(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 

Investors pared their expectations for interest rate cuts, as economic growth remained solid and inflation data for January surprised to the upside.¹ The first federal funds rate cut is now priced for a June/July period. Credit spreads remained tight. Equity markets posted positive returns. While a No-Landing economic scenario is becoming a possibility, a soft landing remains a realistic potential outcome. Continued healthy economic growth has forced investors to reassess what level of interest rates might be restrictive for the economy. A higher-for-longer interest rate environment is not priced into markets.

The Breckinridge Investment Committee’s (IC) base case remains a low-growth or mild recession in the back half of 2024, as the drag from tighter monetary policy persists and fiscal policy turns from a tailwind to a headwind. The IC views the main risk to that outlook is continued economic strength fueled by wage gains, resilient consumer spending, and a still-tight labor market. That risk increased during February.²

The IC continues to expect the Fed to reduce its target for the overnight rate to 4.75 percent by year-end 2024, as core inflation moves back to target, the economy slows, and unemployment rises.

Treasury yields increased in 2-, 5-, 7-, 10-, and 30-year maturities by 41, 41, 40, 34, and 21bps, respectively, based on Bloomberg (BBG) data, and the curve flattened overall (See Figure 1). Bond market volatility remained lower, as measured by the Intercontinental (ICE) Bank of America/Merrill Lynch Option Volatility Estimate (MOVE) Index³ (See Figure 2). The BBG U.S. Treasury Bond Index⁴ declined 1.31 percent. The BBG U.S. Aggregate Bond Index (Agg Index)⁵ fell 1.41 percent.

Municipal Market Review

Municipal bond yields increased by 10bps at the 2-year spot on the curve, by 8bps for 5- and 10-year bonds, and 7bps for 30-year maturities, respectively (See Figure 3). With the outperformance of municipals versus Treasuries, Municipal/Treasury (M/T) ratios slipped further, remaining at about 60 percent or lower for maturities of 10 years and shorter. (See Figure 4).

The BBG Municipal Bond Index⁶ gained 0.13 percent. The BBG Managed Money Short/Intermediate (1-10) Index⁷ fell 0.05 percent. Shorter maturities had the best relative returns. Lower quality outperformed higher quality. 

The Bond Buyer reported February issuance of nearly $27.6 billion, about 11 percent lower than the prior month but 25 percent higher than the same month in 2023. Taxable municipal bond issuance increased about 9 percent compared with the same month last year. Still, issuance was lower than the five-year average monthly issuance for February of about $32 billion, contributing to sustained supply and demand technicals that supported prices for municipal bonds. 

Refinitiv data showed municipal bond mutual fund inflows totaled $0.3 billion, bringing year-to-date inflows to municipal bond funds to $3.9 billion. Conversely, exchange-traded funds (ETFs) experienced outflows of $0.3 billion year to date.

Corporate Market Review

The BBG U.S. Corporate IG Index⁸ declined 1.50 percent. Excess returns were negative 0.11 percent. IG corporate bond spreads closed at an option-adjusted (OAS) spread of 96bps, per BBG data.

The best-performing sectors were Airlines, Paper, Home Construction, Financial Companies, and Autos. The worst-performing were Cable Satellite, Media Entertainment, Railroads, Restaurants, and Aerospace/Defense. On the quality spectrum, bonds rated AAA turned in the worst relative performance while bonds rated BBB had the highest relative returns. Shorter maturities outperformed longer maturities.

IG gross, fixed-rate corporate bond supply for February was $190 billion, BBG reported. Net corporate issuance was $134 billion after $56 billion in redemptions. About $18 billion in assets flowed into IG bond funds, per EPFR Global.

On February 20, FactSet reported that the blended Y/Y revenue growth rate for the S&P 500 for Q4 2023 is 4 percent. While 4 percent is below the 5-year (6.9 percent) and 10-year (5 percent) average revenue growth rates, if it holds and is the actual revenue growth rate for the quarter, it will mark the 13th consecutive quarter of revenue growth for the index, the second-longest period of consecutive quarters of Y/Y revenue growth for the S&P 500 since FactSet began tracking the metric in 2008. 

Securitized Market Review

Among securitized sectors, CMBS and ABS delivered negative total returns and positive excess returns, while MBS underperformed and had a negative excess return.

Auto loan ABS had a negative 0.17 percent total return and a positive 0.18 percent excess return. Credit card ABS had a negative 0.30 percent total return and a positive excess return of 0.08 percent.

Non-Agency CMBS delivered the best total and excess returns at negative 0.43 percent and positive 0.64 percent, respectively. CMBS total and excess returns were negative 0.77 percent and positive 0.44 percent, respectively. Agency CMBS earned a negative 1.13 percent total return and a positive 0.24 percent excess return. MBS returns were a negative 1.63 percent total return and a negative 0.29 percent excess return. Conventional¹² and GNMA¹³ MBS with the lowest coupons (2 percent to 4 percent) detracted most from total and excess returns.

Equity Market Review 

The S&P 500 Index¹⁴ total return was 5.3 percent in February, while Russell 1000 Value Index¹⁵ earned 3.7 percent and Russell 1000 Growth Index¹⁶ added 6.82 percent. Within the S&P 500 Index, dividend payers returned 4.8 percent, while non-dividend payers posted a 7.0 percent return. 

Top performers were led by Consumer Discretionary (8.7 percent), Industrials (7.2 percent) and Materials (6.5 percent), while bottom performers were Utilities (1.1 percent), Consumer Staples (2.3 percent), and Real Estate (2.6 percent). 

On a factor basis, momentum exhibited outperformance, continuing the year-to-date trend. Next best performing factors were growth, size, and beta. Factors that underperformed the most were Dividend Yield, Value and Quality. Notably, Meta Platforms, Inc., doing business as Meta, and formerly named Facebook, announced its inaugural dividend. Four of the Magnificent 7 now pay dividends. Only Alphabet, Inc., and Tesla, Inc., and Amazon.com, Inc., do not. S&P 500 concentration remains topical, with the cohort representing more than 25 percent of the index and driving most of the earnings growth of the index.

The Chicago Board Options Exchange (BoE) Volatility Index¹⁷ (VIX) remained low (See Figure 5).

[1] On February 29, the Bureau of Economic Analysis reported that January personal consumption expenditures (PCE) price inflation accelerated, in line with the consumer price index (CPI) and producer price index (PPI) data for the month. PCE core inflation increased in January at a seasonally adjusted annual rate (SAAR) of 2.8 percent year-over-year (Y/Y). The supercore measure, which excludes housing, was 3.5 percent Y/Y in January. The inflation readings were higher than the prior two months, which showed some moderation. In January, Core CPI’s SAAR increase was 3.9 percent Y/Y, per the Bureau of Labor Statistics release on February 13. The Federal Open Market Committee’s inflation target is 2 percent on a sustainable basis.

[2] Existing home sales increased 3.1 percent month-over-month (M/M) in January, according to a February 22 report from the National Association of Realtors. January new home sales also increased, per the Census Bureau on February 26. The Federal Reserve Bank of Atlanta Wage Tracker on February 27 showed wages increasing by 4.7 percent in January, a deceleration from 5.5 percent Y/Y in December. On February 28, the BEA’s second estimate of gross domestic product growth in the fourth quarter of 2023 was 3.2 percent quarter-over-quarter (Q/Q), on a SAAR basis. 

[3] 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.

[4] 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.

[5] 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.

[6] 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.

[7] 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.

[8] 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.

[9] 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.

[10] 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.

[11] 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.

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

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

[14] 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.

[15] 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.

[16] 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.

[17] 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-03062024-xnjqr7yy (3/8/2024)

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