B of A High Yield Broad Market Index up 0.38% on week, year-to-date return reaches new high at 7.33%

By Paul Deckelman

New York, Oct 2 - The Banc of America Securities High Yield Broad Market Index rose 0.38% in the week ended Sept. 29 - the 14th consecutive week in which the index has advanced, including its 0.08% gain in the previous week, which ended Sept. 22. That further extends a recent strengthening trend which started in late June.

The index has mostly been on the upside this year, except for a period of some weeks of choppiness which ran from mid-May into late June.

With its upward momentum continuing to grow, the index has now shown positive results in 22 weeks out of the last 29 and, over the longer term, in 35 weeks out of the last 45, dating back to mid-November, according to a Prospect News analysis of the B of A data.

The index's year-to-date return grew in the most recent week to 7.33% - a new high for the year - up from 6.92% the week before, the previous 2006 high, and it remains well above 2005's total 2.10% return.

The index's spread over Treasuries, which in the previous week ballooned out to 366 basis points from 350 bps the week before, narrowed to 362 bps in the most recent week. Its yield to worst, which had edged up to 8.31% from 8.29% a week before, narrowed to 8.25% in the most recent week.

The index tracked 1,671 issues of $100 million or more, unchanged from the week before, and its overall market value grew to $594.9 billion from $593.7 billion the previous week. B of A sees the index as a reliable proxy for the nearly $800 billion high-yield universe.

Top credits outperform

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 24.35% of the index - had the best return on the week, 0.53%. This was followed by the middle tier - those issues rated BB-, B+ and B, making up 4318% of the index - which gained 0.42%, while the lowest tier - those issues rated B- and below, accounting for 32.47% of the index - lagged behind at 0.23%.

It was the second consecutive week in which the upper tier was the leader. In the week ended Sept. 21, the upper tier returned 0.27%, the lower tier gained 0.09%, while the middle tier for a second straight week brought up the rear with a 0.02% loss.

B of A analysts said that "low-credit quality paper underperformed during the week," with CCC-rated paper - which is a large part of, but not the totality, of the lower credit tier - returning 0.18%. In contrast, the BB credits - largely, but not exactly similar, to the upper tier - returned 0.50%, while the B credits - which comprise much of, but not all of, the middle tier - generated an 0.36% return.

Show of strength

The analysts said the high-yield market "finished a strong week." They noted the average spread tightening of 4 bps, which was "supported by strong equity markets and low equity volatility. On top of that, risk-free rates retreated further, adding to high-yield total returns." They pointed out that the yield on the 10-year Treasury fell another 3 bps, to 4.61% from 4.64%, resulting in the week's "strong" total return on the HY Broad Market Index of 0.38%, combined with a 19 bps excess return on the week.

Primary market activity, the analysts said, "accelerated from the previous week's levels," as $2.9 billion of new issuance priced in the week ended Friday, up from $745 million the previous week ended Friday Sept. 22. Year-to-date issuance rose to $109.1 billion from the prior week's level of $106.2 billion, according to B of A's calculations.

And the analysts related that weekly reporting high-yield mutual funds showed an outflow of $96 million in the week ended Sept. 27, according to AMG Data Services. That followed the previous week's outflow of $70 million. The year-to-date net outflow increased to $3.2 billion in the latest week, from $3.1 billion the week before, while the average weekly outflow remained at $81 million.

In the latest week, 35 of the 42 industrial sectors into which B of A divides its high-yield universe were in positive territory, with just one - entertainment - showing a loss, and six sectors showing flat 0.00% readings, neither a loss or a gain, although it should be noted that those six were new sectors created in the sector restructuring that took place at the end of March and do not as yet have any issues represented in them.

It was the third time in the last four weeks that just one sector has shown a loss, against 35 gainers and six flat readings. In the previous week, 31 sectors were in the black, four were in the red, and seven sectors - the six new ones, plus one additional sector which actually had bonds trading in it, gas utilities - showed flat readings.

Strongly positive breakdowns have now been seen over the past 13 weeks, and on a longer-term basis, in 35 weeks out of the past 44. Strongly positive breakdowns have pretty much dominated the year, except for the several weeks of choppy returns in May and June.

The automotive sector - the largest single sector in the index, with a 14.18% weighting - did not have a remarkable week to either the upside or the downside, finishing with a respectable 0.53% gain, while the ex-autos remaining 85.82% of the index returned 0.36%. On a year-to-date basis, however, autos continue to strongly outperform ex-autos, 17.30% versus 5.93%.

Consumer non-cyclicals tops for week

Consumer non-cyclical/other was the best-performing sector for the week, its 1.58% gain sufficient to grab the top spot away from the property/casualty insurers, which had been the best-performing sector in each of the previous three weeks, including the week ended Sept. 22, when it rose 1.32%.

Life/health insurers (up 1.05%), other health care (up 1.02%), gas utilities (up 0.82%) and food and drug retailers (up 0.69%) rounded out the latest week's Top Five list of the best-performing sectors. It was a strong improvement for the gas utilities group, which, as noted, had a flat 0.00% reading the previous week, landing it among the Bottom Five worst-performing sectors. However, the sector has shown recent strength, making the Top Five in two weeks out of the last four and three weeks out of the last six. Other health care has also been in the select circle in two weeks out of the past four, and life/health insurers have made it in three weeks out of the last five.

Entertainment worst for week

On the downside, entertainment, which lost 0.01%, was the sole losing sector on the week and takes over as the cellar-dweller from automobiles, which had an index-worst 0.69% loss the week before, its second straight week in that unenviable position. Entertainment has now been in the Bottom Five in two weeks out of the last four.

With entertainment the only sector actually in the red, the rest of the Bottom Five - as has been the case now in three weeks in the last four, as noted - consisted merely of sectors showing smaller gains than the rest of their peers. These were diversified financials (up 0.12%), transportation (up 0.16%), pharmaceuticals (up 0.18%), and property/casualty insurers (up 0.19%). It was a sharp downturn for the property/casualty insurers, which, as noted, had been the best performing sector for a third straight time in the Sept. 22 week. Pharmaceuticals had also been among the Top Five in that previous week, with a 0.46% return, its second time there in three weeks.

Autos still tops for year

On a year-to-date basis, autos remained easily the strongest performer, with a 17.30% total return, as noted, up from 16.68% the week before. The cable/DBS sector solidified its hold on second place, as its cumulative return rose to 10.24% - making it the only sector, other than autos, to break into double-digit territory so far - up from 9.88% the previous week. Health care equipment surged into third place with a 9.82% return on the year, up from 9.07% the week before, while Bottom Fiver entertainment fell to fourth place, its cumulative return edging down to 9.68% from 9.69% previously. Industrial products' return firmed to 8.95% from 8.54% previously.

Health facilities worst for year

On the downside, the health care facilities sector remained clearly the worst performer so far this year, although its cumulative loss diminished to 2.07% from 2.55% previously. It also remains the only sector in the red on a year-to-date basis.

Excluding the flat year-to-date readings on paper of the six sectors in which no bonds yet trade, health care services took over as second-weakest, as its yearly return only grew to 3.55% from 3.24% previously, while the previous number two, Top Fiver life/health insurance, greatly expanded its 2006 return to 4.09% from an even 3.00%.

Consumer durables/non-autos was third-weakest at 3.68%, up from 3.38%, and oil and gas returned 3.78%, up from 3.58% previously.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.