B of A High Yield Broad Market Index up 0.42% on week; 2007 return grows to 3.83%, another new high

By Paul Deckelman

New York, April 30 - The Banc of America Securities High Yield Broad Market Index returned 0.42% in the week ended Thursday, on top of a 0.55% gain in the previous week ended April 19. It was the fourth consecutive weekly advance for the index, as it moves away from its recent pattern of choppiness, seen roughly from late February through early April, and return to the more consistent strength that it showed for a number of weeks at the start of the year.

Including the latest week's results, gains have now been seen in 13 weeks out of the 17 since the start of 2007 - part of a larger pattern of strength that the index has shown since late June of last year, with gains in 39 weeks out of 44 during that stretch. That, in turn, was part of a still-larger trend of positive returns in evidence throughout most of last year and now extending into the beginning of 2007, according to a Prospect News analysis of the B of A data.

The index's year-to-date return increased to 3.83% in the most recent week, a new high for the year so far, up from the previous peak level of 3.39% seen the week before. 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 prior week had narrowed slightly to 298 basis points from 300 bps previously, continued to tighten, to 289 bps, as the index continued its return to the spread-tightening trend that had been seen throughout last year when high-yield spreads started at 384 bps off Treasuries and ended at 305 bps over.

That trend had pretty much continued into the first two months of the new year, until the recent period of turbulence, which included one week - ended March 1 - in which spreads ballooned out by an astonishing 34 bps. Though below their peak 2007 level of 313 bps, seen in the week ended March 15, spreads still remain above their mid-February low for the year of 269 bps, having surrendered and not yet recovered some of the spread-tightening gains that were achieved in the first weeks of the year.

The index's yield to worst, which previously declined to 7.62% from 7.72% the week before, continued to come in, to 7.55% in the most recent week.

The index tracked 1,653 issues of $100 million or more, up from 1,648 the week before, while its overall market value rose to $646.2 billion from $644.4 billion the previous week. 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.

Lowest credit tier still 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 34.07% of the index - had the best return, at 0.55%, followed by the middle tier (those issues rated BB-, B+ and B, making up 44.28% of the index), at 0.38%, with the uppermost tier - those issues rated BB and BB+, comprising 21.66% of the index - bringing up the rear at 0.30%.

It was the third time in the last four weeks, the fifth time in the last eight, and the seventh time in the last 11 weeks that the tiers have finished in that particular order, although in the week ended April 19, the lower tier had returned 0.69%, the upper tier 0.48% and the middle tier 0.47%.

The lowest tier has now been on top in four straight weeks, in six weeks out of the last eight and in 17 weeks out of the last 20. The middle tier has lived up to its name and has been sandwiched between the other two tiers in three weeks out of the last four, in five weeks out of the previous eight and in 11 weeks out of the last 15, while the upper tier has been at the bottom of the pile for five weeks out of the past six and in 12 weeks out of the previous 16.

Accordingly, B of A's analysts once again said that lower-quality paper "outperformed" the rest of the index in the latest week, with CCC-rated paper, which largely, but not totally, comprises the bottom tier, having returned 0.59%, while B-rated paper - similar to, but not exactly the same as the middle tier - returned 0.43% and the higher-rated BB credits (the upper tier partially, but not completely, overlaps this subset) having come in with a 0.31% return.

Primary issuance "accelerated" in the latest week, the analysts said, with some $6.1 billion of new bonds having priced, well up from $1.4 billion in the previous week. The analysts calculate year-to-date new issuance at $66.7 billion, up from $60.6 billion previously. Issuance totaled a record $179.3 billion in 2006, according to B of A's calculations.

Spread tightening key factor

The analysts further observed that "the week's strong performance was driven by a compression in credit spreads," with the average high-yield spread tightening 9 bps, to 289 bps, as noted, while the yield on the 10-year Treasury issue having risen by 4 bps, to 4.70%.

Weekly reporting high-yield mutual funds, as measured by AMG Data Services, showed a minimal weekly inflow of $200,000 in the week ended Wednesday, versus the $33 million net inflow seen the week before. Year-to-date flows remain at some $1 billion, although the average weekly flow fell to $60 million from $64 million, the analysts said.

In the latest week, 38 of the 42 industry sectors into which B of A divides its high-yield universe were in positive territory, no sectors were in negative territory, and four were showing flat 0.00% readings, neither a loss nor a gain, although it should be noted that these were new sectors created in the sector restructuring that took place last year and do not as yet have any issues represented in them.

It was the second consecutive week that the positive sectors scored such a clean sweep, continuing the pattern of solidly positive sector breakdowns that has now been seen in 41 out of the past 44 weeks, going back to last June, and on an even longer-term basis, in 62 weeks out of the past 74, encompassing virtually all of this year so far and last year and extending all the way back to late 2005.

Consumer durables/non-auto week's best

In the week ended Thursday, consumer durables/non-auto had the week's best return, up 0.77%, to take the top spot away from the previous week's champion, diversified telecommunications, which had returned an index-leading 0.92% in that prior week ended April 19. It was the third straight week in which the consumer durables/non-auto sector was among the Top Five best-performing industrial groupings, having recorded gains of 0.72% in that prior week and 0.42% in the week ended April 12. Before this recent surge, the sector had spent five straight weeks among the Bottom Five worst-performing sectors, reflecting the extreme distress at that time among homebuilders, a key component.

Health care equipment and services (up 0.70%), transportation (up 0.67%), automobiles (up 0.65%) and health care services (up 0.62%) rounded out the latest week's Top Five list. It was the second straight week in that select circle for health care services, which had also been there the week before with a 0.89% return.

Diversified financials, wireless, week's worst

On the downside, for a second straight week, there were no sectors actually showing losses - only sectors displaying far smaller returns than all of the other sectors.

Diversified financials and wireless telecommunications tied for the week's weakest return, at 0.23%, eclipsing consumer non-cyclicals/other, the cellar-dweller the previous week with a return that week of just 0.11%.

Other telecom (up 0.24%), commercial services (up 0.27%) and entertainment (up 0.28%) rounded out the latest week's Bottom Five list.

It was the second straight week that entertainment has been among the worst laggards; the sector was also in the Bottom Five that previous week with a paltry 0.25% return, and has now been there in three weeks out of the last four.

Consumer non-cyclical/others tops for year

On a year-to-date basis, with 17 weeks now in the books, the consumer non-cyclical/other sector has regained the position as strongest performer that it had lost the week before, moving up from second place and back into first as its cumulative total firmed to 5.73% from 5.18% previously. That dropped previous top-spotter retailing down a notch, back to second, with a 5.71% return, up from 5.30% the week before.

On the strength of their respective Top Five showings on the week, health care services, formerly tied for fifth-strongest, and health care equipment and services, formerly only sixth-best, moved into a third-place tie at 5.60%, up from 4.95% and 4.86%, respectively.

Following closely behind, industrial products, formerly third-best, dropped one notch to fourth place at 5.58%, up from 5.13% previously. That, in turn, pushed metals and mining down one notch, from fourth to fifth, at 5.39%, up from 5.00% the week before. And Bottom Fiver entertainment was in turn pushed down one place, from fifth to sixth at 5.24%, up from 4.95% previously.

Diversified financials still year's worst

On the downside, diversified financials - the week's weakest sector - also remained the index's worst year-to-date laggard, returning just 0.98%, up from 0.75% previously.

Banks, which previously were only the third-worst on the year, fell to second-worst at 1.75%, up from 1.45%. That sector traded places with the previous second-worst, consumer durables/non-auto, which improved, relatively speaking, to third-worst at 1.90%, up from 1.13%, on the strength of its overall index-leading performance for the week.

Other health care remained fourth-weakest, at 2.06%, up from 1.66%, and Bottom Fiver other telecom stayed at fifth-worst at 2.07%, up from 1.83%. Real estate, not previously considered among the worst finishers, fell to sixth-worst at 2.92%, versus 2.56% the week before.

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