During September, yields continued to rise, touching multi-year highs and causing negative returns across most fixed income asset classes.
The same repricing that hurt returns has materially improved the forward-looking opportunity, and we believe investors now have a compelling opportunity to lock in attractive long-term yields, particularly given today's historically elevated level of real yields. The Bramshill Income Performance Strategy returned -2.97%, bringing year-to-date performance to -3.25%. The month was marked by a sharp sell-off in rates, with the 2-year Treasury yield rising roughly 60 basis points, and the Bloomberg US Aggregate Bond Index fell approximately 2.6%. Within investment grade credit, we reduced exposure from approximately 53% to 48% of the portfolio. We sold a portion of our low-dollar-price, long-duration holdings (MU, AVGO, MS) after they held up well during the sell-off with spreads tightening. We also sold some short-duration IG, which had outperformed in the rising-rate environment, and recycled some of our defensive, 6-month paper yielding 4.75% into 2-year paper yielding 5.50% after the 2-year yield rose to multi-year highs. In preferred securities, our allocation decreased from approximately 13% to 11% as LNC and NLY preferreds were called. This was partly offset by some small additons to fixed-rate preferreds, mainly through an ETF and a few select high-quality banks. This asset class has reached its highest yields (approximately 7.5%) and widest spreads (approximately +210) in several years. While we are not increasing our preferred exposure markedly, we are starting to warm up some bullpen names. We maintained our high yield corporate exposure at approximately 3% of the Strategy, with no significant changes. Our long-duration U.S. Treasury allocation was little changed at approximately 19% of the portfolio. We increased our Municipal exposure from approximately 1% to 3% of the portfolio. Long municipal yields have approached 5.5% (a taxable-equivalent yield above 9%), thus we added exposure through attractive ETFs and a closed-end fund trading at a large discount to NAV. Cash and short-term Treasury balances increased from approximately 11% to 15% of the portfolio as we added to 18-month Treasuries at yields above 4.80%, bringing total Treasury exposure, including short-term holdings, to approximately 34%. At month-end, the portfolio’s yield to maturity stood at 6.17%, and its yield to worst rose to 5.97%. Effective duration was essentially unchanged at 8.03 years, and average credit quality remained singe A rated. Looking ahead, with the 2-year Treasury yield having risen roughly 60 basis points, long treasuries at 25-year highs, preferred yields at their highest levels in several years, and long municipal yields above 5%, we believe the sell-off has created some of the most attractive entry points we have seen in several years. We remain in allocation mode, buying across various fixed income asset classes, while maintaining a disciplined, risk-aware approach to income generation, liquidity, and downside protection.
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.
