B of A High Yield Broad Market Index up 0.36% on week; 2007 return grows to 0.79%

By Paul Deckelman

New York, Jan. 22 - The Banc of America Securities High Yield Broad Market Index rose 0.36% in the week ended Thursday - the fifth straight weekly gain seen for the index, including the 0.17% advance seen in the previous week ended Jan. 11.

The recent pattern of strength continues, with the index having now seen gains in 29 weeks out of the last 30, dating back to late June last year - all except the week ended Dec. 14, during which it declined a paltry 0.09%. That was part of a larger pattern of positive returns throughout most of last year, according to a Prospect News analysis of the B of A data.

The index's year-to-date return firmed to 0.79% from 0.41% the previous week. The index finished 2006 with an 11.89% return - nearly six times 2005's total 2.10% return.

The index's average spread over Treasuries, which in the previous week had tightened markedly to 298 basis points from 311 bps previously, continued to narrow in the most recent week, to 293 bps. This was a continuation of the spread-tightening trend seen throughout last year, when spreads started at 384 bps off Treasuries.

Its yield to worst, which previously was unchanged at 7.76% from the week before, came in, to 7.72% in the most recent week.

The index tracked 1,671 issues of $100 million or more, down from 1,677 issues the week before, although its overall market value rose to $637.3 billion from $635.8 billion the previous week. B of A sees the index as a reliable proxy for the high-yield universe, which by some estimates is nearly $1 trillion in value.

Lower tier continues to lead

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 34.26% of the index - showed the strongest performance, returning 0.66% on the week. That was followed by the middle tier - those issues rated BB-, B+ and B, making up 43.62% of the index - which gained 0.25%, while the uppermost tier - those issues rated BB and BB+, comprising 22.12% of the index - brought up the rear with a 0.14% rise.

It was the seventh consecutive week in which the lowest tier was on the top. It was also the second week in a row and the fifth week out of the last six in which the tiers had finished in that order. In the previous week, ended Jan. 11, the lower tier returned 0.49%, the middle tier rose 0.15%, while the lower tier lost 0.27%.

B of A's analysts again said that CCC-rated paper, which largely, but not totally, comprises the bottom tier, "outperformed," with a 0.76% return, while B-rated paper - similar to, but not exactly the same, as the middle tier - had a total return of 0.38%. The BB-rated credits (the upper tier partially, but not completely, overlaps this subset) were up 0.14%.

About $4.3 billion of new bonds priced in the most recent week, on top of some $4.1 billion the week before. New deal issuance so far this year stands at $8.5 billion, while issuance totaled a record $179.3 billion in 2006, according to B of A's calculations.

The analysts said that weekly reporting high-yield mutual funds, as measured by AMG Data Services, showed a net inflow of $181 million in the week ended Wednesday, following the $50 million inflow seen in the previous week. Net inflows to date total $468 million, for an average weekly $156 million inflow.

Spreads keep tightening

The analysts further stated that in the latest week, the index's "strong performance was driven by compressing spreads," while risk-free (i.e., Treasury) rates were little changed, in contrast to the previous week when government bond yields were up "significantly." While the average spread on the index tightened by 5 bps, in the most recent week, to 293 bps, as noted, the 10-year Treasury's yield stood at 4.74% on Jan. 18, up just 1 bp from 4.73% the week before.

In the latest week, 32 of the 42 sectors into which B of A divides its high-yield universe were in positive territory, with just four showing losses and six showing flat 0.00% readings, neither a loss or a gain, although it should be noted that five of these were 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 other telecommunications sector also actually traded to a flat reading, for a second consecutive week.

In the Jan. 11 week, 22 sectors were in the black, against 13 in the red, and seven sectors - the five new sectors, other telecommunications and health care equipment and services - at 0.00%. Solidly positive sector breakdowns have now been seen over the past 30 weeks, and on a longer-term basis, in 51 weeks out of the past 60, encompassing virtually all of last year and extending back to late 2005. Such strongly positive breakdowns pretty much dominated last year, except for the several weeks of choppy returns in May and June.

Automotive sector tops for week

In the latest week, the automobiles sector drove away with top honors as it returned 0.92% on the week, supplanting the previous week's champion, paper and forest products, which had risen an index-best 1.06% in that Jan. 11 week.

The consumer non-cyclical/other sector (up 0.74%), entertainment (up 0.73%), technology (up 0.66%) and the health care services and cable/DBS sectors (each up 0.62%) rounded out the latest week's Top Five list of the week's best-performing industry groups. Entertainment and technology were each making repeat visits to the Top Five, after having been there in the previous week with returns of 0.60% and 0.51%, respectively.

Life/health insurers worst for week

On the downside, the life/health insurers repeated as the week's worst-performing sector, losing 0.30%, on top of the previous week's index-worst 0.67%. The volatile sector had begun the year the week before that as the strongest single sector.

Gas utilities (down 0.13%), aerospace and defense (down 0.07%) and pipelines (down 0.02%) were the only other sectors finishing in the red this past week. As noted, the other telecom sector had a flat 0.00% reading, filling out the Bottom Five list of the week's weakest performers.

On a year-to-date basis, after three weeks, the consumer non-cyclicals/ other sector, on the strength of its Top Five showing this week, has moved into first place as the strongest 2007 performer so far, with a 1.66% return, up from 0.92% the previous week, edging ahead of paper and forest products, the previous week's leader, whose 2007 return is 1.61%, up from an index-best 1.27% cumulative gain that prior week. Not far behind are Top Fiver cable/DBS at 1.52%, up from 0.90% previously; Top Fiver entertainment at 1.47%, up from 0.73% the week before; autos - the most recent week's top-performing sector, as noted - whose 2007 return jumped to 1.44% from 0.51% previously; and retailers (1.38%, up from 0.92% previously).

On the downside, the weakest sectors are also the only ones in the red for the year so far. Oil and gas (down 0.20%) remains the worst performer, although its loss was reduced slightly from the previous week's 0.25%. Close behind was the life/health insurers, which fell into the red at 0.18%, versus a 0.12% cumulative return the week before, pushed down by its second-straight index-worst performance. Also showing losses for the year so far were other health care, although its previous 0.06% loss for the year inched downward to 0.05%, and Bottom Fiver aerospace and defense, which fell into the red with a 0.01% loss year to date, versus a 0.06% positive return the week before.

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