BRAMSHILL BLOG: From the Desk of Bramshill Investments
We have consistently highlighted the many glaring signs of a US consumer slowdown which provided a warning note of caution on the perceived strength of the US economy. In July, many economic indicators contributed to further signs of slowing economic growth and speculation the Federal Reserve would cut rates this year. As a result, the 10-year US Treasury yield rallied -37bps on the month. We have believed that one of two catalysts will cause the Fed to actually reduce rates this fall, either a marked change in the unemployment rate, or an equity market correction. In July, we made very few asset allocation changes to the portfolio because we are comfortable with our current positioning and the approximate 6% yield (6.42% YTM and 5.75% YTW) on our portfolio. Our largest allocation remains in investment grade corporate bonds at approximately 33% of the portfolio. Our allocation to preferred securities remained stable at 27% of the portfolio as we reduced our position in CFG 5.65% PFD and added a new position in C 7% PFD, which we find attractive because it has 10 years of call protection before it resets to T+275. If rates gravitate lower this year, this longer call protection is beneficial to the position and if rates rise, we believe the 7% coupon will hold in well. In high yield corporates, we maintained an approximate 12% allocation as we reduced our position in ET FRN’s. There was no major change to our municipal CEF exposure which remained at approximately 2% of the portfolio, however, we began to add to our CEF positions in two more liquid CEFs. If the Fed actually cuts rates in the fall, CEFs may be an opportunistic segment in which to add risk due to the anticipated lower borrowing cost on the leverage of such funds. We are not ready to make a meaningful addition to CEF positions at this time. Our treasury allocation is approximately 27% of the Strategy, with 13% allocated to long duration treasuries and the balance in short-term treasuries. We maintained our long treasury exposure as we believe rates will rally in the months ahead on softer economic data. At this time, we have very little credit beta in our positioning (BBB+ average credit rating). In addition, our 14% cash plus ST treasuries serve as dry powder for our bullpen if and when we see better entry points for spread product. As of this writing spreads have widened somewhat in August, however, at this time they are not at attractive entry points for our “probability of loss” scenarios. If treasuries rally to 3.5% on the 10yr treasury, we would most likely monetize some or all of our long bond position and move out of higher quality credit, in favor of spread product on a significant spread widening into either high yield corporates or preferred securities. If the market stays in a rangebound environment, the Fed is your “friend” (telegraphed by a likely cut in September) in which case collecting yield and carry will be favorable.
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.