(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 meeting of the Federal Open Market Committee (FOMC) at the end of July strongly suggested a growing confidence among policymakers that conditions may be in place to cut rates in September. The Bureau of Economic Analysis (BEA) reported core Personal Consumption Expenditures (PCE) price increases in June were unchanged from May at 2.6 percent. The Bureau of Labor Statistics Job Openings and Labor Turnover Survey (JOLTS) for June suggested labor demand and supply are well balanced. The BEA placed Q2 gross domestic product (GDP) growth at 2.8 percent annually on a seasonally adjusted annual rate, accelerating from 1.4 percent in Q1.

For the second month in a row, stock and bond markets turned in positive performances. The Bloomberg (BBG) Treasury Bond Index³ gained 2.29 percent. The U.S. Corporate IG Index added 2.38 percent, with an excess return of 8bps. The (BBG) Managed Money Short/Intermediate (1-10) Index (the Managed Money 1-10 Municipal Bond Index),⁴ returned 0.99 percent. The S&P 500 Index⁵ added 1.2 percent.

Bloomberg (BBG) data showed July Treasury yields in the front end of the curve falling more than yields for longer maturity bonds, in a bull steepening⁶ trend Yields fell by 50, 46, 37, and 26bps for 2-, 5-, 10-, and 30-year bonds (See Figure 1).

While it increased as the FOMC meeting approached, overall bond market volatility ended lower, as measured by the Intercontinental (ICE) Bank of America/Merrill Lynch Option Volatility Estimate (MOVE) Index⁷ (See Figure 2). 

Breckinridge Investment Committee’s (IC) base case remains for slowing growth due to continued tight Fed policy that has impacted small businesses and lower-income households. Many states have also seen unemployment rates increase in the past year, which may also weigh on the economy. The IC continues to expect the Fed to reduce its target for the fed funds rate twice before year-end 2024, as core PCE inflation moves nearer the FOMC’s 2 percent target.

Municipal Market Review

Like Treasuries, yields in the front end of the municipal yield curve fell more so than yields on longer maturity municipal bonds, according to Municipal Market Data (MMD), while overall the drop in municipal yields was more muted than for Treasuries and municipal bonds underperformed. The municipal yield curve’s bull-steepening trend was notably more pronounced and relative value is beginning to shift into the 10-year range.

Municipal yields were lower by 26, 14, 2, and 4bps for 2-, 5-, 10-, and 30-year bonds (See Figure 3). With yields for Treasuries dropping faster than yields for municipal bonds, Municipal/Treasury (M/T) Ratios—a measure of the relative value of municipal bonds and Treasuries—improved in those same spots on the curve compared with June (See Figure 4).

Supply remained elevated in July, continuing the trend for 2024 but was met with more demand from mutual funds and exchange traded funds. The Bond Buyer reported July issuance of $33.9 billion, almost 22 percent higher than the same month one year ago, although lower than total of $48.7 billion issued during June of 2024, which The Bond Buyer revised higher from $44.7 billion. For the month and year-to-date, taxable municipal bond supply continued to lag, finishing July at about 18 percent lower than the prior year’s total for the same periods.

The Managed Money 1-10 Municipal Bond Index outperformed the broader BBG Municipal Bond Index⁸ by 8bps in July. Per BBG data for July, bonds with maturities in the 3- to 7-year segment of the curve outperformed shorter and longer maturities. While the margin of difference was minimal, lower-rated bonds had a slight performance advantage compared to higher-rated bonds, per BBG data.

Reflecting the continued sustained demand for municipal bonds, Lipper reported, inflows totaling more than $2 billion to municipal bonds funds during the month.

Corporate Market Review

The BBG U.S. Corporate IG Index gained 2.38 percent during July, while excess returns were positive at 0.08 percent. The U.S. Corporate IG Index OAS was 1bp lower than at the end of June at 93bps.

According to BBG data, the best-performing sectors during June were Tobacco, Aerospace/Defense, Financial Companies, Electric Utilities and Building Materials. The lowest-performing sectors were Media Entertainment, Airlines, Transportation Services, and Health Insurance. 

BBG reported that during July corporate bonds with maturities ranging from 1 to 10 years were the best performing segment of the curve. The bonds with the highest credit ratings outperformed bonds with lower ratings.

Fixed-rate, gross IG supply for July was $127 billion. After redemptions of about $71 billion, net issuance was $56 billion. About $43 billion in assets flowed into long-term taxable bond mutual and exchange traded funds, per the Investment Company Institute.

Securitized Market Review

Securitized bonds delivered positive total and excess returns for July. MBS, Commercial Mortgage-Backed Securities (CMBS), Agency, and Non-agency CMBS delivered stronger total returns for the month relative to auto loan and credit card ABS, BBG data showed.

Equity Market Review 

The S&P 500 Index earned positive returns of 1.2 percent for the month. The Chicago Board Options Exchange (BoE) Volatility Index¹² (VIX) was low through the middle of the month, then moved higher as the FOMC meeting approached (See Figure 5).

Reflecting a wider rotation among investors in the stock market, the Russell 1000 Value Index¹³ gained 5.1 percent while the Russell 1000 Growth Index¹⁴ fell 1.7 percent for the month ended July 31. On a factor basis, dividend yielding and low-volatility securities outperformed other more growth-oriented factors.

The market rotational trend was further reflected in sector-level performance during the month. Communications Services (negative 4.0 percent) and Information Technology ( negative 2.1 percent), which have led the market on a path higher this year, were the worst-performing sectors. Other sectors—more traditionally defensive sectored—substantially outperformed the S&P 500 Index average: Real Estate (7.2 percent), Utilities (6.8 percent), Financials (6.4 percent), Industrials (4.9 percent) and Materials (4.4 percent). The performance of the Health Care (2.6 percent), Energy (2.1 percent), Consumer Staples (1.9 percent), and Consumer Discretionary (1.6) were more in line with the S&P 500 Index average.

We believe that a solidly positive earnngs season is supporting the positive outlook for stocks. FactSet reported, “The (blended) net profit margin for the S&P 500 for Q2 2024 is 12.1 percent, which is above with the year-ago net profit margin (11.6 percent), above the 5-year average net profit margin (11.5 percent), and above the previous quarter’s net profit margin (11.8 percent). In fact, this quarter marks just the second time that the S&P 500 is reporting a net profit margin above 12 percent since Q2 2022.”

[1] 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.

[2] 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.

[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. You cannot invest directly in an index.

[4] 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.

[5] 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.

[6] A bull steepener is a shift in the yield curve caused by falling interest rates—rising bond prices—hence the term bull. The short-end of the yield curve, which is typically driven by the fed funds rate, falls faster than the long-end, steepening the yield curve.

[7] 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.

[8] 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.

[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] 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.

[13] 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.

[14] 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.

BCAI-08052024-pxczdzus (8/7/2024)

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