(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 began to move higher after the Fed’s 50 basis points (bps) cut to the fed funds rate in September. The 10-Year Treasury’s yield moved from 3.78 percent on September 18, the date of the Fed’s rate announcement, to end October at 4.28 percent (See Figure 1).

Observers variously attributed market volatility to factors including stronger-than-expected and sometimes contradictory macroeconomic news, declining employment data, election season uncertainty, U.S. budget deficits, and global geopolitical concerns. Market volatility moved higher throughout the month, reaching its highest level since December 2023, as measured by the Intercontinental (ICE) Bank of America/Merrill Lynch Option Volatility Estimate (MOVE) Index⁶ (See Figure 2).

Beyond the 10-year Treasury’s yield jump, 2-, 5-, and 30-year yields leapt higher by 53, 60, and 36bps, respectively. The Treasury Index fell 2.38 percent, for the month ended October 31, 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, offset by solid consumer spending. The IC expects the Fed to cut rates by another 50bps, to a range of 4.25-4.50 percent, by year end, as inflation approaches target, job creation slows, and the unemployment rate moves modestly higher.

Municipal Market Review

The BBG Managed Money Short/Intermediate Index⁷ declined 1.47 percent for the month, outperforming Treasuries, while new issue supply surged to a year-to-date (YTD) monthly high in excess of $56 billion, per The Bond Buyer. In the volatile bond markets of October, shorter-term municipal bonds outperformed longer-term issues, based on BBG data, while higher quality bonds underperformed lower quality bonds. 

Municipal yields increased by 30, 36, 44, and 36 for the 2-, 5-, 10-, and 30-year maturities, respectively (See Figure 3). Municipal/Treasury (M/T) Ratios increased (See Figure 4).

According to The Bond Buyer, issuance of $56.6 billion for October was 27 percent higher month-over-month and 45 percent higher year-over-year (Y/Y). Tax exempt supply in October was about $49 billion, compared with $31 billion in the same month in 2023. At about $4.7 billion, taxable municipal bond supply for the month was about $73 million higher than the same month in the prior year. Flows to municipal bond funds  were consistent, totaling more than $3 billion for the month, according to Lipper. 

Late in the month, Breckinridge extended duration of intermediate strategies as yields and ratios increased. 

Corporate Market Review

The Corporate Index fell 2.43 percent for the month, with a positive excess return of 0.38 percent. The U.S. Corporate IG Index OAS was 84bps at month end, tightening 5bps.

According to BBG data, the best-performing sectors in October were Supermarkets, Airlines, Cable Satellite, Media Entertainment, and Natural Gas. The worst-performing sectors were Sovereigns, Health Insurance, Supranationals, Foreign Agencies, and Restaurants.

BBG reported that corporate bonds with lower quality ratings across the IG quality spectrum earned higher returns. Bonds rated BBB earned an excess return of 0.53 percent for the month, while bonds rated A earned 26bps in excess return. While corporate bonds with maturities of less than 5 years tended to have more favorable total returns than longer-term issues, intermediate and long corporate bonds the best excess returns, at 31 and 51bps, respectively.

Total fixed-rate, gross IG supply exceeded $109 billion in October. After redemptions in excess of $118 billion, net issuance was a negative $9 billion, BBG reported. Through October 30, more than $22.2 billion flowed into long-term taxable bond mutual and exchange traded funds (ETFs) during the month, per the Investment Company Institute.

With about 70 percent of the companies in the S&P 500 reporting actual results for Q3 2024 through the end of October, FactSet said 75 percent reported actual earnings per share (EPS) above estimates, below the 5-year average of 77 percent but equal to the 10-year average.

Securitized Market Review 

Based on BBG data, securitized bonds delivered negative total returns in the one-month period ended October 31, 2024. Excess returns were positive for all the period for commercial MBS (CMBS), and agency and non-agency (CMBS) as well as auto loan and credit card ABS. 

MBS total and excess returns were most favorable for conventional⁸ and Ginnie Mae⁹ 30-year mortgages with coupons in the 5.5 percent to 6.5 percent range, BBG reported. Among 15-year conventional mortgages, those with 3 percent coupons performed best.

In the ABS sector, securities backed by auto loans outperformed those backed by credit card debt.

Equity Market Review 

The S&P 500 Index fell 0.9 percent for the month ended October 31, 2024, amid the heightened market volatility that framed investment markets during the month. The Chicago Board Options Exchange (BoE) Volatility Index¹³ (VIX) ended the month at higher levels compared to September’s month end, and above the YTD average level.

Stocks characterized by growth and momentum factors continued to outperform the S&P 500 Index return, while quality underperformed. The Russell 1000 Growth Index¹⁴ fell 0.3 percent for the month, while the Russell 1000 Value Index¹⁵ dropped 1.1 percent.

At the sector level, only Financials (2.7 percent), Communication Services (1.9 percent), and Energy (0.8 percent) earned positive total returns in October. Healthcare (-4.6 percent), Materials (-3.5 percent), and Real Estate (-3.3) had the worst returns.

Corporate fundamentals remained positively biased through October. Based on BBG data, corporate earnings through the third quarter ended September 30 marked the fifth consecutive quarter of positive growth.

We continue to view S&P 500 stock valuations as rich relative to historical forward Price-to-Earnings ratios, at approximately the 86th percentile as measured over a 10-year period by the end of October, according to BBG. U.S. equity exchanged traded fund flows were up 35 percent month-over-month (M/M) through October 31, and already were 55 percent higher than inflows in all of 2023. Still, money remains on the sideline, with already-high money market fund assets increasing slightly M/M to record levels of about $6.5 trillion.

[1] 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.

[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 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).

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

[6] 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.

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

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

[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 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.

[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 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 

BCAI-11062024-8euoe562 (11/11/2024)

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