B of A High Yield Broad Market Index up 0.02% on week, breaks long losing streak; 2007 return edges up to 2.52%

By Paul Deckelman

New York, July 23 - The Banc of America Securities High Yield Broad Market Index inched up 0.02% in the week ended Thursday, barely breaking a string of seven straight weekly losses, including its 0.40% loss in the previous week ended July 12.

Those seven consecutive losing weeks had followed eight straight weekly advances before that, showing the volatile, streaky nature of the index so far this year. After having begun the year with two straight months of strong gains, the index fell into a period of choppiness seen roughly from late February through early April, but after that had again been showing consistent strength, until the beginning of the recent downturn in late May.

Gains have now been seen in 18 weeks out of the 29 since the start of 2007, against 11 losses - part of a larger pattern of strength that the index has shown since late June of last year, with gains recorded in 44 weeks out of 56 during that stretch, according to a Prospect News analysis of the B of A data. However, the momentum, at least through the July 12 week, seems to have shifted to the downside.

The index's year-to-date return rose slightly to 2.52% in the most recent week, up from the 2.50% seen in the week ended July 12, but still well below its 2007 peak level of 4.72% seen the week ended May 24. The low for the year was 0.25%, seen in the first week of the year, ended Jan. 4. The index finished 2006 with an 11.89% return.

Even though the index managed a positive overall return this past week, its average spread over Treasuries, which in the prior week had ballooned to 326 basis points from 312 bps in the week ended July 5, continued to widen to 337 bps - its new high for the year, eclipsing the 326 bps previous peak level, set the week before, as noted.

The index had begun the year in a spread-tightening mode, continuing the trend that had been in effect through 2006, when spreads had begun that year at 384 bps off Treasuries and had ended it at 305 bps over. After continuing to come in for the first two months of this year, spreads had proceeded to rise over the next few weeks before resuming their tightening trend, which brought them down to the low for the year of 263 bps seen in the week ended June 7, which was also the record tight level since B of A began compiling the index. From that nadir, spreads began to gradually climb back up over the next six weeks, to stand at current levels.

The index's yield to worst, which previously had risen to 8.31% from 8.19% the week before, moved further upward, to 8.33%, in the most recent week.

The index tracked 1,646 issues of $100 million or more, up from 1,645 issues the week before, while its overall market value accordingly firmed to $631.9 billion from $631.6 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 back 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 34.44% of the index - had the best return, up 0.10%, followed by the uppermost tier of the three - those issues rated BB and BB+, comprising 21.59% of the index - which gained 0.06%. The middle tier - those issues rated BB-, B+ and B, making up 43.97% of the index - brought up the rear with a 0.06% loss.

That was a departure from the pattern that had been seen over the previous two weeks, including the week ended July 12, with all three credit tiers showing losses for yet another week, in which the middle tier had the smallest loss, at 0.32%, the upper tier lost 0.33%, and the lower tier lost 0.55%.

It also broke the recent pattern of lower-tier weakness - up through that previous week, the lower tier had lived up to its name and had been on the bottom for four straight weeks. In moving back to the top, the lower tier actually reverts to the pattern that was in effect for a long time before those previous four weeks, during which it had dominated; before embarking on that month-long losing streak, the lowest tier had been on top for six consecutive weeks, through the week ended June 14. But even including the results of those past four weeks, as well as its latest index-best showing, the bottom tier has still been dominant now in 11 weeks out of the last 16 and over the longer term, in 24 weeks out of the prior 32.

B of A's analysts accordingly asserted that the low-quality CCC-rated paper, which largely, but not totally, comprises the bottom tier, "outperformed" the rest of the index, posting a 0.16% return for the week. This was followed by the BB credits (the upper tier partially, but not completely, overlaps this subset), which turned in a flat 0.00% return, neither a loss nor a gain, while the B-rated paper - similar to, but not exactly the same as the middle tier - was seen to have underperformed, with a 0.04% loss.

Primary issuance again "remained muted," the analysts said, with $727 million having come to market in the week ended Friday, off from the previous week's already sedate $972.5 million. The analysts calculated that year-to-date new issuance stood at $128.4 billion at week's end. Issuance totaled a record $179.3 billion in 2006, according to B of A's calculations.

Credit spreads widen

The analysts noted that while the average spread on the index versus comparable Treasury issues widened by 11 bps, to 337 bps, as noted, at the same time, risk-free [i.e., Treasury] rates declined, with the yield on the 10-year government benchmark issue tightening, also by 11 bps at the end of the week, to 5.01%, "counteracting the effect of rising spreads on total returns," they said.

Weekly reporting high-yield mutual funds, as measured by AMG Data Services, showed a $194.1 million outflow in the week ended last Wednesday, back to back with the previous $47.5 million cash exodus from the funds. The analysts calculated that year-to-date cumulative outflows now stand at $227.5 million, versus the prior week's $33.4 million deficit for the year. The average weekly outflow increased to $8 million from a $1 million loss the week before.

Positive sectors rebound, barely

In the latest week, 20 of the 42 industry sectors into which B of A divides its high-yield universe were in positive territory, 19 were in negative territory - some sectors on both sides of the divide just barely so - and there were three 0.00% readings, neither a loss nor a gain, although it should be noted that those latter sectors, credit insurance, leisure equipment and products, and water utilities, 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 breaks a six-week period in which the sector breakdown had been negative, including the previous week, which saw 32 sectors in the red, seven in the black and the three new empty sectors with flat 0.00% readings.

That six-week stretch (bracketed by two other weeks, including this past week, which saw the positive/negative sector split virtually even, with only a slight edge to the positive side) represents a sharp deterioration from the previous pattern of solidly positive sector breakdowns that up through the week ended May 24 had been seen in 45 out of the previous 48 weeks, going back to last June, and on an even longer-term basis, in 66 weeks out of the prior 78, encompassing virtually all of this year so far up to that May 24 point, as well as last year, and in fact extending all the way back to late 2005.

Consumer non-cyclical/other week's best sector

The consumer non-cyclical/other sector had the week's best return, 0.64%, supplanting the banking sector, which had been the top-spotter the previous week with a 0.43% gain.

Life/health insurance (up 0.57%), cable/DBS operators (up 0.51%), chemicals (up 0.48%) - likely given a boost on the news that Dutch chemical concern Basell AF will acquire Lyondell Chemical Co., which caused the latter's bonds to firm smartly - and health care services (up 0.45%) rounded out the latest week's Top Five list of the best-performing sectors. It was the second straight week in that select circle for the life/health insurers, who were also there in the week ended July 12 with a 0.28% gain.

Wireline telecom week's worst

On the downside, the wireline telecommunications operators (down 0.68%) had the week's biggest loss, taking over from the previous week's cellar-dwellers, the insurance brokers, who had been down a whopping 1.55% in that July 12 week. But the brokers remained among the Bottom Five worst-performing sectors in the latest week, their second straight week there, with a 0.64% loss.

Apart from the insurance brokers, the latest week's Bottom Five was dominated by the telecom issuers; besides the wireline operators, as noted, other laggards included diversified telecom (down 0.56%), wireless telecom (down 0.38%) and other telecom, down 0.34%. It was the second straight week there, and third week out of the last four, for other telecom, which had also been among the Bottom Five in the July 12 week with a 1.16% loss.

Health care equipment and services tops for year

On a year-to-date basis, with 29 weeks now in the books, the health care equipment and services sector hung onto the top position, its cumulative return rising to 6.08% from 5.92%.

Industrial products remained second-strongest on a cumulative basis, although its return fell to 5.41% from 5.61% the week before.

Health care services, helped by its Top Five weekly showing, remained Number Three in the most recent week, as its 2007 return increased to 5.18% from 4.71% previously.

Metals and mining, previously locked in a fourth-place tie with wireless telecom at 4.49%, took sole possession of fourth as its year-to-date return rose to 4.75%, while Bottom Fiver wireless telecom tumbled out of leadership contention as its return skidded down to 4.09%.

Transportation, previously in sixth place with a 4.44% cumulative return, moved up one notch to fifth, at 4.60%, while Top Fiver chemicals, not previously among the leaders, grabbed the sixth spot with a 4.57% return for the year, up from 4.07% previously.

Insurance brokers year's worst

On the downside, the insurance brokers, dragged down by a second straight Bottom Five weekly finish, clearly remained the year's worst-performing sector as well, mired deep in the dungeon at negative 3.06%, a deterioration from the sector's 2.43% cumulative loss the week before.

Fellow repeat Bottom Fiver other telecom remained the second-worst performer for the year, its 2007 loss widening to 1.84% from 1.50%.

Diversified financials remained the third-worst sector on a year-to-date basis, its cumulative loss increasing to 1.13% from 0.94%.

Consumer durables/non-auto, which in the previous week had fallen a notch to fourth-worst, with a 0.64% loss, remained in that position in the latest week, although its return for the year improved slightly to a 0.55% loss.

Other health care, which in the previous week had traded places with the consumer durables/non-auto group, improving to only fifth-worst with a 0.01% cumulative gain for the year with the help of a weekly Top Five-worthy showing, remained fifth-worst, its return edging down to a flat 0.00%.

Excluding the three new sectors, which are also technically at that same 0.00% for the year because they have no bonds trading in them, the technology sector, not previously among the worst performers, tumbled to sixth-worst as its year-to-date return fell to 1.26% from 1.44%, while the life/health insurers, previously sixth-worst, escaped from the worst performers altogether as their return for the year, helped by a second straight week among the Top Five, improved to 1.98% from 1.40% before.

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