B of A High Yield Broad Market Index down 0.48% on week, year-to-date return cut to 3.06%

By Paul Deckelman

New York, June 20 - The Banc of America Securities High Yield Broad Market Index fell 0.48% in the week ended Thursday, June 15, continuing a recently choppy pattern which had also seen a completely flat reading the previous week, ended June 8. That flat reading had followed a modest 0.07% upturn in the week ended June 1, and two weeks on the downside preceding that.

Even with the latest week's decline, the index has still shown positive results in eight weeks out of the last 14 and, over the longer term, in 21 out of the last 30 weeks, dating back to mid-November, according to a Prospect News analysis of the B of A data. Still the index's year-to-date return retreated to 3.06% from 3.56% the week before, though it remains well above 2005's total 2.10% return.

The index's spread over Treasuries, which in the previous week had risen to 346 basis points from 333 bps, widened out again, to 350 bps in the most recent week. Its yield to worst, which had previously increased to 8.44% from 8.39%, again rose, to 8.59% in the most recent week.

The index tracked 1,684 issues of $100 million or more, down marginally from 1,685 the week before, and its overall market value went down to about $571.21 billion from $576.62 billion the previous week. B of A sees the index as a reliable proxy for the nearly $800 billion high yield universe.

On a credit-quality basis, the middle of the three credit tiers into which B of A divides the HY Broad Market Index - those issues rated BB-, B+ and B, making up 42.28% of the index - had the smallest loss, 0.39%, followed by the upper tier (those issues rated BB and BB+, comprising 24.42% of the index), which was off 0.45%. Bringing up the rear was the lowest tier - those issues rated B- and below, accounting for 33.31% of the index - lagging behind with a 0.60% loss.

In the week ended June 8, the upper tier was up 0.16%, the middle tier lost 0.01% and the lower tier was off 0.08%.

B of A analysts said that "the biggest contribution" to the negative weekly total return performance "came from Treasuries," as the yield on the 10-year note increased by 10 basis points, while the spread on the index widened by 4 bps, resulting in a weekly excess return on the index of negative 2 bps.

Autos outperform once more

The analysts noted that "the dichotomy of the auto sector and the non-auto segment of the market became apparent once again, as the auto sector outperformed the rest of the market." Autos - making up 14.17% of the index - generated a total weekly return of 0.29%, while the non-automotive remaining 85.83% of the index dropped 0.60%.

The analysts also pointed out that across the rating categories, low credit quality once again "underperformed," with the CCC rated issues - which largely, but not completely, overlap the lower of the index's three credit tiers - having an 0.83% negative return, the B rated paper (mostly, but not totally contiguous with the middle credit tier) with a negative 0.45% return, and the BB credits - similar to, but not exactly the same, as the upper credit tier - off "only" 0.37% on the week.

The analysts further observed that primary market activity "was muted, as uncertain market conditions discouraged new issuance." For the week, only two deals, totaling $455 million, had priced by the close on Friday, with the long-awaited Intelsat Ltd./PanAmSat Corp. multi-part issue having been postponed until this week. In contrast, $2.5 billion of new paper had priced by the end of the previous week on Friday, June 9.

And the analysts related that $383 million more flowed out of weekly-reporting high yield mutual funds than came into them in the week ended Wednesday, June 14 - reverting to the recent pattern of outflows that was temporarily broken by the $41 million inflow seen in the prior week, ended June 7, according to AMG Data Services. The latest weekly outflow brings the year-to-date net outflow among weekly-reporting funds to about $2.8 billion, up from the previous week's $2.5 billion, while the average weekly outflow rose to $118 million from $107 million previously. The fund flow numbers are an indicator of overall market liquidity trends.

Most sectors lower

In the latest week, 31 of the 42 industrial sectors into which B of A divides its high yield universe were in negative territory, against just four on the positive side, with seven sectors showing neither gains nor losses, but rather, a flat 0.00% reading (although it should be noted that six of the latter 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 issues represented in them; only banks actually produced a flat return via trading).

That strongly negative split stood in contrast to the previous week, when the breakdown was 17 sectors in the black, 18 in the red, and seven sectors having flat returns. It was also a rare reversal of the strongly positive trend that until the past two weeks had held sway, with solidly positive sector breakdowns having been seen in 23 of the previous 28 weeks through and including the June 1 week.

Life, health insurers show biggest loss

Life/health insurance providers were the single worst-performing sector, plunging a breathtaking 1.27% on the week, and the thus supplanting the previous week's cellar-dweller, consumer durables - non-auto, which had fallen 0.94% in the week ended June 8. It was a sharp reversal for the insurers, who had been among the Top Five best-performing sectors in that previous week, when they were up 0.69%.

Consumer non-cyclical/other (down 1.18%), entertainment (down 0.98%) healthcare facilities (down 0.97%) and food and drug-retail (down 0.90%) rounded out the latest week's bottom five list of worst-performing sectors. It was a sharp comedown for consumer non-cyclical/other, which in the previous week had been the single strongest sector with an index-best 0.93% gain, and for healthcare facilities, which had made the Top Five with a 0.32% return. However, the consumer non-cyclical others have now been among the Bottom Five worst-performing sectors in three weeks out of the past four, while food and drug retailers have been there in two weeks out of the last three.

On the upside, automobiles, as noted, returned 0.29%, taking over from consumer non-cyclical/other as the best-performing sector. The auto sector has now led the index in three weeks out of the past four.

Property/casualty insurers (up 0.19%), gas utilities (up 0.09%) and healthcare-other (up 0.07%) were the only other sectors finishing in the black this past week. The top five was rounded out by sectors tied with a 0.00% flat reading, although only banks actually got there by actual trading. The property/casualty and gas utilities sectors showed sharp rebounds from the previous week, when they were among the Bottom Five, with losses of 0.40% and 0.74%.

Autos still top YTD

On a year-to-date basis, the automobiles sector remained the strongest performer so far, its index-best weekly return allowing it to extend its 2006 cumulative return - also index-best - to 9.27% from 8.95% previously. Entertainment remained a distant second place despite its finish this week in the bottom five, its total return falling to 5.73% from 6.78% a week earlier. Industrial products, in third place, eased to 5.47% from 5.84% previously.

On the downside, the life and health insurers' 2006 loss widened out to 2.27% from 1.01%, easily the worst in the index, as the sector also had the single worst weekly showing of any in the index this past week. Healthcare facilities remains the second-weakest grouping, its bottom five showing making it swing to a 0.74% year-to-date loss from a 0.24% gain previously. Oil and gas also moved into the red on a year-to-date basis, dropping to a 0.23% cumulative loss - bad enough to keep it as third-weakest - from a positive 0.31% cumulative return previously.

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