Summary
BHK is a fixed income CEF focused on Treasuries and investment grade bonds.
The vehicle is down more than 20% year-to-date on the back of a substantial increase in risk-free rates.
The fund runs a very high duration of 10.25 years and has been pummeled on NAV and performance this year due to the rise in interest rates.
Over 60% of the CEF’s portfolio is composed of treasuries, agency mortgage securities and investment grade bonds.
Dilok Klaisataporn/iStock via Getty Images Thesis
BlackRock Core Bond Trust (NYSE: BHK ) is a fixed income closed end fund that has current income as a primary objective. The fund was started in 2001 and it seeks to achieve its primary objective by investing primarily in a diversified portfolio of investment grade bonds. Portfolio holdings can include corporate bonds, U.S. government and agency securities and mortgage-related securities. At least 75% of its total assets will be invested in investment grade bonds. Up to 25% of its total assets may be invested in bonds that at the time are rated Ba/BB or below.
The vehicle currently has a high allocation to Treasuries and agency mortgage securities (36%), investment grade bonds (24.9%) and high yield bonds (15%). Given its mandate and current portfolio set-up, the fund is mainly driven by rates and the Fed policy. We are currently in an incipient tightening cycle with the market implied rate hikes for the rest of the year hovering above 6 after the Fed action yesterday. With 10-year rates currently trading around 2%, we can see a substantial spike higher depending on inflation readings and Fed’s willingness to aggressively address it. The fund is down more than 20% year-to-date as a result of its very high duration of 10.25 years and there is further room to run if rates do indeed follow the 2018 path when they peaked at around 3% (for the 10-year yields).
BHK is a good vehicle long term though, with robust trailing total returns which sit at 5.5% and 6.2% on a 5- and 10-year time horizon. The returns were achieved with a Sharpe ratio of 0.61 and a standard deviation of 7.61 (both measured on a 5-year lookback). We like this fund long term and we think it is a solid buy-and-hold, but we are currently in the worst environment for this long duration rates vehicle, namely an aggressive tightening cycle. With inflation running rampant and at historic highs , it is unclear how high rates will have to go to bring us back to a neutral inflationary environment. BHK is set to experience more weakness from rates and possibly even a little bit more from the widening of the discount to NAV. While we like the fund long term, we do not find it prudent to hold this name now and we see more weakness ahead. We rate this name a Sell currently, to be re-visited during the summer months when we should have more clarity around future Fed actions. Holdings
The fund is currently overweight Treasuries and investment grade bonds: Top Sectors (Fund Fact Sheet) We can see that Treasuries and agency mortgages account for over 36% of the portfolio, making the vehicle highly susceptible to rate moves as driven by inflation, rate hike expectations and the possibility of a recession in the next years.
The ratings parsing paints a similar picture: Ratings (fund fact sheet) The government and government equivalent securities fall in the AAA bucket, while the rest of the ratings parsing shows that the vast majority of the portfolio is investment grade.
The portfolio runs a very high weighted average life and maturity profile: Maturity Profile (Fund Fact Sheet) We can see that the bucket with most of the assets resides in the 20+ years segment, which explains the very high duration of the portfolio, which runs above 10 years: Duration (Fund Fact Sheet) Credit & Market Risk
As we observed from the Holdings section, the fund runs very little credit risk, with only roughly 23% of its assets in below investment grade bonds. Further to that, half of that allocation is within the double-BB bucket, which is the safest slicing of high yield credit. The main risks for this fund reside with market risk, and specifically with interest rate risk.
The fund runs a very high duration of 10.25 years and has been pummeled an NAV and performance perspective this year due to the rise in interest rates. The fund is down more than 21% from a price perspective this year and […]
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