B of A High Yield Broad Market Index up 0.12% on week; 2007 return rises to 1.91%

By Paul Deckelman

New York, Dec. 11 - The Banc of America Securities High Yield Broad Market Index rose 0.12% in the week ended Friday, its second straight weekly gain, following the 1.24% jump seen in the previous week ended Nov. 30. The two weeks of gains, in turn, followed four consecutive weeks of decline.

Although the most recent trend has been largely negative, the index has still now risen in 11 weeks out of the 16 since it began turning upward in the week ended Aug. 23 following a lengthy summer slide. Gains have now been seen in 30 weeks out of the 49 since the start of 2007, against 19 losses - part of a larger pattern of strength that the index has shown since late June of last year; gains have been recorded in 56 weeks out of 76 during that stretch, versus 20 losses, according to a Prospect News analysis of the B of A data.

But while advances have been seen in most weeks this year, much of that occurred in the first half of the year, when there was steady week-to-week strength. The momentum shifted to the downside around mid-year and stayed there for some weeks, before the index started to move back up in late August, through September and into October. November, however, saw a return to negativity, although that has been blunted over the past two weeks. In the last 28 weeks, there have now been 13 positive returns and 15 negative returns.

On a year-to-date basis, the index's return rose to 1.91% from 1.79% the previous week but remains well down from its 2006 finish at 11.89%.

Showing its volatile, streaky nature, the index began 2007 with two straight months of strong gains, followed by a period of choppiness seen roughly from late February through early April, but after that had again showed consistent strength for a number of weeks. The year-to-date return peaked at 4.72% in the week ended May 24, moved down subsequently and actually fell into the red, bottoming at a 0.25% cumulative loss during the week ended Aug. 16. It started heading back upward in late August and subsequent months - only to move back downward through most of November, but then it closed out the month with a robust gain and started December off with a modest advance.

Spread continue tightening

B of A analysts said that the index's average spread over Treasuries narrowed by 9 basis points on the week to finish at 587 bps, in from 596 bps seen the week before.

The index had begun the year in a spread-tightening mode, extending the trend that had been in effect throughout 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 2007, spreads had proceeded to rise over the next few weeks before resuming their tightening trend, which brought them down to their low for the year of 263 bps seen in the week ended June 7. That was also the record tight level since B of A began compiling the index.

From that nadir, though, spreads began to climb back up, getting as wide as 494 bps in mid-August but coming down from that zenith after that. However, there were five sizable spread-widenings over a six-week period in October and November, bringing the average spread back up to its high for the year at a bloated 621 bps in the week ended Nov. 23, before the most recent tightening.

The index's yield to worst, which previously had narrowed to 9.48% from 9.74% the week before, its high for the year, inched back up to 9.50% in the most recent week.

The index tracked 1,573 issues of $100 million or more, down from 1,594 issues the week before, while its overall market value fell to $603.7 billion from $609.1 billion previously. 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.

Middle, lower tiers 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 37.60% of the index - and the middle tier - those issues rated BB-, B+ and B, making up 40.63% of the index - each rose 0.18% on the week. The uppermost tier -those issues rated BB and BB+, comprising 21.77% of the index - brought up the rear with a 0.09% loss.

That broke a string of two weeks in which the upper tier had been the best performer, including the week ended Nov. 30, when it had zoomed 2.04%, followed by the lower tier at 1.30%, while the middle tier lagged with a 0.75% return. The latest week's result did represent a return to the pattern seen in the prior five weeks from mid-October through mid-November, when the middle tier consistently led the way.

By ratings categories for the three major baskets of credits into which B of A divides the index, excluding those issues which are not rated, its analysts said that B-rated credits - similar to, but not exactly the same as the middle tier - "outperformed" the rest of the index with a 0.26% total return, versus their 0.96% return the week before. CCC-rated rated paper, which includes many, but not all, of the lower-tier credits, yielded 0.13%, versus its index-best 1.51% return in that prior week, while the BB-rated assets (the upper tier partially, but not completely, overlaps this subset) lost 0.05%, a sharp turnaround from its 1.44% gain the week before.

Spreads tighten as governments widen

The analysts noted that while the average high-yield spread tightened by 9 bps, as noted, the yield on the benchmark 10-year Treasury note widened by 17 bps to 4.11%, versus 3.94% the week before.

In the primary market, they said, "activity slowed down" from the levels seen the prior week as some $900 million of bonds priced, down from the $5.7 billion of new paper that came the previous week. Year-to-date new issuance grew to $171.4 billion from $170.5 billion previously, according to B of A's calculations, though not yet matching the record total of $179.3 billion, which the bank reported last year.

Weekly reporting high-yield mutual funds, as measured by AMG Data Services, saw a weekly inflow of about $43,000 in the week ended Wednesday, versus the $471.7 million outflow the previous week. The year-to-date cumulative outflow total remains at about $2.5 billion while the average weekly outflow decreased slightly to $52 million from $53 million the week before.

Positive sectors retain control

In the latest week, 22 of the 41 industry sectors into which B of A divides its high-yield universe were in positive territory, 16 were in negative territory, and three others had flat 0.00% readings, neither a loss nor a gain, although it should be noted that those latter three groupings - credit insurance, leisure equipment and products, and water utilities - are relatively new sectors created in the sector restructuring that took place last year and even at this date still do not as yet have any issues represented in them.

The breakdown extends the trend seen the previous week, when 34 sectors finished in the black, just four were in the red and the three new empty sectors had their flat readings. While strongly positive breakdowns have been seen throughout most of the year and have also predominated over the past few months, with 11 positives against just five negatives in the last 16 weeks, negative breakdowns have dominated most recently, with more sectors in the red than in the black in five of the last eight weeks. Positive and negative sector breakdowns have been roughly split since about mid-year, at 13 positive versus 14 negative in the last 27 weeks.

Electric utilities week's best sector

The electric utilities sector turned in the best performance in the most recent week, up 0.86%, to grab the top spot away from diversified financials, which had zoomed an eye-popping 4.70% the week before on speculation that a plan to stop the wave of residential foreclosures - which has sapped the ability of mortgage companies included in that sector to raise fresh capital by securitizing loans - was in the works.

However, the diversified financials remained among the Top Five best-performing sectors for a second straight week with a 0.73% gain, helped by that actual introduction of that long-awaited plan. It's been a dramatic turnaround for the sector, which has chronically been among the worst performers in the index over the past few months, mostly on the turmoil wracking the mortgage lenders. For five straight weeks from mid-October through the week ended Nov. 16, the group had finished among the Bottom Five worst-performing sectors in all five of those weeks, and actually was the worst finisher in the index in four weeks out of the five.

Health care facilities (up 0.72%), chemicals (up 0.66%) and other telecommunications (up 0.65%) rounded out the latest week's Top Five list. It was the second straight week health care facilities had been among that select group, following its 1.61% gain the previous week.

Banks worst sector for week

On the downside, banking was the single worst performer in the index in the latest week, plunging 2.28% to take over that dubious honor from the insurance brokers, the previous week's cellar-dweller with a 3.23% nosedive.

The life and health insurers (down 1.10%), advertising-dependent media (down 0.66%), food and drug retailers (down 0.62%) and cable/DBS operators (down 0.59%) rounded out the latest week's Bottom Five List.

Health care equipment/services tops for year

On a year-to-date basis, with 49 weeks now in the books, the health care equipment and services sector remained in the top position, with its cumulative return firming to 11.16% from 10.70% the previous week. It is still the only sector to break into positive double-digits, percentage-wise, so far this year.

The metals and mining sector jumped four positions in the standings, from sixth-best to second-best, as its year-to-date return firmed to 7.36% from 6.79%. Diversified telecommunications moved up one notch to third-best from fourth place, as its return moved up to 7.20% from 7.03%.

The life-health insurers, which previously had been the second-strongest sector for 2007 so far, moved down two positions to fourth-best, hurt by the sector's Bottom-Five-worthy finish on the week, which pulled its year-to-date return down to 7.12% from 8.31% before.

Transportation, previously the third-strongest sector for 2007, fell two positions, to just fifth-best, as its return declined to 7.01% from 7.31%. The aerospace and defense sector - not previously among the leaders - improved to sixth-strongest in the index with a 6.85% cumulative return, up from 6.59% previously. Food and drug retailers, previously the fifth-best performer year to date, fell out of leadership contention, the sector's loss on the week bad enough to land it in the Bottom Five and drag its cumulative return down to 6.18% from 6.84% previously.

Consumer durables/non-auto year's worst

On the downside, consumer durables/non-auto, which includes the hard-hit homebuilding industry, remained the year's worst-performing sector, although its 2007 loss narrowed a little to a still-yawning 13.35% from an even worse 13.76% the week before.

The insurance brokers segment fell one position, from third-worst to second-, although its loss for the year narrowed to 7.60% from 7.77%. It traded places with repeat Top Fiver diversified financials, which improved, relatively speaking, to only third-worst in the index year to date from second-worst before, its loss narrowing to 7.28% from 7.94%.

Banking remained fourth-worst on the year, although its index-worst performance on the week sharply widened its cumulative loss to 4.41% from 2.17%.

Retailing was again the fifth-weakest sector year to date, although its loss narrowed to 0.75% from 1.03%. Omitting the flat 0.00% 2007 readings of the three empty sectors, Bottom Fiver ad-dependent media, not previously among the worst laggards, fell to sixth-worst on the year, as its 2007 return shrank to 0.24% from 0.91% previously. The previous week's sixth-worst sector, other health care, was also lower on the week, but its return only eased modestly to 0.63% from 0.73% the week before.

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