By Robert Lee
November 6, 2017 (Bloomberg) – Fixed income markets are “on the cusp” of change that could result in dramatic repricing, Bramshill Investments wrote in a 3Q investor letter obtained by Bloomberg.
* Opportunity in credit if 10-yr IG corporates yield 5.0-5.5%, HY index moves toward 7.5% yield, long-duration high-quality muni bonds approach 5%
** “We have witnessed markets change dramatically in short periods. We feel the fixed income markets are on the cusp of such a change”
** “Higher yields and spreads will be the result of a strong economic environment, not an upcoming recession or risk-off event which would cause spreads to widen”
* There is a “poor risk-reward set up in today’s low yield and lofty price environment for most fixed income asset classes”
** Probability of loss “much higher than what is currently reflected” in markets
* “Cannot imagine corporate bonds, municipal bonds, high yield corporates, or long duration preferreds having a meaningful positive total return”
** Bloomberg Barclays HY index absolute return of ~5.7%, “not acceptable compensation for an index which includes CCC-rated credit risk securities”
* Fixed-to-floating preferred securities are “most attractively priced asset class in our investable universe” due to limited durations
** “Until perpetual (long duration) preferred structures offer yields approaching 7% (which is about 125bps higher than current levels), we will not be attracted to such securities”
* Largest allocation is fixed-to-float preferreds in financials
** Credit quality of names like Citi, JPMorgan, Morgan Stanley, Amex “highest level in the past seven years”
** “Economic environment should continue to benefit the financial sector as business activity expands and interest rates rise”
* Bramshill has cyclical exposure to oil and gas credits like Hess, Western Gas Partners, WPX Energy, Kinder Morgan, Southwestern Energy
** “These credits and securities are less interest-rate sensitive and will most likely benefit significantly from higher growth and higher inflation.”
** “Energy sector has been making asset sales, termed out their balance sheets, has liquidity, and is benefiting from a rebound in underlying commodity prices”
–With assistance from Arie Shapira.
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