BRAMSHILL BLOG:  From the Desk of Bramshill Investments

The Bramshill Income Performance Strategy performed well in July, with a total net return of +2.32% and YTD net performance of -6.30%. We achieved this return while maintaining a defensive posture, both in terms of credit risk and rate risk. With the Federal Reserve focused on aggressively raising rates to fight inflation, interest rate risk has been a major focus for the markets. In July, however, 10-year yields fell by approximately 36bps on the month (3.01% to 2.65%).

If you recall, in mid June we allocated 7% of the Strategy to the 20-year US Treasury benchmark which was the highest yielding part of the curve (at the time trading 25bps cheap to the 30yr US Treasury benchmark). This was an opportunistic allocation based on oversold conditions in that market. In early July, we exited this treasury position into the rally. We do not believe the July rally in yields is long-lived. Therefore, we reduced our duration to 2.41years on the Strategy. We also do not believe, in general, investors are being adequately compensated to take significant long-term interest rate risk, thus our duration will likely remain low for the near term. One of the benefits of our investment process is to allocate to sectors and securities with overwhelming relative value attributes for the risk associated with those positions. One such asset class is short-dated investment grade bonds. In July, we increased our allocation to IG corporate bonds from 13% to 16% of the Strategy (and as of this writing this allocation is now over 19% of the Strategy). With yields on 2 to 3year corporates, between 4% and 5% and spreads meaningfully wider this year, we believe there are many credits which offer significant carry with low credit and duration risk. We will likely continue to allocate to this asset class in the coming weeks. Our largest asset class allocation in the Strategy in fixed-to-reset preferred’s was stable at 29%. In July, preferred’s were a significant contributor to performance. In municipals, we maintained an approximate 5% allocation to municipal CEF’s. In high yield corporates, we maintained a 5% allocation to this asset class. With the monetization of the treasury position mentioned above, we increased our cash/short-term treasury allocation to 46% (however, as of this writing this liquidity position has been reduced to 40% as we have been allocating to IG corporates in recent days). While the YTW on the Strategy is 3.83% as of the end of July, the yield to maturity on the invested capital in the Strategy outside of short-term treasuries is 6.08%. The average credit rating across the portfolio is A at this time. We are considering certain positions in fixed coupon perpetual preferreds and crossover high yield corporates which are starting to look attractive, but we are patiently awaiting more opportune investment entry points.