- U.S. Treasury Curve: Treasury yields declined and the curve inversion increased (See Figure 1), as stock and bonds markets rallied sharply during the month.
- Municipal Market Rates and Technicals: Municipal yields followed Treasuries lower and outperformed them by a wide margin. New issuance was about $28.4 billion, about $10 billion less than the prior month and about 8 percent higher than November a year ago. Municipal bond mutual fund outflows slowed, as rates fell.
- Corporate Market Technicals: Investment grade (IG) fixed-rate corporate bond issuance was $95 billion. IG bond fund inflows were about $4 billion.
- Securitized Trends: Mortgage-Backed Securities (MBS) turned in strong performance among securitized sectors, which all had positive total and excess returns for the month.
- Equity market trends: Major indexes recorded November gains, reflecting the improving investor sentiment.
(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; Josh Perez, Portfolio Manager and Director, Corporate Research; and Co-Head of Research, Adam Stern, JD.)
Investors appeared reassured during November when some data suggested the Federal Reserve’s (Fed’s) interest rate hikes are suppressing inflation without dramatically reducing economic activity. The Fed left rates unchanged at its November meeting and interest rate futures markets are pricing in no more rate hikes.
In response, stock and bond values increased throughout the month. With the last rate hike having occurred in July, the conversation among market participants shifted from whether rate cuts were forthcoming to how much they might be cut in 2024.
Even the ongoing Congressional debate over a temporary government funding agreement during the first half of the month could not discourage investors. Congress and the President bifurcated the spending debate and pushed it into early 2024. Concerns over the size of the Federal deficit and increasing amounts of longer-duration Treasuries, which had garnered headlines in October, appeared to fade away temporarily after the Treasury reduced the auction sizes of longer maturities. Instead, investor demand for bonds and stocks suggested a persistently positive outlook. As investor sentiment improved, bond price volatility as measured by the Intercontinental (ICE) Bank of America/Merrill Lynch Option Volatility Estimate (MOVE) Index1 declined (See Figure 2).
During November, signs of easing inflation emerged in government data for October.2 Counterbalancing the price and wage trends were indications that economic growth remained robust, as reflected in sustained high consumer confidence readings from the Conference Board3 and the second estimate of third quarter gross domestic product (GDP) from the Bureau of Economic Analysis (BEA), which jumped up to 5.2 percent quarter-over-quarter.
Based on Bloomberg (BBG) data, yields for Treasury bonds declined across the curve. Treasury yields at 2-, 5-, 10-, and 30-year maturities were lower by 41, 59, 60, and 60bps, respectively. The BBG U.S. Treasury Bond Index4 gained 3.47 percent. The BBG U.S. Aggregate Bond Index5 added 4.53 percent.
Municipal Market Review
Historic monthly performance sent the broad BBG Municipal Bond Index up above 6.3 percent for the month and nearly 4 percent year-to-date (YTD). Duration was rewarded, as long-dated maturities outperformed shorter. The highest-rated (AAA) and lowest-rated (BBB) investment grade (IG) municipal bonds earned the highest returns. The BBG Managed Money Short/Intermediate (1-10) Index6 gained 4.74 percent. The BBG 1-10 Year Municipal Bond Blended Index7 was up 4 percent for the month and 2.93 percent YTD. Municipal/Treasury (M/T) ratios were lower (See Figure 4).
The Bond Buyer reported that total issuance for November was more than $28.4 billion. While the total was about $2 billion higher than the same month one year prior, it was more than 26 percent lower when compared with October’s issuance.
Lower year-over-year (Y/Y) issuance remained a persistent theme in November, with the YTD 2023 total through November 30 more than $26 billion and 6.5 percent lower than the prior year. Tax-exempt issuance is off about $2 billion YTD compared with the same period during the prior year. Taxable municipal bond issuance of about $34 billion is 34 percent lower than than the 2022 YTD total for taxable municipals through November 30.
Monthly outflows from municipal bond funds totaled about about $157 million, Lipper reported.
Corporate Market Review
The BBG U.S. Corporate IG Index8 earned a monthly total return of nearly 6 percent and a positive excess return compared with duration-matched Treasuries of just more than 2 percent. IG corporate bond spreads tightened by 25bps, per BBG data, to close November at an option-adjusted spread of 104bps.
For the period ended November 30, per BBG, the best-performing corporate sectors were Wirelines, Tobacco, Cable Satellite, Telecommunication, and Media Entertainment. The worst-performing sectors were Airlines, Construction Machinery, and Automotive.
Longer-maturity bonds earned the highest returns. The highest-quality bonds delivered the strongest total returns for the month, although triple-B bonds delivered the strongest excess returns.
Investment grade, fixed-rate corporate bond supply for November was $95 billion, BBG reported, with net issuance of $60 billion after $35 billion in redemptions. About $4 billion in assets flowed out of IG bond mutual funds in November, per Lipper.
FactSet reported on November 30 that, in the third quarter, S&P 500 companies reported growth in earnings of 4.7 percent, the first increase in Y/Y earnings since the third quarter of 2022. In addition, 82 percent of companies reported actual earnings per share (EPS) that were above estimated EPS. On November 21, FactSet reported 2023 is set to mark the weakest year of global corporate buyback announcements since the firm started tracking the metric in 2016. “Investors continue to prefer that company executives shore up balance sheets,” FactSet noted, “and the costs of equity and debt capital are much higher compared to year-ago levels.” Lower share buyback activity historically is considered a bondholder-friendly corporate posture.
Securitized Market Review
MBS was the best-performing sector among the securitized markets for the month of November on a total and excess return basis. Each of the securitized sectors delivered positive total and excess returns. Lower coupon MBS—pools with coupons of in a range from than 2 to 4 percent—tended to be the best performers among conventional12 and GNMA13 MBS.
Equity Market Review
The S&P 500 Index gained 9.1 percent on the month, the Russell 1000 Value Index14 added 7.5 percent, and the Russell 1000 Growth Index15 increased 10.9 percent. The same sentiment that bolstered bond values during the month—lower inflation, a potential end to rate hikes, and sustained economic growth—bolstered equities, with a tilt toward growth stocks. Based on BBG data, for the quarter-to-date through November 30, factors such as momentum, size, growth, quality, and dividend yield have outperformed factors such as beta16 and value.
Reflecting the improving outlook among investors for potential future stock performance in an environmental of stable or, perhaps, declining interest rates The Chicago Board Options Exchange (BoE) Volatility Index17 (VIX) declined, falling to year-to-date low levels. (See Figure 5).
Only one sector, Energy, had a negative return (-1.0 percent) for the month. Other sector returns were Technology (12.9 percent), Real Estate (12.3 percent), Consumer Discretionary (10.9 percent), Financials (10.9 percent), Industrials (8.8 percent), Materials (8.4 percent), Communication Services (7.8 percent), Healthcare (5.4 percent), Utilities (5.2 percent), and Consumer Staples (4.1 percent).
 The Intercontinental (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.
 On November 3, the Bureau of Labor Statistics (BLS) reported that labor market conditions eased in October, with payrolls rising a softer-than-expected 150,000, the unemployment rate increasing to 3.9 percent, the workweek edging lower and average hourly earnings growth softening. On November 14, the BLS reported weaker-than-expected Consumer Price Index (CPI) data, led by a sharp pullback in shelter inflation and deceleration in core services inflation. On November 30, the Bureau of Economic Analysis reported that October Personal Consumptions Expenditures (PCE) prices data showed a material slowing in core inflation pressures, akin to the CPI release for the same period. Also on November 30, the U.S. Department of Labor data showed more Americans filing for jobless claims as the month closed, and the overall number of people in the U.S. collecting unemployment benefits rose to its highest level in two years.
 On November 28, the Conference Board reported that its index of consumer confidence increased to 102.0 in November reflecting higher optimism about future expectations. The increase broke a three-month string of declines in confidence, which peaked at 114.0 in July. You cannot invest directly in an index.
 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 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 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.
 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.
 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.
 Conventional MBS are issued by the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC).
 Ginnie Mae MBS are issued by the Government National Mortgage Association (GNMA).
 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.
 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.
 Beta is a measure of the volatility or systematic risk of a security or portfolio compared to the market (as represented, for example, by the S&P 500) as a whole. Stocks with betas higher than 1.0 can be interpreted as more volatile than the market.
 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.
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