- U.S. Treasury Curve: U.S. Treasury rates increased, and the curve steepened. (See Figure 1)
- Municipal Market Technicals: April issuance was $34 billion, 7.5 percent lower than the same month in 2021. Monthly mutual fund outflows were more than $13 billion in April.
- Corporate Market Technicals: Investment grade (IG) fixed-rate bond supply for April was $134 billion. IG bond funds reported $14 billion of outflows during the month.
- Securitized Trends: Higher-coupon mortgage-backed securities (MBS) outperformed lower coupons. Auto-loan asset-backed securities (ABS) outperformed credit-card ABS.
(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, Portfolio Management, Matthew Buscone; Senior Portfolio Manager Sara Chanda; Co-Head, Research, Nicholas Elfner; Co-Head, Portfolio Management, Jeffrey Glenn, CFA; Head, Municipal Trading, Benjamin Pease; and Co-Head, Research, Adam Stern, JD.)
Global uncertainty over inflation, the Russia/Ukraine invasion, and COVID-induced supply chain concerns led to market volatility and losses. The Federal Reserve (Fed) was expected to hike the federal funds rate by 50 basis points (bps) at its early May meeting and continue to hike rates to combat U.S. inflation. Meanwhile, the invasion and the pandemic worsened inflation pressures.
Treasury yields increased across the curve (See Figure 1). Treasuries are now yielding significantly more for investors than a year ago. Yields for maturities for 2- and 5-year ranges were higher by 38 and 50 basis points (bps), respectively. Yields at 10- and 30-years were higher by 60bps and 55bps at 30 years.
Equity prices fell sharply in April, too. For the month, the S&P 500 Index fell 8.8 percent, the Dow Jones Industrial Average fell about 5 percent, and the NASDAQ was 13 percent lower, according to Dow Jones Market Data, as of April 30, 2022.
The Bureau of Economic Analysis reported first quarter gross domestic product (GDP) was weaker than expected, with real GDP falling 1.4 percent. Net exports and inventories detracted significantly, while, on a positive note, consumer spending and business investment showed strength. The savings rate fell below pre-COVID levels.
Breckinridge portfolios remain neutral to modestly long as certain indices duration continued to shorten during April. Municipal credit fundamentals are healthy. We look for fund outflows to taper if and when rates stabilize, presenting a good entry point for clients. Corporate credit fundamentals are broadly stable. Multi-Sector portfolios are overweight spread sectors, but underweight lower quality as we expect rate and spread volatility.
Municipal Market Review
Municipal yields tracked Treasuries and continued to trend higher across the curve. (See Figure 2). Yields rose 44bps in the 2-year range and nearly 50bps across the 5, 10, and 30-year spots over the month, per Bloomberg. As a result, the municipal yield curve steepened slightly between 2 and 10 years and 10 and 30 years.
Municipals underperformed Treasuries and ratios improved, closing at or near year-to-date highs (See Figure 3).
April municipal bond issuance of $34 billion marked a 7.5 percent drop compared to April 2021 and 22 percent lower than March 2022, per The Bond Buyer. Tax-exempt bond issuance was 8.5 percent lower than April 2021, while monthly taxable municipal bond issuance was 35 percent lower year-over-year. Asset outflows continued from municipal bond funds, topping $13 billion, per Lipper, about twice the prior month’s level.
For April, the Bloomberg Managed Money Short/Intermediate (1-10) Index fell 2.00 percent and the Bloomberg 1-10 Year Blend Index declined 1.72 percent. Shorter-maturity and higher quality municipal bonds outperformed those with lower credit ratings and longer maturities.
Corporate Market Review
IG corporate bond spreads widened by 19bps, per Bloomberg data, ending April at 135bps. The Bloomberg U.S. Corporate Investment Grade (IG) Index fell 5.47 percent on a total return basis and delivered a negative excess return of 1.40 percent compared with duration-matched Treasuries.
Bloomberg data showed that corporate bonds rated AA and higher outperformed lower rated A and BBB bonds in April. Shorter-maturity IG bonds outperformed comparable longer-maturity bonds.
The best-performing corporate sectors were airlines, construction machinery and automotive, according to Bloomberg. The worst-performing were cable satellite, media entertainment, oil field services and transports.
Index-eligible IG bond issuance in April, per Bloomberg, was $134 billion, a substantial decrease from $246 billion in March. Net issuance, after redemptions, was a $49 billion in April. According to Emerging Portfolio Fund Research, IG bond funds reported approximately $14 billion of outflows in April.
Securitized Market Review
Nominal Current Coupon MBS spreads widened 15bps in April and closed the month at 125bps over the 5/10 Treasury blend, per Bloomberg data. This produced a negative excess return of 105bps for the overall MBS index. Within the sector, higher coupons outperformed lower coupons, with the 5 percent coupon being the best performer. With a negative excess return of 98bps, Ginnie Mae MBS outperformed Conventional MBS (those backed by Fannie Mae and Freddie Mac), which delivered a negative excess return of 105bps, matching the index headline number.
Among commercial mortgage-backed securities (CMBS), Agency CMBS had negative excess return of 4bps, per Bloomberg data. Non-Agency CMBS delivered a negative excess return of 7bps.
In the ABS market segment, spreads widened 15bps and 8bps for auto loan and credit card debt, respectively. Volume stands at $92.7 billion priced across 134 transactions, year to date. Volume is up 8.3 percent relative to the comparable period in 2021. During April, ABS backed by auto loans had a negative excess return of 3bps, while negative excess return for credit card-backed securities was 18bps.
This material provides general and/or educational information and should not be construed as a solicitation or offer of Breckinridge services or products or as legal, tax or investment advice. The content is current as of the time of writing or as designated within the material. All information, including the opinions and views of Breckinridge, is subject to change without notice.
Any estimates, targets, and projections are based on Breckinridge research, analysis, and assumptions. No assurances can be made that any such estimate, target or projection will be accurate; actual results may differ substantially.
Past performance is not a guarantee of future results. Breckinridge makes no assurances, warranties or representations that any strategies described herein will meet their investment objectives or incur any profits. Any index results shown are for illustrative purposes and do not represent the performance of any specific investment. Indices are unmanaged and investors cannot directly invest in them. They do not reflect any management, custody, transaction or other expenses, and generally assume reinvestment of dividends, income and capital gains. Performance of indices may be more or less volatile than any investment strategy.
Performance results for Breckinridge’s investment strategies include the reinvestment of interest and any other earnings, but do not reflect any brokerage or trading costs a client would have paid. Results may not reflect the impact that any material market or economic factors would have had on the accounts during the time period. Due to differences in client restrictions, objectives, cash flows, and other such factors, individual client account performance may differ substantially from the performance presented.
All investments involve risk, including loss of principal. Diversification cannot assure a profit or protect against loss. Fixed income investments have varying degrees of credit risk, interest rate risk, default risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer-term securities. Income from municipal bonds can be declared taxable because of unfavorable changes in tax laws, adverse interpretations by the IRS or state tax authorities, or noncompliant conduct of a bond issuer.
Breckinridge believes that the assessment of ESG risks, including those associated with climate change, can improve overall risk analysis. When integrating ESG analysis with traditional financial analysis, Breckinridge’s investment team will consider ESG factors but may conclude that other attributes outweigh the ESG considerations when making investment decisions.
There is no guarantee that integrating ESG analysis will improve risk-adjusted returns, lower portfolio volatility over any specific time period, or outperform the broader market or other strategies that do not utilize ESG analysis when selecting investments. The consideration of ESG factors may limit investment opportunities available to a portfolio. In addition, ESG data often lacks standardization, consistency and transparency and for certain companies such data may not be available, complete or accurate.
Breckinridge’s ESG analysis is based on third party data and Breckinridge analysts’ internal analysis. Analysts will review a variety of sources such as corporate sustainability reports, data subscriptions, and research reports to obtain available metrics for internally developed ESG frameworks. Qualitative ESG information is obtained from corporate sustainability reports, engagement discussion with corporate management teams, among others. A high sustainability rating does not mean it will be included in a portfolio, nor does it mean that a bond will provide profits or avoid losses.
Net Zero alignment and classifications are defined by Breckinridge and are subjective in nature. Although our classification methodology is informed by the Net Zero Investment Framework Implementation Guide as outlined by the Institutional Investors Group on Climate Change, it may not align with the methodology or definition used by other companies or advisors. Breckinridge is a member of the Partnership for Carbon Accounting Financials and uses the financed emissions methodology to track, monitor and allocate emissions. These differences should be considered when comparing Net Zero application and strategies.
Targets and goals for Net Zero can change over time and could differ from individual client portfolios. Breckinridge will continue to invest in companies with exposure to fossil fuels; however, we may adjust our exposure to these types of investments based on net zero alignment and classifications over time.
Any specific securities mentioned are for illustrative and example only. They do not necessarily represent actual investments in any client portfolio.
The effectiveness of any tax management strategy is largely dependent on each client’s entire tax and investment profile, including investments made outside of Breckinridge’s advisory services. As such, there is a risk that the strategy used to reduce the tax liability of the client is not the most effective for every client. Breckinridge is not a tax advisor and does not provide personal tax advice. Investors should consult with their tax professionals regarding tax strategies and associated consequences.
Federal and local tax laws can change at any time. These changes can impact tax consequences for investors, who should consult with a tax professional before making any decisions.
The content may contain information taken from unaffiliated third-party sources. Breckinridge believes such information is reliable but does not guarantee its accuracy or completeness. Any third-party websites included in the content has been provided for reference only. Please see the Terms & Conditions page for third party licensing disclaimers.