(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

Bond markets adjusted to a more hawkish Federal Reserve (Fed) during March. The central bank raised the fed funds rate by 0.25 percent, the first such increase in three years. The Fed signaled it would be aggressive in addressing inflation in future rate actions. Several forecasts show the Fed hiking by 50bps at their upcoming meetings.

Geopolitical tensions, specifically the Russian invasion of Ukraine, contributed to global instability, including supply chain concerns. As the quarter closed, a new COVID variant began pressuring economic and business activity in Asia and Europe.

Treasury yields increased across the curve, ending the month inverted at several points. (See Figure 1.) Yields for maturities for 2- and 5-year rages were higher by 90 and 74 basis points (bps), respectively. Yields at 10 years were higher by 51bps and 29bps at 30 years.

Risk assets rallied mid-month after the March Federal Open Market Committee meeting, even with a more hawkish tone from Chair Powell. The S&P 500 Index ended the month up 4 percent while corporate bond credit spreads ended the month tighter, per Bloomberg data.

Signs of a still growing economy in the U.S. offered investors some positive support. Unemployment numbers declined. Job openings and wages grew. Still, consumer sentiment measures wobbled in the face of rising prices. In our view, credit fundamentals in the corporate and municipal bond markets remained favorable.

Municipal Market Review

Municipal yields increased across the curve during March (See Figure 2) and the curve flattened. At month-end, the yield curve between municipal bonds maturing in 2 years and 10 years (the 2s/10s curve) was flatter by 10bps, compared to February 28, while the 2s/30s curve flattened by 15bps.

Municipal/Treasury (M/T) ratios rose across the curve, closing at or near year-to-date highs. (See Figure 3).

Rising Treasury yields led to sizable outflows, about $6 billion per Lipper, from municipal bond mutual funds. Municipal bonds underperformed Treasuries in March, per Bloomberg. Yields in the 2-year range closed the quarter up 70bps, while the 5-, 10-, and 30-year spots finished 63, 60, and 55bps higher, respectively, according to Bloomberg.

March municipal bond issuance of $39 billion was 32 percent higher than the prior month but 18 percent lower than the same month one year ago, per The Bond Buyer. Tax-exempt bond issuance was 19 percent lower than March 2021, while monthly taxable municipal bond issuance was 6 percent lower year-over-year. Year-to-date outflows from municipal bond mutual funds exceeded $20 billion at the end of March.

For March, the Bloomberg Managed Money Short/Intermediate (1-10) Index fell 5.46 percent and the Bloomberg 1-10 Year Blend Index declined 4.76 percent. In this uncertain interest rate and economic environment, shorter-maturity bonds have outperformed longer maturities, while municipal bonds with higher relative credit ratings have outperformed bonds of lower quality.

Corporate Market Review

IG corporate bond spreads tightened by 6bps in March, per Bloomberg data, to settle at 116bps. The Bloomberg U.S. Corporate Investment Grade (IG) Index fell 2.52 percent on a total return basis and delivered a positive excess return of 0.86 percent compared with duration-matched Treasuries.

Bloomberg data showed that bonds rated BBB were the best performing along the investment grade credit quality spectrum, while bonds rated Aa+ were the worst performing. Shorter-maturity IG bonds realized higher relative returns compared with longer-maturity bonds.

The best-performing sectors were sovereigns, metals and mining, integrated energy, cable satellite, and oil field services, according to Bloomberg. The worst-performing sectors were foreign local government, airlines, financial companies, automotive, and supranationals.

Index-eligible IG bond issuance in March, per Bloomberg, was $243 billion, a substantial increase from about $85 billion in February. Net issuance, after redemptions, was a $137 billion, compared with negative net issuance in February. According to Wells Fargo, IG bond funds reported approximately $13 billion of outflows in March, bringing year-to-date outflows to approximately $29 billion.

Securitized Market Review

Securitized bond spreads widened in March across MBS and ABS sectors, per Bloomberg data. The broad Bloomberg MBS Index had a negative excess return of 26bps. Within MBS, spreads widened the most among lower coupons. Ginnie Mae outperformed Conventional MBS (those backed by Fannie Mae and Freddie Mac) as Ginnie Mae securities are generally shorter duration all else equal.

Among commercial mortgage-backed securities (CMBS), Non-Agency CMBS had positive excess returns of 24 bps, per Bloomberg data. Agency CMBS spreads widened, delivering a negative excess return of 16bps.

In the ABS market segment, spreads widened 18bps and 5bps for auto loan and credit card debt, respectively. ABS backed by auto loans had a negative 33bps in excess return, while credit card-backed securities had a negative excess return of 3bps.

#291055 (4/11/2022)

DISCLAIMER

This material provides general and/or educational information and should not be construed as a solicitation or offer of Breckinridge services or products or as legal, tax or investment advice. The content is current as of the time of writing or as designated within the material. All information, including the opinions and views of Breckinridge, is subject to change without notice.

Any estimates, targets, and projections are based on Breckinridge research, analysis, and assumptions. No assurances can be made that any such estimate, target or projection will be accurate; actual results may differ substantially.

Past performance is not a guarantee of future results. Breckinridge makes no assurances, warranties or representations that any strategies described herein will meet their investment objectives or incur any profits. Any index results shown are for illustrative purposes and do not represent the performance of any specific investment. Indices are unmanaged and investors cannot directly invest in them. They do not reflect any management, custody, transaction or other expenses, and generally assume reinvestment of dividends, income and capital gains. Performance of indices may be more or less volatile than any investment strategy.

Performance results for Breckinridge’s investment strategies include the reinvestment of interest and any other earnings, but do not reflect any brokerage or trading costs a client would have paid. Results may not reflect the impact that any material market or economic factors would have had on the accounts during the time period. Due to differences in client restrictions, objectives, cash flows, and other such factors, individual client account performance may differ substantially from the performance presented.

All investments involve risk, including loss of principal. Diversification cannot assure a profit or protect against loss. Fixed income investments have varying degrees of credit risk, interest rate risk, default risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer-term securities. Income from municipal bonds can be declared taxable because of unfavorable changes in tax laws, adverse interpretations by the IRS or state tax authorities, or noncompliant conduct of a bond issuer.

Breckinridge believes that the assessment of ESG risks, including those associated with climate change, can improve overall risk analysis. When integrating ESG analysis with traditional financial analysis, Breckinridge’s investment team will consider ESG factors but may conclude that other attributes outweigh the ESG considerations when making investment decisions.

There is no guarantee that integrating ESG analysis will improve risk-adjusted returns, lower portfolio volatility over any specific time period, or outperform the broader market or other strategies that do not utilize ESG analysis when selecting investments. The consideration of ESG factors may limit investment opportunities available to a portfolio. In addition, ESG data often lacks standardization, consistency and transparency and for certain companies such data may not be available, complete or accurate.

Breckinridge’s ESG analysis is based on third party data and Breckinridge analysts’ internal analysis. Analysts will review a variety of sources such as corporate sustainability reports, data subscriptions, and research reports to obtain available metrics for internally developed ESG frameworks. Qualitative ESG information is obtained from corporate sustainability reports, engagement discussion with corporate management teams, among others. A high sustainability rating does not mean it will be included in a portfolio, nor does it mean that a bond will provide profits or avoid losses.

Net Zero alignment and classifications are defined by Breckinridge and are subjective in nature. Although our classification methodology is informed by the Net Zero Investment Framework Implementation Guide as outlined by the Institutional Investors Group on Climate Change, it may not align with the methodology or definition used by other companies or advisors. Breckinridge is a member of the Partnership for Carbon Accounting Financials and uses the financed emissions methodology to track, monitor and allocate emissions. These differences should be considered when comparing Net Zero application and strategies.

Targets and goals for Net Zero can change over time and could differ from individual client portfolios. Breckinridge will continue to invest in companies with exposure to fossil fuels; however, we may adjust our exposure to these types of investments based on net zero alignment and classifications over time.

Any specific securities mentioned are for illustrative and example only. They do not necessarily represent actual investments in any client portfolio.

The effectiveness of any tax management strategy is largely dependent on each client’s entire tax and investment profile, including investments made outside of Breckinridge’s advisory services. As such, there is a risk that the strategy used to reduce the tax liability of the client is not the most effective for every client. Breckinridge is not a tax advisor and does not provide personal tax advice. Investors should consult with their tax professionals regarding tax strategies and associated consequences.

Federal and local tax laws can change at any time. These changes can impact tax consequences for investors, who should consult with a tax professional before making any decisions.

The content may contain information taken from unaffiliated third-party sources. Breckinridge believes such information is reliable but does not guarantee its accuracy or completeness. Any third-party websites included in the content has been provided for reference only. Please see the Terms & Conditions page for third party licensing disclaimers.