BRAMSHILL BLOG: From the Desk of Art DeGaetano
Posting positive performance in fixed income, even in a rising rate environment, is something Bramshill has done consistently for many years. The Bramshill Income Performance Strategy returned +0.51% net in May, contributing to a +1.85% YTD total return. Using the Bloomberg Barclays Indexes, the year to date returns through May were as follows: US Aggregate Index was down -1.50%, US Treasury Index was down -1.10%, US Corporate Index was down -2.70%, US Municipal Index was down -0.53%, and US High Yield Index was down -0.24%. In 2018, volatility has been elevated in both the credit and rate markets due to a number of global events. Although the current backdrop may not bode well for generic fixed income strategies, higher yields can create more opportunities to invest.
In May, the most significant change in our portfolio was the temporary removal of the US Treasury hedge on the portfolio. Our rationale for this move was driven by a confluence of factors both domestically and internationally. Domestically, the move in rates unfolded according to our projections and had reached our initial targets. From a technical standpoint, 3.25% remains a significant multi-year resistance level for the US long bond. From a positioning perspective, according to the CFTC’s commitment of trader’s report, we saw the largest net short positioning for 10-year US Treasury futures in the product’s history, signaling pent-up short covering demand. Internationally, continued Eurozone weakness heightened the probability of a dovish pivot away from their projected September taper of bond purchases. In Italy specifically, the recent election created a rare far left and far right coalition government which dramatically raises the uncertainty/risk of a Eurozone crisis that could potentially surpass the PIGS sovereign crisis of 2010-2012. All of these factors, coupled with the US Dollar rally, made the US Treasury market an interesting relative value from a global standpoint. The technical and fundamental stars aligned and called for the temporary removal of our hedge. Longer term, our view on higher rates has not changed. US growth and inflation data remain firm, and coupled with heightened US Treasury issuance, our outlook for rates remains wider. We will look to reset our short once the factors mentioned above abate.
The removal of this interest rate hedge has consequently extended our portfolio’s duration modestly to 1.9 years. In terms of positioning, we still have minimal municipal and investment grade corporate exposure due to the significant rate sensitivity and unattractive yields. Our high yield exposure remained steady at 14% of our portfolio, with the majority of such exposure in two closed-end floating-rate loan funds with attractive yields and large discounts to NAV. We modestly increased our exposure to the preferred sector (now 50% of our portfolio) adding to core positions in MET 5.25% and CFG 5.5% fixed to float securities, as well as PFF. Strong credit fundamentals and >6% yields make the preferred asset class attractive. However, we remain mindful of the rate risk of this sector. The current yield on our portfolio is 4.73%, with a yield-to-worst of 4.25%. Short-term US Treasuries and cash now make up approximately 27% of our portfolio. This position will allow us to selectively add more attractive positions in the weeks ahead. We are mindful of the many risks to both the credit and rate markets and believe a conservative portfolio is warranted at this time.
Click here to download our May Income Performance Strategy fact sheet.
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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.