BRAMSHILL BLOG:  From the Desk of Bramshill Investments

In 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.