BRAMSHILL BLOG:  From the Desk of Bramshill Investments

The portfolio returned -2.02% for the month of December, putting 2024 YTD returns for the Bramshill Income Performance Strategy at +3.32%. For comparison, the 2024 return for the Bloomberg US Aggregate Index was +1.25%. 

Furthermore, it was another tough year for several long duration benchmarks as the Bloomberg Long Corp Index and Bloomberg 20+ Year UST Index finished down -1.95% and -7.98% respectively. While the FOMC lowered the Fed Funds rate by 25bps at the December meeting, the Committee signaled its willingness to maintain rates at the current level for the foreseeable future. Concurrently, some stronger economic readings led to a marked change in the term premium of the rates market. The 10-year treasury yield rose by 40bps on the month. This is an unusual condition whereby the Fed cut the Fed Funds rate by 100bps over the last 4 months of 2024, and long term rates rose substantially over this period. As we enter 2025, we think the Fed will become less relevant early in the year and we think they are awaiting more clarity on the incoming Trump administration’s policies. While the Fed could cut two or three times later this year, we align more closely with the outlook indicated by the futures market which has them on hold in the near term. The US Treasury is where the excitement is going to be. We think the new administration will have some innovative policies. Key questions include where they will issue on the curve and what policies they may implement with regard to the current holdings at the Fed. Additionally, we are anxious to see the impact of restraint on fiscal policy, particularly regarding the deficit, which will be a significant factor to watch. The most marked shift we made during the month was the extension of duration in our portfolio. Currently, we hold the longest duration in our portfolio we have had in over a decade. This is not a typical view for us. At this time, we believe credit spreads in most of our markets are overvalued. However, we believe the markets are compensating investors for rate risk over credit risk. We have made our recent shift based on our assessment of risk-reward at this time. This is in sharp contrast to a couple years ago. In 2020, during the pandemic, we allocated heavily to credit. In 2022, our portfolios were allocated to over 45% short term treasuries when almost every fixed income investment was under pressure. Our approach has always been guided by relative value, positive convexity, and a commitment to maintaining a high credit rating across the firm as we incorporate our probability of loss philosophy. In December, we increased our long treasury position from 16% allocation to 20%. In particular, we monetized our position in TLT (and realized a tax loss for taxable accounts) and replaced this with 3 long duration treasuries trading in the $49-$56 dollar price. We like the risk-reward dynamics of these securities [about which we elaborated at length in our Webinar from January 8th]. In preferreds, we marginally increased our allocation from 23% to 24% of the portfolio as we added to our position in NLY 10.582% PFD on market weakness. Our preferred allocation remains primarily in $1000 par fixed-reset structures with limited spread duration. In high yield, we marginally increased our position from 7% to 8% as we added a new position in ALLY 6.55% junior subordinated bonds. We also reduced our position in POST 6.25% ’32 which held in particularly well in the rates selloff. Within investment grade corporate bonds, we increased our allocation from 33% to 36% as we added to WFC 2.164% ’26 and GS 3.5% ‘26, both trading in the 5% yield area and less than 1year to their call dates. We also added to Dominion 7% junior subordinated bonds which contain an attractive coupon floor. Our cash plus short term treasury allocation was reduced from 19% to 11% of the portfolio. Due to the significant rally of the past couple years, equity exposure in the marketplace, as a percentage of households, nonprofits, pensions, endowments is significantly higher. We understand there have been AI and technology booms in the past few years, but it is possible that equity returns have been pulled forward. Currently, investors are significantly on one-side where fixed income has not represented a meaningful allocation. In our opinion, this allocation imbalance is likely to shift if there is an economic slowdown. In the meantime, we see value in long duration fixed income as we anticipate a weaker US dollar, a reduction of deficits, and inflation migrating towards 2%.