A Solid Looking 9% Yielding Bond Fund On The Surface
But The Devil Is In The Details
Every week, we’ll profile a high yield investment fund that typically offers an annualized distribution of 6-10% or more. With the S&P 500 yielding less than 2%, many investors find it difficult to achieve the portfolio income necessary to meet their needs and goals. This report is designed to help address those concerns.
With credit spreads still at historically low levels and the markets unlikely to get the massive Fed rate cutting cycle that they were expecting, it might be time to consider some defensive positioning in your fixed income portfolio. If spreads blow out and/or the markets are forced to price in a more hawkish outcome this year, it will be bad news for bonds, particularly those in the non-investment grade category. Taking positions in higher-rated debt and Treasuries might be advisable in this environment given how credit conditions are deteriorating right in front of our eyes and the flight to safety trade may soon take hold. That type of move usually would require sacrificing some yield in your portfolio, but it doesn’t necessarily have to.
The BlackRock Core Bond Trust (BHK) does pretty much what you’d think it does based on the name. Its focus on higher quality debt of all credit types could make for an ideal fixed income position, but it also uses a high degree of leverage. Investors have gotten away with taking on risk for a while with volatility remaining low, but taking on a leveraged investment in an environment where there are cracks in the dam might not be the best course of action.
Fund Background
BHK’s investment objective is to provide current income and capital appreciation. It seeks to achieve its investment objective by investing at least 75% of its assets in bonds that are investment-grade quality at the time of investment. Investments can include a broad range of bonds, including corporate bonds, US government and agency securities and mortgage-related securities. As mentioned earlier, BHK also utilizes leverage in order to enhance yield and total return potential.
At first glance, BHK sounds exactly like the type of bond strategy you’d want to add to your portfolio - one that focuses on high quality across a number of credit types. One of the problems the fund has had lately is its duration of 10 years. That makes it highly interest rate sensitive, something which hasn’t at all been rewarded throughout most of the past couple years. Even with the tilt towards higher quality, the added duration risk and use of leverage could negate a lot of that by introducing high volatility to the equation. A credit event could certainly work in this fund’s favor with its credit focus, but if the economy manages to pull off the soft landing and the Fed doesn’t seem inclined to loosen monetary policy much in the near future, BHK could be poorly positioned.
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