- U.S. Treasury Curve: Long maturity Treasury yields fell, flattening the curve (See Figure 1).
- Municipal Market Technicals: November issuance was $34 billion, 14 percent lower than October. Monthly mutual fund inflows were $5 billion in November.
- Corporate Market Technicals: Investment grade (IG) fixed-rate bond supply for November was $114 billion. IG fund flows were about $4 billion.
- Securitized Trends: Excess returns for residential and commercial mortgage-backed securities (MBS and CMBS, respectively) were negative as Treasuries rallied. Excess returns for asset-backed securities (ABS), negative for the month, remained positive year-to-date.
(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.)
Treasury yields moved higher during the first half of November before reversing course and falling. The market continued to digest higher readings on inflation, a more hawkish turn from the Federal Reserve (Fed), and the emergence of the Omicron variant.
Treasury yields increased out to three years, were flat at five years, and declined beyond that. The move higher in short maturity yields reflected investor expectations that the Fed hikes interest rates sooner The curve flattened.
Earlier in the month, the Fed started to reduce monthly pandemic-related asset purchases by $15 billion, with a goal to finish by mid-2022. Treasury yields moved higher mid-month with the 10-year treasury yield reaching 1.67 percent on November 23, which was among the highest yields seen to-date in 2021. Subsequently released economic data showed broadly rising prices, pervasive supply chain concerns, strong consumer activity, and sustained high labor demand; all signals that pointed past the Fed’s standing characterization of inflation as transitory. Consumers and investors appeared increasingly uncertain about the future. Equity investors retreated and long Treasury yields fell.
Two-year yields rose 7 basis points (bps), the 5-year spot fell 3 bps while 10-year and 30-year yields experienced more dramatic moves, dropping 11bps and 14bps, respectively.
The 2- to 10-year yield curve (2s10s) flattened by 18bps, while the 2s30s flattened by 21bps.
The Breckinridge investment committee continues to monitor evolving information about Omicron and potential near- and long-term implications for the economy and investment markets. Recognizing steps already taken to insulate businesses and people from the effects of COVID-19 since its global spread in 2020, the committee chose not to make any immediate changes to client portfolios.
The committee’s view at the November close was that maintaining a higher quality bias should help to protect client assets in the event of increasing credit concerns or sustained asset flow reversals.
Municipal Market Review
Municipal bond yields declined, particularly from 5 years and beyond. Yields fell 5, 18, and 21bps at the 5-, 10-, and 30-year spots, per MMD data. The curve flattened. (See Figure 2).
The 2s10s curve spread narrowed by 17bps, while the 2s30s curve narrowed by 20bps.
The ratio curve flattened in November as well, more notably across intermediate- and long-term maturities. Municipals outperformed Treasuries across the curve (See Figure 3).
October issuance at $33.8 billion was 14 percent lower than during the prior month, while exceeding November 2020 issuance by 58 percent.
Per The Bond Buyer, at the end of November, year-to-date tax-exempt issuance was $313 billion, 3 percent higher than during the same period in 2020.
For the month, taxable municipal bond issuance was 55 percent higher in November 2021 than the same month last year but remains about 23 percent less in 2021 on a year-to-date basis year-over-year through November.
Municipal bond funds reached 38 consecutive weeks of positive flows during November, The Bond Buyer reported. Lipper reported year-to-date inflows in excess of $94 billion for the period ending November 30.
The Bloomberg Managed Money Short/Intermediate (1-10) Index gained 0.37 percent while the Bloomberg 1-10 Year Blend Index was up 0.33 percent. Longer maturity bonds outperformed shorter maturity bonds. Lower-quality bonds outperformed higher quality.
Corporate Market Review
IG corporate bond spreads widened by 12bps in November, per Bloomberg data, to settle at 99bps, ending the month 3bps wider year-to-date. The Bloomberg U.S. Corporate Investment Grade (IG) Index gained 0.06 percent for November on a total return basis and had a negative excess return of 0.89 percent compared with duration-matched Treasuries.
Bloomberg data showed that the highest-rated IG bonds delivered the strongest total returns. IG corporate bonds with maturities of seven years and longer turned in the best performance on a total return basis when compared with shorter maturities.
The best-performing sectors for the month were Supranationals, Gaming, Automotive, Home Construction, and Healthcare Real Estate Investment Trusts. The worst-performing sectors were Oil Field Services, Sovereigns, Railroads, Integrated Energy, and Midstream.
Index-eligible IG bond issuance in November, per Bloomberg, was $ 114.2 billion, a decrease of about 20 percent from October. Net issuance, after redemptions, was $29 billion, about 56 percent less than the prior month. Demand for bonds remained solid. According to EPFR, monthly IG fund inflows were about $4 billion in November, down from $5 billion in October, bringing the year-to-date total to about $324 billion.
Securitized Market Review
During the last days of the month, MBS performance was lately highly directional with rates. Omicron reports sent rates lower, and bonds rallied, weighing on MBS. Overall, the sector struggled in November. Spread widening across segments ranged from as few as 5bps to as many as 21bps, per Bloomberg data. Variability in spread widening was specific to coupons and quality, with higher coupons across MBS and CMBS and lower quality among CMBS experiencing the most widening.
On an excess return basis for November, MBS recorded a negative 46bps, while CMBS and Agency CMBS were at negative 42 and negative 48, respectively, according to Bloomberg data.
In the ABS segment of the market, spreads widened by 4bps across bonds backed by auto loan and credit card debt. For the month, auto loans and credit cards delivered negative excess returns of 5bps and 22bps, respectively. Year-to-date, excess returns for auto loans and credit cards are positive at 27bps and 21bps, respectively.
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