(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

A volatile January for investments, highlighted by a Federal Reserve (Fed) sounding more intent on raising interest rates, ended on a positive note, as bond and stock prices regained a measure of the losses realized earlier in the month.

Inflation continued to run well above trend with the Personal Consumption Expenditures (PCE) core deflator coming in at 4.9 percent, year-over-year. Treasury yields increased and market expectations for the number of fed funds rate increases in 2022 increased to 5 by year-end.

Through its statements before and after its January meeting, the Federal Open Market Committee appeared ready to start raising the federal funds rate from its zero-lower bound in March. At some point thereafter, the Fed will begin to reduce the size of its balance sheet, which has grown to $9 trillion in an effort to spark economic activity during the pandemic-induced economic restrictions.

The Treasury curve bear flattened (short term rates rise faster than long term rates) with 2-, 5-, 10-, and 30-year yields rising by 45, 35, 27, and 21 basis points (bps), respectively. The spread between the 2- and 5-year spots on the Treasury curve narrowed by 18bps, while the 2s/30s curve tightened by 24bps.

Municipal Market Review

Municipal bond yield increased, underperforming Treasuries during January (See Figure 2) and Municipal/Treasury ratios improved across the curve (See Figure 3). Municipal bond issuance slowed during the month.

The municipal yield curve finally responded to the flattening that had occurred in the Treasury curve. The 2- to 10-year slope has now fallen from just over 100bps at the end of October 2021 to 66bps at the end of January 2022.

Municipal yields at 2-, 5-, 10-, and 30-years rose by 66, 63, 52, and 46bps, respectively. The spread for the municipal 2s/10s curve narrowed by 14bps, while the 2s/30s municipal curve tightened by 20bps.

The underperformance of municipals drove ratios sharply higher during the month, rising to 77 percent for the two-year maturity, 87 percent for the 10-year, and 93 percent for the 30-year, flattening the ratio curve. Ratios at these more attractive levels allowed us opportunities to add bonds at more compelling yields from both an absolute and relative-value standpoint.

January issuance at $24 billion was 37 percent lower than the prior month and 15 percent lower than January 2021, per The Bond Buyer. At almost $19 billion, tax-exempt issuance was just 1.8 percent off last year’s January total, whereas taxable issuance dropped 54 percent from January 2021, as increasing interest rates made refinancing with taxable bonds less attractive.

Municipal bond fund flows were negative, the first monthly outflow since April 2020. Investment Company Institute data show that as of January 26, 2022, fund outflows had totaled about $1 billion during the month.

For January, the Bloomberg Managed Money Short/Intermediate (1-10) Index fell 2.63 percent while the Bloomberg 1-10 Year Blend Index declined 2.22 percent. Shorter-maturity bonds outperformed bonds at the long end of the curve. Municipal bonds with higher relative credit ratings outperformed bonds of lower quality.

Corporate Market Review

IG corporate bond spreads widened by 13bps in January, per Bloomberg data, to settle at 106bps. The Bloomberg U.S. Corporate Investment Grade (IG) Index fell 3.37 percent for January on a total return basis and 1.15 percent on an excess return basis compared with duration-matched Treasuries.

Bloomberg data showed that dispersion in performance among bonds based on credit-quality rating was limited with higher-quality issues slightly outperforming the lowest IG-quality bonds. IG corporate bonds with shorter maturities turned in the best performance on a total return basis.

The best-performing sectors were Automobiles, Commercial & Consumer Finance, Real Estate Investment Trusts, and Life Insurance. Underperforming sectors included Media & Entertainment, Technology, and Railroads.

Index-eligible IG bond issuance in January, per Bloomberg, was nearly $181 billion, a decrease from about $62 billion in December. Net issuance, after redemptions, was $90 billion, following a negative net total in December. According to EPFR, IG bond funds reported $8 billion of outflows in January.

Securitized Market Review

In securitized sectors in January, spreads widened across current coupon MBS, per Bloomberg data. The broad Bloomberg MBS Index had a negative excess return of 12bps. Within MBS, higher coupon securities outperformed lower coupons. Among ACMBS, spreads tightened, delivering a 1bp excess return. CMBS had a negative excess return of 2bps, per Bloomberg data

In the ABS market segment, spreads narrowed 6bps and 8bps for auto loan and credit card debt, respectively. Credit card-backed securities earned an excess return of 23bps, while securities backed by auto loans added 18bps in excess return for the month.

#283389 (2/8/2022)

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