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Commentary published on November 5, 2021

October 2021 Market Commentary


  • U.S. Treasury Curve: Treasury yields increased through 10 years, fell for longer maturities, and the curve flattened (See Figure 1).
  • Municipal Market Technicals: October issuance was $36 billion, 19 percent lower than September. Monthly fund flows were more than $1 billion in October.
  • Corporate Market Technicals: Investment grade (IG) fixed-rate bond supply for October was more than $143 billion. IG fund flows were about $5 billion.
  • Securitized Trends: Residential mortgage-backed securities (MBS) and asset-backed security (ABS) bonds delivered flat to negative excess returns. Commercial mortgage-backed securities (CMBS), Agency CMBS, and ABS backed by credit card debt delivered positive excess returns.

(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.)

Market Review

Central banks around the globe looked to dial back stimulus in October as higher inflation had markets pricing in faster rate hikes than suggested by the U.S. Federal (Fed) Reserve. November opened with the Fed expected to announce tapering, with details around pace, timing, and composition.1

Treasury yields moved higher for maturities through 10-years during October, as investors grew more concerned about potential inflation.

The combination of slower-than-expected Q3 growth and higher inflation expectations caused the Treasury curve to flatten over the month with 2-year and 5-year yields increasing by 20 basis points (bps) while 30-year yield declined. Inflation expectations increased in October, as oil prices hit $84 a barrel, up 74 percent year-to-date, and the core Personal Consumption Expenditures Index rose 3.64 percent year-over-year, boosted by rapid shelter inflation. The Employment Cost Index rose 1.3 percent in Q3, the highest level in 20 years, signaling that labor costs are firming as demand continues to outpace supply. The Breckinridge Investment Committee modestly raised our 2022 yield forecasts for 2-year and 5-year rates to reflect a higher probability of a Fed hike in second half of next year, while keeping our year-end 10-year rate target at 1.75 percent.

The 2-year yield spiked 20bps to 0.50 percent over the month. After hitting 1.70 percent, the 10-year retreated to 1.55 percent by month end, 7bps higher month-over-month. The 30-year dropped 11bps during the month, closing sub-2 percent (1.95 percent). Yields on 20-year Treasuries rose above 30-year bonds as the month ended, on technical factors, including higher demand for more liquid 30-year bonds as well as expectations of more hawkish Fed policy (See Figure 1).

The 2- to 30-year yield curve (2s30s) flattened by 33bps, while the 2s10s and 10s30s flattened by 16bps and 18bps, respectively.

Municipal Market Review

Municipal bond yields followed a pattern similar to Treasuries. Overall, the curve flattened with the largest rise in yields coming in the 5 year maturity while 10- to 30-year yields rose less. (See Figure 2).

By month end, yields migrated higher by 8bps in 2-years, and closed 14, 7 and 2bps higher across 5-, 10-, and 30-year spots, respectively, per MMD. The 2s5s curve steepened 6bps, while the 2s10s and 2s30s curves flattened by 1bp and 6bps, respectively.

The ratio curve steepened over the month as two-year municipals outperformed Treasuries, while underperforming from 5-years and longer. Higher absolute yields and better ratios represented a better entry point than at any point during 3Q (See Figure 3).

October issuance at $36 billion was 19 percent lower than during the prior month and 51 percent lower than October 2020. The Bond Buyer reported that the total “was on par with a 10-year average, as last year's figures were skewed by COVID-19 market interruptions earlier in the year and the presidential election.”

At the end of October, year-to-date tax-exempt issuance was almost identical to last year’s total at $286 billion. At slightly more than $10 billion, October taxable municipal bond issuance was more than 60 percent lower for the second consecutive month than in the same period during the prior year.

Municipal bond funds reached 34 consecutive weeks of positive flows during October, The Bond Buyer reported. Per Lipper, reported year-to-date inflows of $89.6 billion for the period ending October 28.

The Bloomberg Managed Money Short/Intermediate (1-10) Index declined 0.34 percent while the Bloomberg 1-10 Year Blend Index was 0.28 percent lower. Shorter maturity bonds outperformed longer maturity bonds. The near-term performance bias suggests hesitancy among investors to commit funds for longer terms.

As the pace of inflows has slowed and fiscal stimulus has waned, the strong outperformance of lower-quality bonds has cooled with higher-quality bonds outperforming during October.

Corporate Market Review

IG corporate bond spreads widened by 3bps in October, per Bloomberg data, to settle at 87bps, and were 9bps tighter year-to-date. The Bloomberg U.S. Corporate Investment Grade (IG) Index gained 0.25 percent for October on a total return basis with a flat excess return compared with duration-matched Treasuries. Bloomberg corporate bond data showed that bonds rated BBB outperformed A-rated bonds. Intermediate-maturity bonds underperformed longer-maturity bonds.

The best-performing sectors were Oil Field Services, Railroads, Transportation Services, Food & Beverage and Airlines. The worst-performing sectors were Cable Satellite, Tobacco, Wireless, Gaming and Paper, according to Bloomberg.

Index-eligible IG bond issuance in October, per Bloomberg, was $143 billion, a decrease of about 26 percent from September. Net issuance, after redemptions, was a $67.5 billion, almost $12 billion lower than the prior month. Demand for bonds remained solid. According to EPFR, monthly IG fund inflows were about $5 billion in October, down from $25 billion in September, but still bringing the year-to-date total to about $314 billion.

Real gross domestic product (GDP) increased at an annual rate of 2 percent in the third quarter of 2021, according to the first estimate released by the Bureau of Economic Analysis in October. Second quarter, GDP increased at an annual rate of 6.7 percent. Political, policy, economic, health, and social issues combined during the third quarter to suppress economic activity.

Securitized Market Review

Treasury yield curve flattening during the last week of October last week erased some outperformance earlier in month among higher coupon MBS. MBS index was about flat from excess return perspective for month.

CMBS and Agency CMBS delivered excess returns of 6bps and 11bps for the month, according to Bloomberg data.

In the ABS segment of the market, new issue volume for October increased 11 percent year-over-year to $27.6 billion. Year-to-date volume is 43.1 percent higher compared to the comparable period last year; 11.7 percent higher than comparable 2019 period. Overall spread performance for month was mixed, with some esoteric sectors tightening 5bps month-over-month, while other sectors, such as auto lease, subordinate auto loan tranches, and equipment, widened 3 to 5bps.


[1] On Wednesday, November 3, the Fed announced it will reduce its bond purchases by $15 billion a month in November and by a further $15 billion in December. According to The Wall Street Journal, the announcement acknowledged that similar reductions in the pace of net purchases “will likely be appropriate each month,” though officials would be prepared to adjust that pace “if warranted by changes in the economic outlook.”

#273815 (11/8/2021)

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