B of A High Yield Broad Market Index down 0.13% on week, up 1.46% year to date

By Paul Deckelman

New York, Feb. 13 - The Banc of America Securities High Yield Broad Market Index fell 0.13% in the week ended Thursday, giving up some of the 0.42% gain it had notched in the previous week ended Feb. 2. Even with the latest retreat, the index still shows a broad pattern of strength, with gains seen in two weeks out of the past three, in 10 weeks out of the last 12, dating back to mid-November, in 13 weeks out of the past 24 and in 24 weeks out of the last 36, according to a Prospect News analysis of the B of A data.

On a year-to-date basis, the 2006 index return fell to 1.46%, down from the previous week's 1.60% cumulative gain. The index ended 2005 up 2.10%.

The index's spread over Treasuries, which in the previous week had tightened to 355 basis points from 368 bps previously, widened back out to 360 bps. Its yield to worst, which had previously decreased to 8.10% from 8.16% the week before, rose to 8.18% in the most recent week.

Large caps down 0.22%

The more narrowly focused High Yield Large Cap Index, which generally tracks the patterns seen in the HY Broad Market Index, also retreated after two straight weeks of gains, giving up 0.22% in the week ended Thursday, versus the previous week's 0.46% rise. Even with the latest setback, the index has still shown gains in two weeks out of the last three and in seven weeks out of the past nine. However, over the longer term, the results are more evenly balanced, with 11 gains and 12 losses seen over the past 23 weeks, reflecting the index's recent efforts to battle back from a previously decidedly negative pattern that extended back into last fall.

The HY Large Cap's 2006 year-to-date return dropped to 1.48% - almost in synch with the HY Broad Market Index - from 1.71% the week before. In 2005, the Large Cap index finished with a 1.59% return.

Its spread over Treasuries, which in the week ended Feb. 2 had narrowed to 336 bps from 349 bps previously, widened out to 342 bps in the most recent week. Its yield to worst, which in the previous week had decreased to 7.90% from 7.98% a week earlier, rose to 7.99% this past week.

In that latest week, the more inclusive HY Broad Market Index tracked 1,677 issues of $100 million or more, up from 1,670 the week before, although the overall market value of the index actually decreased slightly, to $556.4 billion from $556.5 billion the previous week.

The more narrowly focused HY Large Cap Index, measuring the most liquid portion of the high-yield world, tracked 663 issues of $300 million or more, up slightly from 662 the week before, although the overall market value also dipped to $363.9 billion from $365.1 billion the previous week. B of A sees both indexes as reliable proxies for the approximately $750 billion high-yield universe.

Lowest credit tier outperforms

On a credit-quality basis, the lowest of the three credit tiers into which B of A divides its index - those issues rated B- and below, accounting for 32.31% of the index - was the only one of the three in positive territory, with a 0.11% gain. The middle tier (those issues rated BB-, B+ and B, making up 43.80% of the index) lost 0.15%, while the uppermost tier - those issues rated BB and BB+, comprising 24.89% of the index - had the worst showing, a 0.43% loss.

That upended the recent pattern, which had seen the upper tier on top in four weeks out of the previous five, including the week ended Feb. 2 when the upper tier returned 0.46% and the middle tier and the lower tier each gained 0.40%. However, it seemed to represent an affirmation of a broader pattern of weakness for the upper tier over the longer term, as it has now finished at the bottom of the pile in eight weeks out of the past 14 and nine weeks out of the past 16.

B of A analysts noted that "GM bonds and health care sector issues weakened over the week, more than offsetting the otherwise positive sentiment in the market." The automotive-dominated consumer durables sector "was the key loser, with a 1.48% decline in total return; its 14.05% weighting in the BMI ensured a significant impact on the Index total return," they added.

Primary market 'vibrant'

The analysts observed that "the primary market was vibrant for the third consecutive week," with eight issuers having tapped the market for $2.769 billion in total proceeds by the close on Thursday, although that was notably less than the extremely robust $5.397 billion of total issuance in nine deals the previous week, and the $5.629 billion in total proceeds from seven deals the week before that.

On the demand side, the analysts said, weekly reporting high-yield mutual funds, a key measure of overall market liquidity trends tracked by AMG Data Services, reported $40.30 million of net outflows in the week ended Feb. 8, versus $27.3 million of net inflows the week before, ended Feb. 1. They noted that 2006 net outflows grew to $410 million.

In the latest week, 19 out of the 23 industry sectors into which the B of A analysts divide their high-yield universe were showing positive returns, against only two in negative territory, and two others coming in with flat 0.00% readings, neither up nor down. It was the second consecutive week in which 19 sectors had finished in the black, although four sectors had been in the red the week before, and it was the 12th straight week in which the positive/negative sector breakdown has been strongly positive.

Consumer durables worst in week

Even so, having just two sectors on the downside was enough to drag the whole index down this past week, since their losses were more sizable than any of the relatively small gains posted by any of the other sectors, and because, as noted, the biggest loss (1.48%), also belonged to the index with the heaviest weighting in the index, consumer durables, multiplying its impact substantially.

As noted, consumer durables' retreat was paced by a skid in GM bonds, after the major ratings agencies, particularly Moody's Investors Service, last week fretted over GM's apparent lack of progress in finding a buyer for a controlling interest in its General Motors Acceptance Corp. financial arm, and warned that a sale to a private equity investor-led group - as both of the potential buyers who have so far emerged are - rather than a financially solid bank would likely not result in the desired rise in GMAC's credit ratings back to investment grade. Consumer durables displaced entertainment, which had been the cellar dweller in the Feb. 2 week with a 0.13% loss.

Going from first to worst was a sharp reversal for consumer durables, which had led all comers the previous week with a sizzling 1.80% return paced by gains in the auto parts names, and which up until that point had been among the Top Five best finishers in four weeks out of the recent five, and the best finisher in three of those weeks. However, the volatile sector has now also been the single worst finisher in two weeks out of the past four, and counting in the prolonged nosedive the sector took at the end of 2005 - it was among the Bottom Five worst finishers in nine weeks out of 12, dating back to mid-October, and was the single worst performer in many of those weeks - it has now been among the biggest losers in 11 weeks out of the last 18.

Health care sector falls

Health care was the only other sector to finish in the red this past week, but its 0.80% fall was also considerably larger than the gain of any other sector, while its moderately heavy weighting in the index (6.01%, fifth-largest of the 23 sectors) also multiplied its impact. Health care slid as concerns over likely government cuts in Medicare reimbursement rates knocked down the bonds of InSight Health Services Corp. and also lowered the bonds of some of its peers among diagnostic imaging providers such as Radiologix Inc., Alliance Imaging Inc. and MedQuest Inc.

It was the third straight week among the Bottom Five for health care, including the much-smaller-than-average 0.03% gain seen in the previous week and the 0.28% loss the week before that, and the fourth week in the last six in which the grouping has been among the Bottom Five.

Two sectors with flat 0.00% returns, publishing and consumer non-durables companies, rounded out the latest week's Bottom Five list, along with any one of three sectors having the smallest gain of any of the positive finishers, at 0.05% - consumer non-cyclical companies, entertainment and transportation. As noted, entertainment had been the previous week's worst performer (down 0.13%), thus marking its second week in a row in the Bottom Five. Transportation - which was in the Top Five the previous week with a 0.39% advance - has now been among the largest losers in two weeks out of the past four.

Lodging tops for week

On the upside, lodging was the week's strongest finisher, up 0.38%, to displace the previous week's champ, consumer durables, which, as noted, tumbled from first to worst. It was a nice snapback for the hoteliers, who had been in the Bottom Five the previous week with a 0.02% loss.

Closely akin to lodging, the gaming sector was among the Top Five with a 0.28% return, as were cable/DBS operators (up 0.25%), utilities (up 0.22%) and the non-ferrous metals and mining sector and the energy sector, each up 0.20%. In the previous week, gaming and non-ferrous metals and mining were in the Bottom Five along with lodging, posting losses of 0.02% and 0.05%, respectively. So was cable/DBS, which had a minuscule 0.03% return to land it in that unfortunate grouping for a fourth straight week. But gaming has now been in the Top Five in two weeks out of the last four. The utilities group has been there in three weeks out of the last five.

Consumer durables tops for year

On a year-to-date basis, even with its huge index-worst loss in this past week, consumer durables remained the best performer, although its overall return plunged to 3.60% from 5.15% the previous week.

Fellow Bottom Fiver transportation's small gain helped it barely hang on to second place, as its cumulative return widened to 2.03% from 1.98% the prior week. But steel was closing the gap fast, moving up to a 2006 gain of 2.02% from 1.84%, with industrials not too far behind, at 1.91%, up from 1.75%.

Health care worst for year

On the downside, Bottom Fiver health care fell deeper into the dungeon, as its loss for the year so far widened to 0.83% from 0.04% the week before. It was the only sector in the red for the year to date.

Advertising-dependent media was the next weakest performer, although its cumulative return rose to 0.37% from 0.19%. Bottom Fiver entertainment rose to 0.90% from 0.85%.

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