(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

A stream of Executive Orders and Department of Government Efficiency (DOGE) announcements with implications for businesses and the economy, softer economic data,⁹ and geopolitics, appeared to have a cumulative effect on investors by mid-February. The result was a familiar flight of investor assets to the perceived safety of U.S. Treasury bonds. Yields fell as investors bought Treasury bonds. By February 28, the closing 10-year U.S. Treasury yield was 4.24 percent, down from 4.79 percent on January 13, according to U.S. Treasury Department data. (See Figure 1.)

By the end of the month, yields were lower for 2-, 5-, 10-, and 30-Year Treasuries by 21, 31, 33, and 30 basis points (bps), respectively. The BBG U.S. Treasury Index¹⁰ (the Treasury Index) added 2.16 percent. As yields fell, bond market volatility increased, as measured by the Intercontinental Exchange (ICE) Bank of America/Merrill Lynch Option Volatility Estimate (MOVE) Index. (See Figure 2.)

With yields currently in the lower range of the Breckinridge Investment Committee (IC) expectations, duration positioning is neutral across our strategies. The IC is expecting one cut to the federal funds rate in 2025 and anticipates the combined impacts on GDP and inflation of DOGE efforts and tariffs to be net negative, exerting modest downward pressure on growth and upwards pressure on inflation.

Municipal Market Review

The Municipal Bond Index gained 0.98 percent in February. During the month, municipal yields fell by 15, 18, 18, and 4bps, respectively, for 2-, 5-, 10-, and 30-year maturities. (See Figure 3.) Municipal/Treasury (M/T) ratios improved mildly. (See Figure 4.)

Bonds with credit ratings in the AAA and BBB ranges outperformed bonds rated AA and A. Bonds with longer maturities outperformed those with shorter maturities.

Per The Bond Buyer, February bond issuance was at $33.7 billion, up 1.6 percent from $33.2 billion in February 2024, according to LSEG data. In January, total asset flows to municipal bond funds was nearly $2.7 billion.

Corporate Market Review

The U.S. Corporate Index OAS widened by 8bps M/M, with all the widening occurring over the last two weeks of the month. On a total return basis, the Corporate Index gained 2.04 percent, while the excess return was negative 0.55 percent. 

According to BBG data, the best-performing sectors were Foreign Agencies, Supranationals, Foreign Local Governments, Financial Companies, and Gaming. The worst-performing were Transportation Services, Railroads, Refining, Health Insurance, and Natural Gas. Bonds rated AAA, the highest rating in the IG quality spectrum, outperformed the lower-rated sectors, with bonds rated BBB turning in the lowest total returns.

Total fixed-rate, gross IG supply was $172.8 billion. After $100.7 billion in redemptions, net supply was $72.1 billion, BBG reported. The total new issuance for the month was lower than the prior month and the same month one year ago by $94.4 billion and $45.4 billion, respectively.

Through February 26, more than $50 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 

All MBS and ABS sectors delivered positive total returns for the month ended February 28, 2024, according to BBG data. MBS outperformed Treasuries on a total return basis. MBS and ABS earned positive excess returns.

Among conventional¹⁴ MBS, lower coupon (2 and 4.5) mortgages outperformed others in the category, while Ginnie Mae¹⁵ MBS with 2 and 4 coupons outperformed their peers.

Equity Market Review 

The S&P Index earned a monthly return of 1.3 percent in February. The Russell 1000 Value Index¹⁶ gained 0.4 percent, while the Russell 1000 Growth Index fell 3.6 percent.¹⁷ Performance among larger capitalization and higher quality stocks led during the month, while growth and high beta¹⁸ stocks lagged.

Chicago Board Options Exchange (BoE) Volatility Index¹⁹ (VIX) moved higher during the last week of the month, reaching levels last seen in mid-December. (See Figure 5.)

At a sector level, 6 of 11 sectors gained on the month. Consumer Staples (5.7), Real Estate (4.2), Energy (4.0), Utilities (1.7), Health Care (1.5), and Financials (1.4) were positive. Materials (-0.01), Information Technology (-1.3), Industrials (-1.4), Communication Services (-6.3), and Consumer Discretionary (-9.3) declined.

The fourth quarter earnings reporting period closed with 77 percent of S&P 500 companies reporting actual earnings per shre (EPS) that exceeded estimates, which was equal to the five-year average, per FactSet. S&P 500 companies reported growth in earnings of 10.0 percent, the highest level since the first quarter of 2024, according to BBG.

[1] U.S. Department of the Treasury, as of February 28, 2025.

[2] Municipal Market Data, as of February 28, 2025.

[3] Municipal bond performance is as measured by the BBG Managed Money Short/Intermediate (1-10) 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] Municipal bond issuance is as reported by The Bond Buyer, as of February 28, 2025.

[5] IG Corporate bond performance is as measured by the BBG 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.

[6] Excess return is the return earned by an investment that carries risk (such as a corporate or securitized bond) when compared to an investment with the same maturity considered to be risk free (such as a U.S. Treasury bond).

[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] 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.

[9] On February 12, the Bureau of Labor Statistics reported that the January core Consumer Price Index (CPI) increased 3.3 percent year-over-year (Y/Y), higher than expected. Similarly, core Personal Consumption Expenditures (PCE) prices rose 0.26 percent Y/Y in January. Investors looking for a lower fed funds rate learned on February 19 that Federal Open Market Committee’s January meeting minutes showed participants supported holding rates unchanged until they are confident that inflation has made further progress or that the labor market has weakened. January housing starts and new home sales declined almost 10 percent, while existing home sales fell nearly 5 percent, month-over-month, in January, according to the U.S. Census Bureau. The Conference Board’s Consumer Confidence Index declined in February on more pessimistic consumer expectations, and a weaker assessment of current conditions. The Department of Labor’s February 27 initial jobless claims recorded a jump to 242,000, the highest since early October, which some analysts attributed to early fallout from DOGE cuts. On February 28, the Census Bureau reported a wider trade deficit, which some analysts suggested reflected front-running of expected tariffs. While the second estimate of fourth quarter gross domestic product (GDP) from the U.S. Bureau of Economic Analysis was unchanged at a seasonally adjusted annual rate (saar) of 2.3 percent, quarter-over-quarter (Q/Q), as of February 27, on February 28the Federal Reserve Bank of Atlanta’s GDPNow model estimate for first quarter of 2025 GDP growth was an saar of negative 1.5 percent.

[10] The BBG 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.

[11] 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.

[12] 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.

[13] 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.

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

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

[16] 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.

[17] 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.

[18] High-beta stocks generally are stocks that are considered to be riskier but to provide higher return potential.

[19] 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-03062025-ytberisf (03/7/2025)

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