BRAMSHILL BLOG: From the Desk of Bramshill Investments
In October, 10-year US treasury yields spiked +35bps and the Bloomberg US Aggregate Index returned -1.58% on the month. The Bramshill Income Performance Strategy returned -1.00% on the month, putting our YTD return at +0.99%.
If you recall, we have maintained caution all of this year because interest rate risk was a headwind to returns. However, we stated in our October Webinar our intention to deploy a significant amount of cash plus short term treasuries by year-end (find the replay on our website's "news" tab). This is driven by our view that inflation is quickly moderating, the US economy is slowing and faces significant headwinds in 2024. Thus, interest rate risk is significantly lower at this time and we want to lessen the reinvestment risk associated with positions in short term treasuries. We have been awaiting an opportune entry point to deploy capital into investments from our bullpen. We also highlighted in our Webinar last month, select areas of US credit in which we see value at this time. In October, we made a sizable shift out of short term treasuries and into investment grade corporates where we increased our exposure from 17% to 25% of the Strategy. Most of this allocation was directed into long duration, low dollar price, high quality bonds which were trading between $55 and $65, yielding approximately 6.75%, and had an average spread of +170 to treasuries. These bonds were issued during the Covid induced low-rate era and have sold off 35-40% in price since that time. The duration risk of these securities has shortened from issuance significantly because of the low dollar prices and thus, we like the optionality these bonds offer. If interest rates settle or move lower, the duration of these bonds extends as the market prices increase and thus there is significant convexity in this allocation. Additionally, the credit risk of these positions from issuers such as Duke Energy, Boeing, Paramount, Simon Property, Verizon, Williams and Kinder Morgan is extremely low due to the low dollar price of the bonds. Historically, recovery rates in IG are much higher than the levels where these bonds are currently priced. To a smaller degree, we also allocated to certain 2-to-3-year investment grade corporates with higher yields and less reinvestment risk than short term treasuries. Our preferred allocation remained stable at approximately 28% of the Strategy. We did pair our position in C 7.375% PFD where we felt spreads were too tight with rates backing up. We still maintain most of our PFD exposure in fixed-reset PFD structures, many of which are trading at low dollar prices relative to their short call dates. Our high yield corporate allocation remained stable at approximately 6% of the portfolio. We are unlikely to add to this allocation in the near term based on our view of a slowing economy. Our municipal allocation remained fairly stable at approximately 8% of the portfolio. We added moderately to municipal CEF’s on the October selloff which resulted in oversold conditions during the month. We also upgraded some of our CEF holdings. As of the end of October, the YTW on the Strategy is 6.98% (YTM 7.13%) and the yield to maturity on invested capital in the Strategy outside of short-term treasuries is 7.72%. Our portfolio duration is 2.90 years and the portfolio's average credit quality continues to be single A-. This is a good time to build long term fixed income portfolios without having to take significant duration or highly levered credit allocations. We plan to continue to allocate capital throughout this quarter.
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.