may 2016 market commentary
COMMENTARY
MAY 2016 MARKET COMMENTARY KEY TAKEAWAYS • Municipal bond demand remained robust in May despite headline risks, including the default of the Puerto Rico Government Development Bank on May 2.
• For municipal bonds, the trend of long-end outperformance continued in May.
• Corporate spreads widened
modestly in May following record issuance of $176 billion.
• Negative rates in Japanese and
certain European government bonds are motivating global investors to search for higher yields.
MARKET REVIEW Strawberry Yields Summer has arrived, when fruity salads and beachside drinks often feature the bright flavor of strawberry. For the best strawberries, some argue that a trip to the Wépion village of Belgium is required. The village, home to a strawberry museum called Musée de la Fraise, germinates strawberries branded La Criée de Wépion. These berries are picked at the peak of ripeness, and then sold for about twice as much as competing berries.1 To those participating in the investment-grade fixed income markets, highly sought assets with prices reflecting strong demand should sound familiar. In May, investors continued to hungrily demand high-grade corporate and municipal bonds—particularly foreign investors in search of yield. High quality assets also benefited from banks seeking a place to sock capital amid a weak environment for business loans.2 Despite the highest level of supply ever, U.S. high-grade corporate bond spreads increased only 1 basis point (bp) for the month.3 Municipal bond inflows were resilient in the face of low yields and headline risks from Puerto Rico. While higher-rated bonds held in well during the month, returns on higherbeta assets (high-yield bonds, equities) fared better as investors drifted down the credit curve and increased duration to gain yield. A relatively benign economic backdrop created fertile soil for fixed income issuance in May. To start the month, weak economic data prompted market participants to reduce expectations for a June rate hike. In labor markets, the unemployment rate was unchanged in April at 5 percent and the participation rate slipped to 62.8 percent for April. The U.S. reported 123,000 new jobs in April (revised), which was shy of expectations and further stoked concerns of a slowdown to labor market improvement.4 May data, released June 3, reflected a 4.7 percent unemployment rate and an increase of 38,000 in nonfarm payroll employment.5 The decline was largely due to workers leaving the workforce rather than improving conditions. Treasury yields fell following the announcement and markets began largely ruling out a June rate hike, versus an implied probability of 22 percent prior to the employment data.6 Manufacturing data remained sluggish; the ISM’s PMI report registered a weak 50.8 percent for April.7 Retail sales climbed 1.3 percent in April from the previous month,8 but growth was mostly restricted to online retailers rather than traditional department stores. Given the reset in rate-hike expectations, the 10-year Treasury 1
MAY 2016 MARKET COMMENTARY
Figure 1: The U.S. Dollar Displays Figure 1: The U.S. Dollar Displays an Inverse RelationshipPrices to Commodity Prices an Inverse Relationship to Commodity
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Commodities Index (lhs) U.S. Dollar Index (rhs) Source: Bloomberg, as of June 1, 2016. U.S. Dollar Index references the Bloomberg Dollar Spot Index. Commodities Index references the Commodity Research Bureau BLS/U.S. Spot All Commodities Index.
bond plummeted to 1.7 percent—the low for the month—on May 13.9 However, markets shifted in the second half of the month due to hawkish statements from the Fed and healthy new U.S. home sales that pointed to a potential June rate hike after all. In addition, the consumer price index (CPI) came out better than expected with an increase of 0.4 percent in April on a seasonally adjusted basis—the largest increase since 2013.10 The Fed’s minutes released May 18 were significantly more hawkish than its March release, as policymakers recognized the flow of improvements in economic data. Concerns about low oil prices and a Chinese hard landing have abated, even as the policymakers acknowledge ongoing risks from the June Brexit referendum and from changing Chinese rate and currency policies. In addition, commodities maintained their correlation with the U.S. dollar (with commodities prices moving inversely to strength in the dollar), and in May oil prices rallied and the dollar reversed some of its notable
strengthening seen in April (Figure 1). With the likelihood of a June hike back on the table, the 10-year moved higher to close the month at 1.85 percent. The Treasury curve flattened, as healthy foreign demand for longer maturities helped anchor the long-end while short-end rates moved higher.11 Given weak PMI and jobs data at the start of June, markets now place a virtually 0 percent chance on a June rate hike. Markets place an 18 percent chance on a July hike, futures data shows.12 Looking forward, markets will watch for the opening of the ECB corporate bond-buying program on June 8, the release of U.S. retail sales data on June 14, the June 14-15 FOMC meeting and the June 23 Brexit referendum.
TAX-EXEMPT MARKET REVIEW Will Puerto Rico Negotiations Bear Fruit? Municipal bond demand remained robust in May despite headline risks, including the default of the Puerto Rico Government Development Bank
on May 2 and the one-notch ratings downgrades that hit Connecticut on May 19.13 Markets had a muted reaction to the widely-expected Puerto Rico default. Congress continues to negotiate on how to handle Puerto Rico. During the month, the House Natural Resources Committee released its latest draft of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) to restructure Puerto Rico’s debt. It is unclear whether the bill will become law and set recovery rules for creditors. Lower-rated municipal bonds continue to attract investors searching for yield.14 This trend benefited some new issues, such as the Baa3-rated $2.3 billion New York Transportation Development Corporation AMT special facilities bonds for LaGuardia Airport, which were in high demand.15 While issuers continued to benefit from supportive supply/demand technicals, the tone weakened slightly after the Treasury sell-off midmonth, resulting in some issuers decreasing debt sizes during the issuance process. The trend of long-end outperformance continued in May (Figure 2). Municipal bond yields fell at the long end but rose at the short end, and the slope of the curve remains very flat. Yields moved +11, +5 and -13bps for fiveyear, 10-year and 30-year maturities during the month. In the second week of May, the 30-year municipal bond fell to a yield of 2.42 percent—a new historic low.16 Year-to-date, long-end returns have outperformed on solid demand, as foreign investors are attracted to longer-duration bonds with stable credit fundamentals. Treasuries underperformed municipal bonds in May due primarily to hawkish rate comments midmonth. Ratios fell 2
MAY 2016 MARKET COMMENTARY
FigureFigure 2: The2:Long-End Outperformed in Municipals and Treasuries, The Long-End Outperformed in Municipals and Treasuries, and Curves Flattened and Curves Flattened
upsized due to oversubscription. For example, computer company Dell upsized its $15 billion senior-secured bond deal to $20 billion after the order book grew to $85 billion. The company is using the proceeds to help fund its acquisition of technology firm EMC Corporation. However, corporate new-issue concessions did increase to an average of 6bps in May from 2bps in April, a consequence of the heavy supply.20 Year-to-date mutual fund inflows totaled nearly $30 billion as of the end of May, per Lipper.21
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Investment-grade corporates had a weaker tone in some pockets of the month due to weakening in equity markets. At the start of the month, high-grade corporates widened for the first time in six weeks. This was due to supply indigestion along with blows to equity from global growth concerns and bearish sentiment coming from statements at high-profile investment conferences. Additionally, after hawkish Fed posturing midmonth, high-grade corporates had a weaker tone partly due to equity weakness.
Treasuries Municipals Source: U.S. Treasury, The Municipal Market Monitor (TM3), Thomson Reuters, as of June 1, 2016.
160 140 120 100
6 M ay -1
Ap r16
6
M ar -1 6
Fe b1
16 n-
5
15
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15 gAu
15 lJu
15
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80 n-
New-issue supply catapulted to an all-time monthly record of $176 billion
180
Ju
GOVERNMENT CREDIT MARKET REVIEW Corporate Issuance Sprouts
200
M ay -1
On the supply side, issuance was $39.63 billion in May, slightly higher than $36.74 billion in May 2015, per The Bond Buyer. Tax-exempt annual issuance declined for the ninthconsecutive month, ending May at $367 billion.18 Again, lower supply reflects reduced refunding volume. Year-to-date refunding volume reached $70.76 billion last month from $163.77 billion for the same period in 2015, The Bond Buyer data shows.
in May, dwarfing the previous record of $157 billion set in May 2015.19 Hefty supply was not the only headwind facing the high-grade corporate market this month; the sector also had to contend with hawkish Fed language and an ongoing deterioration in credit fundamentals, although we think the corporate credit cycle may be nearing its bottom. Despite these hurdles, the Barclays Intermediate Corporate Index only widened 1bp in May due One potential boost to demand for the to strong demand. Many deals were U.S. investment-grade corporate bond Figure 3: Corporate Spreads Widened Modestly Following Hefty Supply Figure 3: Corporate Spreads Widened Modestly Following Hefty Supply Barclays Intermediate Corporate Index (OAS)
and told a similar story to yields; the short-end ended the month cheaper to Treasuries while long-end ratios decreased, given stronger long-end performance. Ratios increased to 80.21 percent and 90.61 percent in five-year and 10-year bonds, respectively. In 30year bonds, ratios decreased 3bps to close the month at 93.23.17
Ja
3yr
15
2yr
c-
1yr
De
Monthly Change in Yield (bps)
15
Source: Barclays, as of June 1, 2016.
3
MAY 2016 MARKET COMMENTARY
market is the European corporate bond-buying program from the ECB, as investors are purchasing bonds in advance of the large buyer coming into the market. The program went into effect June 8. Negative rates in Japanese and certain European government bonds are motivating global investors to search for higher yields, which U.S. corporate bonds currently offer. For the month, the best-performing sectors were Home Construction, Airlines, Electrics and Natural Gas, Barclays notes. Financials also had a strong showing due to midmonth expectations for an earlier rate hike and earnings results that beat expectations. Meanwhile, Metals and Mining gave up some of the rally from earlier in the year and performed poorly. Year-to-date data show that lower-rated credits have seen better returns than more high-quality names, similar to the story in the municipal bond market. BBB names have posted the highest excess returns year-todate in the U.S. Credit Index (excluding crossover credits), per Barclays. Further displaying investors’ demand for yield, high-yield returns outpaced investment-grade returns in May. Only one high-yield deal has been pulled
year-to-date, versus 24 in the same period last year.22
BRECKINRIDGE STRATEGY Hawkish Fed Causes Jam in Sentiment The Fed’s hawkish comments in midMay prompted higher Treasury rates, lower equities and a stronger dollar. However, monetary policy divergence continues to keep a ceiling on Treasury rates particularly in the long-end. Given low absolute yields abroad, foreign demand for Treasuries, corporate bonds and municipal bonds continues to flow through to strong demand across high-quality fixed income. Expectations for rate hikes fluctuated significantly throughout the month based on mixed economic data and Fed statements. While recent economic data prints suggest that a June hike is unlikely, the current low level of rates gives the Fed ample option to raise rates but little opportunity to loosen monetary policy. Therefore, some FOMC members are eager to move rates higher. That said, dollar strengthening, in tandem with rate hikes, could prompt a correction in emerging markets and a negative
feedback loop to U.S. policy hikes. Breckinridge continues to expect a bear flattening of the U.S. yield curve, but notes that it could take longer than expected. We maintain relatively neutral duration targets in our Government Credit and Tax-Efficient strategies. In our Government Credit portfolios, the Investment Committee did not make any changes to asset allocation targets. However, the Committee is closely monitoring pricing trends in taxable municipal bonds, which are seeing strong demand from nontraditional buyers. Additionally, the Committee continues to consistently discuss buying opportunities emanating from pricing weakness in credits that meet our strict standards for credit fundamentals. In our Tax-Efficient portfolios, we continue to lighten our exposure to local general obligation (GO) bonds over time, and we are closely monitoring pockets of risk in pensions and in energy exposure. We are also monitoring headline risks in Puerto Rico, Connecticut, Illinois and New Jersey, but we believe that marketwide impact is likely to be minimal from these issues.
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MAY 2016 MARKET COMMENTARY
FOOTNOTES:
7. Institute for Supply Management, as of May 2, 2016.
1. Zoler, Mitchel L., “In Belgium’s Strawberry Fields,
8. U.S. Census Bureau, as of May 13, 2016.
Perfection’s in the Picking,” The New York Times,
9. Bloomberg, as of June 7, 2016.
June 12, 2015.
10. Bureau of Labor Statistics, as of May 17, 2016.
Reuters, as of June 7, 2016. 17. The Municipal Market Monitor (TM3), Thomson
Reuters, as of June 7, 2016. 18. MMA, as of May 2016. Annualized numbers are
2. Municipal Market Analytics, Inc. (MMA), as of May, 2016.
11. Bloomberg, as of June 7, 2016.
3. Bank of America, as of June 1, 2016; Barclays, as of
12. Bloomberg, as of June 9, 2016.
19. Bank of America Merrill Lynch, as of June 1, 2016.
June 2, 2016.
calculated by a 12-month rolling total.
13. S&P Global Ratings, Fitch Ratings as of May 19, 2016.
20. Bank of America Merrill Lynch, as of June 1, 2016.
4. Bureau of Labor Statistics, as of June 7, 2016.
14. MMA, as of May 2016.
21. Lipper data, as of May 31, 2016.
5. Bureau of Labor Statistics, as of June 3, 2016.
15. Moody’s as of May 27, 2016; MMA, as of May 17, 2016.
22. Goldman Sachs, as of May 26, 2016.
6. Bloomberg, as of June 2, 2016.
16. The Municipal Market Monitor (TM3), Thomson
DISCLAIMER: This material has been prepared for our clients and other interested parties and contains the opinions of Breckinridge Capital Advisors, Inc. Information and opinions are current as of the date(s) indicated and are subject to change without notice. Any specific securities or portfolio characteristics are for illustrative purposes and example only. They may not reflect historical, current or future investments in any client portfolio. Nothing in this document should be construed or relied upon as tax, legal or financial advice. All investments involve risk – including loss of principal. An investor should consult with an investment professional before making any investment decisions. Breckinridge can make no assurances, warranties or representations that any strategies described will meet their investment objectives or incur any profits.This document may include projections or other forward-looking statements, which are based on Breckinridge’s research, analysis, and assumptions. There can be no assurances that such projections will occur and the actual results may differ materially. Other events that were not taken into account in formulating such projections may occur and may significantly affect the returns or performance of any account. Past performance is not indicative of future results. This document includes information from companies not affiliated with Breckinridge (“third party content”). Breckinridge reasonably believes the third party content is reliable but cannot guarantee its accuracy or completeness.
5
MAY 2016 MARKET COMMENTARY KEY TAKEAWAYS • Municipal bond demand remained robust in May despite headline risks, including the default of the Puerto Rico Government Development Bank on May 2.
• For municipal bonds, the trend of long-end outperformance continued in May.
• Corporate spreads widened
modestly in May following record issuance of $176 billion.
• Negative rates in Japanese and
certain European government bonds are motivating global investors to search for higher yields.
MARKET REVIEW Strawberry Yields Summer has arrived, when fruity salads and beachside drinks often feature the bright flavor of strawberry. For the best strawberries, some argue that a trip to the Wépion village of Belgium is required. The village, home to a strawberry museum called Musée de la Fraise, germinates strawberries branded La Criée de Wépion. These berries are picked at the peak of ripeness, and then sold for about twice as much as competing berries.1 To those participating in the investment-grade fixed income markets, highly sought assets with prices reflecting strong demand should sound familiar. In May, investors continued to hungrily demand high-grade corporate and municipal bonds—particularly foreign investors in search of yield. High quality assets also benefited from banks seeking a place to sock capital amid a weak environment for business loans.2 Despite the highest level of supply ever, U.S. high-grade corporate bond spreads increased only 1 basis point (bp) for the month.3 Municipal bond inflows were resilient in the face of low yields and headline risks from Puerto Rico. While higher-rated bonds held in well during the month, returns on higherbeta assets (high-yield bonds, equities) fared better as investors drifted down the credit curve and increased duration to gain yield. A relatively benign economic backdrop created fertile soil for fixed income issuance in May. To start the month, weak economic data prompted market participants to reduce expectations for a June rate hike. In labor markets, the unemployment rate was unchanged in April at 5 percent and the participation rate slipped to 62.8 percent for April. The U.S. reported 123,000 new jobs in April (revised), which was shy of expectations and further stoked concerns of a slowdown to labor market improvement.4 May data, released June 3, reflected a 4.7 percent unemployment rate and an increase of 38,000 in nonfarm payroll employment.5 The decline was largely due to workers leaving the workforce rather than improving conditions. Treasury yields fell following the announcement and markets began largely ruling out a June rate hike, versus an implied probability of 22 percent prior to the employment data.6 Manufacturing data remained sluggish; the ISM’s PMI report registered a weak 50.8 percent for April.7 Retail sales climbed 1.3 percent in April from the previous month,8 but growth was mostly restricted to online retailers rather than traditional department stores. Given the reset in rate-hike expectations, the 10-year Treasury 1
MAY 2016 MARKET COMMENTARY
Figure 1: The U.S. Dollar Displays Figure 1: The U.S. Dollar Displays an Inverse RelationshipPrices to Commodity Prices an Inverse Relationship to Commodity
300
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Commodities Index (lhs) U.S. Dollar Index (rhs) Source: Bloomberg, as of June 1, 2016. U.S. Dollar Index references the Bloomberg Dollar Spot Index. Commodities Index references the Commodity Research Bureau BLS/U.S. Spot All Commodities Index.
bond plummeted to 1.7 percent—the low for the month—on May 13.9 However, markets shifted in the second half of the month due to hawkish statements from the Fed and healthy new U.S. home sales that pointed to a potential June rate hike after all. In addition, the consumer price index (CPI) came out better than expected with an increase of 0.4 percent in April on a seasonally adjusted basis—the largest increase since 2013.10 The Fed’s minutes released May 18 were significantly more hawkish than its March release, as policymakers recognized the flow of improvements in economic data. Concerns about low oil prices and a Chinese hard landing have abated, even as the policymakers acknowledge ongoing risks from the June Brexit referendum and from changing Chinese rate and currency policies. In addition, commodities maintained their correlation with the U.S. dollar (with commodities prices moving inversely to strength in the dollar), and in May oil prices rallied and the dollar reversed some of its notable
strengthening seen in April (Figure 1). With the likelihood of a June hike back on the table, the 10-year moved higher to close the month at 1.85 percent. The Treasury curve flattened, as healthy foreign demand for longer maturities helped anchor the long-end while short-end rates moved higher.11 Given weak PMI and jobs data at the start of June, markets now place a virtually 0 percent chance on a June rate hike. Markets place an 18 percent chance on a July hike, futures data shows.12 Looking forward, markets will watch for the opening of the ECB corporate bond-buying program on June 8, the release of U.S. retail sales data on June 14, the June 14-15 FOMC meeting and the June 23 Brexit referendum.
TAX-EXEMPT MARKET REVIEW Will Puerto Rico Negotiations Bear Fruit? Municipal bond demand remained robust in May despite headline risks, including the default of the Puerto Rico Government Development Bank
on May 2 and the one-notch ratings downgrades that hit Connecticut on May 19.13 Markets had a muted reaction to the widely-expected Puerto Rico default. Congress continues to negotiate on how to handle Puerto Rico. During the month, the House Natural Resources Committee released its latest draft of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) to restructure Puerto Rico’s debt. It is unclear whether the bill will become law and set recovery rules for creditors. Lower-rated municipal bonds continue to attract investors searching for yield.14 This trend benefited some new issues, such as the Baa3-rated $2.3 billion New York Transportation Development Corporation AMT special facilities bonds for LaGuardia Airport, which were in high demand.15 While issuers continued to benefit from supportive supply/demand technicals, the tone weakened slightly after the Treasury sell-off midmonth, resulting in some issuers decreasing debt sizes during the issuance process. The trend of long-end outperformance continued in May (Figure 2). Municipal bond yields fell at the long end but rose at the short end, and the slope of the curve remains very flat. Yields moved +11, +5 and -13bps for fiveyear, 10-year and 30-year maturities during the month. In the second week of May, the 30-year municipal bond fell to a yield of 2.42 percent—a new historic low.16 Year-to-date, long-end returns have outperformed on solid demand, as foreign investors are attracted to longer-duration bonds with stable credit fundamentals. Treasuries underperformed municipal bonds in May due primarily to hawkish rate comments midmonth. Ratios fell 2
MAY 2016 MARKET COMMENTARY
FigureFigure 2: The2:Long-End Outperformed in Municipals and Treasuries, The Long-End Outperformed in Municipals and Treasuries, and Curves Flattened and Curves Flattened
upsized due to oversubscription. For example, computer company Dell upsized its $15 billion senior-secured bond deal to $20 billion after the order book grew to $85 billion. The company is using the proceeds to help fund its acquisition of technology firm EMC Corporation. However, corporate new-issue concessions did increase to an average of 6bps in May from 2bps in April, a consequence of the heavy supply.20 Year-to-date mutual fund inflows totaled nearly $30 billion as of the end of May, per Lipper.21
10 5 0 -5 -10 -15 5yr
7yr
10yr
20yr
30yr
Investment-grade corporates had a weaker tone in some pockets of the month due to weakening in equity markets. At the start of the month, high-grade corporates widened for the first time in six weeks. This was due to supply indigestion along with blows to equity from global growth concerns and bearish sentiment coming from statements at high-profile investment conferences. Additionally, after hawkish Fed posturing midmonth, high-grade corporates had a weaker tone partly due to equity weakness.
Treasuries Municipals Source: U.S. Treasury, The Municipal Market Monitor (TM3), Thomson Reuters, as of June 1, 2016.
160 140 120 100
6 M ay -1
Ap r16
6
M ar -1 6
Fe b1
16 n-
5
15
-1 ov N
pSe
15 gAu
15 lJu
15
5
80 n-
New-issue supply catapulted to an all-time monthly record of $176 billion
180
Ju
GOVERNMENT CREDIT MARKET REVIEW Corporate Issuance Sprouts
200
M ay -1
On the supply side, issuance was $39.63 billion in May, slightly higher than $36.74 billion in May 2015, per The Bond Buyer. Tax-exempt annual issuance declined for the ninthconsecutive month, ending May at $367 billion.18 Again, lower supply reflects reduced refunding volume. Year-to-date refunding volume reached $70.76 billion last month from $163.77 billion for the same period in 2015, The Bond Buyer data shows.
in May, dwarfing the previous record of $157 billion set in May 2015.19 Hefty supply was not the only headwind facing the high-grade corporate market this month; the sector also had to contend with hawkish Fed language and an ongoing deterioration in credit fundamentals, although we think the corporate credit cycle may be nearing its bottom. Despite these hurdles, the Barclays Intermediate Corporate Index only widened 1bp in May due One potential boost to demand for the to strong demand. Many deals were U.S. investment-grade corporate bond Figure 3: Corporate Spreads Widened Modestly Following Hefty Supply Figure 3: Corporate Spreads Widened Modestly Following Hefty Supply Barclays Intermediate Corporate Index (OAS)
and told a similar story to yields; the short-end ended the month cheaper to Treasuries while long-end ratios decreased, given stronger long-end performance. Ratios increased to 80.21 percent and 90.61 percent in five-year and 10-year bonds, respectively. In 30year bonds, ratios decreased 3bps to close the month at 93.23.17
Ja
3yr
15
2yr
c-
1yr
De
Monthly Change in Yield (bps)
15
Source: Barclays, as of June 1, 2016.
3
MAY 2016 MARKET COMMENTARY
market is the European corporate bond-buying program from the ECB, as investors are purchasing bonds in advance of the large buyer coming into the market. The program went into effect June 8. Negative rates in Japanese and certain European government bonds are motivating global investors to search for higher yields, which U.S. corporate bonds currently offer. For the month, the best-performing sectors were Home Construction, Airlines, Electrics and Natural Gas, Barclays notes. Financials also had a strong showing due to midmonth expectations for an earlier rate hike and earnings results that beat expectations. Meanwhile, Metals and Mining gave up some of the rally from earlier in the year and performed poorly. Year-to-date data show that lower-rated credits have seen better returns than more high-quality names, similar to the story in the municipal bond market. BBB names have posted the highest excess returns year-todate in the U.S. Credit Index (excluding crossover credits), per Barclays. Further displaying investors’ demand for yield, high-yield returns outpaced investment-grade returns in May. Only one high-yield deal has been pulled
year-to-date, versus 24 in the same period last year.22
BRECKINRIDGE STRATEGY Hawkish Fed Causes Jam in Sentiment The Fed’s hawkish comments in midMay prompted higher Treasury rates, lower equities and a stronger dollar. However, monetary policy divergence continues to keep a ceiling on Treasury rates particularly in the long-end. Given low absolute yields abroad, foreign demand for Treasuries, corporate bonds and municipal bonds continues to flow through to strong demand across high-quality fixed income. Expectations for rate hikes fluctuated significantly throughout the month based on mixed economic data and Fed statements. While recent economic data prints suggest that a June hike is unlikely, the current low level of rates gives the Fed ample option to raise rates but little opportunity to loosen monetary policy. Therefore, some FOMC members are eager to move rates higher. That said, dollar strengthening, in tandem with rate hikes, could prompt a correction in emerging markets and a negative
feedback loop to U.S. policy hikes. Breckinridge continues to expect a bear flattening of the U.S. yield curve, but notes that it could take longer than expected. We maintain relatively neutral duration targets in our Government Credit and Tax-Efficient strategies. In our Government Credit portfolios, the Investment Committee did not make any changes to asset allocation targets. However, the Committee is closely monitoring pricing trends in taxable municipal bonds, which are seeing strong demand from nontraditional buyers. Additionally, the Committee continues to consistently discuss buying opportunities emanating from pricing weakness in credits that meet our strict standards for credit fundamentals. In our Tax-Efficient portfolios, we continue to lighten our exposure to local general obligation (GO) bonds over time, and we are closely monitoring pockets of risk in pensions and in energy exposure. We are also monitoring headline risks in Puerto Rico, Connecticut, Illinois and New Jersey, but we believe that marketwide impact is likely to be minimal from these issues.
4
MAY 2016 MARKET COMMENTARY
FOOTNOTES:
7. Institute for Supply Management, as of May 2, 2016.
1. Zoler, Mitchel L., “In Belgium’s Strawberry Fields,
8. U.S. Census Bureau, as of May 13, 2016.
Perfection’s in the Picking,” The New York Times,
9. Bloomberg, as of June 7, 2016.
June 12, 2015.
10. Bureau of Labor Statistics, as of May 17, 2016.
Reuters, as of June 7, 2016. 17. The Municipal Market Monitor (TM3), Thomson
Reuters, as of June 7, 2016. 18. MMA, as of May 2016. Annualized numbers are
2. Municipal Market Analytics, Inc. (MMA), as of May, 2016.
11. Bloomberg, as of June 7, 2016.
3. Bank of America, as of June 1, 2016; Barclays, as of
12. Bloomberg, as of June 9, 2016.
19. Bank of America Merrill Lynch, as of June 1, 2016.
June 2, 2016.
calculated by a 12-month rolling total.
13. S&P Global Ratings, Fitch Ratings as of May 19, 2016.
20. Bank of America Merrill Lynch, as of June 1, 2016.
4. Bureau of Labor Statistics, as of June 7, 2016.
14. MMA, as of May 2016.
21. Lipper data, as of May 31, 2016.
5. Bureau of Labor Statistics, as of June 3, 2016.
15. Moody’s as of May 27, 2016; MMA, as of May 17, 2016.
22. Goldman Sachs, as of May 26, 2016.
6. Bloomberg, as of June 2, 2016.
16. The Municipal Market Monitor (TM3), Thomson
DISCLAIMER: This material has been prepared for our clients and other interested parties and contains the opinions of Breckinridge Capital Advisors, Inc. Information and opinions are current as of the date(s) indicated and are subject to change without notice. Any specific securities or portfolio characteristics are for illustrative purposes and example only. They may not reflect historical, current or future investments in any client portfolio. Nothing in this document should be construed or relied upon as tax, legal or financial advice. All investments involve risk – including loss of principal. An investor should consult with an investment professional before making any investment decisions. Breckinridge can make no assurances, warranties or representations that any strategies described will meet their investment objectives or incur any profits.This document may include projections or other forward-looking statements, which are based on Breckinridge’s research, analysis, and assumptions. There can be no assurances that such projections will occur and the actual results may differ materially. Other events that were not taken into account in formulating such projections may occur and may significantly affect the returns or performance of any account. Past performance is not indicative of future results. This document includes information from companies not affiliated with Breckinridge (“third party content”). Breckinridge reasonably believes the third party content is reliable but cannot guarantee its accuracy or completeness.
5
