B of A High Yield Broad Market Index up 0.28% on week, 2008 loss falls to 1.37%

By Paul Deckelman

New York, April 14 - The Banc of America Securities High Yield Broad Market Index rose by 0.28% in the week ended Friday, its fourth straight advance including the 1.31% jump seen in the previous week ended April 4.

That winning streak represents a departure from the pattern of mostly weakness that 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 downward for three more weeks. After that, it alternated stretches of weakness and strength. But following two weeks in which losses were recorded, the last four weeks have all been to the upside.

With 15 weeks now in the books, the index has seen eight losses against seven gains. On a year-to-date basis, the index is down 1.37%, although that represents an improvement over the 1.65% cumulative loss seen in the April 4 week and a considerable 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 widen

B of A analysts said that the index's average spread over Treasuries was 796 basis points, having widened from 784 bps the week before, although it is still in substantially from the 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 the week before to 10.61% from 10.93% in the week ended March 28 and from 11.16% in the March 14 week, its high for the year, edged slightly back up to 10.62% in the latest week.

The index tracked 1,548 issues of $100 million or more, down from 1,552 issues the week before, while its overall market value fell to $574.9 billion from $580.5 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.

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 18.20% of the index - had the best return for the week, rising 0.69%, followed by the lowest tier - those issues rated B- and below, accounting for 35.74% of the index - which gained 0.20%. That was closely followed by the middle tier - those issues rated BB-, B+ and B, making up 46.06% of the index, which was up 0.18%.

It was the fourth straight week in which all three credit tiers finished in the black, continuing to reverse the pattern which had been seen in five of the previous six weeks through March 14, when all three tiers had consistently been showing losses.

The upper tier managed to break out a slump which had seen it at the bottom of the pile in each of the previous two weeks, while the lower tier remained in the middle of the pack for a second straight session, continuing to cautiously move away from its recent pattern of weakness, which through the week ended March 20 had seen it on the bottom in nine weeks out of the previous 13. During the week ended April 4, the middle tier had led the way, zooming 1.51%, followed by the lower tier, which also had a strong showing at 1.40%, while the upper tier lagged with a more moderate 0.65% advance.

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 that are not rated, the BB-rated bonds (the upper tier partially, but not completely, overlaps this subset) outperformed the rest of the index, rising 0.60%, while the B-rated credits - similar to, but not exactly the same as the middle tier - generated a 0.16% gain on the week. The CCC-rated paper - which includes many, but not all, of the lower-tier credits - underperformed the index, advancing 0.08% on the week.

Junk spreads widen, primary picks up

The average high-yield spread widened by 12 bps in the most recent week - reverting to the spread-widening pattern that it has shown for pretty much most of the year so far following a lull of several weeks.

The activity level in the primary sphere was busier in the latest week, with five deals from domestic issuers totaling $1.189 billion. That was in stark contrast with the previous week, when one deal worth $400 million priced.

Fifteen weeks into the year, 2008 new issuance totals about $12.1 billion - although even with busy primary dealings seen in two out of the last three weeks, it'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 month that the junk market is likely to see about $60 billion to $80 billion of new issuance in 2008.

Positive sectors retain control

In the latest week, 33 of the 40 industry sectors into which B of A divides its high-yield universe were in positive territory, five 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 fourth straight - and very dominating - 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 April 4 week, 36 sectors finished in the black, just two 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 15 since the start of the year.

Banking week's best sector

The bank sector had the week's best performance, up 3.57%, to grab the top spot from the previous week's champion, diversified financials, which had risen an index-best 3.60% in the April 4 week.

Consumer non-cyclical/other (up 2.62%), pharmaceuticals (up 1.24%), health care services (up 1.19%) and metals and mining (up 1.08%) rounded out the list of the Top Five best-performing sectors in the latest week.

Insurance brokerage week's worst sector

On the downside, the insurance brokers sector plunged an index-worst 1.42% to remain the cellar-dweller; it had also been the biggest loser in the April 4 week, when it nosedived 3.15%. Additionally, the sector has now been among the Bottom Five worst-performing sectors in each of the last four weeks and has been the single worst performer in three of those four, including the week ended March 20, when the brokers fell an index-worst 1.49%.

Diversified financials (down 0.68%), automobiles (down 0.58%), gaming, lodging and leisure (down 0.49%) and aerospace and defense (down 0.39%) rounded out the latest week's Bottom Five list.

The latest week's results were sharp comedown for both the diversified financials and the autos; in the April 4 week, as noted, diversified financials had topped all sectors, its second such big win in three weeks and its third consecutive week among the Top Five. That was also the autos sector's second straight week among the Top Five, with a 2.92% advance.

Insurance brokerage worst 2008 sector

For a second straight week, the insurance brokers sector has not only had the worst weekly performance, as noted, but has had the unwanted honor of also being the worst sector on a year-to-date basis, as its 2008 loss gapped out to 13.93% from 12.69% previously.

Advertising-dependent media fell one position to second-worst, although its year-to-date loss actually narrowed to 9.01% from 9.41% previously; the previous second-worst sector, consumer non-cyclical/other, turned in a Top Five weekly performance that allowed it to cut its cumulative loss to 8.49% from 10.83% and improve by one notch in the standings, relatively speaking, to just third-worst from second.

Bottom Fiver gaming, lodging and leisure remained the fourth-worst sector of 2008 so far, its loss for the year increasing to 6.98% in the latest week from 6.52%. The paper and forest products sector stayed on as fifth-worst for the year, its overall loss only slightly smaller at 4.80% from 4.84% before. Wireline telecommunications remained as the sixth-worst sector on the year, although its 2008 loss narrowed to 4.20% from 4.70%.

Banking top 2008 sector

On the upside, the banking sector remained clearly the best performer on a year-to-date basis, as its index-leading weekly performance boosted its cumulative return to 7.86% from 4.14% the week before, while the electric utilities sector moved up one notch in the standings to Number-Two, its cumulative gain bulging out to 3.79% from 2.94% in the April 4 week. That vaulted it past the previous week's second-best sector, pipelines, which fell a notch to just third-best in the latest week, while its gain for the year rose modestly to 3.55% from 3.18%.

Health care equipment and services moved up one position to fourth-best from fifth previously, while its 2008 return moved up to 2.59% from 1.73% the week before. That pushed aside the previous fourth-place finisher, health care facilities, which fell to fifth as its return for the year only rose modestly to 2.18% from 2.01%.

Top Five finisher metals and mining, not previously among the leaders, jumped up to sixth-best as its 2008 return exactly doubled to 2.16% from 1.08% the week before. That in turn narrowly pushed the previous sixth-place holder, consumer durables/non-auto, out of leadership contention for now as its year-to-date return only rose to 2.14% from 1.70% the week before.

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