B of A High Yield Broad Market Index up 0.25% on week, year-to-date return grows to 3.21%

By Paul Deckelman

New York, April 24 - The Banc of America Securities High Yield Broad Market Index returned 0.25% in the week ended Thursday. That followed the 0.04% loss seen in the previous week ended April 12. The index, which is normally calculated on a Friday-through-Thursday weekly basis, was calculated through Wednesday that prior week due to the pre-holiday abbreviated session on April 13 and the full market close the following session.

The index's year-to-date return grew to 3.21%, up from an even 3.00% the previous week, extending its improvement so far over 2005's total 2.10% return.

The index has now seen gains in four weeks out of the past six, in seven weeks out of the last 10, in 17 weeks out of the last 22 weeks, dating back to mid-November, and, over the somewhat longer term, in 31 weeks out of the previous 46, 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 333 basis points from 337 bps before that, continued to narrow, to 330 bps. Its yield to worst, which had widened in the previous week to 8.26% from 8.22%, was unchanged in the most recent week.

The index tracked 1,691 issues of $100 million or more, up from 1,682 issues the week before, while its overall market value grew to about $577.9 billion from $576.6 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 HY Broad Market Index - those issues rated B- and below, accounting for 34.02% of the index - was the best finisher, gaining 0.50%, followed by the uppermost tier - those issues rated BB and BB+, comprising 23.18% of the index - which returned 0.13%. The middle tier - those issues rated BB-, B+ and B, making up 42.80% of the index - brought up the rear, though just barely, with an 0.11% gain.

It was the fifth straight week in which the lowest tier had led the pack and the ninth week in the past 11; in the week ended April 12, the lower tier had returned 0.22%, the middle tier lost 0.11%, and the upper tier lost 0.26%. The latest week's order also represented a departure from two other recently seen patterns; through the April 12 week, the middle tier had lived up to its name and ended sandwiched between the other two in eight weeks out of the previous 10, while the upper tier had finished at the bottom of the pile in 15 weeks out of the previous 27.

Index showing 'strong'

B of A analysts characterized the index's latest weekly performance as "strong" and noted that "[a]gain, Autos were a major driver of performance," generating a weekly return of 0.92% and swelling the sector's year-to-date return to 6.82%. In contrast, they noted the non-automotive portion of the index - representing by proxy the whole rest of the junk market - returned just 0.14% on the week and has gained 2.76% year to date.

They also pointed out that "low-quality paper outperformed the index," as CCC rated paper, a grouping similar to the lower credit tier, through not exactly duplicating it, had an identical 0.50% return, B paper, which largely, but not completely, overlaps the middle tier, returned 0.24%, while BB credits, largely, but not completely akin to the upper tier, returned just 0.15%.

Supply increases

The analysts further noted that high-yield supply "picked up steam again after the Easter weekend," with $2.7 billion having come to market in the week ended Friday. B of A calculates year-to-date issuance as of that date of $48.5 billion.

And they observed that $147 million more left high-yield mutual funds than came into them in the week ended Wednesday, according to AMG Data Services, bringing the year-to-date net outflow among weekly reporting funds to $1.6 billion, or an average weekly outflow of $97 million. The fund flow numbers are an indicator of overall market liquidity trends.

In the latest week, 27 of the 43 industrial sectors into which B of A divides its high-yield universe were in positive territory, against 11 negatives and five sectors showing neither gains nor returns, or a flat 0.00% reading. It should be noted that all five were brand-new sectors created in the sector restructuring that took place at the end of March, and they do not as yet have any actual issues represented in them.

That marks a reversion to the recent pattern of strongly positive sector breakdowns, which have now been seen in 19 of the past 22 weeks, although it was not present in the April 12 week, when 18 sectors were in the red, 19 were in the black and six sectors - five of them brand-new - had flat 0.00% readings.

Entertainment tops for week

Entertainment was the week's strongest-performing sector, with a 2.07% return, supplanting the previous week's champion, the consumer durables non-auto sector, which had risen 0.48% in that previous week, its second straight week among the Top Five best-performing sectors. The latest week was the second straight week in the select circle for entertainment, which had gained 0.47% in the April 12 week, and the fourth week out of the last five.

Automobiles (up 0.92%, as noted), property/casualty insurers (up 0.66%), diversified telecommunications (up 0.54%), and other health care (up 0.49%) rounded out the latest week's Top Five list. It was a rebound for other health care, which in the previous two weeks had been among the Bottom Five worst-performing sectors, including its 0.62% loss in the April 12 week. Property/casualty insurers have now been among the Top Five in two weeks out of the past three.

Banks worst for week

On the downside, banks lost 0.66% to take over the unwanted distinction of worst-performing sector from the previous week's cellar-dweller, life/health insurance, which lost 0.96% in the April 12 week. The latter grouping was meantime also a part of the Bottom Five in the most recent week - its third straight week there - with a 0.16% loss.

The consumer non-cyclical-other sector (down 0.33%), and the oil and gas and wireline telecom (both down 0.08%) rounded out the latest week's Bottom Five selection. It was the second straight week there for oil and gas, which had lost 0.33% the previous week.

Auto sector tops for year

On a year-to-date basis, the automobiles sector extended its lead over potential challengers this past week, its year-to-date return growing to 6.82%, as noted, from 5.74% the week before, driven by a strong finish in the Top Five. Its nearest rival, paper and forest products, remained at 5.23%.

Industrial products moved up to third place, at 4.76%, up from 4.53% the week before, pushing past transportation, which edged up to 4.63% from 4.62%, and past the previous third-place holder, wireline telecommunications, whose Bottom Five finish dropped the sector to 4.59% from 4.76%.

Life, health insurers worst for year

On the downside, the life and health insurers - now among the Bottom Five in three straight weeks, as noted - continued to languish at the bottom as the absolute weakest 2006 sector as well, the group's cumulative loss deepening to 2.78% from 2.48% previously. It remains the only sector in the red so far this year.

Health care facilities remains the second-weakest, as its return fell to 0.19% from 0.25%. Banks, pulled down by their index-worst performance in the latest week, fell to 0.88% for the year from 1.54% previously.

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