B of A High Yield Broad Market Index up 0.55% on week; 2007 return grows to 3.39%

By Paul Deckelman

New York, April 23 - The Banc of America Securities High Yield Broad Market Index returned 0.55% in the week ended Thursday, on top of a 0.20% gain in the previous week ended April 12. It was the third consecutive weekly advance for the index, which seems to be trying to break away from its recent pattern of choppiness, seen roughly over the past two months, and return to the more consistent strength that it showed for some weeks at the beginning of the year.

Including the latest week's results, gains have now been seen in 12 weeks out of the 16 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 in 38 weeks out of 43 during that stretch. That, in turn, was part of a still-larger trend of positive returns in evidence 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 increased to 3.39% in the most recent week, a new high for the year so far, up from the previous peak level of 2.82% seen the week before. 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 300 basis points from 311 bps previously, continued to tighten, to 298 bps, in a modest return to the spread-tightening trend that had been seen throughout last year, when high-yield spreads started at 384 bps off Treasuries and ended at 305 bps over. That trend had pretty much continued into the first two months of the new year, until the recent period of turbulence, which included one week - ended March 1 - in which spreads ballooned out by an astonishing 34 bps.

Though below their peak 2007 level of 313 bps, seen in the week ended March 15, spreads still remain well above their mid-February low for the year of 269 bps, having surrendered and not yet regained most of the spread-tightening gains that were achieved in the first weeks of the year.

The index's yield to worst, which previously held unchanged from the week before at 7.72%, came in to 7.62% in the most recent week.

The index tracked 1,648 issues of $100 million or more, down from 1,658 issues the week before, although its overall market value rose to $$644.4 billion from $642.6 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.

Lowest credit tier still on top

On a credit-quality basis, the lowest of the three credit tiers into which B of A divides the HY Broad Market Index - those issues rated B- and below, accounting for 34.03% of the index - had the best return, at 0.69%, followed by the uppermost tier - those issues rated BB and BB+, comprising 21.68% of the index - which returned 0.48%, with the middle tier - those issues rated BB-, B+ and B, making up 44.28% of the index - just a step behind, at 0.47%.

In the week ended April 12, the lower tier had returned 0.30%, the middle tier 0.19% and the upper tier 0.05% - the second consecutive week in which the tiers had finished in that particular order, as well as the fourth time in the previous six weeks, and the sixth time in the prior nine weeks.

The lowest tier has now been on top in five weeks out of the last seven and in 16 weeks out of the last 19. However, the latest week's finish represented a departure from the recent patterns shown by the other two tiers, with the middle tier up through the previous April 12 week having lived up to its name and been sandwiched between the other two tiers in four weeks out of the previous six and 10 weeks out of the last 14, while the upper tier up through the April 12 week had been at the bottom of the pile for four straight weeks, in five weeks out of the previous six and in 11 weeks out of the prior 14.

Accordingly, B of A's analysts said that lower-quality paper once again "outperformed" the rest of the index in the latest week, with CCC-rated paper, which largely, but not totally, comprises the bottom tier, having returned 0.87%, while B-rated paper - similar to, but not exactly the same as the middle tier - returning 0.50%, and the higher-rated BB credits (the upper tier partially, but not completely, overlaps this subset) having come in with a 0.48% return.

Primary issuance "moderated" in the latest week, the analysts said, with some $1.4 billion of new bonds having priced, down from $2 billion in the previous week. The analysts calculate year-to-date new issuance at $60.6 billion, up from $59.2 billion previously. Issuance totaled a record $179.3 billion in 2006, according to B of A's calculations.

Tightened Treasuries the key factor

The analysts further observed that "the primary driver behind the strong performance was a decline in risk-free rates" - i.e., Treasuries - with the yield on the 10-year government paper tightening by 7 bps to 4.66%. At the same time, they added, average high-yield spreads "declined modestly," tightening 2 bps on the week to 298 bps, as noted.

Weekly reporting high-yield mutual funds, as measured by AMG Data Services, showed a $33 million net inflow in the week ended Wednesday, in contrast to the $83 million net outflow seen the week before in the most recent week. Year-to-date flows now stand at some $1 billion, for an average weekly flow of $64 million, the analysts said.

In the latest week, 38 of the 42 industry sectors into which B of A divides its high-yield universe were in positive territory, no sectors were in negative territory, and four were showing flat 0.00% readings, neither a loss nor a gain, although it should be noted that 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.

In the previous week, the breakdown was 28 sectors in the black, 10 in the red and the four with flat readings, continuing the pattern of solidly positive sector breakdowns that has now been seen in 40 out of the past 43 weeks, going back to last June, and on an even longer-term basis, in 61 weeks out of the past 73, encompassing virtually all of this year so far and last year and extending all the way back to late 2005.

Diversified telecom tops for week

Diversified telecommunications was the week's best-performing sector, returning 0.92% to take the top spot away from the previous week's champion, entertainment, which had returned 0.64% in the week ended April 12, its second week among the Top Five best-performing sectors in the prior three.

Health care services (up 0.89%), food, beverages and tobacco (up 0.87%), food and drug retailers (up 0.78%) and the consumer durables/non-auto and paper and forest products sectors (each up 0.72%) rounded out the latest week's Top Five list.

It was the second straight week in that select circle for the consumer durables/non-auto sector, which was also there in the April 12 week, when it returned 0.42%, breaking a string of five straight weeks during which the sector was among the Bottom Five worst-performing industry groups, reflecting the distress among homebuilders, a key component. Food and drug retailers showed a solid rebound, after having been in the Bottom Five the previous week, with a 0.10% loss.

Consumer non-cyclicals/other worst for week

On the downside, with no sectors actually showing losses this past week, the Bottom Five was comprised solely of sectors that simply had smaller positive returns than all of the others. The weakest among them was consumer non-cyclicals/other, which returned just 0.11%, taking over as the cellar-dweller from other telecommunications, which had posted an index-worst 0.26% loss the week before. It was a stark comedown for the consumer non-cyclicals/other grouping, which the week before had been among the Top Five with a 0.42% return.

The latest week's Bottom Five list was rounded out by aerospace and defense (up 0.15%), textile and apparel (up 0.21%), entertainment (up 0.25%) and gas utilities (up 0.26%). Entertainment, as noted, had led all sectors the week before, but the volatile sector, while having been among the Top Five in several recent weeks, as noted, has also now been in the Bottom Five in two weeks out of the last three.

Retail now strongest sector for year

On a year-to-date basis, with 16 weeks now in the books, the retailing sector has taken over as the strongest grouping, its 2007 return rising to 5.30% from 4.70% the week before, when it was the Number-Two sector.

The previous leader, consumer non-cyclicals/other, fell to second place, dragged down by its Bottom Five weekly finish, as its cumulative return only edged up to 5.18% from 5.06% previously.

Industrial products moved up one notch from fourth place to third, its return growing to 5.13% from 4.64%. Metals and mining likewise moved up one position, from fifth place to fourth, now returning an even 5% from 4.57%.

Entertainment, previously in third place, was pulled down to fifth place by its weekly Bottom Five finish, its return for the year moving up to 4.95% from 4.68% before. Weekly Top Fiver health care services, not previously among the leaders, also moved up to 4.95% to tie for fifth, from 4.02%. Health care equipment and services stayed in sixth place at 4.86%, up from 4.50%.

Diversified financials still year's worst

On the downside, diversified financials remained the index's worst laggard, returning just 0.75% up from 0.16% previously.

Consumer durables/non-auto, despite its Top Five finish for the week, remained second-weakest, although its cumulative return moved up to 1.13% from 0.40%. Banks remained third-worst at 1.45%, up from 0.57% previously. Other health care, previously only fifth-weakest, fell to fourth-weakest at 1.66%, up from 1.20%, while other telecommunications improved one notch to just fifth-weakest from fourth, as its return grew to 1.83% from 1.12%. Life/health insurers remained sixth-weakest at 2.43%, up from 1.88%.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.