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BKT: Agency MBS Are A Great Hedge Against Volatility In Equities

Mar. 06, 2020 10:47 AM ETBlackRock Income Trust (BKT)23 Comments


  • Agency MBS is a sector with a low level of volatility, which can come in handy during periods of uncertainty.
  • Mortgage delinquencies continued to decline last quarter on a year-over-year basis, suggesting a low level of credit risk to investors.
  • The refinancing index is quite high right now, which may pressure forward yields. However, even if BKT sees a distribution cut, its leveraged yield and its discount will remain attractive.
  • This idea was first discussed with CEF/ETF Income Laboratory, a marketplace subscription service launched by Stanford Chemist.

Main Thesis

The purpose of this article is to evaluate the BlackRock Income Trust (NYSE:BKT) as an investment option at its current market price. Mortgage debt is an asset class I have been recommending for quite a while, and I continue to see merit in owning it today. With the market in "risk-off" mode right now, I believe moving up in credit quality and relative safety makes a lot of sense. With this mindset, I believe BKT offers a great value proposition. The fund is comprised almost exclusively of agency MBS, which are typically of better credit quality than their non-agency MBS counterparts. Further, the fund sports a healthy discount to NAV, as well as a very attractive income stream.

Some downsides do exist of course. Refinancing activity has picked up markedly since late last year. The new issuance coming out at lower, prevailing interest rates will undoubtedly pressure the future income stream of BKT and funds like it. Further, housing starts are on the rise, which could increase the new supply of MBS very soon. If demand wavers, this increase will impact the underlying value of the assets in BKT's portfolio. However, I see the positive aspects of the fund, as well as declining delinquency rates for mortgages nation-wide, as strong enough catalysts to outweigh these risks for now.


First, a little background on BKT. The fund is managed by BlackRock (BLK), and its objective is to "manage a portfolio of high-quality securities to achieve both preservation of capital and high monthly income", primarily through exposure of agency mortgage backed securities. Currently, BKT trades at $6.13/share and yields 6.73% annually by paying monthly distributions. I covered BKT for the first time in November when I recommended it as a safe way to play the housing market. In hindsight, this was a good call, as BKT has

This article was written by

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CEF/ETF income and arbitrage strategies, 8%+ portfolio yields

I've been in the Financial Services sector since 2008, which unsurprisingly gives me an invaluable insight in how markets can turn. I was a D1 athlete in college (men's tennis), where I studied Finance. I also have my MBA in Finance.

My readers/followers can trust that I won't pump any investment nor discuss a topic I don't genuinely follow and research. In that spirit, I list my portfolio here for transparency

Broad market: VOO; QQQ; DIA, RSP



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Cash position: 30%

Analyst’s Disclosure: I am/we are long BKT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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