BRAMSHILL BLOG:  From the Desk of Art DeGaetano

September was a challenging month for many fixed income markets. Meanwhile, The Bramshill Income Performance Strategy performed relatively well returning +0.43% on the month, bringing YTD returns to +7.85%. During the month, the yield on the 10-year US Treasury increased 17 bps from 1.49% to 1.66%. Using the Bloomberg Barclays Indexes, the US Aggregate Index was down -0.53%, US Treasury Index was down -0.85%, the US Corporate Index was down -0.65%, and the US Municipal Index was down -0.80%. 

Our out-performance was due to our portfolio positioning which has become more defensive in the past few months. In addition to our often discussed concerns about interest rates, we have maintained caution due to extended historically tight spread levels and complacency in the markets which likely warrants a repricing of risk assets. Our fixed to float preferred position, while still substantial, now stands at 37% of the portfolio (down from 42% in August). These securities have performed as expected, with minimal price volatility and attractive income generation. High yield still offers little cushion for price volatility and spreads remain close to historic tights. There is not much margin for error at current valuations. We have only approximately 9.5% of the portfolio allocated to this asset class, mostly in high yield closed end funds. We need to see a significant repricing to become interested in high yield due to relative value considerations. Our allocation to investment grade corporate bonds remained stable in September at approximately 9.5% of the portfolio. Municipal bonds suffered significant price declines in September due to their high correlation to US Treasuries. We have been decreasing our exposure to municipals for the past few months as we have been taking profits in certain municipal closed-end funds (currently 2.3% allocation, down from approximately 10% allocation as of June 30th). Most of these closed end funds have produced returns in excess of 15% IRR’s YTD, thus warranting a reduced allocation.

Although US Treasury yields are at historic lows, and we believe the shape of the US Treasury curve is not compensating investors to take duration risk, we are not running an interest rate hedge at this time. As of the end of September, approximately 42% of our portfolio was allocated to short term US Treasuries. The last time we had this type of liquidity position was 4Q18 when there was a substantial repricing of risk assets. We were able to deploy this liquidity at very opportunistic prices in November and December of 2018. The dynamics in the market for the rest of 2019 could set up very similarly to last year. This could lead to significant opportunities to invest within the next few months. We shall be patient in our assessment.

Interested in more market insights from the Bramshill Team? Download our most recent White Paper on US Preferred Securities.