The Blackrock Income Trust (BKT) — a holding in our high-yield portfolio — is a closed-end fund with a focus on high-quality, agency-backed securities, aimed at providing risk-free current income for investors, explains Todd Shaver, editor of Bull Market Report.

With persistently high inflation and a decade-high interest rate, the fund has witnessed a steady pullback over the past two years, down by 14% YTD, and a colossal 45% compared to the same period two years ago, when rate hikes first began.

With the Fed’s hawkish stance on one end, and the US government stimulating the economy with the $700 billion Inflation Reduction Act on the other, neither interest rates, nor the consumer price index is likely to normalize any time soon. This creates a stellar value-creation opportunity for long-term investors just as well.

Since it was established in 1988, the trust has built a robust track record of outperforming passive mortgage-backed securities and funds. This was made possible by its active management strategy, and the use of instruments such as swaptions, while capitalizing on new mortgage issuances that leave it better off during periods of volatile interest rates.

None of these, however, matter for long-term, conservative, income-seeking investors, given the fund’s focus on agency-backed securities. This means that in case a borrower defaults on a loan, government-backed agencies such as Fannie Mae, Freddie Mac, and Ginnie Mae cover the loss, leaving little to no risk to the company.

With the possibility of further rate hikes muted, the Blackrock Income Trust is essentially derisked, while trading at a 16% discount to book value. While earning an enviable 9.9% dividend yield, this makes it perfect for conservative income-seeking investors with a long time frame, with plenty more value to be created in the future.

The price may go down in the near term but that yield is probably going to keep up with inflation a lot better than Treasury bonds right now. You don't see people dumping their BKT shares for bonds. And when the mood recovers, you'll see this stock come back first.

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