B of A High Yield Broad Market Index off 0.01% on week, year-to-date return eases to 2.83%

By Paul Deckelman

New York, April 3 - The Banc of America Securities High Yield Broad Market Index was virtually unchanged in the week ended Thursday, easing by 0.01%. That took its year-to-date return down to 2.83% from 2.84% previously, although it was still ahead of 2005's 2.10% total return.

The slight erosion followed a gain of 0.36% during the previous week ended March 23. That gain had been its second consecutive rise, as well as its fifth in the prior six weeks - its 15th out of the previous 18 weeks, dating back to mid-November, and, over the somewhat longer term, the 29th week out of the previous 42, according to a Prospect News analysis of the B of A data.

The index's spread over Treasuries, which in the previous week had tightened to 343 basis points from 359 bps before that, continued to narrow, compressing another 4 bps to 339 bps, despite the index's slightly weaker performance on the week, as Treasury spreads widened. Its yield to worst, which had previously narrowed to 8.17% from 8.22%, widened slightly, to 8.24% in the most recent week.

Large caps down 0.07%

The more narrowly focused High Yield Large Cap Index, which generally tracks the patterns seen in the HY Broad Market Index, fell 0.07% in the week ended this past Thursday, breaking a string of two straight weeks of gains, including the previous week's 0.34% advance.

Even with the small retreat, the HY Large Cap Index has still shown gains in six weeks out of the last 10, and in 11 weeks out of the past 16. However, over the longer term, the results are more evenly balanced, with 15 gains, 13 losses and two flat readings now seen over the past 30 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 declined to 2.76% in the most recent week, down from 2.84% previously. In 2005, the Large Cap index finished with a 1.59% return.

Its spread over Treasuries, which in the week ended March 23 had narrowed to 329 bps from 346 bps the week before, continued to tighten, to 328 bps, in the most recent week. Its yield to worst, which in the previous week had come in to 8.03% from 8.08% the week before, widened to 8.12% this past week.

In that latest week, the more inclusive HY Broad Market Index tracked 1,687 issues of $100 million or more, up from 1,679 issues the week before, and the overall market value of the index rose to $579.9 billion from $578.8 billion the previous week.

The more narrowly focused HY Large Cap Index, measuring the most liquid portion of the high-yield world, tracked 671 issues of $300 million or more, up from 670 issues the week before, although the overall market value declined slightly to $384.6 billion from $385 billion previously. B of A sees both indexes as reliable proxies for the nearly $800 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 the HY Broad Market Index - those issues rated B- and below, accounting for 33.30% of the index - was the only one with a positive return, gaining 0.18%. It was followed by the middle tier - those issues rated BB-, B+ and B, making up 43.06% of the index - which lost 0.02%. The topmost tier - those issues rated BB and BB+, comprising 23.65% of the index - lagged with a 0.18% loss.

It was the second consecutive week in which the tiers finished in that exact order; in the week ended March 23, the lower tier returned 0.62%, the middle tier 0.35%, and the upper tier just 0.01%,

The latest week was the sixth week in the past eight during which the lower tier had been on top, and the seventh week out of the last eight in which the middle tier lived up to its name and finished sandwiched between the other two groupings. The uppermost tier, meantime, continued its recent pattern of weakness, which had been temporarily interrupted recently by the top tier's strong showing in the weeks ended March 9 and March 16; the group has now been at the bottom of the pile in 14 weeks out of the last 25.

B of A analysts said the latest week's performance was "the result of rising risk-free [i.e., Treasury] rates and compressing spreads" among the issues measured by the index. They noted that even as the average spread on the BMI was compressing by 4 bps, the yield on the 10-year government bond rose by 12 bps.

For a second straight week, the analysts noted the strength shown by the lower-quality part of the credit spectrum, "while high quality paper underperformed." They said that CCC bonds (similar to, but not exactly coinciding with the lower of the three credit tiers) returned 0.27% on average in the week, while the B segment (partly, but not totally overlapping the middle credit tier) returned just 0.01% and the BB segment, which partly, but not totally, overlaps the upper credit tier, actually lost ground, falling 0.16%.

Issuance increases

The analysts said that the pace of new junk bond issuance "increased markedly" in the week ended Friday, with $5.3 billion in new bonds sold to investors - about double the total in the previous week, when seven issuers priced 10 transactions for a total of $2.6 billion. B of A calculates year-to-date new supply of $37 billion, up from $31.7 billion the week before. It estimated that total new-deal volume for March was $12.2 billion, versus $11.3 billion in March 2005. However, the latest total issuance slightly lags the 2005 first-quarter new-deal volume of $37.4 billion, according to the B of A data.

The analysts noted that the high-yield mutual fund flows - a barometer of overall junk market liquidity trends - showed outflows of about $200 million in the latest week ended Wednesday, according to AMG Data services, more than offsetting the previous week's $49 million inflow. Year to date, net outflows total about $1.3 billion, they said, with an average weekly outflow in 2006 so far of some $101 million.

In the latest week, just 11 of the 23 industry sectors into which the B of A analysts divide their high-yield universe were showing positive returns, against 11 yielding negative results and one sector - advertising-dependent media - showing a flat 0.00% return, neither a gain nor a loss. That almost exactly even split stood in marked contrast to the breakdown the previous week, when 22 out of the 23 sectors finished in the black and just one was in the red, and it was a rare departure as well from the trend of strongly positive sector breakdowns, which up through the March 23 week had been seen in 17 weeks out of the prior 18.

Technology sector tops for week

In the latest week, technology was clearly the strongest finisher, returning 0.55% to edge out the previous week's best-performing sector, entertainment. The latter sector - which in that March 23 week had zoomed to first, with a 1.03% gain, from worst in the March 16 week, when it had the smallest return of any sector, up 0.02%. - just missed making it two weeks in a row on top in the latest week, finishing just behind the tech names with a 0.54% return.

Wireline telecommunications (up 0.34%), business services (up 0.19%) and paper and packaging (up 0.17%) rounded out the latest week's Top Five list of best-performing sectors.

It was the second straight week paper and packaging has been in the select circle, coming on the heels of the previous week's rise of an even 1%. It has now been in the Top Five in six weeks out of the past seven - including three weeks when it led all sectors. Wireline has also made it to the Top Five in six weeks out of the past seven, including five straight weeks at one point.

Publishing sector worst for week

On the downside, publishing was the weakest performer, losing 0.31% in the week ended Thursday to displace the previous week's cellar-dweller, finance, which had lost 0.25% in the week ended March 23, its second straight week among the Bottom Five worst-performing sectors, and the only sector showing a loss that week.

Non-ferrous metals and mining (down 0.29%), utilities (down 0.27%), lodging (down 0.22%) and health care (down 0.19%) rounded out the latest week's Bottom Five list.

It was the second straight week among the Bottom Five for health care, which got there in the week ended March 23 with an anemic 0.09% gain, and for non-ferrous metals and mining, which returned a paltry 0.16%. Going back to the start of the year, health care has now been among the worst-finishers in eight weeks out of the past 11. Non-ferrous metals and mining has been there in three weeks out of the last five, while utilities has also been in the Bottom Five in three weeks out of the past five and lodging in two weeks out of the past four.

Packaging tops for year

On a year-to-date basis, paper and packaging's sixth Top Five placement in the last seven weeks allowed the sector to stay in the top spot for a second straight week, as its cumulative return grew to 5.22% from 5.04% previously.

Top Fiver wireline pushed into second place, as its return increased to 4.97% from 4.62% previously. That bumped the previous week's Number-Two, the automotive-heavy consumer durables sector, down to a close third place, as its 2006 gain eased slightly to 4.93% from 4.96% previously. Other sectors showing notable strength on a year-to-date basis included transportation (4.23%, up from 4.06%) and steel (4.10%, up from 4.01%).

Health care worst for year

On the downside, repeat Bottom Fiver health care remains the weakest sector in 2006 so far, as its cumulative return fell to 0.64% from 0.83% previously. Energy and finance tied for a distant second-worst at 1.37% - finance actually improving from 1.34% previously, while energy declined from the prior week's 1.50%. Gaming's return fell to 1.63% from 1.77% previously, just slightly weaker than repeat Bottom Fiver non-ferrous metals and mining, whose cumulative return declined to 1.64% from 1.93%.

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