B of A High Yield Broad Market index down 0.43% on week; 2008 return falls to 1.43%

By Paul Deckelman

New York, June 2 - The Banc of America Securities High Yield index lost 0.43% in the week ended Friday, after having been unchanged in the previous week ended May 23. Although the index has still posted eight gains in the last 11 weeks dating back to mid-March, it has recently been choppy; after seven straight weeks of advance, the index over the last four weeks has seen just one more gain, overshadowed by two weeks of losses, including the most recent week, as well as the previous week's flat 0.00% reading - neither a gain or a loss.

Even so, the stronger trend seen since mid-March has represented a radical departure from the pattern of mostly weakness that had been seen before that since the start of the year. The index fell for the first three weeks of 2008, blipped back upward for two weeks, then headed back downward for three more weeks. After that, it alternated stretches of weakness and strength. But following two weeks in early March in which losses were recorded, the next seven weeks were all to the upside, after which the more inconsistent, choppy pattern was seen.

With 22 weeks now in the books, weekly gains still hold a slight edge over losses, with 11 of the former against 10 of the latter, plus the one flat 0.00% reading.

On a year-to-date basis, the index's return fell to 1.43% in the week ended Friday, after two straight weeks at 1.86%, its high point for 2008 so far. The year-to-date return has only been in the black since late April after having spent the first 16 weeks of 2008 languishing in the red; the index hit its low point, a 4.15% cumulative loss, in the week ended March 14, after which it began to turn back upward.

In 2007, the index compiled a final cumulative return of 1.85%, with 32 weekly gains against 20 losses, swinging between a high of 4.72% seen about a year ago and a low of a 0.25% loss last August. That 2007 return, in turn, was far smaller than the index's robust 2006 finish of 11.89%.

Spread tightens, yield-to-worst widens

B of A analysts said that the index's average spread over Treasuries was 672 basis points, having tightened from 682 bps the week before despite the index's lagging performance, reflecting the more significant rise in Treasury yields in that time. The latest week's spread is the new tight point for the year, eclipsing the old mark of 677 bps seen in the week ended May 2, and is in considerably from the 862 bps level seen in the March 14 week, the wide point for 2008 so far. Spreads so far this year have been notably wider than the 613 bps mark at which the index ended 2007, as well as its 2007 wide point of 621 bps.

The index's yield to worst, after having risen a little the week before to 10.02% from 9.98% seen in the week ended May 16 - its low for 2008 so far - widened to 10.16% in the latest week. However, yield to worst remains well below its high point for the year, 11.16%, seen in the March 14 week.

The index tracked 1,572 issues of $100 million or more, up from 1,570 issues the week before, while its overall market value fell to $610.4 billion from $614.9 billion previously; however, the total valuation remains above the 2007 year-end total of $595.3 billion, which was reached on 1,568 issues - a mark it only matched and surpassed for the first time this year in the May 2 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.

Lower tier back on top

On a credit-quality basis, all three credit tiers into which B of A divides the HY Broad Market index posted losses in the latest week - the first time that's happened since the March 14 week. The lowest tier - those issues rated B- and below, accounting for 35.92% of the index - was the best performer, relatively speaking, by posting the smallest loss of the three, 0.23%. That was followed by the uppermost tier - those issues rated BB and BB+, comprising 20.21% of the index - which lost 0.41%. The middle tier - those issues rated BB-, B+ and B, making up 43.87% of the index - brought up the rear with a loss of 0.59%. In the week ended May 23, the three tiers had finished very tightly spaced, all within a few hundredths of a percentage point of one another, with the upper tier rising 0.07%, the middle tier gaining 0.04% and the lower tier losing 0.07%.

The latest week was the seventh week in the last 10 in which the lowest tier has been on top, although it also represents a continuation of the recent move away from the pattern of upper-tier weakness that has been seen throughout the spring; through the May 16 week, the top tier was anything but that, finishing at the bottom of the pile in six weeks out of the previous eight going back to mid-March. The latest week also was the first week in the last seven in which the middle tier did not live up to its name and end up sandwiched between the other two tiers.

By the ratings categories for the three major baskets of credits into which B of A divides the index (excluding the relatively small group of issues that are not rated), all three categories remained fairly tightly spaced, though all showed losses for the first time since early March. CCC-rated paper - which includes many, but not all, of the lower-tier credits - was down 0.40%, BB-rated bonds - the upper tier partially, but not completely, overlaps this subset - were off by 0.42%, and B-rated debt - similar to, but not exactly the same as the middle tier - lost 0.45%.

The analysts noted that four new issues were priced last week, totaling $1.2 billion. On a year-to-date basis, 55 issues have priced, totaling $28.8 billion.

The analysts also noted that weekly reporting high-yield mutual funds saw an inflow of $25.6 million in the week ended Wednesday, according to statistics compiled by AMG Data Services. That ninth straight weekly inflow followed the $191 million inflow seen in the previous week. On a year-to-date basis, net inflows among the weekly reporters now total approximately $1.61 billion.

Negative sectors regain control

In the latest week, 31 of the 40 industry sectors into which B of A divides its high-yield universe were in negative territory, seven sectors had positive returns and two sectors had flat 0.00% readings, neither a loss nor a gain. However, it should be noted that these latter sectors - credit insurance and leisure equipment and products - are relatively new sectors created in the sector restructuring that took place in 2006, but even at this relatively late date they still do not have any issues represented in them. The latest week's breakdown was in sharp contrast to the previous week, when 23 sectors finished in the black, 15 sectors were in the red and the two newer sectors had flat readings.

It also represented a clear break from the recent pattern of mostly wins by the positive sectors, which through the prior week ended May 23 had seen positive breakdowns - usually overwhelmingly so - in nine weeks out of the previous ten. That trend, in turn, has been a stark departure from the hugely negative trend that had been seen for most of the year before that. Even counting the latest week's negative sector breakdown, sectors showing gains continue to hold an edge on the year to date, with 12 positive weeks versus 10 negative ones in the 22 weeks since the start of the year.

Automobiles are week's worst sector

The automobile sector was the week's single-worst performing sector, losing 1.89% to take over as the cellar-dweller from the previous week's big loser, other telecommunications, which had lost 0.96% in the week ended May 23. It was the second straight week in which the autos had finished among the Bottom Five worst-performing sectors; the group lost 0.94% the week before.

Banks (down 1.77%), life/health insurance (down 1.28%), diversified financials (down 0.95%) and electric utilities (down 0.82%) rounded out the latest week's Bottom Five. It was a stunning reversal for the life/health insurers, who had posted the biggest gain of any sector the previous week, up 1.44% However, the volatile sector has recently swung wildly between the Bottom Five and the Top Five listing of the index's best-performing industry groups. While that previous week's index-best return marked the second time in three weeks that it made the Top Five, the life/health insurers, counting the latest week's loss, have also now been among the Bottom Five in two weeks out of the last three and in five weeks out of the last seven.

Insurance brokers week's best sector

On the upside, the insurance brokers' sector had an index-best return of 0.37% in the latest week, grabbing the top spot from the previous week's champion, which was the life/health insurers, as already noted. It was the third straight week the insurance brokers finished in the Top Five; they also made the elite group with gains of 0.86% in the May 23 week and 1.40% in the May 16 week.

Consumer durables/non-auto (up 0.34%, likely pushed up by the strong gains in homebuilder Standard Pacific Corp.'s bonds on financing news), cable/DBS (up 0.29%), other telecom (up 0.20%) and health-care facilities (up 0.18%) rounded out the latest week's Top Five list. As noted, the other telecom sector had been the previous week's worst finisher.

Banking still top 2008 sector

Banking remained clearly the best performer on a year-to-date basis, despite its big loss on the week and its ranking within the Bottom Five. Its return for the year declined to 8.59% from 10.55% previously, but that was still good enough to stay on top. Top Five finisher health-care facilities jumped all the way up to second-strongest from sixth-place previously, as its return for the year rose to 5.02% from 4.83%. That pushed the previous Number-Two, pipelines, down a notch to third-best, while its cumulative return retreated to an even 5.00% from 5.26%.

Health-care equipment and services remained the fourth-strongest finisher for the year so far, although its return slipped to 4.75% from 5.05% the week before. Top Fiver consumer durables/non-auto, not previously among the leaders, jumped to fifth-best, its cumulative return growing to 4.71% from 4.36%. Metals and mining - also not among the previous week's leaders - grabbed sixth place, even as its 2008 return shrank to 4.44% from 4.75% previously. The latter two sectors vaulted onto the leaderboard over electric utilities - previously third-best, which tumbled from leadership contention as its weekly Bottom Five showing dropped its 2008 return to 4.36% from 5.22% - and pharmaceuticals, formerly fifth-best but now also ousted from among the leaders as its total return declined to 4.41% from 4.90%.

Life/health insurance now worst 2008 sector

On the downside, life/health insurance was back in its old spot as worst 2008 performer so far - it had temporarily relinquished that dubious honor the week before, actually moving up two notches to only third-worst, but its Bottom Five-worthy weekly loss widened its year-to-date deficit to 5.04% from 3.81% previously and caused it to plunge back to the absolute bottom. The previous week's worst year-to-date laggard, advertising-dependent media, improved, relatively speaking, climbing to merely second-worst with a cumulative loss of 5.03%, widening from 4.76% of red ink previously. Gaming, lodging and leisure, previously the second-worst 2008 performer, also moved up one notch by default to just third-worst, although its year-to-date loss did widen to 4.38% from 4.20% before.

The insurance brokers, despite their index-best weekly showing, remained fourth-worst on the year, although the sector's loss for the year narrowed to 2.44% from 2.80%. Paper and forest products remained as fifth-worst, although that sector's cumulative loss also declined to 1.70% from 1.81% before. Diversified telecom was once again the sixth-weakest sector, its loss for the year widening out to 1.58% from 0.94% the week before.

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