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Investment Commentary


A Message from the Portfolio Management Team


Q3 | 2019 Highlights


  • Markets were volatile in September, driven by global growth concerns, ongoing trade tensions, and rate cuts from the U.S. Federal Reserve (the Fed).


  • Bond yields hit multi-year lows during the quarter, but rates rebounded at quarter-end due to volatility.


  • Municipal returns were positive for the quarter, despite a supply surge in September.
  • Mutual funds continued to post positive inflows, albeit at a slower pace.

Market environment

Stock and bond markets were dominated by concerns over:

  • Ongoing trade tensions
  • Weakening global growth
  • An increase in the number of bonds with negative yields
  • U.S. presidential impeachment inquiries

Additionally, as expected, the Fed cut the federal funds rate twice this quarter, driving bond yields to hit multi-year lows.

Yield curve and municipal bond performance

Overall, municipal yields were 50–100 bps lower compared to year-end.

  • During the quarter, municipal yields hit historic lows for maturities ten-year and longer.
  • In mid-September, they moved up,1 and ended the quarter 15–30 bps lower.
  • In shorter maturities, yields were modestly lower.

Municipal returns were negative in September for the first time this year. Heavy supply in September caused municipal valuations to cheapen relative to Treasuries.

  • Intermediate municipal bonds2 returned 0.76% for the quarter.
  • Meanwhile, government-related and investment-grade U.S. corporate bonds3 returned 2.64%.

Longer-duration and lower-quality bonds were the best performers over the quarter as yields declined and credit spreads tightened. This added to the strategy’s performance given its modestly longer duration and single A overweight relative to the benchmark.

Supply and demand

We believe municipal bonds may remain attractive in Q4 based on expected supply/demand dynamics.

New issuance surged in August and September, closing out the quarter at $103 billion, an 18% increase from Q3 2019.4 Year-to-date, new issuance totaled $275 billion.4 Demand remained at a record-breaking pace with 38 consecutive weeks of positive mutual fund inflows, and an estimated $68 billion5 year-to-date.

Municipal credit conditions

The overall environment supporting municipal credit has remained largely benign.

  • Unemployment has been low, home prices have been stable, and municipal cash reserves remained replenished.
  • Tax revenues were greater than budget targets in the three largest tax-generating states (CA, NY, TX).
  • Home price growth was positive in the 100 metro areas tracked by the Federal Housing Finance Agency through Q2.

Some concerns in the marketplace include impairment increases—such as bond covenant violations and missed payments—in the non-rated and high-yield space. There is also the growing possibility of a large default in the Virgin Islands.

Outlook and positioning

The duration target for the strategy was shortened slightly at the end of August to remain near neutral with the benchmark, which has shortened this year. Breckinridge shortened the strategy’s duration by reducing exposure in the ten-year range and increasing exposure in the five-year range. The drivers for the change were a flatter municipal yield curve, low ratios, and the arrival of a weaker seasonal period. Municipal bonds have become cheaper relative to Treasuries, and a weaker supply/demand environment may keep municipal bonds relatively cheap for the near term.