Commentary published on February 6, 2023
January 2023 Market Commentary
- U.S. Treasury Curve: U.S. Treasury yields fell beyond one year, and the Curve remained inverted (See Figure 1).
- Municipal Market Technicals: January issuance totaled $21.9 billion. Low supply and a reversal of the outflow cycle benefitted municipal bond performance.
- Corporate Market Technicals: Investment grade (IG) corporate fixed-rate bond issuance for January was $144 billion. IG bond fund inflows were about $11 billion.
- Securitized Trends: Mortgage-backed securities (MBS) and asset-backed securities (ABS) each delivered positive monthly total and excess returns, based on Bloomberg indexes.
(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; Senior Portfolio Manager Sara Chanda; Co-Head of Research, Nicholas Elfner; Co-Head of Portfolio Management, Jeffrey Glenn, CFA; Head of Municipal Trading, Benjamin Pease; and Co-Head of Research, Adam Stern, JD.)
Investors received several updates that indicated the economy is slowing, as the Federal Reserve’s (Fed) rate hikes over the last year appear to have had the desired effect on high inflation. As hopes increased that the rate hikes might soon turn to cuts, sentiment for risk assets improved and stocks and bonds gained on the month.
U.S. economic growth cooled slightly to a 2.9 percent annual rate in the fourth quarter, slowing from the 3.2 percent growth rate in the third quarter, per the Bureau of Economic Analysis. Add to that a 0.2 percent decrease in consumer spending, and many investors had all the proof they needed to turn their attention back to the risk assets that declined substantially in 2022.
Not all the news was reassuring for investors or the Fed. The labor market, with an unemployment rate at 50-year lows, continues to put upward pressure on wages.1 Despite news of new layoffs in sectors beyond technology, there is still high demand among employers who are competing with one another to add staff.
At the end of its two-day meeting on February 1 meeting, the Federal Open Market Committee announced another 0.25 percent increase in the federal funds rate to a range of 4.5 percent to 4.75 percent. The increase was half the amount of the December increase and 50 basis points (bps) lower than the four increases preceding December’s boost. Market analysts debated if the Fed was shifting to a more dovish tone, despite its stated plan to announce another rate increase in March.
Bond market volatility was lower during January. The ICE/Bank of America Merrill Lynch MOVE Index,2 a measure of market expectations for bond volatility, ended the month at its lowest level in more than six months, perhaps reflecting improving investor outlooks. (See Figure 2).
Treasury yields in the 2-year spot closed 23bps lower, while 5- and 10-year maturities were 39bps and 37bps lower, while 30-year maturities fell 33bps. The 3-month/10-year Treasury yield curve inversion, historically an indicator of future recessionary conditions, was 118bps, 64bps deeper than at year-end.
During January, the Bloomberg (BBG) U.S. Treasury Bond Index3 gained 2.53 percent. The BBG U.S. Aggregate Bond Index4 was 3.08 percent higher. The S&P 500 Index5 added 6.2 percent.
Municipal Market Review
Municipal bonds outperformed Treasuries as yields declined sharply in a classic seasonal pattern known as the January effect. Municipal bond yields in intermediate maturities from 2 to 10 years fell between 43bps and 47bps, with declines in shorter yields exceeding the 10-year declines (See Figure 3).
The 2-year/10-year (2s/10s) curve was positively sloped at 2bps, while the 2s/30s curve was 103bps. Inversions between the 2- to 3-year and 2- to 5-year maturities remained, ending January at -7bps and -12. Municipal/Treasury (M/T) ratios declined (See Figure 4).
The Bond Buyer reported that municipal bond issuance in January was $21.9 billion, down nearly 17 percent year-over-year (Y/Y). Supply was $4.7 billion more month-over-month (M/M). Tax-exempt municipal bond issuance was 6 percent lower Y/Y, while taxable municipal bond issuance was more than 48 percent lower. Lipper data showed municipal bond mutual fund inflows of $2.3 billion in January, after a year dominated by monthly outflows in 2022.
The BBG Managed Money Short/Intermediate (1-10) Index6 gained 2.35 percent and the BBG 1-10 Year Municipal Bond Blended Index7 added 1.99 percent. Longer-maturity bonds outperformed shorter-maturity issues. Lower-rated IG municipal bonds outperformed higher-rated bonds.
Corporate Market Review
IG corporate bond spreads were 13bps tighter, per BBG data, ending January at 117bps. The BBG U.S. Corporate Investment Grade (IG) Index8 gained 4.01 percent on a total return basis, with a positive excess return of 1.20 percent compared with duration-matched Treasuries.
FactSet reported with less than one-third of S&P 500 companies announcing earnings as of January 27, 69 percent have reported actual earnings per share (EPS) above estimates, which is below the 10-year average of 73 percent. In aggregate, companies are reporting earnings that are 1.5 percent above estimates, which is below the 5-year average of 8.6 percent and the 10-year average of 6.4 percent. The continued positive earnings reports may point to the continued resilience of the economy, while their moderation from longer-term averages may suggest the effectiveness of the Fed’s policies.
Per BBG, the best-performing corporate sectors were Media Entertainment, Cable Satellite, Midstream Energy, Oil Field Services and Life Insurance. The worst-performing were Construction Machinery, Retailers, and Consumer Products.
Corporate bonds in the 5- to 10-year maturity range delivered the strongest total and excess returns while shorter-term maturities had the lowest relative returns. BBB-rated bonds fared the best across the IG quality spectrum, while AAA rated bonds trailed.
January index-eligible IG corporate bond issuance was $144 billion, per BBG, nearly $138 billion more than the prior month and $15 billion more than the same month a year ago. Net issuance was $89 billion for the month after redemptions of $55 billion. IG bond funds saw about $11 billion in inflows, per Emerging Portfolio Fund Research.
Securitized Market Review
In January, securitized markets rewarded investors. The BBG MBS Index9 return had a positive total and excess returns of 3.29 percent and 93bps, respectively. The most favorable total returns were among the 2 to 3 percent conventional10 coupon securities. The strongest relative excess returns were among the 3 to 4 percent conventional coupon securities. BBG data showed Agency CMBS had relatively stronger total returns, while non-agency Commercial MBS (ACMBS) outperformed on an excess return basis.
ABS sector also delivered positive total and excess returns 1.42 percent and 29bps, respectively, per BBG. Credit card loan ABS outperformed auto loan ABS on the basis of total returns, while auto loan ABS outperformed credit card loan ABS on an excess return basis.
 “What to Watch at the Fed’s First Meeting of 2023,” The Wall Street Journal, February 1, 2023.
 The 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.
 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.
 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.
 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.
 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.
 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.
 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.
 The Bloomberg MBS Index tracks agency mortgage-backed pass-through securities (both fixed-rate and hybrid ARM) guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA), and 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.
 Conventional MBS are issued by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation.
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