(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

Incoming data over the quarter reaffirmed that growth remained strong, the path to 2 percent inflation may be bumpy, and supply side factors including immigration helped to absorb still-healthy demand for labor.

Key macroeconomic data during March included a strong employment report, higher inflation readings, and an upward revision of fourth quarter gross domestic product (GDP).² The Federal Open Market Committee (FOMC) held off a rate cut at its March meeting. 

Markets appeared to interpret the FOMC decision as dovish, as the Summary of Economic Projections retained three cuts in 2024, despite upward revisions to core Personal Consumption Expenditures (PCE) and GDP.

Treasury yields decreased slightly across the curve, based on Bloomberg (BBG) data, deepening the inversion in the belly of the curve (See Figure 1). Bond market volatility fell even lower in March, 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 gained 0.64 percent for the month and fell 0.98 percent for the quarter. The BBG U.S. Aggregate Bond Index (Agg Index)⁵ added 0.92 percent and fell 0.79 percent for the quarter.

The No-Landing scenario is becoming a possibility with a Soft-Landing appearing realistic. The market may be reassessing the level at which interest rates are restrictive for the economy. The Breckinridge Investment Committee’s (IC) base case is for slowing economic growth in the second half of 2024 based on the drag of tighter monetary policy for small businesses and lower income households, who are most impacted. The IC continues to expect the Federal Reserve (Fed) to reduce its target for the overnight rate to 4.75 percent by year-end 2024, as core inflation moves back towards its 2 percent target, the economy slows, and unemployment rises. With nominal bond yields still relatively high, Breckinridge views IG fixed income as attractive. Our risk posture is defensive in credit based on tight credit spreads and our forward read of the economy.

Municipal Market Review

Municipal yields moved in a tight range throughout March, with most spots on the curve at or near year-to-date highs. Municipal bond yields increased across the curve, with the largest rise in shorter maturities, further inverting the curve (See Figure 3). 

The two-year Municipal/Treasury (M/T) Ratio ended the month at 64.43 percent, according to Municipal Market Data, the five-year and 10-year at 60.48 percent and 59.85 percent, respectively, and the 30-year at 84.81 percent. (See Figure 4).

The BBG Municipal Bond Index⁶ was flat for the month and fell 0.96 percent for the quarter. The BBG Managed Money Short/Intermediate (1-10) Index⁷ fell 0.39 percent in March and by 0.90 percent for the quarter. During March, longer maturities had the best relative returns and lower quality continued to outperform higher quality, based on BBG data.

The Bond Buyer reported March issuance of nearly $35.3 billion, almost 10 percent higher than the prior month and about 4 percent higher than the same month in 2023. Taxable municipal bond volume issued in March was almost 8 percent lower than the same month last year. Total YTD muni bond issuance of almost $100 billion is almost 24 percent higher than 2023’s first quarter total. Taxable municipal bond issuance YTD at $5.3 billion is 65 percent lower than issued during the first quarter of 2023.

In a reversal of direction from 2023, municipal funds saw net inflows of $7 billion in the first quarter. Open-end funds saw inflows of about $7.1 billion, while ETFs had outflows of $130 million, based on Lipper data.

Corporate Market Review

The BBG U.S. Corporate IG Index⁸ added 1.29 percent during the month and fell 0.40 percent during the first quarter. Positive excess returns were 0.56 percent and 0.89 percent during the same respective periods. IG corporate bond spreads closed at an option-adjusted (OAS) spread of 90bps, per BBG data, 6bps tighter for the month and 9bps tighter year-to-date.

According to BBG data, during March, the best-performing sectors were Wirelines, Refining, Media Entertainment, and Cable/Satellite. The worst-performing were Aerospace/Defense, Construction Machinery, Capital Goods, Airlines, and Diversified Manufacturing. Higher quality IG bonds delivered higher relative performance on a total return basis, while bonds rated BBB had higher excess returns. Longer maturities outperformed shorter maturities.

Fixed-rate, gross IG supply for March was about $168 billion. After redemptions of more than $124 billion, net issuance was about $43 billion. For the first quarter IG issuance on a gross basis is about 29 percent higher than the same period in 2023 and 39 percent higher on a net basis. About $15 billion in assets flowed into IG bond funds, per EPFR Global.

Securitized Market Review

The general trend was for spreads to tighten on Commercial Mortgage-Backed Securities (MBS) and Asset-Backed Securities (ABS) during the quarter. As a result, with a few exceptions in the securitized sectors, total returns and excess returns were positive during March and the quarter, based on BBG data. 

According to BBG data, total and excess returns in March for both Conventional¹² and Ginnie Mae¹³ MBS were positive for securities with coupons from 2.0 percent to 6.5 percent, ranging from 0.93 (6.5 percent coupons) to 1.15 percent (4.5 percent coupons). For the quarter, positive excess returns were biased to higher coupon MBS.

Commercial Mortgage-Backed Securities (CMBS) and Non-agency CMBS delivered stronger total and excess returns for the month and the quarter when compared to Agency CMBS, per BBG data.

Auto loan ABS delivered higher total and excess returns for the month and the quarter than credit card ABS, BBG data showed. 

Equity Market Review 

The Equity Index total return was 3.2 percent in March and 10.6 percent for the first quarter ended March 31. For the same periods, the Russell 1000 Value Index¹⁴ earned 5.0 percent and 9.0 percent while the Russell 1000 Growth Index¹⁵ added 1.8 percent and 11.4 percent, respectively. Within the S&P 500 Index, dividend payers returned 3.7 percent, while non-dividend payers posted a 1.5 percent return in March, while the returns were 10.8 percent and 9.8 percent for each cohort, respectively, over the first quarter. 

The Chicago Board Options Exchange (BoE) Volatility Index¹⁶ (VIX) remained low (See Figure 5).

During March, based on BBG data, outperformers compared to the Equity Index included Energy (10.6 percent), Utilities (6.6 percent), Materials (6.5 percent), Financials (4.8 percent), Industrials (4.4 percent), Communication Services (4.3 percent), and Consumer Staples (3.5 percent). Underperformers compared to the Index included Consumer Discretionary (0.1 percent), Real Estate (1.8 percent), Information Technology (2.0 percent), and Healthcare (2.4 percent).

For the quarter, on a factor basis, BBG data showed Momentum and Growth outperformed the Index. As the quarter progressed, the breadth of the market’s advances broadened to include sectors beyong the companies represented by the Magnificant Seven.¹⁷ Sector performance during the quarter included Communications Services (15.8 percent), Energy (13.7 percent), Information Technology (12.7 percent), Financials (12.5 percent), Industrials (11.0 percent). Underperformers compared to the Equity Index over the past quarter included Real Estate, which was the only sector with a negative return (-0.6 percent), Utilities (4.6 Percent), Consumer Discretionary (5.0 percent), Consumer Staples (7.5 percent), Healthcare (8.9 percent), and Materials (9.0 percent).

[1] 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.

[2] Gathered from various news reports, signs of economic strength included an early March Job Openings and Labor Turnover Survey (JOLTS) from the Bureau of Labor Statistics that showed openings lower but indicated still-firm labor demand, as hiring continued to surpass separations. On March 19, the U.S. Census Bureau reported housing starts in February rebounded 10.7 percent month-over-month (M/M) after a weather-related decline in January. On March 21, the National Association of Realtors reported that existing home sales posted a sharp increase in February, although a Census Bureau report on March 25 showed new home sales flat for February. The Census Bureau reported on March 26 that new durable goods orders rose 1.4 percent month-over-month, following a drop in January. On the other hand, inflation readings, based on various news reports, suggest the path to the Fed’s 2 percent target may be bumpy. For example, on March 12, the Bureau of Labor Statistics showed the core Consumer Price Index (CPI) was up 0.4 percent M/M in February, as the core goods category showed an increase while services inflation moderated. The Conference Board's index on March 26 showed consumer confidence declined in March, marking the second straight monthly decline in the overall index. On March 29, the Bureau of Economic Analysis reported the PCE index bounced back in February, led by increases in spending on services. Household spending also bounced back in February, according to the report. The report had core PCE at 2.9 percent on a six-month, seasonally adjusted annual rate basis, up from December's 1.9 percent. On March 29, the Commerce Department estimated economy grew faster than previously estimated in the fourth quarter, boosted by strong consumer spending and business investment in nonresidential structures like factories and healthcare facilities.

[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 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.

[15] 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.

[16] 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.

[17] The Magnificent 7 stocks are Amazon, Apple, Alphabet (Google parent company), Meta Platforms (Facebook parent company), Microsoft, Nvidia, and Tesla.

BCAI-04042024-poorqwm0 (4/8/2024)

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