B of A High Yield Broad Market Index up 0.58% on week, year-to-date return grows to 3.31%

By Paul Deckelman

New York, July 10 - The Banc of America Securities High Yield Broad Market Index rose 0.58% in the week ended Thursday, its second consecutive gain, following the 0.16% advance seen in the previous week ended June 29. Since about mid-May, the index - which till then had been moving steadily upward most weeks - has shown a choppy pattern - two weeks on the decline, followed by a small upturn in early June, then a completely flat reading, followed by two more downturns, and now, two weeks of upside.

Even with that recent inconsistency, the index has still shown positive results in 10 weeks out of the last 17 and, over the longer term, in 23 out of the last 33 weeks, 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 3.31%, up from 2.71% the week before. It thus remains about midway between 2005's total 2.10% return and its peak so far for 2006, 4.08%, reached during the week ended May 11.

The index's spread over Treasuries, which in the previous week had risen to 356 basis points from 354 bps, tightened to 348 bps in the most recent week. Its yield to worst, which had previously edged up to 8.75% from 8.74%, narrowed to 8.66% in the most recent week.

The index tracked 1,669 issues of $100 million or more, well down from 1,690 the week before, although its overall market value only declined moderately, to about $572.5 billion from $573 billion the previous week. B of A sees the index as a reliable proxy for the nearly $800 billion high-yield universe.

Lowest credit tier outperforms

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 33.34% of the index - had the best return, 0.73%. This was followed by the upper tier - those issues rated BB and BB+, comprising 24.69% of the index - which rose 0.54%. Bringing up the rear was the middle tier - those issues rated BB-, B+ and B, making up 41.98% of the index - which returned 0.49%.

It was the second straight week in which the tiers finished in that order and the third consecutive week in which the lower tier led the others. In the week ended June 29, the tiers were tightly spaced, with the lower tier up 0.18%, the upper tier up 0.16% and the middle tier up 0.14%.

'Strong week' for junk market

B of A analysts said that the junk market "had a strong week, as equity volatility stabilized at moderate levels." Besides generating 0.58% in total returns, the index generated 45 bps in excess returns, as index spreads tightened by 9 bps. Risk-free rates, they noted, "had only a small impact on total returns," with the yield on the 10-year Treasury decreasing 1 basis point in that time, to 5.18%

The analysts noted that the automotive sector, making up 14.29% of the index, "posted another week of strong returns," as it returned 1.29%, versus a return of 0.47% for the non-automotive remaining 85.71% of the index.

From a credit-quality perspective, CCC paper - which largely, but not completely, overlaps the lowest of the High Yield Broad Market Index's three credit tiers - outperformed the rest of the market, with a 0.76% return on the week. The BB-rated credits (similar to, but not exactly the same, as the uppermost credit tier) rose 0.57%, while the B-rated paper - mostly, but not totally contiguous with the middle credit tier - was up 0.54%.

Primary market slows

The analysts further observed that primary market activity "came close to a standstill" during the holiday-shortened week, which saw an abbreviated session July 3 and a full market close for Independence Day July 4, with just $25 million of new paper having priced.

And the analysts related that $97 million more came into the weekly reporting high-yield mutual funds in the week ended July 5, than flowed out of them - the first inflow after three straight weeks of outflows, including $379.3 million a week earlier, ended June 28. Even with the inflow, the year-to-date net outflow accumulates to about $3.5 billion, or an average weekly outflow number of $131 million.

In the latest week, 33 of the 42 industrial sectors into which B of A divides its high-yield universe were in positive territory, with just two showing losses and seven sectors showing neither gains nor losses, but rather, a flat 0.00% reading (although it should be noted that six were brand-new sectors created in the sector restructuring that took place at the end of March, do not as yet have any issues represented in them; the seventh sector, whose flat reading actually resulted from trading, was healthcare services).

That represents a solid improvement from the prior week, when 18 sectors were in the black, 17 were in the red, and seven - the six unoccupied brand-new sectors, plus gaming and lodging - had flat returns. The latest week's showing represents a return to the pattern seen in effect for most of this year, up until the previous several weeks, of a strongly positive trend in sector breakdowns. Solidly positive breakdowns have now been seen in 24 weeks out of the past 33.

Property/casualty insurers tops for week

Property/casualty insurers had an index-best 1.97% return in the week ended Thursday, supplanting the previous week's champion, cable/DBS operators, which returned 0.65% in the prior week ended June 29. The property/casualty names actually went from worst to first, as they had the index's single worst loss in that prior week, plunging 2.97%. The sector has now also been among the Top Five best-performing sectors in two weeks out of the last four.

Consumer non-cyclicals/other (up 1.31%), automobiles (up 1.29%, as noted), pharmaceuticals (up 0.77%) and consumer durables/non-autos (up 0.74%) rounded out the latest week's Top Five. It was the second straight week in the Top Five for consumer non-cyclicals/other, which made it the previous week with a 0.35% return, and for automobiles, which was in the select circle the prior week with a 0.44% return and which has now been there in three weeks out of the past four. Pharmaceuticals, on the other hand, had been among the Bottom Five worst-performing sectors in that previous week, losing 0.21%.

Health care/other worst for week

On the downside, only two sectors actually finished in the red for the week. Health care/other was the week's cellar-dweller with a 0.73% loss, taking over that unenviable distinction from the property/casualty insurers, which, as noted had the worst showing in the week ended June 29.

Life/health insurance (down 0.27%) was the only other sector showing a loss for the week and has now been among the Bottom Five in two weeks out of the past four. The latest week's Bottom Five was founded out by health care services, which, as noted had a flat 0.00% reading, and by the two sectors with the weakest positive returns, transportation (up 0.04%) and banks (up 0.10%). Health care services had also been in the Bottom Five the previous week, when it lost 0.21%.

Autos still tops for year

On a year-to-date basis, the automobiles sector, propelled by two back-to-back weeks in the Top Five, remained by far the strongest performer so far, as its 2006 cumulative return rose to 10.53% from 9.12% previously. Entertainment remained a distant, though solid second, its year-to-date return rising to 6.46% from 6.01%. Industrial products, in third place, fell further off the pace with a smaller weekly rise, to 5.26% from 5.10%.

Life/health insurers worst for year

On the downside, Bottom Fiver life/health insurers' 2006 loss widened out to 3.08% from 2.81%, easily the worst in the index. Health care facilities' cumulative loss was nearly cut in half, to 0.82% from 1.41% previously, but it remained the second-weakest performer year to date. Oil and gas' year-to-date loss fell to 0.15% from 0.68% previously. No other sectors are in the red for 2006 so far.

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