BlackRock Credit Allocation Income TrustNYSE: BTZ

This analysis argues that BTZ, a BlackRock fixed income CEF, is not a good buy right now despite its attractive yield. The analysis highlights that current credit spreads are historically low, and when they widen (which is expected), it will negatively impact BTZ's price. A significant portion of BTZ's distribution comes from ROC, which essentially returns investors' own money and can erode the fund's NAV over time.

BlackRock Credit Allocation Income Trust is a debt-focused closed-end fund that boasts a 9.23% current yield. The BTZ closed-end fund claims to invest in a combination of floating-rate and fixed-rate debt, but the portfolio is almost entirely in fixed-rate assets with floating-rate securities an afterthought. The BTZ fund substantially underperformed competing funds that are more flexible in the balance between floaters and fixed-rate bonds over the past three years.

The BlackRock Credit Allocation Income Trust offers a current yield of 9.68%, lower than other debt funds in the market. The fund's shares have increased by 7.19% since October 12, 2023, outperforming the Bloomberg U.S. Aggregate Bond Index. BTZ's performance history suggests competent management, but it favors fixed-rate securities over floating-rate securities, which may impact performance.

The BlackRock Credit Allocation Income Trust offers a high yield of 10.29%, but it is lower than other fixed-income closed-end funds. The BTZ closed-end fund has outperformed its peers in the past, but may have been slower to adapt its strategy to higher interest rates. The BTZ fund's leverage is above the preferred level, but it is not out of line with other debt-focused closed-end funds.

Taxable closed-end fund discounts have narrowed, reducing their attractiveness, while credit spreads have tightened, producing returns in some areas of the CEF market. Municipal CEFs remain exceptionally cheap, with discounts wider than 99% of historical observations. The risk-reward in the taxable bond CEF space is on the downside, while the upside potential in municipal CEFs is significant, but dependent on a shift in Fed policy and inflation.

BlackRock Credit Allocation Income Trust provides diversified exposure to fixed-income securities with a multi-sector approach. BTZ remains attractively valued despite a bit of a narrowing discount, but distribution coverage has worsened. The fund utilizes derivatives with its highly flexible investment strategy, which could potentially provide for capital gains to fund the payout.