B of A High Yield Broad Market Index slides 0.84% on week; 2007 return back in the red at 0.25%

By Paul Deckelman

New York, Aug. 20 - The Banc of America Securities High Yield Broad Market Index continued to zig-zag in the week ended Thursday, falling 0.84%. The move followed the previous week's 0.63% gain, which itself had followed two weeks on the downside, including the dramatic 2.32% plunge the week before that, ended July 26 - easily its worst loss so far this year and one of its worst weekly deficits ever.

While advances have been seen in most weeks this year, the momentum has decidedly been to the downside of late, with 10 negative returns and just two positive returns in the last 12 weeks.

Year-to-date performance has also been zig-zagging; after having dipped into the red for the first time in 2007 during the week ended Aug. 2, at 0.03%, it was back in the black the following week, ended Aug. 9, at 0.59%, but it now is once again in the red, down 0.25% for the year, its worst cumulative loss so far, in the latest week. The index had its peak 2007 return of 4.72% in the week ended May 24.

The index had finished 2006 with an 11.89% return. Showing its volatile, streaky nature, it began 2007 with two straight months of strong gains, followed by a period of choppiness seen roughly from late February through early April, but after that had again showed consistent strength, until the beginning of the most recent downturn, after it peaked in late May.

Gains have now been seen in 19 weeks out of the 33 since the start of 2007, against 14 losses - part of a larger pattern of strength that the index has shown since late June of last year, with gains recorded in 45 weeks out of 60 during that stretch, according to a Prospect News analysis of the B of A data. However, since hitting its high point in late May, the recent momentum has clearly shifted to the downside.

The index's average spread over Treasuries, which in the prior week had tightened to 428 basis points from 435 bps in the week ended Aug. 2, ballooned out to 494 bps, its high point for the year, in the latest week.

The index had begun the year in a spread-tightening mode, extending the trend that had been in effect throughout 2006, when spreads had begun that year at 384 bps off Treasuries and had ended it at 305 bps over. After continuing to come in for the first two months of 2007, spreads had proceeded to rise over the next few weeks before resuming their tightening trend, which brought them down to the low for the year of 263 bps seen in the week ended June 7. That was also the record tight level since B of A began compiling the index. From that nadir, spreads began to climb back up, to stand at their current bloated levels.

The index's yield to worst, which previously had fallen to 8.92% from 9.02%, at the time its high level for the year, zoomed to 9.29% in the most recent week, its new high for the year.

The index tracked 1,642 issues of $100 million or more, up from 1,638 issues the week before, although its overall market value declined slightly to $616.7 billion from $616.9 billion the previous week. B of A sees the index as a reliable proxy for the high-yield universe, which by some estimates is around $1 trillion in value.

Middle credit tier stays on top

On a credit-quality basis, all three of the credit tiers into which B of A divides the HY Broad Market Index showed losses, although the middle of the three - those issues rated BB-, B+ and B, making up 43.01% of the index - was, relatively speaking, the best performer with the smallest loss, 0.75%. This was followed by the lowest tier - those issues rated B- and below, accounting for 34.06% of the index - which was off 0.88%. The uppermost tier - those issues rated BB and BB+, comprising 22.92% of the index - brought up the rear with a 0.95% loss.

It was the second consecutive week in which the three tiers finished in that particular order; in the week ended Aug. 9, the middle tier returned 0.69%, the lower tier rose 0.58% and the upper tier followed closely behind at 0.57%.

The latest week also was the fifth week out of the last six in which the middle tier has been on top. However, it also continued the departure from other recent patterns, which as of the Aug. 2 week had included three straight weeks in which the uppermost tier had finished sandwiched between the other two, and six weeks out of the prior seven in which the lower tier had lived up to its name and had finished at the bottom of the pile.

B of A's analysts asserted that "performance was negative across the credit ratings," with B-rated credits - similar to, but not exactly the same as the middle tier - down 0.69% on the week, BB credits (the upper tier partially, but not completely, overlaps this subset) losing 0.83%, and CCC-rated paper, which largely, but not totally, comprises the bottom tier, plunging 1.20%.

Primary issuance was completely stilled by the turmoil in the credit markets, with no transaction having priced by Friday, versus the two transactions totaling $565 million that priced the week before. Year-to-date issuance was unchanged at $131 billion at week's end. Issuance totaled a record $179.3 billion in 2006, according to B of A's calculations.

Credit spreads widen

The analysts noted that while the average spread on the index versus comparable Treasury issues jumped by 67 bps on the week, partly due to the downgrade of troubled Residential Capital Corp.'s bonds into the index, at the same time, risk-free [i.e., Treasury] rates narrowed, with the yield on the 10-year government benchmark issue falling to 4.66% from 4.77% at the end of the week.

Weekly reporting high-yield mutual funds, as measured by AMG Data Services, showed a $272.5 million outflow in the week ended last Wednesday, back to back with the previous $439 million cash exodus from the funds. It was the 10th consecutive outflow. The analysts calculated that year-to-date cumulative outflows now stand at $1.8 billion, versus the previous week's $1.5 billion deficit for the year. The average weekly outflow increased to $55 million from $48 million the week before.

Negative sectors back in control

In the latest week, 27 of the 42 industry sectors into which B of A divides its high-yield universe were in negative territory, 10 were in positive territory, and there were five flat 0.00% readings, neither a loss nor a gain, although it should be noted three of those latter sectors - credit insurance, leisure equipment and products, and water utilities - were new sectors created in the sector restructuring that took place last year and do not as yet have any issues represented in them. The gaming, lodging and leisure and entertainment sectors also recorded flat readings.

The breakdown represents a shift from the previous week, when 33 sectors were in the black, six were in the red, and the three new sectors had empty readings.

That trend of negative breakdowns has predominated recently, having now been recorded in nine weeks out of the last 11. However, the larger trend for much of this year, and even stretching back into last year, has had strongly positive breakdowns.

Diversified financials week's worst

The diversified financials sector was the week's single worst-performing industry group, plunging 3.93% to take over as the cellar-dweller from the consumer durables/non-auto sector, which had an index-worst 0.66% loss in the previous week. However, consumer durables/non-auto, which includes the hard-hit homebuilding industry as well as makers of such goods as appliances and furniture, whose sales trends are to some degree dependent on home sales, lost 2.33% to remain among the Bottom Five worst-performing sectors for a fourth straight week, including two weeks in which it was the single worst performer.

Automobiles (down 2.88%), insurance brokers (down 1.43%), and the cable/DBS operators (down 1.25%) rounded out the latest week's Bottom Five list. It was a sharp comedown for the insurance brokers grouping, which in the previous week had been the single best-performing sector, up 2.30% on the week. However, it was also a reversion to the kind of weakness which the group - one of the single worst-performing sectors so far this year - had been showing over most weeks.

Life/health insurance week's best sector

On the downside, the life/health insurance providers were the week's best performer, posting a 0.82% gain, grabbing the top spot from the previous week's best performer, the insurance brokers, as noted. It was a notable improvement for the insurers, which had been in the Bottom Five the week before, with a 0.57% loss.

Other health care (up 0.49%), pipelines (up 0.43%), banks (up 0.31%) and food, beverage and tobacco (up 0.26%) rounded out the latest week's Top Five list of best-performing sectors. It was the second straight week in that prestigious group for other health care, which also made it in the previous week with a 1.88% return. On the other hand, banks had spent the previous week among the Bottom Five with a 0.12% loss.

Health care equipment and services tops for year

On a year-to-date basis, with 33 weeks now in the books, the health care equipment and services sector remained in the top position, although its cumulative return edged downward to 4.95% from 4.97%.

Transportation moved up one notch, to second-best, at 3.65%, although that was down from the previous week's 3.88% year-to-date return.

Industrial products was also up a notch, in third place with a 3.35% return, although that was also down from its 2007 showing the week before, at 3.53%. Meanwhile, the metals and mining sector, which had been the second-best sector the week before, tumbled two positions, to fourth-best, as its year-to-date return declined to 3.25% from 4.03%.

The chemicals sector remained fifth-best, while its return for the year fell to 3.06% from 3.31% previously. The wireless telecommunications sector remained sixth-best, at 2.86%, down from 3.07% the week before.

Consumer durables/non-auto year's worst

On the downside, the consumer durables/non-auto sector remained the worst performer on a year-to-date basis, its repeat Bottom Five weekly loss dragging its cumulative return down to 9.28% from 7.11% the week before.

The diversified financials sector - the week's worst - fell one notch to second-worst for the year, its cumulative loss widening sharply to 8.11% from 4.35% previously.

Fellow Bottom Fiver insurance brokers' loss for the week was relatively smaller, as it improved to just third-worst from second-worst previously. Its loss for the year widened to 7.99% from 6.66%.

Other health care remained fourth-worst on the year, although its Top Five weekly finish cut its year-to-date loss to 2.87% from 3.34% previously.

Other telecom remained as the fifth-worst performer for the year, as its 2007 loss widened to 2.85% from 2.01%.

Autos, not previously counted among the worst laggards, fell to sixth-worst, pulled down by their Bottom Five weekly loss. The sector swung to a 1.79% loss for the year from a 1.42% positive return previously, while the sixth-worst sector the previous week, retail, got itself out from among the worst, its year-to-date loss only widening to 1.74% from 1.40% the week before.

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