Advantage Data: Lodging, real estate tops as high-yield major sectors rebounded last week

By Paul Deckelman

New York, Sept. 6 - The high-yield market was back in the black last week as a majority of industry groupings - particularly the most significantly sized - showed strong gains, according to weekly industrial-sector bond-performance statistics supplied to Prospect News by Advantage Data Inc.

It was the second time in the past three weeks that most sectors ended on the upside, and the 26th week so far this year, against nine downturns - although most of that lopsided breakdown reflects tremendous strength early in the year, when there was week after week after week of improvements. More recently, since the market's peak upside levels in late May, upturns and downturns have been more or less evenly matched, with a week or two of the one then alternating with one or two weeks, or so, of the other.

Some 60 of the 72 broad-industry sectors into which Boston-based Advantage Data currently divides its entire high-yield universe finished in the black in the latest week, with just seven sectors in the red and another five sectors showing not enough statistically meaningful activity to produce any kind of results.

That represented an exact mirror-image reversal of the bearish pattern seen the previous week, ended Aug. 26, when 60 sectors posted negative returns, only seven had positive results and the other five showed no results.

And in another mirror-image reversal of the prior week's results, all 30 of the most significantly sized sectors - as measured by the number of bond issuers, the collective number of issues tracked and their total face amount - ended in the black this week, against none finishing in the red - exactly the opposite of the 30-to-nothing negative breakdown seen the week before.

Among specific major sectors in the latest week, bonds of lodging, real estate and metals mining companies showed the biggest gains, while publishing, machinery and computer manufacturing and non-depository financial institutions posted relatively smaller gains on the week.

Among statistical indicators, the junk market's total year-to-date return, as measured by the widely followed Merrill Lynch High Yield Master II index, rose in the latest week, reversing the previous week's decline, marking its second gain in the past three weeks. However, it remains well below its peak level for the year.

Lodging leads the way

Among specific significantly sized sectors, bonds of lodging providers showed the biggest gain on the week, returning 2.25%. The frequently volatile group accomplished the relatively rare feat of going from worst to first, having been the single biggest loser the week before, when it was down by an almost identical 2.23%, its second consecutive week among the worst-performing key sectors.

Also among the strongest finishers during the week were real estate (up 2.09%), metals mining (up 1.82%), transportation equipment manufacturing (up 1.76%), precision equipment manufacturing (up 1.72%) and miscellaneous retailers (up 1.70%).

It was the second straight week among the better finishers for the transportation equipment makers, while the retailers have been in that elite grouping now in two weeks out of the last three. However, real estate, like lodging, had been among the worst finishers the week before.

There was no downside per se in the latest week - only major sectors turning in relatively smaller advances than all of the others, a mirror-image reversal of the week before when there had been no real upside, but only a handful of sectors showing relatively smaller losses than all the others.

In the latest week, publishing had the smallest gain of those key sectors, up 0.62%, followed in ascending order by machinery and computer manufacturers (up 0.68%), non-depository financial institutions (up 0.85%), insurance carriers (up 0.91%), metals producers (up 0.93%) and depository financial institutions (up an even 1.00%).

It was the third straight week among the underachievers for the publishers, who have now also been there in seven weeks out of the last nine and in eight weeks out of the last 12.

But the non-depository financials, now among the worst key sectors in two weeks out of the last three, had actually been the best performer among those large sectors the previous week, when they lost a relatively modest 0.19%. The depository financials had also been among the better finishers in that week ended Aug. 26.

Food stores back in first

On a year-to-date basis 35 weeks into 2011, bonds of the major-sized sectors have been moderately strong, with 22 out of 30 showing cumulative returns of at least three full percentage points, up from 18 sectors at 3% or above year to date posted the week before. Two topped 7% and one was above 6%, versus none over 7% and three over 6% in the previous week. Two were above 5%, just like the earlier week, but 12 exceeded 4% and five topped 3%, versus just two over 4% and 11 returning more than 3% the week before. For a fourth straight week, two sectors were in negative territory on a year-to-date basis.

Bonds of food store operators - which had led all major sectors year to date for a number of weeks before relinquishing that honor in the previous week - were back on top in the latest week with a 7.75% cumulative return. They were followed by electric and gas services - the previous week's new, but short-lived leader - at 7.48% and precision instrument manufacturers (up 6.81%).

Bringing up the rear, publishing was down 1.88% and building construction was losing 1.01%. Real estate showed just a relatively modest 1.74% year-to-date return.

Key barometer bounces back

Looking at the overall domestic high-yield market, junk bonds, as measured by the Merrill Lynch High Yield Master II Index, had a one-week gain as of Friday of 1.501%, the second gain seen in the past three weeks. It reversed the 1.721% loss seen in the previous week, ended Aug. 26, which had been the fourth such retreat recorded in the previous five weeks, demonstrating the choppy and volatile nature of the junk market.

The latest gain lifted the index's year-to-date return to 2.30% from the previous Friday's 0.719%, which had been one of the lowest levels seen this year. The cumulative return, however, remained well down from the 2011 peak level of 6.362%, set on July 26.

As of this past Friday, the index showed an average price of 98.109, a yield to worst of 8.38% and a spread to worst of 732 basis points over comparable Treasuries, versus a price of 96.797, a yield of 8.66% and a spread of 743 bps at the end of the previous week.

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