B of A High Yield Broad Market Index flat on week, year-to-date return 3.56%

By Paul Deckelman

New York, June 12 - The Banc of America Securities High Yield Broad Market Index was unchanged in the week ended Thursday, June 8, showing neither a gain nor a loss. That followed its modest 0.07% upturn the previous week, ended Thursday, June 1, which had been the first gain after being on the downside the two previous weeks. Even with the flat results in the latest week, the index has still shown positive results in eight weeks out of the last 13, and, over the longer term, in 21 out of the last 29 weeks, dating back to mid-November, according to a Prospect News analysis of the B of A data.

Despite the statistically flat weekly reading, the index's year-to-date return inched up marginally to 3.56% from 3.55% the week before, and remains well above 2005's total 2.10% return.

The index's spread over Treasuries, which in the previous week had tightened to 333 basis points from 337 bps, widened out to 346 bps in the most recent week. Its yield-to-worst, which had previously increased to 8.39% from 8.38%, again rose, to 8.44% in the most recent week.

The index tracked 1,685 issues of $100 million or more, down from 1,693 the week before, and its overall market value went down to about $576.64 billion from $579.4 billion the previous week. B of A sees the index as a reliable proxy for the nearly $800 billion high yield universe.

On a credit-quality basis, the uppermost of the three credit tiers into which B of A divides the HY Broad Market Index - those issues rated BB and BB+, comprising 24.69% of the index - had the best return, up 0.16%. The middle tier (those issues rated BB-, B+ and B, making up 42.04% of the index) lost 0.01%, with the lower tier - those issues rated B- and below, accounting for 32.37% of the index - lagging behind with a 0.08% loss.

It was the third week in the last four in which the upper tier has lived up to its name and led the other tiers - continuing to move away from the pattern which had been seen over the previous several months, with the upper tier having finished on the bottom of the pile in 18 weeks out of the 31 weeks ended May 11, its upturn beginning the following week.

For the 14th week out of the previous 18, the middle tier also lived up to its name, and ended up sandwiched between the other two levels. And even though the lower tier ended up on the bottom this time around, it has still been the top finisher in nine weeks out of the past 12 (eight straight, at one point), and in 12 weeks out of the past 16. In the week ended June 1, the lower tier had returned 0.19%, the upper tier was up 0.01%, and the middle tier had a flat 0.00% return.

B of A analysts said that the junk bond market had "experienced a week of mixed and volatile daily performances, adding up to a zero weekly total return" for the HY Broad Market Index. They blamed the inflation fears and growth concerns that pushed equities down and pushed implied equity volatility, as measured by the VIX, to new highs. They noted that while the 10-year Treasury tightened by 10 basis points on the week, credit spreads widened 12 bps - driving the Broad Market Index's excess return deep into negative territory, down 57 bps.

Across the rating categories, low credit quality "underperformed," with the CCC rated issues - which largely, but not completely, overlap the lower of the index's three credit tiers - having an 0.09% negative return, the B-rated paper (mostly, but not totally contiguous with the middle credit tier) with a negative 0.06% return, and the BB credits - similar to, but not exactly the same, as the upper credit tier - up 0.12% on the week.

The analysts also observed that new issuance increased from the previous week's levels, with $2.5 billion of new paper having priced by the close on Friday, and "the lion's share" of it pricing that very day, in contrast to the previous week, when there were only two deals worth $725 million.

B of A estimated that year-to-date issuance as of Friday stood at $70.2 billion, up from $67.7 billion the week before.

And the analysts related that $41 million more came into weekly-reporting high yield mutual funds than left them in the week ended Wednesday, Feb. 7 - the first such weekly inflow seen after eight straight weeks of outflows, including the $244 million that leaked from the funds the week before, according to AMG Data Services. With the relatively small inflow, the year-to-date net outflow among weekly-reporting funds stayed at about $2.5 billion, while the average weekly outflow fell to $107 million from $113 million previously. The fund flow numbers are an indicator of overall market liquidity trends.

Autos gain, others drop

The recent split between the automotive and non-automotive portions of the index continued, as the autos had a 0.25% return on the week, in contrast to the 0.03% loss posted by the non-automotive portion of the index, representing the remaining 85.96% of the Broad Market Index.

In the latest week, 17 of the 42 industrial sectors into which B of A divides its high yield universe were in positive territory, against 18 negatives and seven sectors showing neither gains nor losses, but rather, a flat 0.00% reading (although it should be noted that six of the latter were brand-new sectors created in the sector restructuring that took place at the end of March, and they do not as yet have any issues represented in them; only paper and packaging actually produced a flat return through trading).

That virtually even split stood in contrast to the previous week, when 23 sectors were in the black, 13 in the red and six were flat. Through the June 1 week, strongly positive sector breakdowns had been seen in 23 of the previous 28 weeks.

Consumer non-cyclical/other had the best return of any sector this past week, up 0.93%, supplanting the previous week's top-spotter, automobiles, which had risen 0.55% in the week ended June1. It was a solid rebound for the sector, which had been in the Bottom Five grouping of worst-performing sectors in the previous week with a 0.30% loss - its second straight week there and third week in the previous five.

Life/health insurance (up 0.69%), aerospace and defense (up 0.56%), healthcare facilities (up 0.32%) and banks (up 0.30%) rounded out the latest week's Top Five list of best-performing sectors. It was a turnaround for the banks, which had been the single worst-performing sector in the previous week with a 0.42% loss. However, the banks have now been among the Top Five in two weeks out of the past four. The life/health insurers have been in the Top Five now in three weeks out of the past five.

Consumer durables place last

On the downside, consumer durables, non-auto had the week's biggest loss (down 0.94%), to take over as the cellar-dweller from the banks, which as noted held that unenviable distinction in the June 1 week.

Consumer products (down 0.74%), gas utilities (down 0.72%), property/casualty insurers (down 0.40%) and pharmaceuticals (down 0.38%) rounded out the latest week's Bottom Five. It was a sharp reversal for the drugmakers, who had been among the Top Five in the June 1 week with a 0.39% return. Consumer products have now been part of the Bottom Five in two weeks out of the past three.

On a year-to-date basis, the automobiles sector remained the strongest performer so far, extending its index-best 2006 cumulative return to 8.95% from 8.68% previously. Entertainment remained a solid, though distant second place, edging up to 6.78% from 6.76%, as industrial products, in third place, eased to 5.84% from 5.91% previously.

On the downside, the life and health insurers' 2006 loss narrowed to 1.01% from 1.68% on the strength of the sector's Top Five finish, although from 1.94%, but the sector decisively remains the worst-performing grouping, and now is again the only sector in the red for the year. Leaving out the sectors with flat paper returns for the year because no bonds trade in them yet, healthcare facilities remains the second-weakest grouping - but its weekly Top Five performance put it back in the black year-to-date, as it swung from a 0.08% cumulative loss to a 0.24% gain for 2006 so far. Not far above that is oil and gas, which fell to a 0.31% cumulative return from 0.41% previously.

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