BTT: Why the Low Yield?

The BlackRock Municipal 2030 Target Term Trust (BTT) stands out in the sector for its puny yield of 2.98% despite boasting a healthy 35% leverage, very low fee of 0.40%, a fairly long duration profile and not an exceptionally high quality portfolio.

In fact, the fund’s distribution coverage is among the highest in CEF space. What gives?

The trick lies with the fund’s name. Being a target term fund, BTT aims to return the original $25 NAV back to shareholders at its maturity in 2030. The trouble with most funds is that their distribution rates are more aligned to their income yields rather than their portfolio yields which causes them to overdistribute relative to their longer-term return prospects.

This has to do with the fact that muni bonds tend to be issued at coupons that are above their yields and CEFs are all too happy to use that as a basis for distribution since it boosts their yields. So far this dynamic has not resulted in persistently falling NAVs since risk-free rates have continued to fall. Until now…

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