B of A High Yield Broad Market Index up 0.44% on week, year-to-date return reaches another new high at 10.19%

By Paul Deckelman

New York, Nov. 20 - The Banc of America Securities High Yield Broad Market Index rose 0.44% in the week ended Thursday, almost replicating its 0.43% gain in the previous week, which ended Nov. 9. It was the 21st consecutive week in which the index has advanced, continuing a 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 which ran from mid-May into late June.

With its upward momentum extending for yet another week, the index has now shown positive results in 29 weeks out of the last 36 and, over the longer term, in 42 weeks out of the last 52, dating back to mid-November last year, according to a Prospect News analysis of the B of A data.

The index's year-to-date return moved into double-digit territory on a percentage basis, growing in the most recent week to 10.19% - yet another new high for the year - up from 9.70% the week before, the previous 2006 high, and far surpassing 2005's total 2.10% return.

The index's spread over Treasuries, which in the previous week had narrowed to 332 bps from 341 bps previously, continued to tighten in the most recent week, to 320 bps. Its yield to worst, which came in to 7.98% from 8.03% the week before, continued to decline in the most recent week, to 7.93%.

The index tracked 1,678 issues of $100 million or more, down slightly from 1,679 the week before, while its overall market value eased to $616 billion from $617 billion the previous week. B of A sees the index as a reliable proxy for the roughly $800 billion high-yield universe.

Lower 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 32.39% of the index - turned in the best performance, with a 0.52% return on the week, followed by the middle tier - those issues rated BB-, B+ and B, making up 45.85% of the index - at 0.43%. The uppermost tier - those issues rated BB and BB+, comprising 21.83% of the index - brought up the rear, with a 0.37% gain.

It was the second straight week during which the three tiers finished in that order. In the week ended Nov. 9, the lower tier returned 0.54%, the middle tier returned 0.43%, just as it did this past week, and the upper tier rose 0.26%. The bottom tier has now been on top in six weeks out of the past seven, while the middle tier has finished in the middle of the pack for three straight weeks now.

Accordingly, B of A's analysts said that "as in the previous week, low quality paper outperformed," with the CCC credits, which largely, but not totally, comprise the bottom tier, returning 0.51%, the B paper - similar to, but not exactly the same, as the middle tier - returning 0.48%, and the BB-rated credits (the upper tier partially, but not completely, overlaps this subset) returning 0.36%.

Index extends rally

The analysts said that overall, the BAS High Yield Broad Market Index "extended its rally," and that "as in the previous week, the strong performance was driven by a marked spread tightening." While the average spread in the index tightened by 11 bps, "risk-free rates, in contrast, continued to increase modestly," with the 10-year Treasury standing at 4.66% as of this past Thursday, up 0.04% from 4.63% on Nov. 9.

For a third straight week, they declared that "primary market activity remained at record-breaking levels." A total of $10.4 billion was priced in the week ended Friday, on top of the staggering $11.5 billion the previous week. Year-to-date issuance rose to $156.1 billion from a $145.7 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 $49 million in the week ended Wednesday, according to AMG Data Services. That followed an inflow of $39 million seen in the previous week, ended Nov. 8. The year-to-date net outflow remained at $2.9 billion, while the average weekly outflow slipped to $63 million from $66 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.

It was the second consecutive week in which no sectors showed losses; the week before, 35 sectors had been in the black, and six had flat readings - the five new sectors, plus pharmaceuticals, which came by its flat reading by actual trading.

Strongly positive sector breakdowns have now been seen over the past 20 weeks, and on a longer-term basis, in 42 weeks out of the past 51. Strongly positive breakdowns have pretty much dominated the year, except for the several weeks of choppy returns in May and June.

Property/casualty insurers outperform

Property/casualty insurers had the best performance of any sector, up 0.91% on the week. It was the second time in four weeks that the group has led all sectors, and the third time in the last five weeks that it has been among the Top Five best-performing sectors in the index.

The property/casualty insurers took the top spot away from health care facilities, which had been the top performer in the week ended Nov. 9, when it jumped 1.62%, pushed up by the bonds of Nashville-based hospital industry leader HCA Inc., whose bonds rose smartly that week, and brought along those of competitor Tenet Healthcare Corp., ahead of HCA's very well-received $5.7 billion offering of new bonds, which priced Nov. 9. Health care facilities did remain in the Top Five for a second straight week, returning 0.74% in the most recent week.

Automobiles (up 0.82%), health care equipment and services (up 0.73%) and consumer durables/non-autos (up 0.63%) rounded out the latest week's Top Five list. It was a solid rebound for the latter sector, which in the previous week had been among the Bottom Five worst-performing sectors in the index, with a weak 0.06% gain. Health care equipment and services has now been in the Top Five in two weeks out of the last four.

Consumer non-cyclical week's worst

On the downside, as noted, none of the sectors, for a second consecutive time, actually finished in the red this past week - they merely showed considerably smaller returns than the rest of the sectors. The index did not count the five new sectors turning in statistically flat readings for a lack of bonds trading in them in tabulating the Bottom Five.

The smallest return of them all among sectors which actually had bonds trading in them was the consumer non-cyclical/other sector, which returned a paltry 0.03% to take over as the cellar-dweller from pharmaceuticals, which, as noted had a flat (0.00%) reading in the Nov. 9 week. The consumer non-cyclical/others group has now been the weakest sector in two weeks out of the last four - but its recent behavior has been volatile, as the group has also been in the Top Five in two weeks out of the last five. The pharmaceuticals sector, meantime, remained among the Bottom Five for a third straight week with a meager 0.05% gain.

Banks (also up only 0.05%), transportation (up just 0.11%) and real estate (an anemic 0.13% gain) rounded out the latest week's Bottom Five list. It was the second straight week the banks finished in the Bottom Five with a very slight return, following the previous week's 0.07% showing.

Autos still tops for year

On a year-to-date basis, the automobiles sector - the largest single sector in the index, with a 13.82% weighting - remained by far and away the strongest performing sector on the year, its Top Five finish lifting its cumulative return to 21.32% from 20.34% previously. Meanwhile, the remaining 86.18% of the index, which B of A breaks out separately from the autos, returned 0.38% on the week, for a 8.62% ex-autos year-to-date return.

Cable/DBS operators remained a solid, if still-somewhat distant, second place, as its 2006 return firmed to 14.48% from 14.10%.

Top Fiver health care equipment and services remained in third place, as its total return rose to 13.03% from 12.21% previously.

Entertainment's year-to-date gain rose to 12.06% from 11.68% previously, keeping it in fourth place.

The property/casualty insurance group, on the strength of its index-best weekly return, had a year-to-date gain of 11.99%, up from 10.98% previously - good enough to move into fifth place, just ahead of retail, which had dislodged the insurers from among the top cumulative performers the previous week. Retail's cumulative gain in the latest week was 11.93%, up from 11.34% previously.

Health facilities worst for year

On the downside, excluding the flat year-to-date readings on paper of the five sectors in which no bonds yet trade, health care facilities remained clearly the worst performer so far this year, although its second consecutive Top Five weekly finish put the sector's year-to-date performance into full-percentage point territory, as it climbed to 1.08% from 0.33% previously. No sectors are currently showing a loss for the year.

Health care services remained the second-weakest sector for the year, although its 2006 return rose to 5.54% from 5.27% previously.

Bottom Five finisher real estate's weak gain for the week left the sector in third place among the underperformers for the year so far, its cumulative return increasing only to 6.01% from 5.88% previously, when it was fifth-weakest. Meanwhile, the oil and gas sector, which previously was the third-weakest year to date, moved up to 6.35% from 5.71% previously - a good enough showing to take it completely off the list of the laggards for the year.

Fellow Bottom Fiver banks' return only increased to 6.03% from 5.98% previously, a small enough gain to be punished with fourth place on the list of the year's weakest sectors to date. The previous week's Number Four, gaming, lodging and leisure, returned 6.05%, leaving it now the fifth weakest sector in the index year to date.

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