B of A High Yield Broad Market Index zooms 1.31% on week, 2008 loss slashed to 1.65%

By Paul Deckelman

New York, April 7 - The Banc of America Securities High Yield Broad Market Index jumped by 1.31% in the week ended Friday, its third straight advance including the 0.94% gain seen in the previous week ended March 28.

The latest gain represented a continuation of the recent departure from the pattern of mostly weakness which had been seen since the start of the year; the index fell for the first three weeks of 2008, blipped back upward for two weeks, then headed back downward for three more weeks. Since that time, it has alternated stretches of weakness and strength. The latest three weekly gains followed two prior weeks in which losses had been recorded. Even with the latest advance, though, the index has still posted losses in five of the last nine weeks.

With 14 weeks now in the books, the index has seen eight losses against six gains. On a year-to-date basis, the index is down 1.65%, although that represents a considerable improvement over the 2.93% cumulative loss seen in the March 28 week and even more of an improvement from its low point for the year so far, the 4.15% cumulative loss seen in the week ended March 14.

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

Spread, yield to worst narrow

B of A analysts said that the index's average spread over Treasuries was 784 basis points, having narrowed substantially from 830 bps the week before and from 862 bps seen in the March 14 week, the wide point for 2008 so far. Spreads so far this year are notably wider than the 613 bps mark at which the index ended 2007, as well as its high point for 2007 of 621 bps.

The index's yield to worst, after having decreased slightly the week before to 10.93% from 11.13% in the holiday-shortened week ended March 20 and from 11.16% in the March 14 week, its high for the year, continued to decline, falling to 10.61% in the latest week.

The index tracked 1,552 issues of $100 million or more, down from 1,554 issues the week before, although its overall market value rose to $580.5 billion from $572 billion. It had ended 2007 tracking 1,568 issues having a collective value of $595.3 billion. 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 tier back on top

On a credit-quality basis, the middle one 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 45.21% of the index - had the best return for the week, jumping 1.51%, followed by the lowest tier - those issues rated B- and below, accounting for 35.56% of the index - which gained 1.40%. The uppermost tier - those issues rated BB and BB+, comprising 19.23% of the index - brought up the rear with a relatively modest advance of 0.65%.

It was the third straight week in which all three credit tiers finished in the black, reversing the pattern which had been seen in five of the six weeks through March 14, when all three tiers had consistently been showing losses. It was also the second straight week at the bottom of the pile for the upper tier and the second week in the last three in which the middle tier was on top. The lower tier was, in the meantime, cautiously moving away from its recent pattern of weakness, which through the March 20 week had seen it on the bottom in nine weeks out of 13. In the previous week, ended March 28, the lower tier had led the way, soaring 1.27%, followed by the middle tier, which was up 0.95%, while the upper tier had lagged behind with a 0.24% gain.

By the ratings categories for the three major baskets of credits into which B of A divides the index, excluding the relatively small group of issues which are not rated, the B-rated credits - similar to, but not exactly the same as the middle tier - outperformed the rest of the index, generating a 1.81% return, while CCC-rated paper - which includes many, but not all, of the lower-tier credits - rose by 1.51%. The BB-rated bonds (the upper tier partially, but not completely, overlaps this subset) underperformed the index, advancing 0.56% on the week.

Junk spreads tighten

The analysts noted that the average high-yield spread narrowed by a full 46 bps in the most recent week - continuing to break away from the spread-widening pattern that it has shown for pretty much most of the year so far. By ratings categories, CCC paper contracted by 67 bps on average to 1,154 bps, B-rated paper narrowed by 50 bps to 802 bps, and BB-rated bonds tightened by 25 bps to 550 bps.

The analysts characterized the activity level in the primary sphere as "quiet" in the latest week, with one deal worth $400 million having priced, versus the week before when three new deals totaling $1.34 billion came to market.

Fourteen weeks into the year, 2008 new-issuance totals about $10.9 billion - although that's still well under the brisk pace seen in 2007, when a near-record total of $172.5 billion priced, according to B of A's calculations. A key B of A syndicate official projected last week that that the junk market is likely to see about $60 billion to $80 billion of new issuance in 2008.

Weekly reporting high-yield mutual funds, as measured by AMG Data Services, saw an inflow of $372.8 million, in sharp contrast to the previous week's outflow of $78.4 million. The latest cash infusion dropped the year-to-date cumulative outflow to $694.5 million, while the average weekly outflow plunged to around $49.6 million.

Positive sectors retain control

In the latest week, 36 of the 40 industry sectors into which B of A divides its high-yield universe were in positive territory, just two were in negative territory and two sectors had flat 0.00% readings, neither a loss nor a gain, although it should be noted that these sectors - credit insurance and leisure equipment and products - are relatively new sectors created in the sector restructuring that took place in 2006. However, even at this relatively late date they still do not as yet have any issues represented in them.

That third straight - and very convincing - win by the positive sectors represented a continued departure from the negative trend that has been seen for most of the year so far. In the March 28 week, 32 sectors finished in the black, six were in the red, and the two empty "newer" sectors continued to show flat readings. Negative breakdowns, however, have still been seen in eight weeks out of the 14 since the start of the year.

Diversified financials week's best sector

The diversified financials sector turned in the week's best performance, rising by 3.60% to grab the top spot from automobiles, the previous week's champion with a 2.29% return that week. It was the diversified financials sector's third straight week among the Top Five best-performing sectors, including its 1.97% gain in the March 28 week, and the second week in the last three in which it has led all of the sectors; it posted an index-best 2.10% rise in the March 20 week. Autos, meantime, also stayed among the Top Five in the latest week, with a 2.92% advance.

Diversified telecommunications (up 2.29%), consumer durables/non-automotive (up 2.28%) and cable/DBS (up 1.62%) rounded out the latest week's Top Five list.

Insurance brokers week's worst sector

On the downside, the insurance brokers sector plunged an index-worst 3.15% to take over as the cellar-dweller from the previous week's biggest loser, life/health insurance, which had sank 2.05% that week. It was the second week in the last three in which the insurance brokers were on the bottom; in the March 20 week, the sector had turned in an index-worst 1.49% deficit. The group had also been among the Bottom Five worst-performing sectors in the March 28 week, with a 0.02% loss.

The pipelines sector (down 0.10%) was the only other sector actually finishing in the red this past week. The Bottom Five was filled out with sectors which merely had smaller gains than all of the others - wireline telecom (up 0.04%), other health care (up 0.06%) and transportation (up 0.14%). It was the second straight week there for the transport names, which had been there the week before when the sector lost 0.02%.

Insurance brokerage worst 2008 sector

The insurance brokers sector, besides having the worst weekly performance, as noted, has now assumed the unwanted distinction of also being the worst sector on a year-to-date basis; it tumbled two positions from just third-worst in the previous week, as its 2008 loss gapped out to 12.69% from 9.85% previously. That allowed the previous bottom-feeder, consumer non-cyclical/other, to improve a notch, relatively speaking, to just second-worst, while its cumulative loss narrowed to 10.83% from 11.93%.

The previous week's second-worst cumulative performer, advertising-dependent media, likewise was thus pushed up by one position in the standings to just third-worst, and its loss for the year so far narrowed to 9.41% from 10.50% before.

Gaming, lodging and leisure remained the fourth-worst sector of 2008 so far, although its cumulative loss narrowed to 6.52% in the latest week from 7.24%. However, the paper and forest products sector and wireline telecom sector, neither of which had previously been among the biggest losers, took over fifth- and sixth-worst, respectively. Paper and forest products' loss for the year narrowed to 4.84% from 5.32% the week before, while Bottom Fiver wireline's loss only edged down to 4.70% from 4.74%. Diversified financials and diversified telecom, which respectively were fifth- and sixth-worst year to date in the previous week, each turned in Top Five weekly showings to separate themselves from the worst laggards, with diversified financials cutting its loss for the year to 2.72% from 6.10% before and diversified telecom improving to just a 3.20% loss from 5.36% in the previous week.

Banking still top 2008 sector

The banking sector remained clearly the best performer on a year-to-date basis, as its cumulative return rose to an index-leading 4.14% from 3.76% the week before, while the pipeline sector, a weekly Bottom Fiver, remained a distant Number-Two, its gain for the year reduced to 3.18% from 3.29%. Electric utilities remained third-best, its cumulative gain bulging out to 2.94% from 2.07% in the March 20 week.

Health care facilities, not previously among the leaders, vaulted past several other sectors to grab fourth-place with a 2.01% return for the year, up sharply from just 0.47% the previous week. That pushed the previous fourth-place finisher, health care equipment and services, down to fifth-best, even as its return nearly doubled to 1.73% from 0.91%. Weekly Top Fiver consumer durables/non-auto, also not among the previous leaders, moved up to sixth-place its strong showing on the week swinging it into the black at 1.70% from a 0.57% cumulative loss the week before.

Other health care - a Bottom Fiver this week - and metals and mining, which had occupied the last two slots on the year-to-date leader board the previous week with 0.58% cumulative returns for each, completely fell out of leadership contention in the week ended Friday, even as their 2008 performances improved to 0.64% and 1.08%, respectively.

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