(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

Inflation data in early May added to uncertainty about the Federal Reserve’s (Fed’s) rate policy for the balance of 2024. Federal Open Market Committee (FOMC) meeting minutes released later in the month suggested some participants might hold hawkish views on rates going forward. As the month closed, updated data suggested the economy may be slowing and progress toward the Fed’s 2 percent inflation target is underway. The net effect was a broadly favorable month for stock and bond investors, although technical conditions contributed to negative total returns in the municipal bond market.

In the Treasury market, Bloomberg (BBG) data showed yields falling by 16, 21, 18, and 14bps for 2-, 5-, 10- and 30-year maturities (See Figure 1). The path of the 10-year Treasury for the month reflected the variability in market sentiment during May (See Figure 2).

Bond market volatility ended lower, as measured by the Intercontinental (ICE) Bank of America/Merrill Lynch Option Volatility Estimate (MOVE) Index¹ (See Figure 3).

The BBG U.S. Treasury Bond Index² added 1.46 percent for the month. The BBG U.S. Aggregate Bond Index (Agg Index)³ was 1.70 percent higher.

The Breckinridge Investment Committee’s (IC) base case remains that the economy will continue to slow, as monetary policy effects can lag. The IC continues to expect the Fed to reduce its target for the fed funds rate twice before year-end 2024, as we expect that core inflation will move back to target, the economy slows, and unemployment rises.

Municipal Market Review

The Bond Buyer reported May issuance of about $43.9 billion, about 47 percent higher than the same month one year ago. The Bond Buyer also revised issuance for April higher, from $39.5 billion to $44.2 billion. May’s nearly $44 billion total issuance is also 22 percent higher than the 10-year average issuance for May. Sustained high supply thus far in 2024 is pressuring municipal bond prices and supporting yields higher. 

According to Municipal Market Data, municipal yields were higher by 13, 29, and 30bps at the 2-, 5- and 10-year spots, while the 30-year maturity was flat (See Figure 4). The move higher reduced the depth of the inversion in the belly of the curve from 2 to 10 years. M/T Ratios improved compared with April (See Figure 5).

The BBG Municipal Bond Index⁴ fell 0.29 percent. The BBG Managed Money Short/Intermediate (1-10) Index⁵ fell 1.02 percent. Shorter maturity and lower-rated bonds performed better than longer maturity and higher-rated bonds.

Municipal bonds funds saw net inflows of $200 million in May, based on Lipper data.

Corporate Market Review

The BBG U.S. Corporate IG Index⁶ gained 1.87 percent during the month, while excess returns were positive at 0.30 percent. IG corporate bond spreads closed 2bps tighter for the month at an OAS of 85bps, per BBG data.

On a sector basis, according to BBG data, the best-performing sectors were Cable/Satellite, Chemicals, Gaming, Banking, and Metals and Mining. The worst performing were Restaurants, Integrated, Paper, Aerospace/Defense, and Refining. BBB-rated bonds fared the best across the IG quality spectrum, while Aa+ rated bonds fared the worst.

Fixed-rate, gross IG supply for May was $150.5 billion. After redemptions of about $114 billion, net issuance was more than $35 billion. About $32 billion in assets flowed into taxable bond funds, per the Investment Company Institute.

Securitized Market Review

Securitized bonds delivered positive total and excess returns for May. In a reversal of April’s returns, MBS delivered stronger total and excess returns for the month relative to Auto loan and credit card ABS, BBG data showed.

Among MBS, conventional MBS¹⁰ delivered positive total and excess returns across the coupon stock higher coupon bonds outperformed lower coupons, based on BBG data, while Ginnie Mae¹¹ delivered positive total returns for all coupons except the 3, 6, 6.5 coupon MBS, which had negative excess returns.

Equity Market Review 

In another reversal from April, the S&P 500 Index¹² earned a positive 5.0 percent return in May. For the same period, the Russell 1000 Value Index¹³ gained 3.2 percent, while the Russell 1000 Growth Index¹⁴ was up 6.0 percent. On a factor basis, dividend yield, momentum, and size outperformed during the month, while low volatility, quality, and value underperformed.

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

During May, based on S&P/Dow Jones data, outperformers compared to the S&P 500 Index included Information Technology (10.08 percent), Utilities (8.97 percent), Communication Services (6.58 percent), and Real Estate (5.08 percent). Sectors delivering positive total returns but trailing the broader S&P 500 Index were Materials (3.22 percent), Financials (3.16 percent), Consumer Staples (2.45 percent), Health Care (2.38 percent), Industrials (1.65 percent), and Consumer Discretionary (0.30 percent). The only sector to deliver a negative total return for the month was Energy (-0.39 percent).

FactSet noted that first quarter corporate earnings reports were favorable. “The blended (combines actual and estimated results) year-over-year earnings growth rate for the S&P 500 for Q1 2024 is 5.4 percent. If 5.4 percent is the actual growth rate for the quarter, it will mark the highest year-over-year earnings growth rate reported by the index since Q2 2022 (5.8 percent).”

[1] 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.

[2] 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.

[3] 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.

[4] 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.

[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 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.

[7] 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.

[8] 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.

[9] 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.

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

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

[12] 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.

[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-06072024-3xbfikz7 (6/7/2024)

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