Market Insights from the Bramshill Investments Team.

2023 May Portfolio Commentary

Posted by Bramshill Investments Team on June 16, 2023

BRAMSHILL BLOG:  From the Desk of Bramshill Investments

Logo BlueIn May, 10-year US treasury yields spiked +24bps and the Bloomberg US Aggregate Index returned -1.09% on the month. The Bramshill Income Performance Strategy returned -0.39% on the month, putting our YTD return at +1.35%.

It seems as if every month there is a tug-of-war between interest rates moving higher or lower based on the latest CPI readings, Fed speak, or risk sentiment. While the yield on the 10-year treasury has traded in a range from approximately 3.30% to 4.05% during the last six months, the volatility has been extreme at times. We have been consistent with our message of “higher for longer”, meaning we believe inflation readings will remain elevated. While the Fed was successful in reining in inflation from 8% to 4% over the last year, it will be more challenging for the Fed to bring inflation down from 4% to their 2% target. Furthermore, even when inflation does trend toward that 2% level, we believe the Fed will want to see it stay below elevated levels for quite some time before changing policy. Therefore, rates will likely be “higher for longer”. While economic indicators have been mixed of late, we believe that a Fed pivot is very unlikely unless there is a significant change in risk sentiment in the markets. Let us recall the last time the Fed “pivoted” was December 2018 following an approximate 20% correction in the S&P 500 Index. In 2023, with most risk markets rallying, such a Fed pivot seems unlikely. With the inversion of the treasury curve, and the likelihood that such short end rates remaining high for some time, we find good value in short duration assets and choose not to employ much duration in the portfolio at this time. Our portfolio duration is 2.55 years. We also believe the yield on the Strategy at 6.50% YTW (YTM 6.63%) and the yield to maturity on the invested capital (outside of short-term treasuries) at approximately 7.25% is attractive currently. While our allocation to short-term Treasuries is approximately 43%, this position continues to buffer the portfolio from volatility while allowing our investment team to deploy capital into less liquid markets. Our preferred allocation remained stable at approximately 28% of the portfolio. We continued to reduce our regional bank exposure (now less than 3% of the portfolio) to CFG and RF PFD securities. We also continue to add to our C 5% PFD position which we have highlighted in previous commentary. We still maintain most of our PFD exposure in fixed-reset PFD structures. Our high yield corporate allocation stands at approximately 7.5% of the portfolio as we added to a position in an unlevered CEF we find attractive. We moderately increased our municipal CEF allocation from 7% to 8.5%. While it is not our base case, we would increase this municipal CEF allocation upon a Fed pivot. Our investment grade corporate allocation was stable at approximately 14% of the portfolio. The portfolio's average credit quality continues to be single A. We highly favor the yield and duration dynamics of our portfolio over the yield and duration of indices such as the Bloomberg US Aggregate Index (4.77% YTW and 6.3 year duration) and we think there is risk in such passive allocations. We believe recent fixed income volatility has created more opportunities, and therefore, greater return potential for our Bramshill Income Performance Strategy than we have seen over the past year.

This commentary is provided by Bramshill Investments, LLC for information purposes only and may contain information that is not suitable for all investors. Certain views and opinions expressed herein are forward-looking and may not come to pass. Investing involves risk, including the potential loss of principal. Past performance may not be indicative of future results, which are subject to various market and economic factors. No statement is to be construed as an offer to sell or a solicitation of an offer to buy securities or the rendering of personalized investment advice. Stated performance is reflective of realized/unrealized capital gains/losses and investment income achieve in composite accounts, net of investment management fees and expenses for trading, custody and fund maintenance (where applicable). Returns reflect the reinvestment of dividends and other such distributions and performance for January 2009 through April 2012 depicts actual returns generated by the strategy while managed by the Firm’s Chief Investment Officer at an unaffiliated investment firm. All information is accurate as of the date of publication and is subject to change without notice.

Topics: Commentary