B of A High Yield Broad Market Index up 0.12% on week, year-to-date return grows to 3.66%

By Paul Deckelman

New York, July 24 - The Banc of America Securities High Yield Broad Market Index rose 0.12% in the week ended Thursday, its fourth consecutive gain, including the 0.22% advance seen in the previous week ended July 13.

That fourth straight gain appeared to extend a nascent trend of strength, after the index broke out of a period of choppiness that had started in mid-May and ran through late June, alternating several weeks on the downside with small advances and even, one week, a completely flat reading. Up until that point in mid-May, the index, after having started the year strongly, had been moving steadily upward most weeks.

With its upward momentum re-established, the index has now shown positive results in 12 weeks out of the last 19 and, over the longer term, in 25 out of the last 35 weeks, dating back to mid-November, according to a Prospect News analysis of the B of A data.

The index's year-to-date return grew in the most recent week to 3.66%, up from 3.54% the week before. It thus remains well above 2005's total 2.10% return, though below its peak so far for 2006, 4.08%, reached during the week ended May 11.

The index's spread over Treasuries, which in the previous week had ballooned out to 359 basis points from 348 bps, continued to widen, to 366 bps in the most recent week. Its yield to worst, which had previously been unchanged at 8.66%, edged upward to 8.67% in the most recent week.

The index tracked 1,665 issues of $100 million or more, down from 1,669 the week before, while its overall market value declined to about $570.1 billion from $570.8 billion the previous week. B of A sees the index as a reliable proxy for the nearly $800 billion high-yield universe.

Middle credit tier outperforms

On a credit-quality basis, the returns of the three credit tiers into which B of A divides the HY Broad Market Index were tightly spaced, all separated by just five-hundredths of a percentage point. The middle tier - those issues rated BB-, B+ and B, making up 42.08% of the index - had the best return, 0.14%, followed by the lowest tier - those issues rated B- and below, accounting for 33.33% of the index - which returned 0.10%, just a shade better than the uppermost tier - those issues rated BB and BB+, comprising 24.59% of the index - which firmed 0.09%.

In the previous week, the upper tier returned 0.35%, the middle tier rose 0.19% and the lower tier was up 0.16%.

B of A analysts, while noting that "the trend of credit spread widening remained intact over the recent week" with the 7 bps rise in the spread to worst, said that "the effect of spread widening on high-yield bonds was partly offset by declining risk-free rates," with the 10-year Treasuries decreasing by 4 bps.

Primary activity quiet

Primary market activity, they noted, "quieted down from the prior week," with some $1.1 billion in new issuance priced in the week ended Friday, versus $2.1 billion the week before. Month-to-date volume rose to $3.2 billion and year-to-date issuance rose to $85 billion from $83.9 billion the week before, according to B of A's calculations.

And the analysts related that after two consecutive weeks of inflows to weekly reporting high-yield mutual funds, $72 million more left the funds than came into them in the week ended Wednesday - exactly offsetting the $72 million inflow reported by AMG Data Services the week before, ended July 12. The net outflow still accumulates to about $3.5 billion, with an average weekly outflow of $122 million.

There was only a little real difference between the behavior of the automotive and the non-automotive components of the index. The automobile issues, representing about 14.24% of the index - the single largest sector - was up 0.20% in the most recent week, while the non-autos, comprising the remaining 85.76% of the index, gained 0.10%.

In the latest week, 26 of the 42 industrial sectors into which B of A divides its high-yield universe were in positive territory, with 10 showing losses and six sectors showing neither gains nor losses, but rather, a flat 0.00% reading (although it should be noted that five of the six were brand-new sectors created in the sector restructuring that took place at the end of March, do not as yet have any issues represented in them; bonds actually began trading in the sixth sector that formerly fell into that category, other telecommunications, but the initial weekly return remained flat).

The strongly positive trend over the past three weeks in the sector breakdown represents a return to the pattern of broad-based strength seen in effect for most of this year, up until the several choppy weeks, in May and June. Solidly positive breakdowns have now been seen in 26 weeks out of the past 35.

Diversified Telecoms tops for week

Diversified telecommunications turned in the best performance in the week ended Thursday, as the group returned 0.90% on the week, supplanting the previous week's top-spotter, life/health insurers, which had risen 1.20% in the prior week, ended July 13, as the sector rebounded solidly that week from a finish the week before that among the Bottom Five worst-performing sectors.

Aerospace and defense (up 0.65%), food and drug retailers (up 0.52%), wireline telecom (up 0.46%) and cable/DBS operators (up 0.41%) rounded out the latest week's Top Five list of best-performing sectors. Cable/DBS has now been among the Top Five finishers in two weeks out of the past four, and three weeks out of the last five.

Health care facilities worst for week

On the downside, health care facilities turned in the worst showing, down 1.18%, with the B of A analysts noting that sector spreads had widened in response to a Wall Street Journal article last week on failed leveraged buyout talks for Nashville, Tenn.-based HCA Corp. (those talks were subsequently revived over the weekend and produced Monday's news that the company will be bought out in a $21 billion LBO deal). Facilities thus took over as the week's cellar-dweller from the technology issues, which had the previous week's worst showing with a 0.49% loss.

Property/casualty insurers (down 0.59%), consumer durables/non-auto (down 0.52%), consumer non-cyclical/other (down 0.50%) and consumer products (down 0.21%) rounded out the latest week's Bottom Five. It was the second straight week in the Bottom Five for consumer durables/non-auto, which had lost 0.34% in the previous week, and for consumer products, which had lost 0.32% in the July 13 week. Property/casualty insurers have now been among the Bottom Five in two weeks out of the last four.

Autos tops for year

On a year-to-date basis, the automobiles sector remains by far the strongest performer so far, as its 2006 cumulative return rose to an even 11% from 10.84% previously.

Entertainment posted a small loss for the week but remains a distant, though solid second, even as its year-to-date return declined to 7.14% from 7.21%. Industrial products, in third place, advanced to 5.83% from 5.55% previously. However, cable/DBS, given a boost by its Top Five weekly showing, advanced to 5.45% from 5.01%.

Health care facilities worst for year

On the downside, the health care facilities sector's index-worst loss for the week dropped it down into the dungeon occupied by the worst cumulative performer so far, as its 2006 deficit ballooned to 1.64% from 0.47% in the previous week.

The life/health insurers - which had been mired down at the very bottom for most of the year - cut their cumulative loss to 1.51% from 1.91% previously. No other sectors are in the red for 2006 so far.

Other telecommunications, where bonds actually began trading during the week to an initial flat weekly performance, thus earned a similarly flat year-to-date return of 0.00% - neither a gain nor a loss. Oil and gas' total return for the year so far firmed to 0.43% - the smallest of any sector not in negative or neutral territory - from 0.17% the week before.

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