BRAMSHILL BLOG:  From the Desk of Bramshill Investments

Interest rates had a meaningful correction in April as the 10-year US Treasury yield rose approximately 60bps on the month. Volatility in interest rates weighed on most asset classes including the Bloomberg US Aggregate Index which returned -3.97% in April (-9.50% YTD) and the S+P 500 Index which dropped -8.72% on the month (-12.92% YTD). The Bramshill Income Performance Strategy returned -1.61% for the month of April, putting YTD returns at -6.45%.

Although we are not satisfied with this outperformance, we are comforted by our large liquidity position (44% cash plus short term treasuries allocation in the Strategy) which we maintain because we are concerned about outflows in US credit. Liquidity is extremely poor at this time. Other asset managers are experiencing meaningful redemptions and therefore are being forced to sell. We are seeing large blocks of bonds and preferred paper for sale, and we are getting ready to deploy capital in the Strategy as others become forced sellers. However, based on the current environment and in an effort to protect capital, we maintain caution because prices have not yet fully reflected capitulation. We have strategically redeployed such capital in other volatile environments (such as 1Q16, 4Q18 and 2Q20) and this has led to substantial returns for our Strategy in the ensuing months in the past. Within investment grade corporates, we are deploying capital to increase the yield of our portfolio. We are finding value in short duration IG bonds, where we increased our allocation to approximately 15% of the portfolio. There are many 2yr corporate bonds yielding close to 4% at this time. We are adding to these positions and looking for other names in this sector for diversification. The names to which we are allocating will not only likely withstand a potential recession, but will offer good carry while we await credit spreads to continue to correct. Also, within investment grade corporates, we have added to our bullpen several low coupon, 20-30yr maturity IG bonds which have moved to low dollar prices ($65-$75). These securities look attractive based on their recovery value and their accretion to par. We have a bullpen of 15-20 names in this asset class which are on our immediate radar. In high yield, we have a limited 6% allocation at this time. However, we have many BB 5-year corporate individual securities in our bullpen which are looking attractive at 5.5-6% yields. We will likely not dip down very far in terms of credit quality in high yield because of the potential for a meaningful slowdown in the US economy and therefore potential defaults. In the municipal bond asset class, we mentioned last month that we had reduced our exposure from approximately 10% to 5% of the portfolio. We maintained a stable allocation in the municipal asset class this month and see no likely further allocation in the short term. Within preferred securities, we also maintained our approximate 30% exposure to this asset class. This is an asset class to which we may add if there is dramatic price movement. These positions have become even more attractive after April’s meaningful increase in treasury rates as the coupons of our preferred’s reset off US Treasuries at their call dates (3-4years). This step-up feature, post an increase in rates, increases the likelihood that these preferred’s will be called and thus maintain their short durations. Our portfolio duration is approximately 2.73 years. At this time, short-term U.S. Treasury bonds represent approximately 40% of our portfolio and we have staggered the maturities of these positions to maximize carry. We believe we will allocate significantly in the coming months as we capitalize on all of the displacement across these asset classes.