BHK - BHK: Profit-Taking Is The Best Move Today (Rating Downgrade)

2024-02-12 08:00:25 ET

Summary

• The BlackRock Core Bond Trust is a closed-end fund that primarily invests in investment-grade assets, making it a low-risk option for income-focused investors.
• Despite investing in safer assets, the fund has been able to maintain a yield of 8.27%, comparable to junk bond funds.
• The fund has delivered a solid performance, with a 6.08% increase in share price since November 2023 and a 7.56% total return for investors.
• The fund seems highly likely to give up its recent gains, as the market's expectations of four to five rate cuts in 2024 are unlikely to be proven correct.
• The fund has failed to cover its distributions since July 1 and is currently trading at a premium. This looks like a good opportunity to realize some profits.

The BlackRock Core Bond Trust ( BHK ) is a closed-end fund that income-focused investors can employ as a method of achieving their goals while keeping their risks at a minimum. This is because, this is one of the few closed-end bond funds that invests primarily in investment-grade assets. The majority of closed-end debt funds invest their money in more speculative securities, such as junk bonds or leveraged loans, due to the fact that it was much easier to generate a respectable level of income off of speculative-grade securities over most of the past two decades. This is natural, because these securities have much higher yields than investment-grade bonds because of their higher risk of default-related losses. Interestingly, though, the BlackRock Core Bond Trust has not needed to sacrifice much in terms of yield relative to its peers despite investing in safer assets. As of today, the fund yields 8.27%, which is very much in line with most junk bond funds. This is something that we should investigate, as it does not make much sense that an investment-grade bond fund should be able to compete with junk bond funds in terms of yield.

As regular readers can no doubt recall, we previously discussed the BlackRock Core Bond Trust in late November 2023. At that time, the market was wildly optimistic about the potential for interest rate cuts in 2024 and was driving up bond prices in an attempt to front-run the Federal Reserve. The market is still optimistic today, although it has tempered its optimism somewhat over the past few weeks. This has not stopped the fund from delivering a very solid performance, however. As we can see here, its share price is up 6.08% since the date that the previous article was published. This is substantially better than the 2.13% gain of the Bloomberg U.S. Aggregate Bond Index ( AGG ):

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