(The following commentary is a summary of discussions among members of the Breckinridge Capital Advisors Investment Committee as they reviewed monthly activity in the markets and investment returns. The members of the Investment Committee under the leadership of Chief Investment Officer Ognjen Sosa, CAIA, FRM, are Co-Head of Portfolio Management, Matthew Buscone; Head of Municipal Trading, Sara Chanda; Co-Head of Research, Nicholas Elfner; Co-Head of Portfolio Management, Jeffrey Glenn, CFA; Portfolio Manager and Director, Corporate Research, Josh Perez, CFA; and Co-Head of Research, Adam Stern, J.D., M.P.A.)

Market Review

Prospects weakened for near-term federal funds rate cuts. Inflation measures trended higher, while month-end reporting showed gross domestic product (GDP) growth slowed in the first quarter. Hiring and consumer spending remained solid.¹ Treasury yields increased across the curve, based on Bloomberg (BBG) data, by 42, 50, 48, and 44bps for 2-, 5-, 10- and 30-year maturities (See Figure 1).

Markets anticipated that economic circumstances would lead to a more cautious view about reducing interest rates among Federal Reserve (Fed) policymakers. Bond market volatility ended higher than at the beginning of the month, as measured by the Intercontinental (ICE) Bank of America/Merrill Lynch Option Volatility Estimate (MOVE) Index² (See Figure 2). The BBG U.S. Treasury Bond Index³ fell 2.33 percent for the month. The BBG U.S. Aggregate Bond Index (Agg Index)⁴ was 2.53 percent lower.

The Breckinridge Investment Committee’s (IC) base case is for slowing economic growth in the second half of 2024 based on the drag of tighter monetary policy for small businesses and lower income households, who are most impacted. The IC continues to expect the Federal Reserve (Fed) to reduce its target for the overnight rate by year-end 2024.

With nominal bond yields still relatively high, Breckinridge views IG fixed income as attractive. The risk posture of Breckinridge fixed income strategies is defensive entering May, based on tight credit spreads and the IC’s outlook for the economy.

Municipal Market Review

In an environment that we believe is conducive to higher yields for a longer period—and acknowledging the ongoing negative slope in 2- to 10-year maturities—the portfolio management team chose to slightly extend Tax Efficient strategy duration. The team reduced allocations to 5- to 6-year bonds and increased investments in bonds in the 10- to 15-year range, where we view both the slope of the yield curve and Municipal/Treasury (M/T) Ratios as more attractive.

According to Municipal Market Data, municipal yields were higher by about 28 or 29bps across the curve (See Figure 3). The uniform nature of the move higher resulted in the curve inversion being unchanged at the end of April when compared to the end of March. M/T Ratios also were stable. (See Figure 4).

The BBG Municipal Bond Index⁵ fell 1.24 percent. The BBG Managed Money Short/Intermediate (1-10) Index⁶ fell 1.17 percent. Municipal bonds rated A and AA turned in the best performance relative to other bonds in the IG-rated universe, based on BBG data, and shorter-maturity bonds outperformed longer-term issues, as rates rose.

The Bond Buyer reported April issuance of about $39.5 billion, about 3 percent higher than the prior month and more than 18 percent higher than the same month in 2023. It was the fourth consecutive month of increasing issuance. While new issue supply typically wanes in the summer months, this year may be an anomaly as issuers come to market over the summer instead of closer to the election.

Year-to-date (YTD) tax-exempt bond issuance through April is about 25 percent ahead of the same period in 2023, while taxable municipal bonds issued YTD through April are almost 41 percent lower than the same period last year. Municipal funds saw net outflows of $340 million in April, based on Lipper data, but open-end mutual funds have seen $3.2 billion of net inflows YTD.

Corporate Market Review

The BBG U.S. Corporate IG Index⁷ fell 2.54 percent during the month, while excess returns were positive at 0.22 percent. IG corporate bond spreads closed 3bps tighter for the month at an OAS of 87bps, per BBG data.

On a sector basis, according to BBG data, the best-performing sectors were Home Construction, Tobacco, Airlines, Metals and Mining, and Oil Exploration and Production. The worst-performing were Media Entertainment, Refining, and Cable Satellite. IG bonds with relatively lower credit quality ratings delivered better performance compared with bonds with higher ratings, while shorter maturities outperformed longer maturities.

Fixed-rate, gross IG supply for April was $142 billion. After redemptions of more than $98 billion, net issuance was about $44 billion. About $6 billion in assets flowed into IG bond funds, per EPFR Global.

Securitized Market Review

Auto loan and credit card ABS delivered stronger total and excess returns for the month relative to MBS, BBG data showed. YTD ABS volume continued at a record pace through April compared to all periods in prior years.

Among MBS, higher coupon bonds outperformed lower coupons, based on BBG data. Ginnie Mae¹¹ 6 and 6.5 coupon MBS outperformed like-coupon conventional MBS¹² by close to 100bps, due to strong demand.

Equity Market Review 

The S&P 500 Index¹³ had a negative total return of about 4 percent. For the same period, the Russell 1000 Value Index¹⁴ fell 4.4 percent, while the Russell 1000 Growth Index¹⁵ declined 4.3 percent. Within the S&P 500 Index, dividend payers had a negative return of 4.4 percent, while non-dividend payers had a negative return of almost 7 percent return.

The Chicago Board Options Exchange (BoE) Volatility Index¹⁶ (VIX) jumped for a few sessions in the middle of the month and returned to relatively low levels by month end (See Figure 5).

During April, based on FactSet data, outperformers compared to the S&P 500 Index included Utilities (+1.59 percent), Energy (-0.87 percent), Consumer Staples (-1.07 percent), Communication Services (-2.22 percent), and Industrials (-3.62 percent). Underperformers compared to the S&P 500 Index included Real Estate (-8.62 percent), Technology (-5.46 percent), Healthcare (-5.19 percent), Materials (-4.61 percent), Consumer Discretionary, (4.35 percent), and Financials (-4.31 percent).

FactSet reported that first quarter corporate earnings reports received through the end of April were generally stronger than the expectations of FactSet analysts. The blended Y/Y earnings growth rate of 3.8 percent compared with the 3.4 percent expected at the end of the first quarter. Earnings that were beating estimates also ran above 10-year averages.

[1] Economic data showed inflation trending higher, while economic growth slowed, even as hiring and wages remained solid. The Bureau of Economic Analysis (BEA) reported price inflation, as reflected in the Core Personal Consumption Expenditures (PCE) Index firmed to 0.32 percent month-over-month (M/M) in March, following upward revisions to the January and February estimates. The BEA also reported the Core Consumer Price Index (CPI) was 0.36 percent M/M and 3.8 percent year-over-year (Y/Y), still above the Federal Reserve’s 2 percent inflation target. The BEA estimated first quarter GDP slowed from 3.4 percent quarter-over-quarter (Q/Q) in the fourth quarter of 2023 to 1.6 percent in the first quarter of 2024. This measure fell short of expectations among Barclay’s analysts for a 2.5 percent increase. The Bureau of Labor Statistics (BLS) Employment Cost Index for civilian workers rose 1.2 percent for the three-month period ended in March, accelerating from 0.9 percent in the preceding three-month period. Nonfarm payroll employment gained in April but at a slower pace than in prior months, per BLS data, exceeding expectations of Barclay’s analysts. The unemployment rate moved up to 3.9 percent. Household spending was strong in March, per the BEA, following a strong February report, jumping 0.8 percent M/M. The Conference Board’s consumer confidence index decreased to 97.0 in April, the third consecutive monthly decline on consumers' weaker assessment of the present situation and more pessimistic view about the future.

[2] The Intercontinental Exchange (ICE) Bank of America/Merrill Lynch Option Volatility Estimate (MOVE) Index measures U.S. interest rate volatility by tracking the movement in U.S. Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year, 5-year, 10-year and 30-year Treasuries. Historically, the index rises as concerns grow that interest rates are moving higher. You cannot invest directly in an index.

[3] The Bloomberg U.S. Treasury Bond Index is an unmanaged index of prices of U.S. Treasury bonds with maturities of 1 to 30 years. You cannot invest directly in an index.

[4] The Bloomberg U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment-grade, U.S.-dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, mortgage-backed securities (agency fixed-rate and hybrid adjustable-rate mortgage pass-throughs), asset-backed securities, and commercial mortgage-backed securities. You cannot invest directly in an index.

[5] The Bloomberg Municipal Bond Index is considered representative of the broad market for investment grade, tax-exempt bonds with a maturity of at least one year.

[6] The Bloomberg Municipal Managed Money Short/Intermediate Index measures the performance of the publicly traded municipal bonds that cover the USD-denominated short/intermediate term tax-exempt bond market, including state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds. It is rules-based, and market-value weighted. You cannot invest directly in an index.

[7] The Bloomberg U.S. Corporate Bond Index is an unmanaged market-value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more. You cannot invest directly in an index.

[8] The Bloomberg MBS Index tracks agency mortgage-backed pass-through securities (both fixed-rate and hybrid ARM) guaranteed by government-sponsored enterprises (GSEs) Government National Mortgage Association (Ginnie Mae) (GNMA), Federal National Mortgage Association (Fannie Mae) (FNMA), and Federal Home Loan Mortgage Corporation (Freddie Mac) (FHLMC). The index is constructed by grouping individual pools into aggregates or generics based on program, coupon, and vintage. You cannot invest directly in an index.

[9] The Bloomberg U.S. CMBS Investment Grade Index measures the market of U.S. Agency (GNMA, FNMA, and (FHLMC) and U.S. Non-Agency conduit and fusion CMBS deals with a minimum current deal size of $300mn. You cannot invest directly in an index.

[10] Bloomberg U.S. Asset-Backed Securities (ABS) Index is the ABS component of the Bloomberg U.S. Aggregate Bond Index, a flagship measure of the U.S. investment grade, fixed-rate bond market. The ABS index has three subsectors: credit and credit cards, autos, and utility. You cannot invest directly in an index.

[11] Ginnie Mae MBS are issued by the Government National Mortgage Association (GNMA).

[12] Conventional MBS are issued by the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC).

[13] The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market-value-weighted index with each stock’s weight in the index proportionate to its market value. You cannot invest directly in an index.

[14] The Russell 1000® Value Index is an unmanaged market capitalization-weighted index of value-oriented stocks of U.S. domiciled companies that are included in the Russell 1000 Index. Value-oriented stocks tend to have lower price-to-book ratios and lower forecasted growth values. You cannot invest directly in an index.

[15] The Russell 1000® Growth Index is an unmanaged market capitalization-weighted index of growth-oriented stocks of U.S. domiciled companies that are included in the Russell 1000 Index. Growth-oriented stocks tend to have higher price-to-book ratios and higher forecasted growth values. You cannot invest directly in an index.

[16] The Chicago Board Options Exchange (OEX) Volatility (VIX) Index is the ticker symbol and name for the Chicago Board Options Exchange's (CBOE) Volatility Index, a measure of the stock market's expectation of volatility based on S&P 500 index options. You cannot invest directly in an index.

BCAI-05072024-tizvgaam (5/7/2024)

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