(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 Head of Municipal Trading, Sara Chanda; 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

With little evidence to suggest that either monetary policy or favorable economic trends were set to change in the near term, stock and bond markets turned in positive performance in June. Bonds, which entered the year bearing the weight of market expectations for multiple interest rate cuts, captured positive total returns in June, as measured by the Corporate Bond and the Municipal Bond indexes, although, as of June 30, second quarter and YTD total returns were negative for each. The S&P 500 Index⁴ had positive monthly, quarterly, and YTD returns.

Bloomberg (BBG) data show June Treasury yields falling by 12, 13, 10 and 9 basis points (bps) for 2-, 5-, 10-, and 30-year bonds (See Figure 1). Overall yields increased during the second quarter (2Q) and YTD periods ended June 30 (See Figure 2).

Bond market volatility ended lower, as measured by the Intercontinental (ICE) Bank of America/Merrill Lynch Option Volatility Estimate (MOVE) Index⁵ (See Figure 3). 

The BBG U.S. Treasury Bond Index⁶ added 1.01 percent in June and had a positive 0.10 percent and a negative 0.86 percent return for the quarter and YTD periods, respectively. The BBG U.S. Aggregate Bond Index (Agg Index)⁷ was 0.95 percent for the month of June, while earning a positive 0.07 percent for the quarter and negative 0.71 percent YTD.

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 Personal Consumption Expenditures (PCE) inflation moves nearer the Federal Open Market Committee’s 2 percent target.

Municipal Market Review

According to Municipal Market Data (MMD), municipal yields ending June 28 were lower by 24, 25, 27, and 24bps for 2-, 5-, 10-, and 30-year bonds (See Figure 4). M/T Ratios declined in those same spots on the curve compared with May (See Figure 5).

Despite the decline in June yields, absolute yields remain at relatively higher levels thanks, at least in part, to sustained higher levels of municipal bond issuance in 2024, which has pressured prices. The Bond Buyer reported June issuance of $44.7 billion, about 13 percent higher than the same month one year ago. The Bond Buyer also revised issuance for May higher, from $43.9 billion to $46.9 billion. Issuance YTD through June 30 is $55 billion higher than the same period in 2023, a 30 percent increase. 

Through June 30, the BBG Managed Money Short/Intermediate (1-10) Index⁸ added 1.30 percent for the month and lost 0.91 and 1.80 percent for the three-months and six-months ended June 30, respectively. The BBG Municipal Bond Index⁹ gained 1.53 percent in June and fell 0.02 and 0.40 percent for the quarter and YTD, respectively. For June, longer maturity bonds performed best, while the highest-rated (AAA) and lowest-rated (BBB) bonds in the IG category turned in the highest performance.

According to data from Lipper, outflows totaling about $500 million from municipal bonds funds during the week ending June 26, reduced net inflows for the month through that date to about $200 million. IG municipal bond funds have seen YTD inflows of about $4 billion through June 30. 

Corporate Market Review

The BBG U.S. Corporate IG Index gained 0.64 percent during June, while excess returns were positive at 0.56 percent. YTD excess returns through June 30 were 0.89 percent. IG corporate bond spreads closed 9bps wider for the month at an OAS of 94bps, per BBG data. June 2024 marked the first monthly widening of the U.S. Corporate IG Index OAS since October 2023, when the OAS hit 129bps, 8 bps wider than the prior month-end close.

According to BBG data, the best-performing sectors during June were Home Construction, Airlines, Supranationals, Foreign Agencies and Lodging. The lowest-performing sectors were Media Entertainment, Refining, Railroads, Integrated Oil, and Oil Field Services.

Bloomberg reported intermediate-term corporate bonds outperformed longer-maturity corporate bonds for the month of June. Higher-rated bonds outperformed lower-rated bonds for the same period.

Fixed-rate, gross IG supply for June was $113.9 billion. After redemptions of about $79 billion, net issuance was more than $33 billion. About $20 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 mixed excess returns for June. For the second consecutive month, MBS delivered stronger total returns for the month relative to auto loan and credit card ABS, BBG data showed. ABS delivered the highest total returns for the quarter. Non-agency CMBS total and excess returns were the highest relative to other Securitized sectors for the YTD period through June 30.

Equity Market Review 

The S&P 500 Index earned positive returns of 3.6 percent, 4.3 percent, and 15.3 percent, respectively, for the month, quarter, and year-to-date periods ended June 30. 

For the month and the quarter, respectively, the Russell 1000 Value Index¹³ fell 0.9 percent and 2.2 percent, while gaining 6.6 percent YTD. The Russell 1000 Growth Index¹⁴ added 1.5 percent, 8.3 percent, and 20.7 percent for the month, quarter, and YTD periods ended June 30. On a factor basis, size, momentum, quality and growth outperformed, and value trailed.

The Chicago Board Options Exchange (BoE) Volatility Index¹⁵ (VIX) remained below trend (See Figure 6).

During June, based on BBG data, among outperformers compared to the S&P 500 Index were Information Technology (9.3 percent), Consumer Discretionary (4.9 percent), and Communication Services (4.8 percent). Sectors the lowest returns in June included Utilities (-5.5 percent) and Materials (-3.0 percent).

For the quarter, top-performing sectors were Information Technology (13.8 percent), Communication Services (9.4 percent), and Utilities (4.7 percent), while Materials (-4.5 percent), Industrials (-2.9 percent), and Energy (-2.4 percent) trailed other sectors.

On a YTD basis, only one sector (Real Estate Investment Trusts (REITs -2.5 percent) had a negative return, while Information Technology (28.2 percent) and Communication Services (26.7 percent) had the highest returns. The next highest sector return was Energy (10.9 percent).

Entering the third quarter, the outlook for corporate earnings remains positive. FactSet reported, “Industry analysts in aggregate predict the S&P 500 will report year-over-year earnings growth of 11.3% in 2024 and 14.4% in 2025. If these numbers are the actual earnings growth rates for these years, it will mark the third time in the past 15 years that the S&P 500 has reported two consecutive years of double-digit earnings growth.”

[1] 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.

[2] 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.

[3] 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.

[4] 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.

[5] 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.

[6] 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.

[7] 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.

[8] 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.

[9] 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.

[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® 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.

[15] 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-07032024-hbstfdlz (7/10/2024)

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