DVDN Blog Post

Although longer-term treasury yields ended 2Q24 up only 20bp from 1Q24, intra-quarter the 10-year treasury hit 4.70% (up 50bp) before rallying to end the quarter at 4.40%. Shortterm yields were similarly volatile with the 2-year treasury increasing from 4.62% to 5.04% before ending the quarter at 4.75%. While consensus seems to be forming around 2 fed rate cuts, beginning September, recently rates have been somewhat volatile as the market is handicapping the economic impact of a new administration.

During June, DVDN maintained 18 total positions as allocation to Commercial REITs increased to 8 names and 37% of AUM, from 5 names and 9%, respectively, from May. Residential REITs decreased to 10 positions, from 11, and 63% of AUM. DVDN eliminated exposure to BDCs as it expects 2Q24 results will reflect lower marginal ROEs from tighter lending spreads, and potentially weaker credit.

For further details, please see our June 2024 Newsletter here.

After increasing 80 basis points from year-end 2023 through 4/30/24 (from 3.88% to 4.68%), the 10-year treasury yield declined 18 basis points during May 2024 (from 4.68% to 4.50%). The yield curve continues to be a battleground with the short-end now discounting 0-3 fed rate cuts while the long-end buffets between a soft (no recession) and hard (recession) landing for the economy.

During May, increased total positions to 18 from 14 as it added 4 “special situations” with three residential mortgage REITs and one commercial mortgage REIT. Among the residential REITs, one company completed a debt restructuring that improved its capital structure allowing it to commence investing and a second company that continues to make progress in earning its current dividend. Among the commercial REITs, DVDN added one company invested in multifamily assets that is performing well and would seem to be in a position to increase its dividend.

For further details, please see our May 2024 Newsletter here.

The 10-year treasury yield increased 48 basis points during April, that followed on the 32-basis-point increase during 1Q24, which resulted in DVDN declining 2.85% during the month. In fact, the 80-basis-point YTD24 increase resulted in 10-year treasury yields settling just above the yield at the time DVDN was launched. Market expectations are settling in at 1 rate cut, later in FY24, as the most likely outcome.

During April, DVDN portfolio managers, (a) reduced BDC positions from 7 to 2 as stocks reached price targets and forward lending spreads are compressing; (b) reduced CREIT positions from 5 to 4 eliminating one office-centric stock; and (c) increased MREIT positions to 8 from 5 to take advantage of better relative value companies. One notable item is the reduction in the equal-weighted yield for the CREITs that declined from 12.22% in MAR24 to 8.97% in APR24. The reason is that DVDN currently holds one CREIT that does not pay a dividend and is owned as a total return opportunity.

For further details, please see our April 2024 Newsletter here.

10-year treasury yields declined a modest 5 basis points during March which allowed DVDN’s active portfolio management to deliver monthly returns that more than offset the January & February return drawdowns* largely resulting from the 37-basis-point increase in yields. Market expectations for FY24 Federal Reserve rate cuts seem to be settling in at 2 or 3 with July being the market’s odds-on favorite for the first rate cut. That said, markets are also pricing a 0 or 1 rate cut as non-zero probability outcome.

During March, DVDN portfolio managers (a) increased total companies in the portfolio to 17 from 14; (b) continued decreasing exposure to residential REITs as median valuations rallied to 90%+ of book value*; (c) increased exposure to commercial REITs by overweighting multifamily exposure and taking opportunistic positions in attractively priced office exposure; and (d) maintained its allocation to BDCs that should continue delivering attractive returns in a “higher-for-longer” rate environment.

For further details, please see our March 2024 Newsletter here.