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 entered 2024 expecting the Federal Reserve (Fed) to cut interest rates early in the year and multiple times more than the Fed is predicting. Some observers thought the cuts might happen as early as March. During the month, however, economic data continued to suggest inflation is persisting at around 2.6 percent year-over-year (Y/Y), consumer spending is healthy, and jobs are plentiful.¹ The data reduced expectations for near-term rate cuts, but sustained expectations for cuts later in 2024. That was enough for investors to extend the year-end stock market rally, albeit at a more measured pace, while bond yields increased.

The Fed met at the end of the month, announcing on February 1 that the federal funds target rate would stay at 5.25 percent to 5.50 percent. A more subtle shift in language in its official statement after the meeting sustained investors’ expectations for rate cuts this year.

Compared with the last day of December 2023, Treasury yields increased in 10-, 20-, and 30-year maturities by 3, 7, and 14 basis points (bps), respectively, based on Bloomberg (BBG) data, and the curve steepened (See Figure 1). Treasury yields at 2-, 5-, and 7-year maturities were lower by 4, 1, and 1bps, respectively. Market volatility declined, 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 declined 0.28 percent. The BBG U.S. Aggregate Bond Index (Agg Index)⁴ lost 0.27 percent.

Municipal Market Review

Municipal bond yields increased at the 2-, 5, 10-, and 30-year maturities by 23, 18, 19, and 21bps, respectively (See Figure 3). The BBG Municipal Bond Index declined 0.53 percent.

Shorter-term maturities outperformed longer-term bonds and higher-rated investment grade (IG) municipal bonds outperformed lower-rated bonds. The BBG Managed Money Short/Intermediate (1-10) Index⁵ fell 0.53 percent, while the BBG 1-10 Year Municipal Bond Blended Index⁶ lost 0.34. Municipal/Treasury (M/T) ratios were slightly higher in shorter maturities, but the ratio curve remains flat and stuck around 60 percent from 10 years and shorter. (See Figure 4).

The Bond Buyer reported January issuance of nearly $28 billion, about 17 percent higher than January of 2023 and compared with December 2023. Tax-exempt volume was higher than the prior month and prior year. The additional supply was welcomed, as market appetite for municipal bonds remained robust. BBG data showed about $1.9 billion flowed to municipal mutual funds in January, a departure from the experience during most of 2023, which was characterized by municipal mutual fund outflows. Taxable volume was lower compared with the prior month and year, continuing a trend. 

Corporate Market Review

The BBG U.S. Corporate IG Index⁷ declined 0.17 percent. Excess returns were positive at 0.44 percent. IG corporate bond spreads tightened by 3bps, per BBG data, to close at an option-adjusted (OAS) spread of 96bps. 

The best-performing corporate sectors and subsectors were Home Construction, Property & Casualty Insurance, Life Insurance, Oil Refining, and Midstream Energy. The worst-performing sectors and subsectors were Environmental, Construction Machinery, Aerospace and Defense, and Consumer Products. Shorter-maturity and lower-quality bonds outperformed longer-term and higher-quality bonds.

IG, fixed-rate corporate bond supply for January was $178 billion, BBG reported, with net issuance of $111 billion after $67 billion in redemptions. About $16 billion in assets flowed into IG bond funds, per EPFR Global.

With about half of the S&P 500 Index companies reporting results through February 2, 2024, fourth quarter corporate earnings are beating expectations. In aggregate, S&P 500 companies have reported actual earnings that have exceeded estimates by 7.3% during this period, FactSet reported.

Securitized Market Review

Among securitized sectors, Non-Agency CMBS delivered the highest total and excess returns at 1.42 percent and 1.27 percent, respectively. CMBS earned total and excess returns of 0.72 percent and 0.64 percent, respectively. Agency CMBS earned a 0.01 percent total return and a 0.02 percent excess return. 

MBS returns were a negative 0.46 percent total return and a negative 0.18 percent excess return. Conventional¹¹ and GNMA.¹² MBS with the lowest coupons (2 percent to 3.5 percent) were the most significant detractors from total and excess returns, while higher coupons across the MBS coupon stack, ranging from 4 percent to 6.5 percent, delivered mostly positive monthly returns. With modest moves in the interest rate markets at month end, nominal MBS spreads remained at the lower end of the fair value range of 140bps to 150bps, in our view.

With total and excess returns of 0.54 percent and 0.17 percent, respectively, ABS backed by automobile loans outperformed credit card ABS with total and excess returns of 0.47 and 0.13, respectively. January 2024 issue volume exceeded volume seen for the full months of January from 2019 through 2023.

Equity Market Review

The S&P 500 Index gained 1.7 percent, while the Russell 1000 Value Index added 0.1 percent, and the Russell 1000 Growth Index gained 2.5 percent. Dividend paying stocks within the S&P 500 returned 1.8 percent, according to FactSet, while non-dividend payers returned 1.3 percent. From a factor return perspective, momentum, size and quality outperformed the market while growth was also positive.

The Chicago Board Options Exchange (BoE) Volatility Index¹³ (VIX) remained low, rising somewhat as the date of the FOMC meeting approached (See Figure 5), but still well off highs seen during 2023.

During December 2023, nearly all sectors exhibited positive stock performances broadened across sectors and industries, as investors digested disinflationary trends and generally slowing but still resilient economic data. January saw performance that was more varied across sectors, though most constituents of the Magnificent 7¹⁴, which had fueled last year’s returns, exhibited higher relative performance to open 2024.

Based on Bloomberg data Communication Services (5.02 percent), Technology (3.95 percent), Financials (3.04 percent), and Healthcare (3.01 percent) were the top-performing sectors. Underperformers were Real Estate (-4.74 percent), Materials (-3.91 percent), Consumer Discretionary (-3.53 percent), Utilities (-3.01 percent), Industrials (-0.88 percent), and Energy (-0.38 percent). Consumer Staples earned a positive 1.54 percent return but trailed the market’s monthly return.

Equity indices returning to all-time highs has some stock market observers expressing concerns for future price action within the context of elevated forward price-to-earnings (P/E) multiples. Fourth quarter earnings reports are well underway, with a little under half of S&P 500 Index constituents reporting, and through January 31, earnings are surprising to the upside with growth of 4 percent Y/Y.

[1] The Bureau of Economic Analysis reported on January 26 that headline Personal Consumption Expenditures (PCE) rose 0.17 percent month-over-month (M.M) and 2.6 percent Y/Y, suggesting a firming relative to November's readings of negative 0.07 percent M/M and 2.6 percent Y/Y. The inflation target of the Federal Open Market Committee is 2 percent. On January 30, the Conference Board said the index of consumer confidence rose in January, due to increased optimism about both expectations and the current situation. The December Job Openings and Labor Turnover Survey (JOLTS), released on January 30 by the Bureau of Labor Statistics showed labor demand holding firm with job openings increasing while the separation rate held steady. The ratio of vacancies to unemployed was higher.

[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 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.

[6] The Bloomberg Municipal 1-10 Year Blend 1-12 Year Index measures the performance of short and intermediate components of the Municipal Bond Index — an unmanaged, market value-weighted index which covers the U.S. investment grade, tax-exempt bond market. 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] Conventional MBS are issued by the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC).

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

[13] 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.

[14] The Magnificent 7 stocks and gains in 2023 are Amazon (80.9 percent), Apple (48.2 percent), Alphabet (Google parent company) (58.3 percent), Meta Platforms (Facebook company) (194.1 percent), Microsoft (56.8 percent), Nvidia (238.9 percent), and Tesla (101.7).

BCAI-02062024-bu6icbs8 (2/8/2024)

DISCLAIMER:

This material provides general and/or educational information and should not be construed as a solicitation or offer of Breckinridge services or products or as legal, tax or investment advice. The content is current as of the time of writing or as designated within the material. All information, including the opinions and views of Breckinridge, is subject to change without notice.

Not all securities or issuers mentioned represent holdings in client portfolios. Some securities have been provided for illustrative purposes only and should not be construed as investment recommendations.

Past performance is not a guarantee of future results. Any index results shown are for illustrative purposes and do not represent the performance of any specific investment. Indices are unmanaged and investors cannot directly invest in them. They do not reflect any management, custody, transaction, or other expenses, and generally assume reinvestment of dividends, income, and capital gains. Performance of indices may be more or less volatile than any investment strategy.

All investments involve risk, including loss of principal. Diversification cannot assure a profit or protect against loss. No investment or risk management strategy can guarantee positive results or risk elimination in any market. Fixed income investments have varying degrees of credit risk, interest rate risk, default risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer-term securities. Income from municipal bonds can be declared taxable because of unfavorable changes in tax laws, adverse interpretations by the IRS or state tax authorities, or noncompliant conduct of a bond issuer.

Equity investments are volatile and can decline significantly in response to investor reception of the issuer, market, economic, industry, political, regulatory, or other conditions.

Separate accounts may not be suitable for all investors.

Breckinridge believes the data provided by unaffiliated third parties to be reliable, but investors should conduct their own independent verification prior to use. Some economic and market conditions contained herein have been obtained from published sources and/or prepared by third parties, and in certain cases have not been updated through the date hereof. All information contained herein is subject to revision.

Certain third parties require us to include the following language when using their information:

BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg does not approve or endorse this material or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.

The S&P500 Index (“Index”) and associated data is a product of S&P Dow Jones Indices LLC, its affiliates and/or their licensors and has been licensed for use by Breckinridge. ©2024 S&P Dow Jones Indices LLC, its affiliates and/or their licensors. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit www.spdji.com. S&P® is a registered trademark of Standard & Poor’s Financial Services LLC (“SPFS”) and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). Neither S&P Dow Jones Indices LLC, SPFS, Dow Jones, their affiliates nor their licensors (“S&P DJI”) make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and S&P DJI shall have no liability for any errors, omissions, or interruptions of any index or the data included therein.