(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 Co-Chief Investment Officers Matthew Buscone and Jeffrey Glenn, CFA, are Co-Heads of Research, Nicholas Elfner and Adam Stern, J.D., M.P.A.; and Portfolio Manager and Director, Corporate Research, Josh Perez, CFA.)

Market Review

Federal Reserve (Fed) Chair Jerome Powell communicated a policy shift to stemming labor market weakness, as inflation continued to cool. The timing and pace of rate cuts will depend on the incoming data, the evolving outlook, and the balance of risks. 

Futures markets are anticipating 100bps of cuts by year-end, implying a cut of 50bps at one of the three remaining meetings. The decision will be subject to the balance of views among the members of the full Federal Open Market Committee (FOMC) charged with reaching a majority decision on interest rates in September. The Fed’s summary of Economic Projections (SEP) update will be released after the meeting.

July Personal Consumption Expenditures (PCE) rose by 0.2 percent, bringing year-over-year (Y/Y) PCE to 2.5 percent. All three monthly PCE readings for the second quarter were revised fractionally lower resulting in a 0.1 percent downward revision to the annualized rate of headline inflation.

Treasuries continued their summer rally in August and the curve bull steepened. Two-year yields fell by 34bps, and 10-year yields fell by 13bps (See Figure 1). Overall bond market volatility continued its trend lower, as measured by the Intercontinental (ICE) Bank of America/Merrill Lynch Option Volatility Estimate (MOVE) Index⁴ (See Figure 2). The Treasury Index gained 1.28 percent for the month ended August 31, 2024. 

Breckinridge Investment Committee (IC) expects just 50bps of cuts prior to year-end and maintains a target range for the 10-year yield at 3.75 to 4.25 percent. August payrolls and Consumer Price Index data will be announced prior to the next Fed meeting.

The IC’s base case remains for slowing growth due to sustained tight Fed policy that has impacted small businesses and lower-income households. Through July, based on data from the Department of Labor, 28 states and the District of Columbia have seen unemployment rates increase in the past year, which may also suggest slower growth. 

Municipal Market Review

The municipal bond market reflected themes similar to July, as the curve bull steepened (shorter-term yields fell more than longer-term yields, see Figure 3). Municipal yields dropped by 40 and 33bps at 2 and 5 years, while they moved lower by just 11 and 8bps at 10 and 30 years.

Elevated new issue supply contributed to the modest underperformance of the Broad Muni Index relative to the Treasury Index, mainly in longer maturities. Cheaper ratios to Treasuries enhanced the value of the tax benefit for municipal investors (See Figure 4).

August marked the third consecutive month of returns in excess of 1 percent for the Managed Money Short/Intermediate Index, 1.31 percent for the month, bringing its year-to-date (YTD) return into positive territory. The BBG Managed Money 1-10 Municipal Bond Index was up 1.04 percent. The Broad Muni Index was up 0.79 percent. BBG reported bonds with maturities from 3 to 10 years performed best. Municipal bonds rated AAA and BBB outperformed bonds rated in the AA and A categories.

The Bond Buyer reported, “August saw an increase in supply for the eighth consecutive month as pent-up demand and front-loaded issuance led issuers to tap the capital markets, leading to the highest monthly total volume for August on record.” August issuance was $49.2 billion, 25 percent higher than $39.4 billion in 2023, the highest monthly total this year, and above the 10-year average of $40.8 billion. Issuance year-to-date is at $334.6 billion, up 33.6 percent Y/Y.

Sustained high demand for municipal bonds was evidenced by nearly $9 billion in investment flows to municipal bonds funds, as reported by Lipper.

Corporate Market Review

The BBG U.S. Corporate IG Index gained 1.57 percent during August, with 0.19 percent in excess returns. The U.S. Corporate IG Index OAS ended at 93bps.

According to BBG data, the best-performing sectors were Sovereigns, Restaurants, Paper, Brokers and Asset Management, and Life Insurance. The worst-performing were Supermarkets, Home Construction, Oil Field Services, Foreign Local Government, and Technology. Bonds rated AA fared the worst.

BBG reported corporate bonds with maturities ranging beyond 10 years were the best performing segment of the curve. For the second consecutive month, bonds with the highest credit ratings outperformed bonds with lower ratings.

Fixed-rate, gross IG supply was nearly $129 billion. After redemptions of about $68 billion, net issuance was close to $61 billion. Through August 28, $33.4 billion flowed into long-term taxable bond mutual and exchange traded funds during the month, per the Investment Company Institute.

Securitized Market Review

Securitized bonds delivered positive total returns in August. Excess returns were positive in all sectors except ABS.

With rates moving lower, lower-coupon MBS performance was favorable across conventional⁸ and Ginnie Mae⁹ mortgages. Conventional and Ginnie Mae mortgages with coupons of 2 and 2.5 percent were the strongest performers, with conventionals holding a performance advantage over Ginnie Maes.

In the ABS sector, YTD volume stands at $238 billion, up 31.1 percent compared with last year's comparable period and a record versus comparable periods in all prior years.

Equity Market Review 

The S&P 500 Index earned a positive return of 2.4 percent for the month. The Chicago Board Options Exchange (BoE) Volatility Index¹⁰ (VIX) jumped early in the month to levels not seen since October 2020 on recession fears and currency concerns in Japan. Consequently, the 200-day moving average increased mildly, with volatility returning to low levels by the end of the month (See Figure 5).

The Russell 1000 Value Index¹¹ gained 2.7 percent while the Russell 1000 Growth Index¹² gained 2.1 percent for the month ended August 31. On a factor basis, Quality did well as the markets consider potential impacts of an economic slowdown while Momentum also did well, continuing a YTD trend. The Dividend Yield factor also did well, on the expectations of a September rate cut.

For August, sector total returns, per BBG, showed that Energy was the worst performer (down 1.70 percent) followed by Consumer Discretionary (down 0.97 percent). Concerns around energy demand and lower refining margins weighed on the Energy sector, while Consumer Discretionary traded lower on some concern around consumption. Consumer Staples was the top sector performer (5.94 percent), as defensive and large retailers rallied. Real Estate (5.79 percent) was the next best performer, as expectations for rate cuts improved the outlook for the sector. Nine of the market sectors delivered positive results.

The earnings growth rate for the S&P500 in Q2 2024 is 10.9 percent, and if that rate stands, it will represent the highest Y/Y earnings growth rate reported by the S&P 500 Index since Q4 2021, per FactSet.

[1] 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.

[2] 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.

[3] 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.

[4] Excess return is the difference between the return earned by a security and the return earned by a U.S. Treasury security of similar duration.

[5] 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.

[6] 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.

[7] 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.

[8] 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.

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

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

[11] 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.

[12] 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.

BCAI-09052024-yx4om6ld (9/10/2024)

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