B of A High Yield Broad Market Index down 0.35% on week; 2007 return shrinks to 2.31%

By Paul Deckelman

New York, March 5 - The Banc of America Securities High Yield Broad Market Index fell 0.35% in the week ended Thursday, its first loss after three straight weekly gains, including the 0.38% advance seen in the previous week ended Feb. 22.

Even so, gains have still been seen in seven weeks out of the nine since the start of 2007, part of a larger pattern of strength that the index has shown since late June of last year, with gains now seen in 33 weeks out of 36 during that stretch. That, in turn, was part of a still-larger trend of positive returns seen throughout most of last year and now extending into the beginning of 2007, according to a Prospect News analysis of the B of A data.

The index's year-to-date return retreated to 2.31% in the latest week - down from the previous week's 2.67%, its high point for the year so far. 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 prior week had narrowed to 269 basis points from 279 bps previously, ballooned out to 303 bps in the latest week - a pronounced departure from the spread-tightening trend that was seen throughout last year (when high-yield spreads started at 384 bps off Treasuries and ended at 305 bps over), and which had pretty much been continuing into the first two months of the new year.

Its yield to worst, which previously had narrowed to 7.47% from 7.53% the week before, widened to 7.60% in the most recent week.

The index tracked 1,706 issues of $100 million or more, unchanged versus the week before, while its overall market value declined to $659.4 billion from $660.9 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.

Only upper tier shows gain

On a credit-quality basis, the uppermost of the three credit tiers into which B of A divides the HY Broad Market Index - those issues rated BB and BB+, comprising 22.77% of the index - was the only one of the three to actually show a gain on the week, firming by 0.10%. That was followed by the middle tier - those issues rated BB-, B+ and B, making up 42.99% of the index - which lost 0.26%. Bringing up the rear was the lowest tier - those issues rated B- and below, accounting for 34.23% of the index - which plunged 0.74%.

That was a rare setback for the lower tier, which had the best returns in each of the previous three weeks and in 11 weeks out of the prior 12, and was an equally rare show of strength by the upper tier, which previously had been on the bottom for two straight weeks and for six weeks out of the prior seven. The latest week also marked the third straight time - and the sixth week in the last eight - in which the middle tier had lived up to that billing and been in the middle. In the previous week, ended Feb. 22, the lower tier was up 0.57%, the middle tier up 0.36% and the upper tier up 0.12% - the second straight week in which they had finished in that exact order.

B of A's analysts said that CCC-rated paper, which largely, but not totally, comprises the bottom tier, "underperformed," losing 0.91% on the week, while the B-rated paper - similar to, but not exactly the same, as the middle tier - lost 0.41%. The BB-rated credits (the upper tier partially, but not completely, overlaps this subset) was the only one of the three divisions in positive territory, edging up 0.04%.

Primary issuance "was strong," they said, with $6.7 billion of new paper pricing in the week ended Friday, up from $2.4 billion in the previous, holiday-shortened week, when the Presidents Day holiday weekend saw an early close on Feb. 16, followed by a full market close on Feb. 19. The analysts calculate year-to-date new issuance at $33.9 billion, up from the previous week's $27.2 billion. 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 outflow of $23 million in the week ended Wednesday - the first such loss this year - following the $74 million inflow seen in the previous week. Net inflows to date total about $840 million, down from around $862 million the week before, for an average weekly $93 million inflow, down from $108 million the week before.

Spreads widen, rates drop

The analysts further stated that the index "experienced a week of poor performance," with "a marked increase in credit spreads" as the primary driver, while risk-free interest rates were going in the opposite direction. While average high-yield spreads grew by a whopping 34 bps on the week to 303 bps, as noted - risk-free (i.e., Treasury) rates on the other hand "declined substantially," with the 10-year government paper's yield plummeting to 4.55% on March 1, well down from 4.73% a week earlier.

In the latest week, 26 of the 42 industry sectors into which B of A divides its high-yield universe were in negative territory, 10 sectors were in positive territory, while six were showing flat 0.00% readings, neither a loss nor a gain, although it should be noted that four of these were new sectors created in the sector restructuring that took place last year, and do not as yet have any issues represented in them.

That marked a rare dramatic reversal of the usual pattern of solidly positive sector breakdowns, including in the previous week, when 36 sectors were in the black, two sectors were in the red, and the four new sectors had flat readings - a continuation of the long-running pattern, dating back to last June, which had been interrupted only one other time, in the week ended Feb. 1.

Even including the latest week's results, positive sector breakdowns have now still been seen in 34 of the past 36 weeks, going back to June, and on an even longer-term basis, in 55 weeks out of the past 66, 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.

Auto sector worst for week

In the most recent week, the automobiles sector was the worst-performing industry group, falling 1.34% to take over as the cellar-dweller from diversified financials, which had lost an index-worst 0.50% in the previous week.

Health care facilities (down 0.85%), cable/DBS operators (down 0.81%), paper and forest products (down 0.73%) and technology (down 0.70%) rounded out the latest week's Bottom Five list of worst-performing sectors. It was a marked comedown for both health care facilities and the cablers, as each had been among the Top Five best-performing sectors in the previous week - facilities for a second straight time - with returns of 0.75% and 0.70%, respectively.

Life/health insurance best in week

On the upside, life-health insurers returned 0.83% to take over the top spot from aerospace & defense, which had led all sectors the previous week with a 0.93% return. The insurers' index-best performance was in sharp contrast to its showing the week before, when it landed in the Bottom Five with an 0.14% loss - one of only two sectors actually finishing in the red that week.

Gas utilities, (up 0.64%), property/casualty insurers (up 0.62%), pipelines (up 0.37%) and food and drug retailers (up 0.34%) rounded out the latest week's Top Five list. The food and drug retailers had been among the Bottom Five the week before, when it returned just 0.14% - one of the smallest positive returns of any sector that week.

Consumer non-cyclicals/other tops for year

On a year-to-date basis, the consumer non-cyclicals/other sector remains the top performer, although its 2007 return fell to 4.21% from 4.50% the week before.

Entertainment moved up four notches to assume second place, versus sixth place the week before, even though its cumulative return fell to 3.53% from 3.69%; all of the previous week's leaders above entertainment saw considerably larger week-over-week drops in their year-to-date returns. The previous week's second-place finisher, paper and forest products, fell to third place and made this week's Bottom Five list as its cumulative return plunged to 3.35% from 4.11% previously.

Industrial products, not among the leaders previously, broke into fourth place with a 3.28% return, down from 3.40%. It narrowly edged out retail, which fell one notch to fifth place from fourth the week before with a 3.27% year-to-date return, down from 3.81%. Retail, in turn, stayed narrowly ahead of sixth-place finisher metals and mining, also not among the previous week's leaders; its 3.26% cumulative return was unchanged from the previous week.

Diversified financials year's weakest

Among the downsiders, the same names held sway as the weakest performers so far this year, although there were some position changes at the back of the pack. The previous week's two weakest sectors, diversified financials and banks, stayed that way in the most recent week, with diversified financials' index-worst reading virtually unchanged at 0.52%. Second-weakest sector banks' return fell to 0.67% from 0.90% previously.

Other telecom's standing deteriorated to third-weakest from fourth previously, as its return fell to 0.79% from 1.28%. Likewise, other health care worsened to fourth-weakest from fifth, as its year-to-date return fell to 0.92% from 1.48% the week before. Alone among the weakest sectors, real estate showed relative improvement, its 2007 return so far rising to 1.36% from 1.06%. That improved the sector's position from third-worst the previous week to fifth-worst in the week ended Thursday.

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