B of A High Yield Broad Market Index falls 0.45% on week, 2008 loss grows to 2.56%

By Paul Deckelman

New York, Feb. 19 - The Banc of America Securities High Yield Broad Market Index fell 0.45% in the week ended Friday, its second consecutive retreat; the market gauge had also fallen 1.15% in the previous week ended Feb. 8, which brought to an abrupt halt a two-week streak of upside movement. The back-to-back losses returned the index to the pattern of weakness seen at the start of the year, when it fell for the first three weeks of 2008.

With seven weeks now in the books, the index has seen five losses and two gains. On a year-to-date basis, the index is down 2.56%, a new low point for the year so far, having deteriorated from the 2.12% cumulative loss seen the previous week and having fallen below the previous low point for the year, the 2.21% deficit seen during the week ended Jan. 18.

In 2007, the index posted a return for the year of 1.85% on 32 weekly gains and 20 losses, having see-sawed between its peak level of 4.72% reached in the week ended May 24 and its low-point of a 0.25% loss seen in the week ended Aug. 16. That 2007 return was far smaller than the index's 2006 finish of 11.89%.

Spread at new wide point of year

The index's average spread over Treasuries was 756 basis points, having widened from 747 bps seen the previous week, which was also the previous wide point for the year. The spreads so far this year are notably wider than the 613 bps mark at which the index ended 2007, as well as its high point for 2007 of 621 bps.

The index's yield to worst, after having widened the week before to 10.34% from 10.04% previously, moved up again to 10.50% in the latest week - another new high for the year, eclipsing the previous high mark set in that previous week.

The index tracked 1,569 issues of $100 million or more, up from 1,563 the week before, while its overall market value eased to $579.6 billion from $582.8 billion the week before. It had ended 2007 tracking 1,568 issues having a collective value of $595.3 billion. 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 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 again finished in the red in the latest week and replicated the previous week's order of finish as well. The middle tier - those issues rated BB-, B+ and B, making up 41.06% of the index - had the best performance, relatively speaking, by turning in the smallest loss of 0.30%. That was followed by the uppermost tier - those issues rated BB and BB+, comprising 20.01% of the index - which lost 0.40%. The lowest tier - those issues rated B- and below, accounting for 37.93% of the index - brought up the rear with a 0.64% loss.

In the previous week, the middle tier lost 0.75%, the upper tier lost 0.86% and the lower tier fell by 1.73%.

By the ratings categories for the three major baskets of credits into which B of A divides the index, excluding the relatively small group of issues which are not rated, CCC-rated paper - which includes many, but not all, of the lower-tier credits - underperformed the rest of the index, with a 0.57% retreat. BB-rated bonds (the upper tier partially, but not completely, overlaps this subset) had the smallest loss, 0.31%, while B-rated credits - similar to, but not exactly the same as the middle tier - fell 0.48%.

Junk, government spreads widen

While the average high-yield spread widened by 9 bps to a new high for the year of 756 bps, as noted, continuing the spread-widening pattern that it has shown for pretty much most of the year so far, the yield on the benchmark 10-year Treasury note increased by 13 bps to 3.77% from 3.64% the week before. It was the third straight week in which Treasury yields had risen and the second straight week in which the junk spread and the Treasury yield were moving in the same direction.

Primary market activity picked up a little in the latest week, with the market having priced three deals totaling $828 million, versus one deal worth $205 million the week before. Six weeks into the year, 2008 new-issuance totals $8.4 billion - well under the brisk pace seen in 2007, when $172.5 billion priced, according to B of A's calculations, although that itself was somewhat short of the record total of $179.3 billion that the bank reported in 2006.

Weekly reporting high-yield mutual funds, as measured by AMG Data Services, saw an inflow of $3.2 million in the week ended Wednesday - the second such cash infusion this year, however small, following the previous week's $141.6 million inflow. That lowered the year-to-date cumulative outflow slightly to about $657 million, for an average weekly outflow of about $93 million.

Negative sectors retain control

In the latest week, 31 out of the 41 industry sectors into which B of A divides its high-yield universe were in negative territory, seven were in positive territory and three others had flat 0.00% readings, neither a loss nor a gain, although it should be noted that those sectors - credit insurance, leisure equipment and products, and water utilities - are relatively new sectors created in the sector restructuring that took place in 2006 and even at this relatively late date still do not as yet have any issues represented in them.

That was almost identical to the previous week's breakdown of 32 sectors in the red, six in the black and the three empty "newer" sectors continuing to show flat readings, and continues the general trend of mostly negative splits seen this year; positive breakdowns have been seen in only two weeks out of the seven since the year's beginning.

Life/health insurance week's worst sector

In the latest week, life/health insurers plunged 4.22% to take over the unwanted distinction of single worst-performing sector from the previous week's cellar-dweller, advertising-dependent media, which had tumbled an index-worst 3.29% that week. The latter grouping - which has been hard-hit by the downturn in bonds of phone-directory publishers Idearc Inc. and R.H. Donnelley Corp. as well as newspaper publishers Tribune Corp. and Media News Group Inc. on fears a slowing economy will reduce ad placements - stayed among the Bottom Five worst-performing sectors for a third consecutive week with a 1.62% loss.

Paper and forest products (down 1.54%), consumer non-cyclical/other (down 1.48%) and diversified telecommunications (down 1.32%) rounded out the latest week's Bottom Five list. It was the second straight week among the biggest losers for consumer non-cyclical/other, which was also there the week before with a 2.42% loss.

Textile and apparel week's best sector

On the upside, textile and apparel was the best-performing sector on the week with a 0.89% gain, grabbing the top spot away from the previous week's champion, banking, which took the honors that week with an index-best 3.90%, its second such first-place finish in three weeks. It was a sharp turnaround the for the textile makers, which had been among the worst performers the previous week with a 1.88% loss.

Banks remained among the Top Five best-performing sectors for a second straight week and for a third week out of the last four with a 0.26% gain.

Health care equipment and services (up 0.28%), retail (up 0.22%) and food/beverage/tobacco (up 0.20%) rounded out the latest week's Top Five list. It was the second straight week in that select circle for the health care equipment and services sector, which had made it the previous week with a 0.12% return.

Insurance brokers worst 2008 sector

On a year-to-date basis, insurance brokerage remained the worst-performing sector of 2008 so far, as its loss for the year widened to 8.82% from 8.04% the week before. Repeat Bottom Fiver consumer non-cyclical/other's position remained second-worst in the index as its cumulative deficit widened to 7.89% from 6.51% the week before. Ad-dependent media, also a repeat Bottom Five finisher, as noted, continued to languish at third-worst in the index as its year-to-date red ink increased to 7.77% from 6.25% previously.

Gaming, lodging and leisure remained fourth-worst as its loss for the year increased to 6.25% from 5.52% before. Entertainment and Bottom Fiver diversified telecom, not previously among the worst finishers, fell to fifth-worst and sixth-worst, respectively; entertainment's loss for the year increased to 5.35% from 4.24%, while diversified telecom's deficit gapped out to 5.07% from 3.80% previously.

Banking still top 2008 sector

The banking sector, a repeat visitor to the Top Five, clearly remained the best performer on a year-to-date basis as its return rose to 2.73% from 2.46% in the previous week. Other health care held onto second-strongest, although its return for the year declined to 0.46% from 0.70%.

Property/casualty insurers moved up one position to third-best, although its cumulative return declined slightly to 0.31% from 0.34% the week before. That, in turn, dropped the previous third-place holder, consumer durables/non-automotive, which includes the beleaguered homebuilding business, down one notch to fourth-best, as its return for the year was halved to 0.23% from 0.46% before.

Repeat Top Fiver health care equipment and services and electric utilities, neither of them previously among the leaders, moved up to fifth- and sixth-best, respectively; health care equipment and services' return for the year rose to 0.19% from 0.09%, while electric utilities also improved to 0.03% from a 0.11% loss the week before.

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