B of A High Yield Broad Market Index up 0.29% on week, year-to-date return reaches new high at 8.28%

By Paul Deckelman

New York, Oct. 23 - The Banc of America Securities High Yield Broad Market Index rose 0.29% in the week ended Thursday - the 17th consecutive week in which the index has advanced, including its 0.13% gain in the previous week, which ended Oct. 12. That continues a recent strengthening trend that started in late June. The index has mostly been on the upside this year, except for a period of some weeks of choppiness from mid-May into late June.

With its upward momentum still extending, the index has now shown positive results in 25 weeks out of the last 32 and, over the longer term, in 38 weeks out of the last 48, 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 8.28% - yet another new high for the year - up from 7.96% 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 narrowed markedly to 340 basis points from 357 bps the week before, continued to come in, to 336 bps in the most recent week. Its yield to worst, which had increased slightly to 8.19% from 8.18% the week before, decreased to 8.16% in the most recent week.

The index tracked 1,678 issues of $100 million or more, up from 1,675 issues the week before, and its overall market value grew to $602.1 billion from $599.4 billion the previous week. B of A sees the index as a reliable proxy for the roughly $800 billion high-yield universe.

Bottom credit tier on top again

On a credit-quality basis, the lowest of the three credit tiers into which B of A divides the HY Broad Market Index - those issues rated B- and below, accounting for 32.24% of the index - had the best return for the week, at 0.41%. This was followed by the uppermost tier - those issues rated BB and BB+, comprising 23.70% of the index - which returned 0.24% - just a hairbreadth in front of the middle tier - those issues rated BB-, B+ and B, making up 44.05% of the index - which rose 0.23% on the week.

It was the third straight week in which the lowest tier was leading the pack; in the week ended Oct. 12, the bottom tier had returned 0.45%, the middle tier gained 0.06% and the upper tier lost 0.19%.

B of A's analysts once again said that low-quality paper was the best-performing credit segment, with CCC credits, which largely, but not totally, comprise the bottom tier, generating 0.49% in total return and 41 bps in excess return, while the BB credits (the upper tier partially, but not completely, overlaps this subset) had a total return of 0.28% and 18 bps of excess return, and the B paper - similar to, but not exactly the same, as the middle tier - returned 0.24%, with 14 bps of excess return.

Another week of strong gains

Overall, the analysts said that the U.S. high-yield market "had a week of strong gains," generating total return of 0.29% during the week and 20 bps of excess return. "With risk-free rates almost constant," the analysts said - the 10-year Treasury stood at 4.78% on Oct. 19, up 0.01% from 4.77% a week earlier - "total returns reflect the impact of spread compression of 4 basis points during the week. Persistently strong equity markets and low equity volatility continued to support credit spreads."

Primary market activity, the analysts said, "came back to life following a week of no issuance," as 11 deals totaling $3.7 billion were priced in the week ended Friday, versus the complete lack of any pricing in the previous week ended Oct. 13. Year-to-date issuance rose to $122 billion from a $118.3 billion cumulative total the week before, according to B of A's calculations.

And the analysts related that weekly reporting high-yield mutual funds showed an inflow of $3 million in the week ended Wednesday, according to AMG Data Services. That followed the outflow of $62 million seen in the previous week ended Oct. 11. The year-to-date net outflow remained at $3.2 billion, while the average weekly outflow slipped to $75 million from $77 million the week before.

In the latest week, 36 of the 41 sectors into which B of A divides its high-yield universe were in positive territory, with none showing a loss, and five sectors showing flat 0.00% readings, neither a loss or a gain, although it should be noted that those five sectors showing flat readings 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. In the previous week, 24 sectors were in the black, 12 were in the red, and the five new sectors had flat readings.

Strongly positive sector breakdowns have now been seen over the past 16 weeks, and on a longer-term basis, in 38 weeks out of the past 47. Strongly positive breakdowns have pretty much dominated the year, except for the several weeks of choppy returns in May and June.

Life/health insurance the leader

The life/health insurance sector jumped 2.38% in the latest week, by far the best performance of any grouping, taking over the top spot from entertainment, which held that honor in the Oct. 12 week with a 0.60% return. The insurers, in fact, went from worst to first, since they had shown the biggest loss in that previous week, down 1.36%. The group has now been among the Top Five best-performing sectors in two weeks out of the last four, and in three weeks out of the last six.

Property/casualty insurers (up 1.24%), consumer non-cyclical/other (up 1.04%), entertainment (up 0.84%) and consumer durables/non-auto (up 0.71%) rounded out the Top Five this past week. It was the second straight week in that select circle for entertainment, which, as noted, had been the prior week's leader. That two-week winning streak represents a solid turnaround for entertainment, which previously had been among the Bottom Five worst-performing sectors for two straight weeks. The consumer non-cyclical/other sector has now been among the Top Five in two weeks out of the last four, while property/casualty insurers have been there in three weeks out of the last six.

Autos still spinning its wheels

With all sectors - other than the five new sectors with no bonds in them - having shown gains this past week, the latest Bottom Five list merely consisted of sectors with smaller returns than their peers. The smallest return of them all belonged to the automotive sector, up just 0.01%. Autos were thus the worst performer on the week, wresting that dubious honor from the life/health insurers, who, as noted, were the previous week's cellar-dweller. The autos have now been among the index's big losers for two straight weeks, and in four weeks out of the last six.

Health care services (up 0.09%), diversified financials (up 0.12%), real estate (up 0.14%) and health care facilities (up 0.15%) rounded out the latest week's Bottom Five list. It was the second straight week there for both health care services and real estate, which had been in the previous week's Bottom Five with losses of 0.19% and 0.18%, respectively. The diversified financials sector has now been in the Bottom Five in two weeks out of the last three, and in three weeks out of the last four.

Autos still tops for year

While the automobiles sector - the largest single sector in the index, with a 13.89% weighting - was barely moved this week, the remaining 86.11% of the index rose 0.34%. However, on a year-to-date basis, the autos continue to soundly outperform the ex-autos portion of the index, with respective returns of 18.04%, unchanged on the week, and 6.91%, making autos clearly the strongest grouping.

Cable/DBS operators remained a solid, if distant, second place, as the sector's return firmed to 11.72% from 11.41% previously. Entertainment, given a boost by its repeat Top Five showing on the week, remained in the third-place slot it had taken over the previous week, its return growing to 11.35% from 10.43% previously. Health care equipment and services, which had dropped to fourth place in the previous week, stayed there, as its 2006 return grew only modestly, to 10.64% from 10.29% previously. Industrial products continued to lag far back among the leaders, at 9.85%, up from 9.37% previously.

Heath facilities worst for year

On the downside, Bottom Fiver health care facilities remained clearly the worst performer so far this year, although its cumulative loss diminished to 1.17% from 1.32% 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 five sectors in which no bonds yet trade, another Bottom Five finisher, health care services, emerged as the second-weakest sector for the year, its 2006 return rising only slightly, to 4.11% from 4.01% previously, while the previous second-place grouping, the life/health insurers - the week's strongest performer, as noted - zoomed to a 5.62% return from 3.16%. Oil and gas remained the third-weakest cumulative performer, its return for the year increasing only modestly, to 4.12% from 3.92% previously. Gaming, lodging and leisure was the fourth-weakest 2006 performer, its return 4.56%, up a middling 0.20%. Real estate's return increased to 4.73% from 4.58% previously.

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