B of A High Yield Broad Market Index up 0.17% on week; 2007 return grows to 0.41%

By Paul Deckelman

New York, Jan. 16 - The Banc of America Securities High Yield Broad Market Index rose 0.17% in the week ended Thursday - the fourth straight weekly gain seen for the index, including the 0.25% advance seen in the previous week ended Jan. 4.

The recent pattern of strength continues, with the index having now seen gains in 28 weeks out of the last 29, dating back to late June last year - all except the week ended Dec. 14, during which it declined a paltry 0.09%. That was part of a larger pattern of positive returns throughout most of last year, according to a Prospect News analysis of the B of A data.

The index's year-to-date return firmed to 0.41% from 0.24% the previous week, which differed slightly from the weekly result in that first week of the year, as the latter, which is normally figured on a Friday-to-Thursday basis, included a 0.01% gain posted in the abbreviated pre-holiday session on Dec. 29, the last official trading day of 2006. The index finished 2006 with an 11.89% return - nearly six times 2005's total 2.10% return.

The index's average spread over Treasuries, which in the previous week had widened to 311 basis points from 305 bps previously, where it also ended 2006, tightened markedly in the most recent week, to 298 bps. This was a continuation of the spread-tightening trend seen throughout last year, when spreads started at 384 bps off Treasuries.

Its yield to worst, which had previously declined to 7.76% from 7.78% the week before and 7.79% at the end of 2006, was unchanged in the most recent week, at 7.76%.

The index tracked 1,677 issues of $100 million or more, unchanged from the week before, while its overall market value declined slightly to $635.8 billion from $636.9 billion the previous week. B of A sees the index as a reliable proxy for the high-yield universe, which by some estimates is nearly $1 trillion in value.

Lower tier continues to lead

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 34.21% of the index - showed the strongest performance, returning 0.49% on the week. That was followed by the middle tier - those issues rated BB-, B+ and B, making up 43.72% of the index - which gained 0.15%, while the uppermost tier - those issues rated BB and BB+, comprising 22.08% of the index - brought up the rear with a 0.27% loss.

It was the sixth consecutive week in which the lowest tier was on the top. It was also the fourth week out of the last five in which the tiers had finished in that order; the exception was, in fact, the previous week, ended Jan. 4, in which the lower tier returned 0.37%, the upper tier 0.22% and the middle tier 0.16%.

B of A's analysts again said that CCC-rated paper, which largely, but not totally, comprises the bottom tier, "outperformed," with a 0.65% return, while B-rated paper - similar to, but not exactly the same as, the middle tier - had a total return of 0.23%. The BB-rated credits (the upper tier partially, but not completely, overlaps this subset) lost 0.17%.

After two straight weeks during which there was no primary market activity to speak of, with the new-deal arena in its traditional holiday-time lull, primary market action finally accelerated during the recent week, with $4.1 billion having priced. Issuance totaled a record $179.3 billion in 2006, according to B of A's calculations.

The analysts said that weekly reporting high-yield mutual funds, as measured by AMG Data Services, showed a net inflow of $50 million in the week ended Jan. 10, following the $232 million inflow seen in the previous week. In contrast, net outflows in 2006 totaled about $3 billion.

Spreads tighten as Treasury rates climb

The analysts further stated that while the 0.17% weekly return was "rather average," the index's performance "masks the significant moves of spreads and risk-free [i.e., Treasury] rates during the period." While average spreads on the index tightened by 13 bps to 298 bps, as noted, producing a weekly excess return for the index of 69 bps, risk-free rates "increased significantly," with the yield on the 10-year Treasury issue climbing to 4.73% as of Jan. 11, up 0.13% from 4.60% on Jan. 4.

In the latest week, 22 of the 42 sectors into which B of A divides its high-yield universe were in positive territory, with 13 showing losses and seven showing flat 0.00% readings, neither a loss or a gain, although it should be noted that five of these were new sectors created in the sector restructuring that took place at the end of March and do not as yet have any issues represented in them. The health care equipment and services and other telecommunications sectors also actually traded to flat readings.

In the Jan. 4 week, 35 sectors were in the black, against just two in the red, and the five new sectors at 0.00%. Strongly, or at least, solidly, positive sector breakdowns have now been seen over the past 29 weeks, and on a longer-term basis, in 50 weeks out of the past 59, encompassing virtually all of last year and extending back to late 2005. Such strongly positive breakdowns pretty much dominated last year, except for the several weeks of choppy returns in May and June.

Paper, forest products top performers

In the latest week, the paper and forest products sector returned 1.06%, helped by strong performances by Canadian forest products companies such as Abitibi-Consolidated Inc. and Tembec Inc., which are seen benefiting from the recent softening of the Canadian dollar and expectations that this will help that country's exports.

The paper and lumber companies thus take over the top spot from the previous week's champion, the life/health insurers, which had had gone from the worst in the Dec. 28 week (a 0.42% loss) to first in the Jan. 4 week, with an index-best 0.77%.

Retailers (up 0.79%), entertainment (up 0.60%), technology (up 0.51%) and consumer products (up 0.47%) rounded out the list of the Top Five best-performing sectors in the latest week. It was a strong rebound for the tech names, which in the previous week had suffered the largest loss, 0.25%, as one of only two sectors actually in the red that week.

Technology relinquished its unenviable distinction as the index's cellar dweller to the volatile life/health insurance grouping, which, as noted, previously went from worst to first, only to return to the basement in the most recent week with a 0.67% loss.

Oil and gas (down 0.37%), diversified financials (down 0.36%), banks (down 0.24%) and real estate (down 0.22%) rounded out the latest week's Bottom Five list of the worst-performing sectors.

Paper tops for year, oil/gas worst

On a year-to-date basis - albeit with only two weeks in the books - paper and forest products is the strongest sector so far, and the only one that has broken into the 1%-plus range, with a 1.27% cumulative return, although retail is not far behind with a 0.96% 2007 gain. Both sectors got a big boost from their Top Five performances this week. Close behind the retailers are consumer non-cyclical/other (up 0.92%) and consumer products, a Top Fiver, and cable/DBS (both up 0.90%).

On the downside, the weakest sectors are also the only ones in the red for the year so far, Bottom Fivers oil and gas (down 0.25%) and diversified financials (down 0.11%), as well as pipelines (down 0.07%) and the other health care sector (down 0.06%).

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