B of A High Yield Broad Market Index up 0.11% on week, year-to-date return grows to 2.95%, sectors restructured

By Paul Deckelman

New York, April 10 - The Banc of America Securities High Yield Broad Market Index returned 0.11% in the week ended Thursday. That followed the virtually flat reading for the week ended March 30, when it eased by 0.01%. The index's year-to-date return pushed up to 2.95% from 2.83% the previous week and remained well ahead of 2005's total return of 2.10%.

The index has now seen gains in three weeks out of the past four, in six weeks out of the last eight, in 16 weeks out of the last 20 weeks, dating back to mid-November, and, over the somewhat longer term, in 30 weeks out of the previous 43, 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 339 basis points from 343 bps before that, continued to narrow, compressing another 2 bps to 337 bps. Its yield-to-worst, which had widened in the previous week to 8.24% from 8.17% previously, declined to 8.22% in the most recent week.

Large caps up 0.08%

The more narrowly focused High Yield Large Cap Index, which generally tracks the patterns seen in the High Yield Broad Market Index, returned 0.08% in the week ended this past Thursday, after having fallen 0.07% in the previous week.

The High Yield Large Cap Index has now risen in three weeks out of four, in seven weeks out of the last 11 and in 12 weeks out of the past 17. However, over the longer term, the results are more evenly balanced, with 16 gains, 13 losses and two flat readings now seen over the past 31 weeks, reflecting the index's recent efforts to battle back from a decidedly negative pattern that extended back into last fall.

The High Yield Large Cap's 2006 year-to-date return rose to 2.84% in the most recent week, up from 2.76% previously. In 2005, the Large Cap index finished with a 1.59% return.

Its spread over Treasuries, which in the week ended March 30 had narrowed slightly to 328 basis points from 329 bps the week before, continued to tighten, to 326 bps, in the most recent week. Its yield-to-worst, which in the previous week had widened out to 8.12% from 8.03% the week before, declined slightly to 8.11% this past week.

In the latest week, the High Yield Broad Market Index tracked 1,678 issues of $100 million or more, down from 1,687 the week before, while the overall market value of the index fell to about $577 million from $579.9 billion the previous week. B of A sees the index as a reliable proxy 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 High Yield Broad Market Index - those issues rated B- and below, accounting for 33.39% of the index - was the best finisher, gaining 0.21%.

It was followed by the uppermost tier - those issues rated BB and BB+, comprising 23.33% of the index - which rose 0.16%. Lagging behind was the middle tier - those issues rated BB-, B+ and B, making up 43.06% of the index - which returned just 0.01%.

It was the third straight week in which the lowest tier had led the pack; in the week ended March 30, the bottom grouping had returned 0.18% - the only one of the three in positive territory - the middle tier lost 0.02% and the upper tier lost 0.18%. The March 30 week had been the second consecutive week in which the tiers finished in that exact order.

The latest week was a continuation of the recent pattern of lower-tier strength. Besides being three in a row, it was also the seventh week in the past nine during which the bottom tier was on top.

However, the week's results represented a break from two other recently observed patterns: the middle tier finished sandwiched between the other two groupings in seven weeks out of eight through March 30, and the upper tier up finished at the bottom of the pile in 14 weeks out of the previous 25 through that date.

As had been the case the week before, B of A analysts said the latest week's performance was driven by "compressing [high-yield] spreads and rising risk-free [i.e., Treasury] rates." They noted that while the average spread on the index compressed by 3 basis points, the yield on the 10-year Treasury rose 4 bps in the week ended Thursday. In the previous week, the BMI average spread compressed by 4 bps, while the yield on the 10-year government bond rose by 12 bps.

For a third straight week, the analysts noted the strength shown by the lower-quality part of the credit spectrum: CCC bonds (similar to, but not exactly coinciding with the lower of the three credit tiers) returned 0.45% on average in the week, the B segment (partly, but not totally overlapping the middle credit tier) returned 0.04% and the BB segment (partly, but not totally overlapping the upper credit tier) returned 0.07%.

Issuance increases

The analysts said that the pace of new junk bond issuance "remained at healthy levels" in the week ended Friday, with $5.6 billion in new bonds coming to market, on top of the $5.3 billion of new junk which priced in the week ended March 31. B of A calculated a year-to-date new supply of $42.6 billion, up from $37 billion the week before.

The analysts noted that the high-yield mutual fund flows - a barometer of overall junk market liquidity trends - showed inflows of $50 million in the latest week ended Wednesday, which at least partially offset the previous week's $200 million of outflows. Year-to-date, net outflows still total about $1.3 billion, they said, little changed from the prior week, although the average weekly outflow in 2006 fell to some $90 million from $101 million previously.

Sectors restructured

During the past week, B of A instituted a major overhaul in how it reports sector performance. While its analysts previously divided their high-yield universe into 23 industry sectors, the number of separate sectors has now nearly doubled to 43 for the week ended Thursday and going forward.

In most cases, the larger old sector classifications, which frequently lumped various kinds of companies operating in vaguely related industries into broad catch-all categories, were broken down into several new sectors to provide a clearer picture of how those specific sectors are performing.

For instance, the old finance sector, which had included banks, real estate operators and insurance companies, has been broken down into eight separate sectors - five for different kinds of insurance companies alone. The utilities and health care sectors were each subdivided into four new sectors, and the number of telecommunications sectors doubled to four from two.

In other cases, however, smaller sectors whose businesses were seen having some similarities to one another were combined into larger ones: for example, gaming and lodging were united into a single sector, along with leisure-time activities. The steel sector and non-ferrous metals and mining sector were also combined.

Another important change was the splitting of the old consumer durables sector into a distinct automobile-related sector and a non-auto sector, reflecting the volatile movement in recent months among automotive names such as original equipment manufacturers General Motors Corp. and Ford Motor Co. and such automotive suppliers as Dura Automotive Systems Inc., Lear Corp. and the recently bankrupt Dana Corp. This change reflects the reality that for some time, B of A analysts have been separately breaking out the performance of the automotive companies versus the rest of the index.

In restructuring the sectors, B of A recalculated their monthly, quarterly and year-to-date returns on a pro-forma basis - in other words, as if the new divisions had been in effect since the beginning of the year. The sector restructuring had no impact on the monthly, quarterly or year-to-date returns for the overall High Yield Broad Market and High Yield Large Cap indexes.

Non-cyclical-other tops week

In the latest week, with 43 sectors now in the mix, 25 yielded positive returns, against 12 negatives. Six sectors showed flat readings of 0.00%, although it should be noted that five of the six are brand-new sectors that do not yet have any issues represented in them; only one, oil and gas, actually has any bonds in it, and the flat reading is an actual performance level of those bonds this week.

In the previous week, 11 sectors were in the red, 11 were in the black and one had a flat reading. The latest week's showing thus reflects a return to the recent pattern of a strongly positive sector breakdown, which has been seen in 18 of the last 20 weeks.

Using the reconfigured sector calculations, the newly created consumer non-cyclical-other sector, had the week's best return, up 2.66%. It supplanted the previous week's leader, technology, which had been the best performer in the week ended March 30 with an 0.55% gain. Although the consumer non-cyclical-other's nominal gain was extremely strong, it actually had very little impact on the overall index, since the new sector - which tracks only two issues - makes up a minuscule 0.06% of the index's value.

Three other brand-new sectors - property/casualty insurers (up 0.75%), health-care facilities (up 0.69%) and non-automotive consumer durables (up 0.55%) - plus one old-line sector, cable/DBS operators (up 0.51%), rounded out the Top Five list of best-performing sectors. Cable/DBS has now been in the Top Five in three weeks out of the past four, although the sector itself was reduced somewhat in size and market value in the reconfiguration, with some of its issues transferred elsewhere.

Consumer products worst for week

On the downside, the new consumer products sector had the worst showing, losing 0.95% on the week, to take over as the cellar-dweller position from publishing, which had been the worst performer during the week ended March 30, when it lost 0.31%.

The latest week's Bottom Five list of worst performers was rounded out by three newly created sectors - life/health insurers (down 0.70%), other health care (down 0.58%) and gas utilities (down 0.37%) - along with one old-line sector, wireline telecommunications (down 0.24%). Wireline had been in the Top Five the previous week, with a 0.34% return and at that point had been in the Top Five for six weeks out of the prior seven.

Automobiles best for year

On a year-to-date basis, the sector restructuring substantially shook up the rankings for best and worst performers.

The newly created automobiles sector had the best year-to-date return in the most recent week. At 5.40%, it pushed past the previous week's top-spotter, paper and packaging, even though the latter - now renamed paper and forest products, but essentially the same sector - increased its total return to 5.32% this past week, from an index-best 5.22% previously.

Wireline telecom fell into third place from second previously, as its 2006 return declined to 4.76% from 4.97% previously, pulled down by its Bottom Five finish this past week.

With the old consumer durables sector (up 4.96% on the year as of the prior week) having now been replaced, largely, by the new automobiles sector, other sectors showing notable year-to-date strength include the new consumer non-cyclical-other sector, its 4.67% return helped by its index-best showing this past week; the new industrial products sector (consisting of most of the old industrials sector), at 4.40%; and the transportation sector, largely unchanged by the sector shuffle, at 4.67%, up from 4.23% previously.

Life and health insurers worst for year

On the downside, health care had until now had the unenviable distinction of being the weakest sector for most of 2006, including the prior week, when it had an anemic 0.64% return. But now it has been split into four separate sectors, and newly created financial grouping life and health insurers - in this past week's Bottom Five - took over as the year's worst performer with a 1.70% 2006 loss so far. It's the only sector in the red year-to-date.

The newly created oil and gas sector - largely consisting of the old energy grouping, with the addition of several other issues - was second-weakest, with a flat reading for the year so far, matching its weekly showing.

Health-care facilities - the weak heart of the old health care sector - is also among the weakest year-to-date sectors, at a 0.19% cumulative return, despite having landed in the Top Five during the past week.

© 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.