BRAMSHILL BLOG:  From the Desk of Bramshill Investments

The Bramshill Income Performance Strategy performed well in August, up +1.41% on the month, which brings our YTD performance to +2.36%. Having positioned the portfolio defensively coming into 2Q20, we were able to allocate capital as prices in credit moved lower earlier this year.

The portfolio benefitted from this opportunistic rotation (the 6th major shift in the 11 years of managing the Income Performance Strategy) out of cash/ST US Treasuries and primarily into preferreds, investment grade corporates and senior secured high yield corporates. In the past few months, the portfolio has benefitted from this opportunistic repositioning. In August, we made few changes to the portfolio. Our preferred allocation remained stable at 44% of the portfolio. These positions have experienced a recent spread tightening but continue to offer value as they are still cheap from a historical basis on spread vs treasuries. We reduced our investment grade corporate exposure slightly to approximately 15% as we took profits in LNC and RGA hybrid securities. We marginally increased our exposure in high yield corporates to approximately 18% of the portfolio by adding to our position in X 12% 6/25 secured bonds. Our entire municipal allocation (approximately 14% of the portfolio) is in municipal closed end funds trading at attractive NAV discounts. Cash/ST US Treasuries remained stable at approximately 7% of the portfolio. One note regarding interest rates, recently we have expressed our view that the Fed is “pegging” US rates at this time. Whether the Fed officially states they are exercising yield curve control or they are simply using QE tools which are large and very flexible in size, both of these are consistent with our view that interest rates will remain very low. A recent academic professor’s research piece went as far as saying the Fed will keep the Fed Funds rate at zero for the next 5 years. We are not sure of that extreme, but currently Eurodollar futures are implying the next Fed rate hike will not occur until some time in 2023. Clearly, the Fed has also stated its intention to allow inflation to run hotter than normal. They have also strongly stated they do not want negative interest rates, as that would be damaging to risk assets. Thus, our view is that given 10yr inflation break-evens are at approximately 1.70% and given the fact that a steeper curve (relative to the now zero fed funds) would be beneficial to the banks and viewed positively by the investment community, we see the Fed allowing the 10yr - 30yr rates to move a bit higher. Our humble range would be 0.60%-1% on 10yr treasury yields and 1.25-2% on 30yr treasury yields. At the lower end of those ranges, we would expect our portfolio to perform very well with larger principal gains ahead in addition to an approximate 5% portfolio yield, with a backdrop of a Fed which is highly supportive of US credit. At the upper end of those interest rate ranges, we would anticipate spread tightening against rising treasury yields and would expect to see moderate principal gains while collecting an attractive coupon. Currently we are running an approximate 3.9yr duration and approximately 50% of our portfolio has securities that benefit from rising rates. We will continue to assess the environment and make adjustments accordingly.