(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

Treasury yields already were moving higher through the first half of December, after a rally following the U.S. elections (See Figure 1). Greater certainty for fiscal and monetary policy emerged among investors during an unsettled week in mid-December caused bond and stock market volatility to jump, as measured by the Intercontinental (ICE) Bank of America/Merrill Lynch Option Volatility Estimate (MOVE) Index and the Chicago Board Options Exchange (BoE) Volatility Index¹ (VIX) (See Figures 2 and 3).

The U.S. House of Representatives struggled to agree to a spending plan that would avert a government shutdown. President-elect Trump and others opposed a budget proposal that appeared to be headed to passage. Congress subsequently approved and President Biden signed a new spending plan that will last through March 2025, but the late-breaking events surrounding fiscal policy may have elevated investor concerns for increased instability upon arrival of the new administration. 

During the same week, the Federal Open Market Committee (FOMC) met market expectations with a fed funds rate cut of 25bps but, in the same announcement, reduced the number of cuts the Federal Reserve (Fed) expects to make in 2025. 

The December 2024 Fed dot plot projected 2025 Fed rate cuts that were 50bps less than projected in the dot plot of September 2024.The projected slower approach to a more accommodative monetary policy appeared to disappoint investors.

Yields by the end of December added 9 basis points (bps) for 2-year Treasuries, and 40, 41, and 42bps in the 5-, 10-, and 30-year spots. For the month and quarter ended December 31, 2024, the BBG Treasury Index fell 1.54 percent and 3.14 percent, respectively. It gained 0.58 percent for the year.

The Breckinridge Investment Committee (IC) expects the Republican-led White House and Congress policy focus will likely be on tariffs, immigration, taxes, and regulations. The timing and specifics remain to be determined, with potentially inflationary and disinflationary proposals included. Concerns over debt levels and Treasury issuance may recur in 2025.

The IC’s base case is for slower, but positive real growth due to the lag effect of tight Fed policy that has impacted small businesses and lower-income households offset by solid consumer spending. A risk to our thesis is that a pro-growth agenda may work to offset this and keep growth and inflation higher.

Municipal Market Review

The BBG Managed Money Short/Intermediate Index (the Municipal Index) fell 0.97 percent in December. For the quarter and year ended December 31, 2024, the Municipal Index fell 1.35 percent and 0.17 percent, respectively.

During December, municipal yields increased by 24, 29, 30 and 35bps, respectively, in the 2-, 5-, 10-, and 30-year spots (See Figure 4). Ratios rose for 2-year municipal bonds but were close to unchanged across the rest of the curve as munis performed in-line with Treasuries (See Figure 5).

Shorter-duration securities tended to outperform longer-term municipal bonds for the month, quarter, and year, based on BBG data. BBG data showed that for the month and the quarter, bonds rated AA and A outperformed other rating categories, while bonds rated BBB earned the highest returns for the year ended December 31, 2024.

Per The Bond Buyer, December municipal bond issuance in excess of $31 billion was more than 14 percent higher than the $27 billion issued in the same month in 2023. Full-year issuance was more than $507 billion, up nearly 32 percent from $385 billion for the same period in 2023, which surpassed the prior record of more than $484 billion set in 2020.

Heavy issuance was met with consistent demand in the market, as more than $23 billion flowed to municipal bond mutual funds during 2024, according to Lipper data reported by The Bond Buyer, compared with about $15 billion in outflows from municipal bond funds during 2023.

Corporate Market Review

On a total return basis, the Corporate Index fell 1.94 percent and 3.04 percent for the month and quarter ended December, 31, 2024, while earning a positive 2.13 return for the year 2024. Total returns exceeded Treasuries for the quarter and the year, while trailing for the month. 

For the same periods, excess returns—the return compared to a Treasury bond with a similar maturity—were negative 0.02 and positive 0.87 and 2.46 percent, respectively. The U.S. Corporate IG Index OAS was 80bps at the end of December, widening 2bps on the month and tightening 9 and 19bps for the quarter and year ended December 31, 2024, respectively.

According to BBG data, the best-performing sectors were Supermarkets, Aerospace/Defense, Gaming, Airlines, and Financial Companies. The worst-performing sectors were Health Insurance, Sovereigns, Healthcare, Foreign Local Government and Media Entertainment.

BBG reported that, bonds rated BBB turned in the best performance compared to other bonds across the IG quality spectrum, falling 1.82 and 2.48 percent in the month and quarter ended December 31, 2024, while gaining 2.97 percent for the year. Performance of bonds rated A were the next best performing quality rating segment. Corporate bonds with shorter maturities tended to outperform bonds with longer maturities for the month of December and the quarter and year ended December 31, 2024.

Total fixed-rate, gross IG supply was $34.5 billion. After redemptions in excess of $46 billion, net issuance was negative $12 billion, BBG reported, a third consecutive month of negative net issuance. For the full year through December 31, 2024, year-over-year, total fixed-rate, gross IG supply was 21 percent higher than 2023, and net supply was 16 percent higher than the prior year.

Through December 24, nearly $12 billion flowed into long-term taxable bond mutual and exchange traded funds (ETFs) during the month, per the Investment Company Institute (ICI).

Securitized Market Review 

BBG data for month-, quarter-, and year-end total and excess securitized sector returns were as follows:

All MBS and ABS sectors delivered positive total and excess returns for the year ended December 31, 2024, according to BBG data.

For MBS during December, BBG reported that higher coupons (6 and 6.5) outperformed, generating positive excess returns, while lower coupons underperformed as Treasury yields rose. Commercial Mortgage-Backed Securities (CMBS) continued to outperform led by non-agency sectors, with spreads tightening by 6bps. For the year 2024, non-agency CMBS was one of the best-performing sectors across IG fixed income.

For December, ABS backed by auto loans had the best total returns, at 0.33 percent, while credit card ABS earned the best excess returns, at 0.06 percent.

Equity Market Review 

December was an anomaly for stocks in 2024, as measured by the S&P Index. While the S&P Index gained 25 percent for the year ended December 31, 2024, it fell 2.4 in December, which was only the third monthly decline for the S&P Index after losses in April and October.

The Russell 1000 Growth Index¹³ added 0.88 percent in December to close 2024 with a 33.4 percent gain. The Russell 1000 Value Index¹⁴ fell 6.8 percent in December to close the year with a gain of 14.4 percent. 

At a sector level, 8 of 11 declined on the month. Communication Services (3.6), Consumer Discretionary (2.4), and Information Technology (1.2) had positive results, while Materials (-10.7), Energy (-9.5), Real Estate (-8.6), Industrials (-7.9), Utilities (-7.9), Health Care (-6.2), Financials (-5.5), and Consumer Staples (-4.9) had negative returns.

At a sector level for the year ended December 31, 2024, 10 of 11 gained Communication Services (40.2), Information Technology (36.6), Financials (30.5), Consumer Discretionary (30.1), Utilities (23.4), Industrials (17.3), Consumer Staples (14.9), Energy (5.7), Real Estate (5.2), and Health Care (2.6) had positive results, while Materials (-0.04) had a negative return.

[1] U.S. Department of the Treasury, as of December 31, 2024.

[2] As of December 31, 2024, based on the Intercontinental (ICE) Bank of America/Merrill Lynch Option Volatility Estimate (MOVE) Index, which tracks 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 may be higher. You cannot invest directly in an index.

[3] Municipal bond performance is as measured by the BBG Managed Money Short/Intermediate Index, which 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.

[4] Treasury bond performance is as measured by the BBG Treasury Index, an unmanaged index of prices of U.S. Treasury bonds with maturities of 1 to 30 years. You cannot invest directly in an index.

[5] Municipal bond issuance is as reported by The Bond Buyer, as of December 31, 2024.

[6] IG Corporate bond performance is as measured by the Bloomberg U.S. Corporate Investment Grade Bond Index, 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.

[7] The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. Itis 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.

[8] According to Dow Jones Market Data.

[9] 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.

[10] 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.

[11] 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.

[12] 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.

[13] 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.

[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.

BCAI-01082025-s2ehqwab (1/10/2025)

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