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Commentary published on October 11, 2023

September 2023 Market Commentary


  • U.S. Treasury Curve: Treasury yields rose to 15-year highs and the curve steepened, as markets assessed the Federal Reserve’s (Fed’s) pause in rate increases while economic data suggests a recession remains at bay. (See Figure 1).
  • Municipal Market Rates and Technicals: Municipal bond yields were higher across the curve. New issuance was almost $27.6 billion, about 1 percent higher than September a year ago. Municipal bond mutual fund outflows were about $2.2 billion.
  • Corporate Market Technicals: Investment grade (IG) corporate bond issuance was $114.5 billion. IG bond fund outflows were about $6 billion.
  • Securitized Trends: Commercial Mortgage-Backed Securities (CMBS) outperformed like-duration Treasuries, while MBS and Asset-Backed Securities (ABS) underperformed.

Market Review

Bond yields leapt during September. The Fed on September 20 announced it would hold the fed funds rate at a range from 5.25 percent to 5.50 percent.

Before investors could get too comfortable, in post-meeting comments, Fed Chair Jerome Powell stated that the rate hiking campaign to control inflation was not over. He said rates could rise another quarter of a percentage point before year end. The Fed’s updated rates forecast lowered expectations for rate cuts in 2024 to just 50bps, confirming the higher-rates-for-longer scenario, pending data that might indicate inflation was under control.

The Fed targets an annual inflation rate of 2 percent. The Bureau of Economic Analysis (BEA) reported August Personal Consumption Expenditures, excluding food and energy, were 3.9 percent higher on a year-over-year (Y/Y) basis. While that number remains above the Fed’s target, it was 0.4 percent lower than the prior month.

On September 2, the BEA’s third estimate of second quarter gross domestic product (GDP) showed a 2.1 percent annual growth rate. Within the context of 20-months of interest rate hikes, analysts continued to describe GDP as resilient. Wage and job growth continued. The Federal Reserve Bank of Atlanta’s Wage Tracker’s showed growth as steady or slightly decelerating, depending on unsmoothed and smoothed measures, respectively. Meanwhile, jobs data released by the Bureau of Labor Statistics in late August showed some easing of labor demand, although the number of job openings continued to exceed the number of unemployed workers.

The Fed’s updated Summary of Economic Projections (SEP) reinforced the outlook for a higher rate environment over the near to medium term. Bond yield volatility, as measured by the Bank of America/Merrill Lynch MOVE Index1 reflected a spike in uncertainty among investors at the end of September.

Based on Bloomberg (BBG) data, yields for Treasury bonds increased substantially across the curve. Treasury yields at 2-, 5-, 10-, and 30-year maturities were higher by 18, 36, 46, and 49 basis points (bps), respectively.

With the most significant increases occurring among intermediate and long maturities, the yield curve steepened overall while the inversion—shorter-maturity bonds yielding more than longer maturity bonds—declined because longer-term yields increased more than short-term yields.

The BBG U.S. Treasury Bond Index2 fell 2.21 percent. The BBG U.S. Aggregate Bond Index3 lost 2.54 percent.

Municipal Market Review 

Following Treasuries, the municipal yield curve also steepened and the inversion at the front end of the curve declined. (See Figure 3).

Municipal yields increased more than Treasury yields, underperforming for the month, per BBG data. Longer segments of the yield curves steepened over the month. The continued reduction of the inversion in the 3- to 10-year segment of the curve brought higher relative values among intermediate maturities versus shorter-term municipal bonds. Municipal/Treasury (M/T) yield ratios improved, closing above 70 percent across the curve (See Figure 4).

The BBG Managed Money Short/Intermediate (1-10) Index4 fell 2.23 percent and the BBG 1-10 Year Municipal Bond Blended Index5 was 1.81 percent lower. Lower-rated municipal bonds—those rated A and BBB—outperformed their counterparts that were rated AAA and AA, benefitting the BBG 1-10 Year Municipal Bond Blended Index, compared with the Managed Money Short/Intermediate (1-10) Index, which does not include bonds rated A. Shorter maturity bonds outperformed longer-date issues.

The Bond Buyer reported that total issuance for September was nearly $27.6 billion, a 1.2 percent increase over the same period one year ago. On a year-to-date (YTD) basis, 2023 municipal bond issuance was 13 percent lower than 2022, as of September 30.

For the month, tax-exempt municipal bond issuance increased by about 6 percent year-over-year (Y/Y). Taxable municipal bond issuance was $685 million in for the month, and was approximately 69 percent lower than 2023 through September YTD. 

Monthly outflows from municipal bond funds accelerated in September, as reported by Lipper/Refinitiv, reaching more than $2.1 billion by month end.

Corporate Market Review

Investment grade (IG) corporate bond spreads widened by 3bps, per BBG data, to close September at an option-adjusted spread of 121bps. Lower-quality bonds outperformed higher-quality corporates on a total return basis, while bonds rated AAA and AA outperformed bonds rated A and BBB on an excess return basis. Shorter-maturity bonds outperformed longer maturities on a total return basis, while bonds with maturities of 10 years and longer had the best excess returns.

For the period ended September 30, the BBG U.S. Corporate IG Index6 monthly total return was negative 2.67 percent and a 0.05 percent excess return compared with duration-matched Treasuries. Per BBG, the best-performing sectors and subsectors were Integrated Energy, Midstream Oil Services, Electric Utilities, Oil Refining, and Oil Exploration and Production. Among the worst-performing sectors and subsectors were Banking, Consumer Cyclical Services, Lodging, and Media/Entertainment.

FactSet reported the overall number of S&P 500 companies issuing earnings per share (EPS) guidance for the third quarter is above the 5-year average, the highest number of S&P 500 companies issuing EPS guidance for a quarter since FactSet began tracking the metric in 2006. Of the companies reporting EPS guidance, 74 (64 percent), which is above the 5-year average of 59 percent but equal to the 10-year average of 64 percent. Forty-two companies have issued positive EPS guidance, which is above the 5-year average of 39 and above the 10-year average of 36.

Investment grade, fixed-rate corporate bond supply for September was nearly $115 billion, BBG reported, with net issuance of almost $53 billion after $62 billion in redemptions. About $6 billion in assets flowed out of IG bond mutual funds in September, per Lipper.

CMBS, both Agency and Non-Agency, were the best-performing sectors in the securitized markets for the month of September on an excess return basis. Lower coupon MBS underperformed higher coupons by a large margin. MBS pools with 3.5 percent coupons were the worst performers among conventional10 mortgage issues, while 6.5s produced positive excess returns.

ABS earned negative total and excess returns. Auto loan ABS performed best on a total return basis while credit card loan ABS had better excess returns.

Equity Market Review

The S&P 500 Index declined 4.8 percent on the month, the Russell 1000 Value Index11 fell 3.9 percent, and the Russell 1000 Growth Index12 dropped 5.4 percent. Despite the continued data that supports the view of mild recessionary conditions in the future, if not a continutation of growth trends despite nearly two years of rate increases, investors seemed to express uncertainty or outright pessimism at the thought of a sustained period of interest rates at the current levels or higher.

After declining during August, the Chicago Board Options Exchange (BoE) Volatility Index13 (VIX) spiked following the Fed’s interest rate decision and release of SEP data. (See Figure 5).

Energy (2.5 percent percent total return in September) once again was the only sector of the 11 in the S&P 500 Index to achieve a positive return during September. Health Care (down 3.1 percent), Financials (3.2 percent lower), and Communication Services (a 3.7 percent loss) were the best sector performers, after Energy, while Real Estate (down 7.8 percent), Information Technology (a 6.9 percent decline), and Industrials (a 6.1 percent drop), were the worst performing sectors. 


#BCAI-10052023-BTUFZMID (10/11/2023)

[1] The Bank of America Merrill Lynch 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.

[2] 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.

[3] 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.

[4] 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.

[5] 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.

[6] 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.

[7] 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.

[8] 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.

[9] 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.

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

[11] 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.

[12] 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.

[13] 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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