BRAMSHILL BLOG:  From the Desk of Bramshill Investments

The portfolio returned -1.43% for the month of February, putting YTD returns at -3.87%. With the backdrop of a robust global economy and the Federal Reserve’s tightening policy, our view has not changed – that interest rates would quickly move higher in 2022. 

This view has recently been affirmed by high inflation numbers, a tight labor market, and persistent shocks to the commodity markets. The main detractor to our portfolio for the month came from our position in preferreds which produced -1.16% drag in performance. We believe these positions represent good value at current levels. Although the recent correction in rates and spreads has impacted most securities in the credit markets, the predominant structure which we have favored (fixed-reset preferred structures) maintain their short duration as they have very high resets at their call dates (3-5years). They now represent substantial spread pickups when compared to senior corporate debt in the same capital structures, and should recover in the weeks ahead. That being said, in February, we reduced this asset class allocation to the preferred market from approximately 32% to 30% of the portfolio. In particular, we sold C 4.70% PFD and D 4.35% PFD as we continued to reduce exposure to structures with lower back-end resets which are more subject to potential extension risk. We increased our allocation to investment grade corporates from approximately 12% to 14% of the portfolio. We added positions in PCG 3.25 ’24 and ENB 2.15 ’24 which both came in the new issue market at substantial concessions to the secondary market. We maintained our approximate 9% allocation to high yield corporate bonds and levered loan sector with few changes on the month. We have expressed this allocation mainly through two closed-end loan funds and closed-end high yield funds which average 8-10% discounts to NAV and carry roughly a 200+yield cushion above the underlying individual cash securities. The high yield corporate market has corrected in a meaningful way the past two months and we are beginning to populate our bullpen with many BB securities which may be in our target zone in the coming weeks. Despite the our bearishness on rates, mid-month we briefly took a 6.5% position in long duration Treasuries as our technical momentum models began to signal an oversold position, coupled with geopolitical tensions in Ukraine. As of this writing we have exited this long duration Treasury position. While our duration ended the month at 4.15years, as of this writing the duration of the portfolio is approximately 2.2 years. Our combined positions in short-term corporate bonds, short-term U.S. Treasury bonds and cash represent approximately 43% of our portfolio. We believe U.S. fixed income is in a secular shift, and we are likely to maintain this defensive position on interest rates and credit as we await opportunities to reposition in the coming months.