(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

Treasury yields declined following the U.S. elections, as Republicans captured the Presidency and majorities in the U.S. Senate and House of Representatives. Coupled with positive economic news⁹ and a cut of 25bps in the federal funds rate, investors bid up Treasuries (See Figure 1). 

Yields fell by 2bps for 2-year Treasuries, and by 11bps in the 5-, 10-, and 30-year spots. The BBG Treasury Index gained 0.78 percent for the month ended November 30, 2024.

The Breckinridge Investment Committee (IC) base case is for slower, but positive real growth due to the lag effect of tight Fed policy that has impacted small businesses and lower-income households. We expect solid consumer spending to continue, as inflation approaches target. Sustained but slowing job creation likely will continue, in our view, although the unemployment rate may move modestly higher.

Before the Federal Open Market Committee (FOMC’s) next scheduled meeting in mid-December, November Consumer Price Index and Producer Price Index data will be released. While the FOMC will factor the updated information into its rate decision, the IC’s expectation is for another 25bps cut to a range of 4.25 to 4.50 percent, by year end.

Municipal Market Review

The BBG Managed Money Short/Intermediate Index gained 1.10 percent for the month, outperforming Treasuries. Yields fell by 10, 7, 23 and 25bps, respectively, in the 2-, 5-, 10-, and 30-year spots (See Figure 3). Municipal/Treasury Ratios declined (See Figure 4).

Longer-duration securities outperformed shorter-term municipal bonds, based on BBG data, while the highest- and lowest-rated bonds outperformed bonds with AA and A credit quality ratings. 

Following October’s year-to-date (YTD) monthly high issuance, November marked a YTD monthly low at $24.7 billion in new supply, per The Bond Buyer.

According to The Bond Buyer, YTD issuance of almost $475 billion through November 2024 is almost $119 billion higher than for the same period in 2023, and with the exception of 2020, already higher than full-year issuance in each of the last 10 years.

Tax exempt supply in November was about $21 billion, compared with almost $31 billion in the same month in 2023. At about $1.7 billion, taxable municipal bond supply for the month was about 49 percent lower than the same month in the prior year. Demand for municipal bonds, as measured by asset flows into municipal bond funds, remained consistent, totaling more than $3.3 billion for the month and $22 billion YTD, according to Lipper. 

Early in the month, Breckinridge extended duration of intermediate strategies, intending to take advantage of favorable supply and ratio trends in place at the time. 

Corporate Market Review

The Corporate Index gained 1.34 percent for the month, with a positive excess return of 0.49 percent. The U.S. Corporate IG Index OAS was 78bps at month end, tightening 6bps.

According to BBG data, the best-performing sectors were Media Entertainment, Cable Satellite, and, from the Energy sector, Oil Field Services, Midstream Oil Service Providers, and Independent Oil Producers. The worst-performing sectors were Airlines, Sovereigns, Supranationals, Foreign Agencies, and issuers in the Metals and Mining sector.

BBG reported that BBB bonds fared the best across the IG quality spectrum, adding 1.49 percent, followed by bonds rated AAA, which added 1.29 percent. Bonds rated A had the lowest relative returns in the IG range, gaining 1.20 percent. Corporate bonds with maturities of 10 years or more earned the highest monthly returns, at 2.27 percent.

Total fixed-rate, gross IG supply was nearly $94 billion. After redemptions in excess of $96 billion, net issuance was negative $2.5 billion, BBG reported, a second consecutive month of negative net issuance. Through November 26, more than $13 billion flowed into long-term taxable bond mutual and exchange traded funds (ETFs) during the month, per the Investment Company Institute (ICI).

FactSet reported that companies in the S&P 500 Index reported earnings growth of 5.8 percent for the third quarter in 2024. In addition, estimated earnings growth for the fourth quarter 2024 is expected to more than double to 12 percent, which would be “the highest year-over-year earnings growth rate reported by the index since Q4 2021 (31.4 percent).” 

Securitized Market Review 

Based on BBG data, by November’s month-end, total and excess returns YTD were positive for all securitized sectors. 

During November, MBS total and excess returns were most favorable for conventional¹⁰ for 30-year mortgages with coupons in the 2.5 percent to 5.5 percent range, while Ginnie Mae¹¹ 30-year mortgages with coupons in the 3.5 percent to 5.0 percent range performed best, BBG reported. Among 15-year conventional mortgages, those with 4 percent coupons performed best.

In a switch from October, within ABS, securities backed by credit card debt outperformed those backed by auto loans.

Equity Market Review 

The S&P 500 Index gained 5.9 percent, as all 11 sectors gained, reflecting a broadening of positive performace across the market that has been in place for much of the later half of the year. The Russell 1000 Growth Index¹⁵ added 6.5 percent for the month, while the Russell 1000 Value Index¹⁶ gained 6.4 percent. While market leadership for growth factors were sustained, value-oriented stocks have continued to increase their share of market returns over the second half of 2024.

At the sector level, Consumer Discretionary fared best, up 13.3 percent, and Health Care had the lowest returns, up 0.3 percent. Other sector percentage returns were Financials (10.3), Industrials (7.5), Energy (6.9), Consumer Staples and Information Technology (both 4.7), Real Estate (4.1), Utilities (3.7), Communication Services (3.1), and Materials (1.6). 

The Chicago Board Options Exchange (BoE) Volatility Index¹⁷ (VIX) ended the month at levels well below those at October’s month end, and below the 200-day moving average.

S&P 500 stock valuations remained rich relative to historical forward Price-to-Earnings ratios, according to BBG, as measured over a 10-year period by the end of November. Through November 20, the ICI reported domestic equity long-term mutual fund flows and ETF net issuance of nearly $52 billion—about $44 billion in the week following the U.S. election alone—during November, compared with net outflows of about 4.7 billion combined fund and ETF flows in October.

[1] U.S. Department of the Treasury, as of November 30, 2024.

[2] As of November 30, 2024, based on the Intercontinental (ICE) Bank of America/Merrill Lynch Option Volatility Estimate (MOVE) Index, which tracks 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] Municipal bond performance is as measured by the BBG Managed Money Short/Intermediate Index, which 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. Treasury security performance is as measured by the BBG Treasury Index, 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] Municipal bond issuance is as reported by The Bond Buyer, as of November 30, 2024.

[5] As measured by the Bloomberg U.S. U.S. Corporate Investment Grade Bond Index, 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.

[6] Excess return is the return earned by an investment that carries risk (such as a corporate or securitized bond) when compared to an investment with the same maturity considered to be risk free (such as a U.S. Treasury bond).

[7] 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.

[8] FTSE Russell, a subsidiary of the United Kingdom-based London Stock Exchange Group, produces, maintains, licenses, and markets stock market indices.

[9] Government data suggested inflation trends remained intact, while consumer and employment data were resilient. For example, the U.S. Census Bureau reported higher construction spending in October. In addition, the National Association of Realtors said that lower mortgage rates supported higher sales of existing homes. October Consumer Price Index (CPI) readings from the U.S. Bureau of Labor Statistics (BLS) were largely in line with market expectations, per analysts at Barclays Research. The same firm’s analysts considered Personal Consumption Expenditures (PCE) inflation was also broadly in line with expectations. The second estimate of Gross Domestic Product (GDP) from the Bureau of Economic Analysis (BEA) was a solid a seasonally adjusted annual growth rate of 2.8 percent quarter-over-quarter. While job growth numbers from the BLS fell short of expectations, they still showed growth and hourly earnings were higher. The Conference Board reported November Consumer Confidence increased in November and higher retails sales were sustained in in October, with a rebound in auto sales and food services, according to the Census Bureau.

[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 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.

[13] 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.

[14] 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.

[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 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.

[17] 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-12052024-nlgcviny (12/09/2024)

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