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Commentary published on January 12, 2024

December 2023 Market Commentary


  • U.S. Treasury Curve: Treasury yields continued to fall in December as an “everything” rally spurred on by expectations for more rate cuts in 2024, drove markets into year-end.
  • Municipal Market Rates and Technicals: Municipal yields fell along with Treasuries. December new issuance of $23.8 billion was about 17 percent higher than the same month a year ago. Municipal bond mutual fund outflows were about $975 million.
  • Corporate Market Technicals: Investment grade (IG) fixed-rate corporate bond issuance was $20 billion. IG bond fund inflows were about $8 billion.
  • Securitized Trends: In securitized bond sectors, mortgage- and credit-related securities earned positive total and excess returns.
  • Equity market trends: In December, the S&P 500 Index [1] total return was 4.54 percent, the Russell 1000 Value Index [2] increased 5.54 percent, while the Russell 1000 Growth Index [3] increased 4.43 percent.

(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, JD.)

Market Review

As anticipated among many market observers, the Federal Reserve (Fed) left interest rates unchanged at its early December meeting. With that decision and subsequent comments from Fed Chair Jerome Powell that interest rate cuts were in the offing in 2024, the rally in stock and bond values that began at the end of October continued.

Treasury yields declined across the curve (See Figure 1). Market volatility declined during December, after spiking earlier in the month at the time of the Fed’s December meeting. With the Fed’s decision to stand pat on rates and more signs of declining inflation and sustained economic activity, investors decided to extend the year-end rally.4

Based on Bloomberg (BBG) data, yields for Treasury bonds declined across the curve in December. Treasury yields at 2-, 5-, 10-, and 30-year maturities were lower by 43, 42, 45, and 47bps, respectively.

The BBG U.S. Treasury Bond Index5 gained 3.36 percent in December and 4.05 in 2023. The BBG U.S. Aggregate Bond Index (Agg Index)6 added 3.83 percent in December and 5.53 percent in 2023. On an excess return basis, when compared with duration-matched Treasury securities, the Agg Index gained 0.26 percent in December and 1.40 percent in 2023. The 10-year Treasury yield was unchanged year-over-year at 3.88 percent, despite significant bond market volatility intra-year, as measured by the Intercontinental (ICE) Bank of America/Merrill Lynch Option Volatility Estimate (MOVE) Index7 (See Figure 2).

Municipal Market Review

Municipal bonds enjoyed a second consecutive month of solidly positive returns in December to complete a remarkable fourth quarter rally. Municipal bonds outperformed Treasuries over the quarter. The BBG Municipal Bond Index gained 2.32 percent for the month and 6.40 percent for the year.

Longer-dated maturities outperformed shorter-term bonds and lower-rated investment grade (IG) municipal bonds outperformed higher-rated bonds. The BBG Managed Money Short/Intermediate (1-10) Index8 gained 1.92 percent in December and 4.48 percent in 2023. The BBG 1-10 Year Municipal Bond Blended Index9 was up 1.63 percent for the month and 4.61 percent in 2023. 

For the month, municipal yields declined by 32, 31, 35, and 35bps at the 2-, 5-, 10-, and 30-year spots on the curve. Municipal/Treasury (M/T) ratios were lower for municipal bonds maturing in 2, 3, 5, and 10 years (See Figure 4) at month end.

The Bond Buyer reported December issuance of almost $24 billion brought total volume for the year to $380 billion, 3 percent lower than 2022, which was 19 percent lower than 2021. Tax-exempt volume was slightly higher while taxable volume was sharply lower. Lower issuance was attributed to market volatility, higher interest rates, pandemic aid, and concerns about economic growth. A rebound in December issuance compared with the same month last year supported anticipation of more robust issuance in 2024.

Mutual fund outflows continued in 2023 as investors looked to harvest losses but those outflows were partially offset by inflows into exchange-traded funds (ETFs) and increased purchases from the household sector.

Corporate Market Review

In December, the BBG U.S. Corporate IG Index10 earned a monthly total return of 4.34 percent, finishing 2023 with an 8.52 percent total return. Excess returns were positive also at 0.30 percent for December and 4.55 percent for the year. IG corporate bond spreads tightened by 5bps, per BBG data, to close December at an option-adjusted (OAS) spread of 99bps, 31bps tighter than the 130bps OAS on December 31, 2022. 

For the period ended December 31, per BBG, the best-performing corporate sectors and subsectors were Real Estate Investment Trusts (REITs), Financial Companies, Building Materials, and Home Construction. The worst-performing sectors and subsectors were Integrated Energy, Pharmaceuticals, Tobacco, Cable Satellite, and Technology. Longer-maturity, higher-quality bonds delivered the highest total returns.

Investment grade, fixed-rate corporate bond supply for December was $20.4 billion, BBG reported, with negative net issuance of $13.7 billion after $35.9 billion in redemptions. About $8 billion in assets flowed into IG bond funds in December, per EPFR Global.

FactSet reported on December 11 that analysts are reporting a favorable outlook for 2024 corporate earnings. “Despite concerns about a possible recession next year, analysts expect the S&P 500 to report double-digit earnings growth in calendar year (CY) 2024. The estimated (year-over-year) earnings growth rate for CY 2024 is 11.8 percent, which is above the trailing 10-year average (annual) earnings growth rate of 8.4 percent (2013 – 2022).” The report went on to say that, on a quarterly basis, analysts are expecting the highest earnings growth to occur in the fourth quarter of 2024. Analysts project earnings growth of 6.8 percent, 10.8 percent, and 9.0 percent for the first quarter through the third quarter, respectively, in 2024. For the fourth quarter of 2024, analysts are projecting earnings growth of 18.2 percent.

Securitized Market Review - December 2023 

Each of the securitized sectors delivered positive total and excess returns in December and through year-end December 31. Mortgage-Backed Securities (MBS) earned the highest returns among the securitized sectors for the month of December on a total return basis. MBS and Non-Agency Commercial Mortgage-Backed Securities (Non-Agency CMBS) delivered the highest monthly excess returns. Lower coupon MBS—pools with coupons lower than 4 percent—were the best performers among conventional14 and GNMA15 MBS during December on a total and excess return basis.

For the full year 2023 through December 31, the highest total returns among securitized sectors were earned by CMBS and Non-Agency CMBS. The highest securitized sector excess returns were achieved by CMBS and Agency CMBS. On a year-to-date basis, total returns were consistently strong across the coupon stack while, on an excess return basis, lower coupons—below 4 percent—tended to outperform higher coupon mortgage pools.

Asset-Backed Securities (ABS) backed by credit card debt were the leading performers on a total return basis in December, while ABS backed by auto loans outperformed credit card ABS for the full year 2023. Auto loan ABS earned the highest excess returns for December and for the year 2023.

Equity Market Review

The S&P 500 Index gained 4.54 percent during the month and 26.29 percent for the full year ended December 31, 2023. For the same periods, the Russell 1000 Value Index added 5.54 percent and 11.46 percent, and the Russell 1000 Growth Index increased 4.43 percent and 42.68 percent, respectively. Dividend-paying stocks outperformed in December, as reflected in the Russell 1000 Value Index’s advantage over the broad S&P 500 Index for the month, but underperformed for the full year.

Reflecting the improved equity market sentiment, The Chicago Board Options Exchange (BoE) Volatility Index16 (VIX) declined, falling to year-to-date low levels. (See Figure 5).

For the full year, from a factor style performance perspective, which considers stocks on the basis of certain characteristics, beta and growth strongly outperformed during the year while value and dividend yield underperformed.

Stocks in the U.S. gained in the fourth quarter, following a weak third quarter when the S&P 500 Index declined 3.27 percent. Increasingly, the market strength, which relied significantly on the gains of the Magnificent Seven17 for much of the first three quarter of the year—broadened during the fourth quarter. Based on Bloomberg data Real Estate (18.8 percent), Information Technology (17.2 percent) and Financials (13.9 percent) were the strongest performing sectors while Energy (-6.9 percent), Consumer Staples (5.5 percent) and Health Care (6.4 percent) posted the weakest performance.

For the year ended December 31, 2023, the strongest performances on a sector basis came from from Information Technology (57.8 percent), Communication Services (55.8 percent), Consumer Discretionary (42.3 percent) and Industrials (18.1 percent). The worst performing sectors for the year included Utilities (-7.1 percent), Energy (-1.4 percent), Consumer Staples (0.5 percent) and Health Care (2.1 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] 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.

[3] 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.

[4] On December 19, 2023, the U.S. Bureau of the Census reported housing starts increased a surprisingly strong 14.8 percent month-over-month (M/M) in November, a third month of growth. On December 20, The Conference Board announced its December index of consumer confidence rose to110.7, the second consecutive month with an increase. On December 21, the Bureau of Economic Analysis (BEA) released its third estimate of Q3 gross domestic product (GDP growth), which subtracted 0.3 percentage points to produce a still-robust 4.9 percent rate quarter-over-quarter, on a seasonally adjusted annual rate. On December 22, BEA data showed: household spending remained solid in November; income rebounded following anomalies attributed to the United Auto Worker’s strike; and consumers continued to pare down accumulated savings, with few signs of concern. On the same day, the BEA reported Personal Consumption Expenditures (PCE) for a second consecutive were up just 0.1 percent M/M, which analysts considered a relatively soft reading that reflected declining core goods prices.

[5] 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.

[6] 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.

[7] 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.

[8] 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.

[9] The Bloomberg Municipal 1-10 Year Blend 1-12 Year Index measures the performance of short and intermediate components of the Municipal Bond Index — an unmanaged, market value-weighted index which covers the U.S. investment grade, tax-exempt bond market. You cannot invest directly in an index.

[10] 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.

[11] 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.

[12] The Bloomberg U.S. CMBS Investment Grade Index measures the market of U.S. Agency (GNMA, FNMA, and (FHLMC) and US Non-Agency conduit and fusion CMBS deals with a minimum current deal size of $300mn. You cannot invest directly in an index.

[13] 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.

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

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

[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.

[1]7 The Magnificent Seven stocks and gains in 2023 are Amazon (80.9 percent), Apple (48.2 percent), Alphabet (Google parent company) (58.3 percent), Meta Platforms (Facebook company) (194.1 percent), Microsoft (56.8 percent), Nvidia (238.9 percent), and Tesla (101.7).

BCAI-01052024-byz4zg8b (1/11/2024)


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