BlackRock's Leveraged Mortgage-Backed Securities Venture Yielding 9%, now receiving an Upgraded Rating

In the world of fixed income mutual funds, BlackRock Income Trust (BKT) stands out as a leveraged closed-end fund specializing in mortgage-backed securities (MBS) and other U.S. fixed income assets[1][2]. Managed by BlackRock Advisors, LLC, BKT offers a relatively high distribution yield of around 9%, making it an attractive option in a yield-scarce environment[1][4].

The fund's primary focus is on leveraging up credit risk-free assets, such as Agency MBS bonds, to produce superior returns when interest rates move lower[2]. As of July 2025, BKT has a duration of 6.7 years, a holding weighted average life (WAL) of 9.2 years, a yield to maturity (YTM) of 5.3%, and a CEF distribution rate of 9%[1].

BKT's structure is designed to leverage up a credit risk-free asset, Agency MBS bonds, to generate superior returns when interest rates move lower. The fund contains mostly Agency MBS bonds (118%), US Government bonds (8%), and securitized products (6%)[1]. Its 20% gearing makes it most sensitive to intermediate rates, given its 6.7-year duration[1].

However, it's important to note that BKT runs rate risk, as it has no credit risk. When rates move up, BKT loses value. Conversely, when rates move lower, BKT gains in value[1]. The market trades probabilities indicate a 100 bps decrease in Fed Funds within the next year[3]. If this happens, BKT is expected to generate a total return of approximately +14%[1], with a true cash yield of roughly 6.5%[1].

Despite the high distribution rate, it's not supported by the portfolio yield to maturity (5.3%)[1]. Furthermore, BKT's resilience to rate shocks and slow accretion when rates move lower has been evident in its year-to-date performance, compared to similar funds like Dynex Capital, Annaly Capital, and AGNC Corp[1].

BKT is highly correlated with 10-year yields and is less volatile than mReit peers running more leverage[1]. The fund's reporting includes leverage, which is approximately 20%[1]. Last year, the BlackRock Enhanced Government Fund merged into BKT[1].

The fund's market presence is significant, with a market capitalization around $285 million and a share price near $11.72 as of August 2025[4][5]. However, it's worth noting that while it has moderate liquidity (average daily trading volume of around 70,000 shares), technical indicators show mixed signals with some near-term sell signals, suggesting potential price corrections[3][5].

In terms of risks, the fund uses leverage (1.16x), which amplifies both gains and losses, increasing volatility, especially in a rising interest rate environment or if mortgage-backed securities underperform[1]. BKT is also sensitive to interest rate fluctuations, prepayment risks, and changes in credit spreads. Rising rates can negatively impact the net asset value (NAV).

While primarily high-grade securities, the inclusion of non-agency MBS and asset-backed securities adds credit risk relative to pure government bonds[2][4]. Short interest is currently low (~0.28% of float) and decreasing, indicating limited market bearish bets against the fund, but this can change with market conditions[5].

In conclusion, while BKT offers a high distribution yield and benefits from BlackRock's management expertise and a diversified portfolio, it carries risks related to leverage, interest rates, and credit exposure in the current volatile fixed income market[1][2][4]. Investors should carefully consider these risks before investing in BKT.

[1] BlackRock (2025). BlackRock Income Trust (BKT) Overview. Retrieved from https://www.blackrock.com/corporate/investor-relations/fund/blackrock-income-trust-bkt [2] BlackRock (2025). BlackRock Income Trust (BKT) Factsheet. Retrieved from https://www.blackrock.com/corporate/literature/publications/literature/investor-relations/literature/fact-sheet/blackrock-income-trust-bkt-factsheet.pdf [3] Yahoo Finance (2025). BlackRock Income Trust (BKT). Retrieved from https://finance.yahoo.com/quote/BKT/ [4] MarketWatch (2025). BlackRock Income Trust (BKT) Stock Quote. Retrieved from https://www.marketwatch.com/investing/stock/bkt/profile [5] Finviz (2025). BlackRock Income Trust (BKT). Retrieved from https://finviz.com/quote.ashx?t=BKT&ty=cashflow&p=dch1

BlackRock's Leveraged Mortgage-Backed Securities Venture Yielding 9%, now receiving an Upgraded Rating