A Decent All-In-One Bond Fund

But This Isn’t The Right Time For It

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.

Corporate bonds have looked vulnerable for a while now with credit conditions deteriorating and spreads remaining abnormally low. It looks like they may finally be paying the price. Credit spreads are at their highest level since September and corporates have been trailing Treasuries since December. In a world where credit risk didn’t seem to matter for the longest time, the last month or so is a good reminder of why pushing the risk envelope should be done at your own risk.

Income investors still looking to maximize yield might want to consider dialing back credit risk here. The BlackRock Core Bond Trust (BHK) is a true all-credit fund, but its focus primarily on investment-grade credit could be particularly advantageous. Within equities, we’re beginning to see diversification get rewarded again. The same thing should be true on the bond side as well.

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. The portfolio will include a broad range of bonds, including corporate bonds, U.S. government and agency securities and mortgage-related securities. The fund also utilizes leverage in order to enhance yield and total return potential.

It’s actually somewhat unusual to see a bond fund that invests in both investment-grade and junk bonds. That makes BHK a relatively nice balance between managing credit risk and capturing an above average yield. Diversification is the key to this fund. Its ability to spread out risks across credit tiers and types gives the feel of a more genuine all-in-one fixed income investment. There is still some risk here and the use of leverage will enhance that, but this portfolio looks comparatively more balanced than many of its CEF peers.