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Investing Podcast recorded on September 11, 2015


Podcast Transcript

Welcome to the Breckinridge Podcast. This is Ariana Jackson and joining me today, I have Portfolio Manager, Matt Buscone. Matt will be doing a special topic on the recent volatility in the markets. Matt, thanks for being here.

Good to be back, Ariana.

So there's obviously been a lot written about it over the last few weeks, can you just give us a summary of the volatility in the equity and commodity markets?

Sure, that was a very tough stretch for stocks in August, the Dow, S&P and NASDAQ were all down over 6% for the month and they were all in correction territory down over 10% at one point during August before coming back strongly a few different days. The VIX, which is an index that measures equity market volatility, jumped to over a 50 reading after spending much of the last few months and hovering just around 15.

Okay, and how about the price action in commodities?

So the CRB index which tracks a broad basket of commodities, traded at levels that were lower than we actually saw during the 2009 financial recession. It was led by oil, obviously. That bottomed out at just around $39 a barrel before rebounding sharply as well. Copper and other metals all fell in response to the weakness in the Chinese economy.

Most of the headlines have been involved in the equity markets, but the treasury market was impacted as well.

It was. There was a pretty big impact on treasuries. As equities rose and fell, there was a very wide trading band on both the 10 and 30-year bond. The 10-year was just over 225 at the beginning of the month, briefly traded as low as a 1.9% that Monday morning where the Dow fell 1000 points on the open, but now it retraced most of those gains right into the end of the month, and then it was back at a 225 right around the end of August. A similar story on the 30-year, round trip of over 30 basis points, a high of 2.95% traded as low as a 270, and then got close to a 3% this week, so, as equities rose and fell, bonds were trading just as wide in response to that.

Sure. Now on the corporate bond side, there's been a lot of focus on energy names. What were the changes like and you can start off with investment grade.

Sure, investment grade spreads widened again in August. The Barclay's Corporate Index was about 9 basis points wider, that significantly underperformed treasuries over the course of the month. That index is now 30 basis points wider year-to-date and back to levels last seen in September 2012. And, as you would expect during a period of volatility like this, higher quality names, AAs, outperformed BBBs by a wide margin.

Sure. And what about sector level performance.

So, consistent with the performance of the commodities prices that we saw, the worst performing sectors were metals and mining, pipelines and oil and gas. The media sector also came under pressure after Disney reported disappointing earnings. The sectors that performed well during the sell-off, financials, food, beverage, and home builders, somewhat more defensive sectors, obviously.

Right. Now how about performance of high yield?

Much weaker than we saw in the investment grade side. While AA and high-grade corporates were down anywhere from, say, 38 to 67 basis points over the course of the month, high yield was down over 1.75%.

Okay, and so we saw some big swings and some weak performance across several asset classes. What happened with munis?

You know, as you'd hope, munis held up very well and they were actually somewhat of an oasis of calm amidst all the volatility we saw in other asset classes.

And what do you think is the reason for the low volatility for munis?

You know, so many of the reasons for the equity and commodity sell-off, whether it was China currency devaluation, emerging market weakness, or the slow-down of the Chinese economy, it really had very little impact on municipal credit quality. Obviously, state and local economies and their revenues are tied to the domestic economy, and many of those numbers, I think of payroll growth for example, continue to look good, so no material spread widening from a credit standpoint in municipals as opposed to what you saw, in say, high yield energy names.

Got it. So low volatility in terms of credit spreads, but what about the overall level of yields?

So, just a few minutes ago we highlighted how much the 10-year treasury moved, let's contrast that with the 10-year AAA muni. Much more muted move in yields from peak to trough. The yield peaked at 2.24% at the beginning of the month, and it stayed within a 15 basis point range as it bottomed at a 2.09%. Similar story with the 30-year AAA muni. It started August at a 312, bottomed at a 3, so munis exhibited roughly half of the yield volatility that treasuries did over the same time period.

Definitely. All right, and what were municipal returns like for August?

So the Barclay's indices showed positive returns across the board with their broad municipal bond index returning 0.2% for the month, and year-to-date, that index is now up just over 1% so you've got negative returns in equities, negative returns in high yield and IG corporates, munis are inching along at +1%.

Okay, and did anything stand out from a ratings or sector standpoint?

On the ratings front, AAA and AA returns were much better than those of A and BBB rated bonds, and from a sector standpoint, one noticeable laggard was lease backed or appropriation bonds. We've highlighted that during several of our podcasts. As people are getting a little bit more concerned about some muni credits, they're looking at sort of the weakest link in their capital structure. That tends to be the appropriation bonds. They were the only muni sector with negative returns for the month.

So what's the main takeaway for the performance of municipals versus other asset classes?

You know, I'd say it's basically that munis did what they were supposed to do in a period of elevated volatility and, despite the credit concerns about some issuers, munis were able to provide a much needed counterbalance to riskier assets and produce some positive returns during the month.

Excellent. Thank you, Matt. We hope that you in the field have found this informative and we look forward to you joining us again next week.


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