B of A High Yield Broad Market Index up 0.43% on week, year-to-date return grows to 4.08%

By Paul Deckelman

New York, May 15 - The Banc of America Securities High Yield Broad Market Index returned 0.43% in the week ended Thursday. It was the third straight weekly gain, following the 0.19% rise seen in the previous week, ended May 4.

The index's year-to-date return grew to 4.08%, up from 3.64% the previous week, extending further its improvement so far over 2005's total 2.10% return.

The index has now seen gains in seven weeks out of the past nine, in 10 weeks out of the last 13, in 20 weeks out of the last 25, dating back to mid-November, and, over the somewhat longer term, in 34 weeks out of the previous 49, 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 319 basis points from 325 bps before that, continued to narrow, to 312 bps. Its yield to worst, which had been unchanged at 8.24%, declined to 8.18% in the most recent week.

The index tracked 1,687 issues of $100 million or more, down from 1,688 issues the week before, although its overall market value rose to about $579.4 billion from $578.3 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 34.47% of the index - was the best finisher, gaining 0.75%, followed by the middle tier - those issues rated BB-, B+ and B, making up 42.13% of the index - which returned 0.27%. The uppermost tier - those issues rated BB and BB+, comprising 23.40% of the index - was up 0.23%.

It was the third consecutive week in which the tiers had finished in that exact order and the fourth week in the last five. In the week ended May 4, the lower tier rose 0.53%, the middle tier gained 0.04% and the upper tier lost 0.04%.

It was also the eighth straight week in which the lowest tier has led the pack and the 12th week in the past 14. Also, it was the 11th week in the last 14 in which the middle tier has now lived up to its name and ended sandwiched between the other two, while the upper tier has now paradoxically finished at the bottom of the pile in 18 weeks out of the past 31.

B of A analysts said that "for another week, the high-yield market posted strong returns." They noted particular strength in the automotive portion of the market, which was up 1.23% on the week as Delphi Corp.'s bonds rose, and to a lesser degree, General Motors Corp.'s, after several top GM executives, as well as several equity analysts, expressed optimism that talks going on between the two companies and Delphi's unions on doing something about Delphi's heavy labor costs - a factor in its bankruptcy - will produce an agreement that will head off a threatened strike that is seen as a potential disaster for GM as well as Delphi.

The non-automotive remainder of the market, in contrast, returned 0.30% on the week.

Spreads tighten

The analysts also observed "a broad-based spread tightening" in the junk market, even as 10-year Treasuries remained almost unchanged on the week. Low-quality paper, they said, "outperformed," with the spread on CCC paper - which largely, but not completely, overlaps the lower of the index's three credit tiers - tightening 21 bps, while BB paper (similar to, but not exactly the same, as the upper credit tier) tightened 6 bps, and B paper - mostly, but not totally contiguous with the middle credit tier - was tightening just 4 bps.

Primary market activity, they said, "continued at a solid pace," with $4 billion in new bonds marketed to investors during the week ended Friday, up from the $3.7 billion of issuance the prior week. B of A calculated that May issuance so far has totaled $7.7 billion and said year-to-date issuance rose to $61.8 billion from the previous week's $57.8 billion total.

Continued net outflows

And the analysts observed that $105 million more left high-yield mutual funds than came into them in the week ended May 10, according to AMG Data Services. The year-to-date net outflow among weekly reporting funds increased to about $1.8 billion, while the average weekly outflow was $93 million. The fund flow numbers are an indicator of overall market liquidity trends.

In the latest week, 31 of the 42 industrial sectors into which B of A divides its high-yield universe were in positive territory, against five negatives and six sectors showing neither gains nor losses, but rather, a flat 0.00% reading. It should be noted that all six sectors with flat readings 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.

The latest week saw the continuation of the recent pattern of strongly positive sector breakdowns, which have now been seen in 22 of the past 25 weeks, including the May 4 week, when 28 sectors were in the black, eight were in the red and six had flat 0.00% readings.

Health care equipment tops for week

Health care equipment and services jumped 1.43% in the latest week, the strongest performance of any sector, taking over the top spot from property and casualty insurers, which held it the previous week with a 1.20% gain, the third straight week the latter group had been among the Top Five best-performing sectors on the week, and the fourth week out of the prior five.

Life/health insurance (up 1.34%), automobiles (up 1.23%), retail (up 0.87%) and entertainment (up 0.82%) rounded out the latest week's Top Five list.

It was the second straight week there for retail, following its 0.82% gain in the May 4 week, and the third week in the past four. Entertainment, which also made the Top Five in the May 4 week with a 0.66% return, has now been in the select circle for five straight weeks, and for seven weeks out of the last eight. Autos have now made it in two weeks out of the last four. On the other hand, life/health insurers had been the single worst-performing sector in the May 4 week, with a 1.30% loss - its fourth week among the Bottom Five weakest-finishing sectors out of the previous five.

Property/casualty insurers worst for week

On the downside, property/casualty insurers went from first the previous week (a 1.20% gain, as noted), to worst in the latest week, with a 0.32% loss, taking over from the previous week's cellar-dweller, life/health insurance (as noted, with a 1.30% loss in the May 4 week).

Gas utilities (down 0.12%), transportation (down 0.11%), other health care (down 0.10%) and health care facilities (down 0.03%) rounded out the latest week's Bottom Five list. Health care facilities have been there in two weeks out of the last three, as has gas utilities; the latter sector, along with other health care, has also been in the Bottom Five for three weeks out of the last six.

Autos tops for year

On a year-to-date basis, the automobiles sector's big Top Five-worthy weekly gain caused its cumulative return to zoom to a clear index-best 8.32% from an even 7% the week before - although repeat Top Fiver entertainment didn't lose too much ground, its cumulative return growing to 7.75% from 6.87% previously.

Paper and forest products continued to hold third place, increasing its 2006 return to 6.14% from 5.80% previously, but Top Five finisher retail moved up from 5.10% to 6.02% to push its way into a fourth-place tie with industrial products, which also rose to 6.02% from 5.42% the week before.

Life, health insurers worst for year

On the downside, the life and health insurers' strong Top Five showing in the latest week slashed its index-worst 2006 cumulative loss to 2.16% from 3.46% previously. However, the group still by far and away continues to languish right at the bottom and remains the only sector in the red for the year so far.

Bottom Fiver health care facilities remains the second-weakest sector - excluding the newly created sectors having no issues in them yet which thus on paper have 0.00% total returns - as facilities' cumulative return eased to 0.17% from 0.20%.

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