DLY - BIT: Hard To Justify The Premium For This Fund

2025-03-11 07:11:24 ET

Summary

• BlackRock Multi-Sector Income Trust offers a high yield of 10.13%, but its real after-tax yield is much more disappointing.
• The fund owns a lot of mortgages, which have been suffering from delinquency problems.
• BIT's leverage ratio of 36.25% is higher than its peers, which increases both potential returns and risks.
• Despite recent outperformance, the fund failed to cover its distributions over the past year, relying on new share issuance.
• Trading at a 1.24% premium to NAV, it is difficult to justify buying this fund given its distribution coverage issues.

The BlackRock Multi-Sector Income Trust ( BIT ) is a closed-end fund that investors can purchase as a means of earning a high level of income from the assets in their portfolios. As is the case with many income-focused closed-end funds, this one primarily accomplishes its objectives by investing in a portfolio of bonds. This could be both a good thing and a bad thing, depending on one's point of view. On the positive side, bonds are offering much better yields than they did over most of the past decade. As of the time of writing, the ten-year U.S. Treasury note yields 4.25%, which, as we can see here, is much higher than it has had on average over most of the past ten years:

On the other hand, bond yields may not be sufficiently high so as to preserve the purchasing power of an investor's assets over time. As just stated, the current yield of the ten-year U.S. Treasury note is 4.25%. The most recent inflation report from the Bureau of Labor Statistics states that the consumer price index has risen by 3.0% over the past year. This means that an investor needs a yield that is at least this high in order to ensure that they do not lose purchasing power to inflation. The ten-year U.S. Treasury note appears to be satisfying this right now, but this still reduces its real yield down to 1.25%. That does not give much of a margin of error in case inflation spikes again, which is a real risk. Indeed, as I showed in a recent article , the headline U.S. inflation rate as measured by the consumer price index has been increasing ever since September 2024:

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