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Municipal Bonds: Navigating the Curve in 2024

S&P Kensho New Economies Commentary: Q4 2023

Mexico Fixed Income Commentary: Q4 2023

iBoxx Tadawul SAR Government Sukuk Indices – Q4 2023

The Growth of Passive Investments in Islamic Finance: Trends and Implications

Municipal Bonds: Navigating the Curve in 2024

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Jennifer Schnabl

Head of Fixed Income Core Indices

S&P Dow Jones Indices

Banner Performance, But Far from a Straight Line

The municipal bond market, as measured by the S&P National AMT-Free Municipal Bond Index, finished 2023 posting its strongest quarter in 14 years.  Its 2023 annual return of 6.24% was its best full-year performance since 2019.  While this was good news for many market participants, the path to get there was far from linear; 2023 presented many challenges for most fixed income asset classes, with central bank policy at the core.  Municipal bond indices proved resilient throughout the volatility, with favorable technicals and strong fundamentals driving performance.  As a new year begins, municipal bond indices may continue to be positioned to provide opportunities for 2024, both on a broad basis as well as across the curve.

Full Circle: How Did We Get Here?

The municipal bond market spent much of 2023 weathering the storm of interest rate volatility, as the U.S. Federal Reserve continued the most aggressive rate hiking cycle seen in over 40 years.  While the year began with optimism, performance across the municipal bond suite struggled through mid-year 2023 as the Fed raised rates for the 11th time in 16 months to 5.25-5.50%, before pausing in September.  The 10-year U.S. Treasury bond yield reached its peak in October, surpassing 5% for the first time in 16 years, at which time the S&P National AMT-Free Municipal Bond Index was down 2.13% YTD.

The rest of the fourth quarter would see the rate narrative change sharply, as falling inflation and weaker-than-expected economic data coupled with the Fed pause increased market expectations for rate cuts in Q1 2024.  The 10-year U.S. Treasury yield fell from its high and came full circle to end the year largely where it began, near 4%.  Munis rallied in sympathy with Treasuries and the S&P National AMT-Free Municipal Bond Index posted a quarterly gain of 7.29%, its strongest single quarter since Q3 2009.

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S&P Kensho New Economies Commentary: Q4 2023

The S&P Kensho New Economy Indices seek to track the industries and innovation of the Fourth Industrial Revolution

The U.S. equities market's overall performance in 2023 was incongruous to many predictions made at the beginning of the year.  The global economy was resilient, avoiding a recession despite negative geopolitical headlines (link).  The U.S. remained a prominent contributor to this optimism, countering the weaker-than-expected growth in the world’s second-largest economy, China.  Macro conditions turned more favorable in the final quarter of year, with inflation gliding lower and interest rates across most countries stabilizing, albeit at a higher level for now.

The fourth quarter saw a broad recovery of the equities market from the previous quarter’s weakness to reach near all-time highs.  The S&P Global BMI was up 11.2% over the quarter, within roughly 1% of its all-time high.  Similar patterns played out across the S&P United States BMI (12%) and S&P Europe 350® (11%), while the S&P Emerging BMI (7%) was hindered by a relatively weaker performance of the S&P China BMI (-3%).

As U.S. interest rates took a breather, U.S. equities across the market-cap spectrum posted their best quarterly returns in nearly three years, with the S&P 500®, S&P MidCap 400® and S&P SmallCap 600® up 12%, 12% and 15%, respectively.  This optimism within equities has been supported by, among other things, the pause in Fed rate hikes since August, the Fed's December 2023 meeting minutes signaling potential rate cuts in 2024, strong buyback activity and solid fund inflows, especially within the U.S. small-cap space.

The end-of-year cheer was widespread across S&P 500-linked factors, with high beta (18%) and momentum (15%) taking the top spots, value (14%) outperforming growth (10%), and low volatility (7%) near the bottom.  However, the “bad breadth” syndrome was notable, as 72% of the stocks in the S&P 500 underperformed the benchmark over the year.  The S&P 500’s outperformance (10.2%) of its equal-weight counterpart was the largest in more than two decades.  Except for Energy, all other S&P 500 sectors posted positive quarterly returns, led by the interest rate-sensitive Real Estate sector (19%).  The S&P Kensho New Economies Composite Index (19%) had its best quarter since Q4 2020, having broad-based positive contributions from 24 of its 25 subsector indices.  In terms of 2023 performance, 19 of the 25 S&P Kensho New Economies subsectors posted gains, underscored by Distributed Ledger’s impressive 228% annual return, followed by the Tech- and Semiconductor-heavy Virtual Reality (64%).

U.S. interest rates, which had been steadily rising since mid-2021, fell sharply over the quarter.  The S&P U.S. Treasury Bond Index staged an impressive rally (5%), more than recovering the losses of the past two quarters and posting its first annual gain (4.5%) since 2020.  The European Central Bank also paused its interest rate hikes in October but has refrained from suggesting any possibility of rate cuts in 2024.  The quarterly gain of the S&P Eurozone Sovereign Bond Index (up 6.6%) was the best in more than 20 years.  In a reversal of its previous quarter, the relatively longer-duration S&P U.S. Investment Grade Corporate Bond Index (10.3%) outperformed its high-yield counterpart index (7.25%) and the floating-rate leveraged loans index (2.5%).  Fed futures are pricing in more than 125 bps of rate cuts over 2024, much higher than the FOMC’s forecast.  While the Fed rate path will be key in 2024, U.S. economic growth will be closely watched for any signs of deviation from the “soft landing” scenario we seem to be in.  The Conference Board’s U.S. leading economic indicators have steadily fallen for 20 consecutive months.

The commodities segment was one of the few areas with negative performance.  Supply cuts supported oil prices during the first half of the year, but growing concerns over demand outweighed and dragged the price down near USD 70.  The S&P GSCI Energy was down 16.8% over the fourth quarter, as oil futures positioning appears cautious.  The S&P GSCI Agriculture (-1%) was down and near three-year lows from near-record supplies.  The S&P GSCI Industrial Metals (0.8%) barely moved due to rising concerns and weak manufacturing activity evidenced from PMI surveys across the U.S. and Europe.  The S&P GSCI Precious Metals (11%) was the anomaly, posting positive quarterly performance.  Easing interest rates, a softening U.S. dollar and increased geopolitical tensions have played into precious metals’ appeal.

Mexico Fixed Income Commentary: Q4 2023

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Catalina Zota

Associate Director, Fixed Income Product Management

S&P Dow Jones Indices

Market Snapshot

Mexico’s central bank held interest rates steady at 11.25% in December 2023.  The Bank of Mexico has kept the rate unchanged since March 2023.  Market participants are expecting rate cuts in 2024.  The inflation rate was up to 4.66% in December 2023, compared to 4.45% at the end of Q3 2023.

Yield on all S&P/BMV Fixed Income Indices trended down for Q4 2023.  Yields remained unchanged or declined slightly on the sovereign bond and floating rate indices, while quasi-sovereign, inflation-linked, corporate and Eurobond indices saw declines.

For 2023, the S&P/BMV All Sovereign Bond Index gained 10.2%, the S&P/BMV Quasi Sovereign Bond Index was up 11%, and the S&P/BMV Corporate Bond Index posted 11.3%.

Eurobonds and United Mexican States (UMS) bonds ended the year in negative territory.  Despite large gains in Q4, the S&P/BMV Sovereign International UMS Bond Index fell 3.9% in 2023, while the S&P/BMV Corporate Eurobonos Bond Index was down 5.6%.  Yields on Eurobond corporates dropped 89 bps, from 6.67% in September 2023 to 5.81% at the end of Q4 2023.  The yield for UMS bonds dropped 95 bps, from 6.44% at the end of Q3 2023 to 5.49% at the end of Q4 2023.  Comparing the S&P/BMV Sovereign International UMS Bond Index with the iBoxx $ Eurodollar Sovereigns Index—a measure of the broader Eurodollar sovereign market—the yields are close.  The iBoxx $ Eurodollar Sovereigns Index had a yield decrease of 86 bps, dropping from a yield of 6.17% in Q3 2023 to 5.31% in Q4 2023.  Comparing the S&P/BMV Corporate Eurobonos

Bond Index with the broader market indicator—iBoxx $ Eurodollar Corporates—a similar view is apparent.  The iBoxx $ Eurodollar Corporates had a yield decrease of 96 bps, from 6.19% at the end of Q3 2023 to 5.23% in Q4 2023.

The Eurobonds market is one of the most liquid fixed income markets in the world.  It provides foreign capital to issuers and diversification to investors, usually at a fixed rate.  According to the iBoxx $ Eurodollar Overall Index, the nominal value of all 8,247 bonds included in the index as of December 2023 stood at USD 9.13 trillion, with a market value of USD 8.34 trillion.  A drop in yields signifies that the bonds are more expensive to buy and that investors expect to earn less on the securities.  A drop in yields can also signal a possible recession.

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iBoxx Tadawul SAR Government Sukuk Indices – Q4 2023

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Jessica Tan

Principal, Fixed Income Indices

S&P Dow Jones Indices

iBoxx Tadawul SAR Government Sukuk Index

iBoxx Tadawul SAR Government Sukuk Indices: Exhibit 1

Following three consecutive months of losses totaling ‑2.12% in Q3 2023, the iBoxx Tadawul SAR Government Sukuk Index dipped further in October before joining the global bond market rally in November and December, resulting in a return of 0.26% in Q4 2023.  This brought the full-year 2023 return of the index to 2.09%.

iBoxx Tadawul SAR Government Sukuk Indices: Exhibit 2

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The Growth of Passive Investments in Islamic Finance: Trends and Implications

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Darius Nass

Associate Director, Global Equity Indices

S&P Dow Jones Indices

Introduction

Islamic indices provide market participants with a comprehensive set of Shariah-compliant benchmarks for equities and sukuk, offering a diverse range of strategies tailored to various investment goals.  These have been developed to cater to the unique needs of the Islamic financial ecosystem, reflecting the evolving dynamics of the global market.  Historically, Islamic investing has been predominantly actively managed; however, a recent shift toward passive investing is evident, especially as Shariah investors see the benefits of ETFs—including transparency and cost-efficiency—over active funds.  In the predominantly Muslim Middle East and North Africa (MENA) region, the benefits of passive investments are especially pronounced.  According to the S&P Indices Versus Active (SPIVA®) MENA Mid-Year 2023 Scorecard, 85%-88% of equity funds in the region underperformed their benchmarks and only 42% survived over the past decade.

Review of 2023

Global Islamic indices dropped by over 20% in 2022, paving the way for a 2023 resurgence. During the first nine months of 2023, the S&P Global BMI Shariah and Dow Jones Islamic Market World Index increased by approximately 12.3% and 13.0%, respectively. Over the past 10 years, the S&P Global BMI Shariah outperformed its conventional benchmark in five-year rolling returns nearly 75% of the time.

The asset landscape mirrored this upward trend.  By Sept. 30, 2023, there were 29 Islamic ETFs with a combined AUM of USD 2.33 billion—a significant jump from 2022's 26 ETFs and USD 1.67 billion AUM.  Looking back five years, the growth has been even more remarkable: from 7 ETFs and an AUM of USD 326 million in 2018.

The Growth of Passive Investments in Islamic Finance: Trends and Implications: Exhibit 1

In response to the surging interest in Shariah-compliant investing, especially among Australia’s growing Muslim community, S&P Dow Jones Indices (S&P DJI) collaborated with Australia Securities Exchange (ASX) to introduce its first Shariah-compliant series of benchmarks to the Australian market, the S&P/ASX Shariah Indices, in March 2023.  With the launches of the S&P/ASX 200 Shariah and S&P/ASX 300 Shariah, the renowned S&P/ASX Indices now complement other globally recognized Shariah-compliant equity benchmarks, including the S&P 500® Shariah, S&P/TOPIX 150 Shariah and S&P/TSX 60 Shariah.

In parallel to equity indices, sukuk listings increased significantly over the past decade.  Conventional and Shariah-compliant bonds increased notably to USD 180 billion in outstanding debt, with sukuk representing a substantial portion, at USD 77 billion.  Among the notable listings are the U.A.E. Ministry of Finance sukuk and the debut of ESG sukuk, with the total ESG sukuk reaching approximately USD 18 billion.  Concurrently, in Saudi Arabia, the domestic government sukuk market, as represented by the iBoxx Tadawul SAR Government Sukuk Index, flourished between 2019 and 2022, establishing Saudi Arabia as the premier global sovereign sukuk issuer.  Since the index's inception (June 30, 2019), the sukuk count rose from 29 to 50, with the total notional outstanding advancing from about USD 40 billion to USD 115 billion.

The past few years have witnessed a significant pivot from predominantly active Shariah-compliant mutual funds to passive index-based investing.  Notably, nearly two-thirds of Islamic index funds launched post-2017 have extended their influence beyond traditional Islamic centers such as Malaysia and Saudi Arabia to North America and Europe. This evolution is underscored by the listing of Shariah-compliant ETFs on major platforms, like the London Stock Exchange, New York Stock Exchange and elsewhere, signifying the increased value of these offerings.

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