B of A High Yield Broad Market Index up 0.41% on week, year-to-date return grows to new high at 6.35%

By Paul Deckelman

New York, Sept. 11 - The Banc of America Securities High Yield Broad Market Index rose 0.41% in the week ended Thursday, virtually replicating its 0.42% gain in the previous week, ended Aug. 31. It was the 11th consecutive week in which the index has advanced, extending a strengthening trend that started in late June.

The index has mostly been on the upside this year, except for a period of choppiness that ran from mid-May into late June.

With its upward momentum continuing to grow, the index has now shown positive results in 19 weeks out of the last 26 and, over the longer term, in 32 weeks out of the last 42, 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 6.35% - a new high for the year - up from 5.92% the week before, the previous 2006 high, and it remains well above 2005's total 2.1% return.

The index's spread over Treasuries, which in the previous week grew slightly, to 368 basis points from 365 bps the week before, contracted to 358 bps in the most recent week. Its yield to worst, which had tightened to 8.42% from 8.47% the week before, continued to narrow, to 8.37% in the most recent week.

The index tracked 1,674 issues of $100 million or more, down from 1,679 issues the week before, although its overall market value grew to $589.3 billion from $587.1 billion the previous week. B of A sees the index as a reliable proxy for the nearly $800 billion high-yield universe.

High-quality bonds still best

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 33.20% of the index - had the best return, 0.48%. This was followed by both the uppermost tier - those issues rated BB and BB+, comprising 23.90% of the index - and the middle tier - those issues rated BB-, B+ and B, making up 42.91% of the index - which were each up 0.37% on the week.

That broke the recent pattern of the middle tier leading the way, as it had in three weeks out of the prior four, with the lower tier lagging behind, as it had in the previous two weeks. In the week ended Aug. 31, the middle tier returned 0.47%, followed by the upper tier at 0.41% and the lower tier at 0.35%.

As they had the previous week, B of A analysts declared that overall the HY Broad Market Index "had a strong week" in posting its 0.41% total return. They noted that "excess return performance was even better," as the index generated 60 bps in excess return as the average spread on the index compressed by 10 bps.

The analysts also noted, however, that risk-free rates increased during the week, as the yield on the 10-year Treasury climbed by 6 bps to 4.79%, "counteracting somewhat the effect of spread compression on total returns."

Primary market activity, they said, "was still muted" following the seasonal slowdown around the Labor Day weekend, with one issue of $160 million having priced in the week ended Friday, although that was an increase from the week before, during which no new debt issues priced.

Year-to-date issuance rose to $99.5 billion from the prior week's level of $99.3 billion, according to B of A's calculations.

The analysts said that weekly reporting high-yield mutual funds showed an inflow of $107 million in the week ended Wednesday, according to AMG Data Services. That followed the previous week's outflow of $153 million. The latest inflow brought the year-to-date net outflow down to $3 billion from $3.1 billion previously, with an average weekly outflow of $83 million, compared to the prior week's $89 million.

In the latest week, 35 of the 42 industrial sectors into which B of A divides its high-yield universe were in positive territory, with just one - life/health insurance - showing a loss. Six sectors are new sectors created in the sector restructuring that took place at the end of March and do not as yet have any issues represented in them.

The week before, the index had a 34-2-6 breakdown. The strongly positive trend over the past 10 weeks in the sector breakdown represents a return to the pattern of broad-based strength seen in effect for most of this year, except for the choppy weeks in May and June. Solidly positive breakdowns have now been seen in 32 weeks out of the past 41.

Property/casualty insurers tops for week

Property/casualty insurers and the automotive sector finished first and second this past week, reversing the order of the top finishers in the prior week, ended Aug. 31.

The insurers returned 1.50% in supplanting the autos in the top spot. It was the second consecutive strong finish for the sector, which as noted, was second strongest in the previous week, with a 0.88% gain. That recent strength represents a radical departure from the sector's previous weak performance, which had seen it land among the Bottom Five worst-performing sectors in four consecutive weeks, and in five weeks out of six in the period through the week ended Aug. 24.

Autos performance 'stood out'

The automotive sector, as noted, was the second-strongest in the most recent week, with a 1.30% return, on top of its index-best 1.15% finish in the previous week. It was the fourth week in the last six in which the autos were among the Top Five best-performing sectors, and the fifth week in the last seven.

The autos continued to take an upside ride on gains in the bonds of Ford Motor Co. and its Ford Motor Credit Co. financing unit, spurred by the surprise announcement at mid-week that the troubled No. 2 domestic carmaker's chairman, William Clay Ford Jr., would relinquish the chief executive officer's post, which he has also held for the past five years. He will turn over day-to-day control of the company, founded a century ago by his great-grandfather Henry Ford, to an outsider to the auto industry - long-time Boeing Co. senior executive Alan Mulally.

Also helping to give the sector a jump-start was Ford arch-rival General Motors Corp.'s announcement that it was instituting a much stronger powertrain warranty program - five years or 100,000 miles - looking to attract buyers by means other than offering revenue-destructive price incentives.

Auto parts makers meantime continued to firm in the wake of the prior week's news that Metaldyne Corp. will be acquired in a $1.2 billion deal by Asahi Tec Corp.

The analysts noted that the auto sector - the single largest component in the HY Broad Market Index, at 14.36% - "stood out," as it continued to solidly outperform the non-automotive 85.64% remainder of the index, which returned 0.26% on the week.

Autos, they added, generated 148 bps in excess return this past week, versus the 45 bps generated by the remaining portion of the index.

The autos also continued to substantially outpace the non-autos on a year-to-date basis, posting cumulative returns of 17.58% versus 4.76%, respectively.

Gas utilities (up 0.80%), other health care (up 0.75%) and pharmaceuticals (up 0.67%) rounded out the latest week's Top Five list. It was a solid rebound for the other health care sector, which in the week ended Aug. 31 had been one of only two sectors to show a loss, down 0.01% on the week. The gas utilities group has meantime now been in the Top Five in two weeks out of the last three.

Life/health insurers week's worst

On the downside, only one sector - life/health insurers, as mentioned - actually posted a loss for the week, when the group was off 0.08%. It supplanted consumer non-cyclical/other, which had lost 0.49% the week before, as the latest week's cellar-dweller. In that previous week, the life/health insurers had actually been in the Top Five for the second time in three weeks, with a 0.83% return.

With only one sector actually finishing in the red, the latest week's Bottom Five list was rounded out by sectors with much smaller returns than their positive peers. These were banks (up 0.02%), health care services (up 0.07%), and the entertainment and wireline telecommunications sectors, each of which rose 0.08% on the week.

Wireline telecom has now been among the Bottom Five in two weeks out of the last three.

Autos still tops for year

On a year-to-date basis, the automobiles sector clearly remains the 2006 cumulative returns champion, its Top Five return in the most recent week extending its already big bulge to 17.58%, as noted, from the previous week's 16.08%.

Cable/DBS strengthened its hold on second place, as its year-to-date return increased to 8.85% from 8.42%, while recently close rival entertainment failed to keep pace, as its 2006 return only rose to 8.37% from 8.28%, a small enough gain to land in the Bottom Five. Health care equipment broke the previous week's virtual tie with industrial products at 7.68% to move into fourth place with an 8.19% return, while industrial products only rose to 8.06% in the latest week.

Health care facilities worst for year

On the downside, the health care facilities sector trimmed its 2006 loss to 3.07% from 3.64% the week before, but it was still by far the worst cumulative performer and the only sector in the red on a year-to-date basis.

The life/health insurers, the week's only losing sector as noted, fell to a 2006 return of 1.88% from 1.96% the week before. Excluding the flat year-to-date readings on paper of the six sectors in which no bonds yet trade, the life/health insurers are still the second-weakest sector in the index on a year-to-date basis.

Consumer durables/non-auto fell to third-weakest in the index, even as its yearly return grew to 2.44% from 2.28% previously, as the prior third-place holder, property/casualty insurers, improved out of contention, its index-best weekly showing lifting its year-to-date return to 3.77% from 2.23%.

Bottom Fiver health care services' return for the year so far grew only slightly, to 2.58%, while oil and gas firmed more substantially to 2.80%, each up from 2.50% the week before.

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