps, reached in the week ended Nov. 23.

The index's yield to worst, after having jumped to 9.83%, its first reading for the year, from 9.68% the week before, which was also where it ended 2007, pushed upward to 10.06% in the most recent week, its high point for the new year so far.

The index tracked 1,561 issues of $100 million or more, up from 1,559 issues the week before, though still down from 1,568 issues at the end of 2007. However, its overall market value slid to $582.9 billion in the latest week from $589.5 billion the previous week and from $595.3 billion at the end of 2007. 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, all three of the credit tiers into which B of A divides the HY Broad Market Index again posted losses, with the uppermost tier - those issues rated BB and BB+, comprising 21.45% of the index - having the smallest loss, 011%, followed by the middle tier - those issues rated BB-, B+ and B, making up 41.31% of the index - which was down 0.77%. The lower tier - those issues rated B- and below, accounting for 37.24% of the index - brought up the rear with a 1.55% loss.

It was the third straight week in which the lower tier lived up to its name and sank to the bottom - in the week ended Jan. 4, the lower tier lagged behind with at 1.06% deficit, while the middle tier was off 0.19% and the upper tier lost 0.38%. The latest week did also mark the third week in the previous four and the fourth week in the prior seven in which the upper tier was on top.

By the ratings categories for the three major baskets of credits into which B of A divides the index, excluding those issues which are not rated, CCC paper - which includes many, but not all, of the lower-tier credits - again "underperformed," the analysts said, noting its 1.80% loss for the week, while the B-rated credits - similar to, but not exactly the same as the middle tier - lost 0.93%. The BB-rated assets (the upper tier partially, but not completely, overlaps this subset) had the smallest loss, of 0.37%.

Spreads widen as governments tighten

The analysts pointed out that while the average high-yield spread rose by 33 bps on the week, as noted, the yield on the benchmark 10-year Treasury note tightened by 8 bps to 3.79% from 3.87% the week before, a sixth straight week of movement in opposite directions and the fourth straight week in which the junk spread widened while the Treasury yield fell.

In the primary market, they said, there was one transaction worth some $600 million seen in the most recent week, versus a zero figure the week before, so with two weeks in the books, the year-to-date new issuance stands at $600 million. In 2007, about $172.5 billion priced, according to B of A's calculations, somewhat short of the record total of $179.3 billion that the bank reported in 2006.

Weekly reporting high-yield mutual funds, as measured by AMG Data Services, saw an outflow of $284.8 million in the week ended Wednesday. That followed the previous week's outflow of $4.5 million (revised by AMG from the previously reported $2.9 million), for a year-to-date cumulative outflow of $289.3 million and an average weekly outflow of $144 million.

Negative sectors keep control

In the latest week, 36 of the 41 industry sectors into which B of A divides its high-yield universe were in negative territory, just two were in positive territory, and three others had flat 0.00% readings, neither a loss nor a gain, although it should be noted that those sectors - credit insurance, leisure equipment and products, and water utilities - are relatively new sectors created in the sector restructuring that took place in 2006 and even at this relatively late date do not have any issues represented in them.

That continued and expanded upon the outcome seen in the previous week, when 23 sectors finished in the red, 15 were in the black and the three empty "new" sectors had flat readings. While both weeks so far this year have been clearly to the downside, looking at a broader timeframe, the market remains in the somewhat inconsistent pattern seen for much of last year, from about early June onward; in the 32 weeks since then, positive and negative sector breakdowns have been almost evenly split, at 15 positives versus 17 negatives.

Banking week's worst sector

In the latest week, banks were by far and away the worst-performing sector, nose-diving 3.77% to take over as the cellar-dweller from retailing, which held that unenviable position the week before with a 2.18% loss. The latest week's results were a sharp comedown for the banks, since the group had actually made it into the Top Five best-performing sectors the previous week, the second such finish in three weeks, with a 0.64% gain.

Consumer durables/non-automotive, which includes the hard-hit homebuilding sector, sank 1.91%. The advertising-dependent media sector (down 1.88%), followed closely by cable/DBS operators (down 1.87%) and gaming, lodging and leisure (off 1.81%) rounded out the latest week's Bottom Five list of the worst-performing sectors. It was the second straight week among that sorry group for cable/DBS, which also made it the previous week with a 1.77% loss.

Diversified financials week's best sector

On the upside, the diversified financials were the best-performing sector with a 0.18% return, taking the top spot away from life/health insurance, the champion in the previous week, when it returned 1.45%. It was a rebound for the diversified financials, which had been among the previous week's Bottom Five with a 1.71% loss. The group has now been in the Top Five in two weeks out of the last three.

Entertainment was the only other sector to finish the week in positive territory, posting a 0.09% gain. The latest week's Top Five was filled out by sectors which merely had smaller losses than the other sectors finishing in the red - wireless telecommunications (down 0.03%), health care services (down 0.06%), and insurance brokers (down 0.13%).

Cable/DBS worst 2008 sector

On a year-to-date basis, cable/DBS has emerged as the worst-performing sector so far in 2008, dragged down by back-to-back weekly finishes among the Bottom Five. That ballooned its 2008 loss so far to 3.58% from 1.74% the previous week. The cablers traded places with the previous week's worst year-to-date performer, retail, which improved, relatively speaking, to only second-worst with a cumulative loss of 3.42%, widening from an index-worst 2.07% the week before.

Banking - the week's single-worst performer, as noted - tumbled all the way to third-worst on the year, after having been among the best year-to-date sectors the previous week, its former 0.56% profit deteriorating into a 3.26% cumulative loss.

The commercial services sector, not previously among the worst laggards, was the fourth-worst, the sector's 2008 loss widening to 2.62% from 1.02% the previous week. Consumer durables/non-auto had also not been among the worst in the previous week, with a 0.37% loss then - but it is now, pulled down by its Bottom Five weekly performance, which widened its year-to-date loss to 2.27%. The technology names improved, relatively speaking, from fifth-worst to sixth, with a year-to-date loss of 2.18%.

Property/casualty insurance year's best

On the upside, the previous week's top two year-to-date performers so far switched places in the most recent week. Property/casualty insurance moved up a notch into the top spot with a 0.37% cumulative return, down from 0.58%, while the previous week's leader, life/health insurance, had a bigger weekly loss, which cut its 2008 gain so far to 0.15% from 1.03%. Consumer non-cyclical/other remained the third-strongest sector on the year, although its return was sliced to 0.07% from 0.56%.

The banks, which had been the fourth-strongest sector in the previous week, tumbled to among the worst, as noted, but their place in the rankings was taken by transportation, which moved up one notch to fourth-best from fifth previously, although it swung into the red at minus 0.03% from a 0.14% gain the week before.

Health care equipment and services, the previous sixth-best with a 0.13% return, moved up to Number-Five, although it too fell into the red at a 0.09% loss. Real estate, not previously among the leaders, moved up to sixth-best on the year so far by posting only a relatively small loss on the week, which turned its previous 0.08% cumulative return into an 0.17% deficit - smaller than those of most other sectors.

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