BRAMSHILL BLOG: From the Desk of Art DeGaetano
Prices deteriorated modestly in most of U.S. fixed income in November as U.S. Treasuries, corporate bonds and municipal bonds all posted negative returns. Our portfolio gave back -0.22% on the month, which brings our YTD performance +1.42% net.
November was characterized by low volatility in most markets, and we made very few shifts in our portfolio. Our views have not changed. We are positive on credit as we believe there is a strong cyclical recovery occurring in the U.S. Our biggest concern in fixed income is higher interest rates, and therefore, we are positioned to capitalize upon such an occurrence.The duration of our portfolio is currently 0.35 years, with a current yield of 5.57% and a yield-to-worst of 4.04%. Our largest allocation (approximately 50% of our portfolio) remains in fixed-to-float preferred securities which offer attractive yield characteristics and manageable durations. Roughly 13% of our portfolio is in high yield and loan closed-end funds with short durations and limited interest rate exposures. Approximately 9% of the portfolio is allocated to investment grade corporates and about 10% of our portfolio is allocated to convertible preferred securities in the energy sector. Our interest rate hedge currently accounts for approximately 9% of the portfolio.
There are several reasons for our conviction with regard to interest rates including a strong economy, a more restrictive Federal Reserve, commodity inflation and an increasingly tight labor market. We believe the “technical” bid for long-end U.S. Treasuries should fade in the coming months as a) Fed tapering accelerates, b) the ECB begins its tapering of its bond purchases, and c) the calendar year changes. Recently, pension funds have been aggressively purchasing long duration fixed income assets to pre-fund pension obligations ahead of tax reform in 2018. This phenomenon is likely to change early next year. Additionally, we foresee three rate hikes next year and the 10 year U.S. Treasury yield moving toward 3%. Finally, there is a possibility that the Federal Reserve hikes the Federal Funds rate more slowly and allows the economy to run “hotter” to reach their 2% inflation target. This could be another catalyst to spur long-end interest rates to move higher more quickly and the yield curve to steepen.
We believe one of two things are likely to occur in 2018 which will move long-term interest rates higher: growth and inflation accelerate leading to a parallel shift in yields; or, the Federal Reserve slows its tightening pace, hence keeping the yield curve from flattening or inverting and, in fact, making it steepen. Consistent with our views in recent months, in such a rising rate environment, we anticipate our portfolio performing well and producing positive returns in 2018.
Did you miss our live Q3 2017 webinar?
Watch the webinar replay here.
This commentary is provided by Bramshill Investments, LLC for information purposes only and may contain information that is not suitable for all investors. Certain views and opinions expressed herein are forward-looking and may not come to pass. Investing involves risk, including the potential loss of principal. Past performance may not be indicative of future results, which are subject to various market and economic factors. No statement is to be construed as an offer to sell or a solicitation of an offer to buy securities or the rendering of personalized investment advice. Stated performance is reflective of realized/unrealized capital gains/losses and investment income achieve in composite accounts, net of investment management fees and expenses for trading, custody and fund maintenance (where applicable). Returns reflect the reinvestment of dividends and other such distributions and performance for January 2009 through April 2012 depicts actual returns generated by the strategy while managed by the Firm’s Chief Investment Officer at an unaffiliated investment firm. All information is accurate as of the date of publication and is subject to change without notice.