BRAMSHILL BLOG:  From the Desk of Bramshill Investments

The Bramshill Income Performance Strategy produced a strong month in March, with a total net return of +1.19% and YTD net performance of 0.04%. We achieved this return while maintaining a very defensive posture, both in terms of credit risk and rate risk. Interest rate risk has been a major focus for the markets, as 10-year yields are +83bps higher this year and most major benchmarks in US fixed income have posted losses in 1Q21. We have been conservatively positioned this year because we believed the probability of loss was high. This is in stark contrast to most of 2020 when we saw a plethora of attractive investments in our asset classes and invested appropriately. 

Regarding interest rate risk, the Fed has been consistent with its guidance of no rate hikes until 2023. While the selloff in US Treasuries has been driven by impending inflation in connection with a reopening of the economy, we believe such inflation will be temporary in nature. We believe the other major factor fueling the recent selloff has been record treasury supply. The Biden administration has already passed substantial fiscal measures this year with regard to the COVID relief package and a large infrastructure package is forthcoming. “Net issuance of treasury bonds and notes are set to hit an all-time high of $414 billion in March, almost twice the previous record.” * We have stated for many quarters that the markets have not been compensating investors to take significant duration risk. For these reasons, approximately 21% of our portfolio is allocated to short-term treasuries and cash. In terms of credit risk, we believe corporate spreads are at the tight end of recent ranges therefore we are being cautious with regard to investment grade and high yield corporates. We have a modest approximate 15% exposure to high yield at this time which was a slight increase from last month as we added to our ET floating rate note position. A portion of this high yield allocation is allocated to loan CEF’s that are attractively priced at this time. Within investment grade corporates, we have an approximate 11% allocation which was stable on the month. Our largest asset class allocation is in preferreds, which accounts for approximately 39% of the portfolio. This allocation increased by 2% in the month as we initiated a new position in a utility preferred issue, EIX 5.375% fixed-reset PFD (similar limited duration structure to most of our preferred allocation). This position resets in 5 years, if not called, at 5YR UST+470. One other sector note, we like the fact that most of financial preferred issuers have seen large rallies in their equities (in many cases over 20% YTD), and these issuers will largely benefit from a steeper Treasury curve. In municipals, we maintained a 13% allocation to municipal CEF’s. The current yield of the portfolio is 4.69%, while the YTW is 3.37%. The duration of the portfolio is 3.2 years and the average credit rating is BBB+. We are considering certain positions in fixed coupon perpetual preferreds and crossover investment grade corporates which are starting to look attractive but we are patiently awaiting more opportune investment points. Meanwhile, floating rate structures with 4%-5% yields continue to remain our core allocation.

* Source: MarketWatch, 2 Mar. 2021